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  • References: FHWA, “Office of Asset Management Annual Report 2001,” November 2001. On Office of Asset Management CD. FHWA, “Asset Management Primer,” December 1999, at site http://www.fhwa.dot.gov/infrastructure/asstmgmt/amprimer.pdf FHWA Office of Asset Management website is at http://www.fhwa.dot.gov/infrastructure/asstmgmt/index.htm
  • Reference: AASHTO, with technical assistance from FHWA, is sponsoring a National Cooperative Highway Research Program (NCHRP) project to develop the Guide (NCHRP Project 20-24[11]), at site http://www4.trb.org/trb/crp.nsf/All+Projects/NCHRP+20-24(11)
  • Reference: NCHRP, “Phase I Report, Task 1 of 3: Synthesis of Asset Management Practice,” February 2002, Table 1-1 at http://www4.trb.org/trb/crp.nsf/All+Projects/NCHRP+20-24(11)
  • Pavement design is where we’re at with respect to LCCA, for the most part. Pavement and bridge management systems have the potential to do LCCA, but they are not being exploited in this fashion The final two bullets represent our planned future direction.
  • Reference: FHWA, “Life-Cycle Cost Analysis in Pavement Design Interim Technical Bulletin,” FHWA-SA-98-079, September 09, 1998.
  • Reference: Scott Farrow and Michael Toman, “Using Environmental Benefit-Cost Analysis to Improve Government Performance,” Discussion Paper 99-11, December 1998 (Copyright: Resources for the Future)
  • Reference: Scott Farrow and Michael Toman, “Using Environmental Benefit-Cost Analysis to Improve Government Performance,” Discussion Paper 99-11, December 1998 (Copyright: Resources for the Future) http://www.rff.org/disc_papers/PDF_files/9911.pdf
  • Reference: ECONorthwest, “Development of an Update to the 1977 AASHTO Redbook: User Benefit Analysis for Highways Draft 1.0,” May 2001, Chapter 7. Economic Development Group library website at http://www.edrgroup.com/
  • Reference: FHWA, “Highway Economic Requirements System for State Use” at http://www.fhwa.dot.gov/infrastructure/asstmgmt/hersfact.htm
  • References: FHWA, “Highway Economic Requirements System for State Use” at http://www.fhwa.dot.gov/infrastructure/asstmgmt/hersfact.htm FHWA, “Highway Economic Requirements System, Volume IV: Technical Report, Final Report,” December 2000. On Office of Asset Management CD. FHWA HERS/ST presentations.
  • References: Herbert Mohring, “Maximizing, Measuring, and Not Double Counting Transportation Improvement Benefits: A Primer on Closed-Economy and Open-Economy Cost-Benefit Analysis.” Transportation Research 27B,6: 413-424. Glen Weisbrod, “Current Practices for Assessing Economic Development Impacts from Transportation Investments: A Synthesis of Highway Practice” NCHRP Synthesis 290, 2000.
  • References: Glen Weisbrod, “Current Practices for Assessing Economic Development Impacts from Transportation Investments: A Synthesis of Highway Practice” NCHRP Synthesis 290, 2000. Forkenbrock, D., S. Benshoff, G. Weisbrod, “Assessing the Social and Economic Effects of Transportation Projects,” NCHRP Web Document 31 (Project B25-19), February 2001, at http://trb.org/trb/publications/nchrp/nchrp_w31.pdf
  • Reference: Randall W. Eberts, “The Economic Justification of Road Investments: Infrastructure and Development” presented at the 14 th IRF World Congress, Paris, France, June 11, 2001.
  • Reference: Glen Weisbrod, “Current Practices for Assessing Economic Development Impacts from Transportation Investments: A Synthesis of Highway Practice” NCHRP Synthesis 290, 2000.

Transcript

  • 1. Transportation Asset Management Presented by: Eric Gabler Economist, Office of Asset Management Federal Highway Administration FEDERAL HIGHWAY ADMINISTRATION The Role of Engineering Economic Analysis
  • 2. Introduction
    • The mission of the Federal Highway Administration’s Office of Asset Management is to provide leadership and expertise in the systematic application of management and investment strategies for highway infrastructure assets
    • Mission includes development of tools, techniques, and information on applications of Transportation Asset Management (TAM)
    FEDERAL HIGHWAY ADMINISTRATION
  • 3. FHWA’s Approach to TAM
    • Office works in cooperation with AASHTO and other national organizations in promoting TAM
      • In 1997, AASHTO requested that FHWA assist it with development of products and programs that could aid States in implementing TAM in their organizations
      • FHWA assisted AASHTO in the development of its strategic plan for Asset Management
    • No national policy for TAM
    FEDERAL HIGHWAY ADMINISTRATION
  • 4. What TAM Is
    • Recent Thinking – TAM is a strategic approach to the optimal allocation of resources for the management, operation, and preservation of transportation infrastructure
    • There are other definitions of TAM, but most specify a common goal of making better resource allocation decisions with better information
    FEDERAL HIGHWAY ADMINISTRATION
  • 5. “ Better Resource Allocation Decisions”
    • What constitutes a better resource allocation decision?
      • “Cost-effective” solutions are frequently cited as desired standard
      • “Economically efficient” allocation of resources
      • “Optimal” allocation or “highest rate of return on investment”
    FEDERAL HIGHWAY ADMINISTRATION
  • 6. Where EEA Fits in TAM
    • TAM requires an integrated decision-making process of which EEA is a critical part
    • EEA directly addresses the core reason we undertake transportation projects – the creation of net benefits for the traveling public and society at large
    • EEA will not work without good data and performance modeling
    FEDERAL HIGHWAY ADMINISTRATION
  • 7. Development of Alternatives/EEA Data Collection Performance Modeling Decision-Making Monitoring Feedback Policies Budgets Goals External Factors And Constraints Implementation Asset Management: Where EEA Fits
  • 8. EEA Informs Decision Maker
    • Note that diagram does not show EEA at Decision Maker level
    • EEA informs Decision Maker but does not make the decision
      • Decisions will be based on a host of factors, including policies, budgets, and goals
    • If EEA is done correctly, it will reflect agency goals and objectives and answer Decision Maker questions about resource allocations
    FEDERAL HIGHWAY ADMINISTRATION
  • 9. EEA Tools
    • EEA provides a tool kit for better allocation of resources through TAM framework
    • Tools range in complexity and scope
      • Discounting
      • Life Cycle Cost Analysis/value engineering
      • Benefit-Cost Analysis
      • Applications in economic development studies
    • As in any tool kit, use of the right tool saves time and effort
    FEDERAL HIGHWAY ADMINISTRATION
  • 10. Discounting
    • Discounting is the backbone of EEA
    • Use of a discount rate facilitates comparison of the costs and benefits of alternative transportation projects over time
    • Dollars can be:
      • Relocated in time
      • Any combination of flows can be summed into a single value at a single point in time
      • Lump sums can be converted to annual flows
    • Discount rate is distinct from inflation rate
    FEDERAL HIGHWAY ADMINISTRATION
  • 11. Life Cycle Cost Analysis (LCCA)
    • LCCA is discounting applied to the cost side of an investment decision
    • LCCA should be applied once a decision to undertake an improvement has been reached, but the method of implementing the improvement is undecided
      • All reasonable design alternatives should be evaluated over identical analysis periods
      • Benefits of design alternatives must be equivalent
      • Analysis of differences in life cycle costs only
    FEDERAL HIGHWAY ADMINISTRATION
  • 12. LCCA Steps
    • Step 1: Establish design alternatives
    • Step 2: Determine activity timing
    • Step 3: Estimate costs (Agency and user)
    • Step 4: Discount life cycle costs
    • Step 5: Analyze the results
    FEDERAL HIGHWAY ADMINISTRATION
  • 13. Potential Applications of LCCA
    • Pavement design (choice between pavement types)
    • Pavement and Bridge Management Systems may have LCCA capabilities
    • Selection of pavement preservation strategies
    • Bridge replacement
    FEDERAL HIGHWAY ADMINISTRATION
  • 14. Benefits of LCCA
    • In many cases, there is no question that an improvement must be made—the question concerns only what is most cost-effective means to do it
      • A failing bridge that must be replaced
      • Cost-effective solution will likely be optimal investment of resources in asset preservation
    • Practice of LCCA promotes broader use of EEA tools
    • LCCA is “disciplining framework” for review and discussion of project design alternatives
    FEDERAL HIGHWAY ADMINISTRATION
  • 15. Economic Concepts in LCCA
    • LCCA introduces following economic concepts
      • Notion of long term, as represented by “life cycle”
      • Risk analysis
      • Best practice LCCA specifically addresses costs to users associated with work zones and maintenance
    FEDERAL HIGHWAY ADMINISTRATION
  • 16. Limitations of LCCA
    • Cannot compare design alternatives that have different benefits (e.g., reconstruct road vs. reconstruct road with widening)
    • Cannot, of itself, answer question of whether an improvement is worth pursuing (i.e. the project has a positive net present value)
    FEDERAL HIGHWAY ADMINISTRATION
  • 17. LCCA Products
    • Numerous commercial products are available to do LCCA
      • Range from simple spreadsheets to component management systems to specialized project analysis programs
      • FHWA has issued the Life-Cycle Cost Analysis in Pavement Design Interim Technical Bulletin and will soon be releasing an LCCA model that incorporates risk analysis
    FEDERAL HIGHWAY ADMINISTRATION
  • 18. Benefit-Cost Analysis (BCA)
    • The discounted value of project’s life cycle benefits is compared to the discounted value of its life cycle costs
    • Different measures are used to compare benefits to costs
      • Net present value (NPV)
      • Benefit-cost ratio (B/C)
      • Equivalent Uniform Annual Value
      • Internal rate of return (IRR)
    FEDERAL HIGHWAY ADMINISTRATION
  • 19. Applications of BCA
    • BCA is used to address the following resource allocation decisions:
      • Whether or not to pursue an improvement
      • Select among design alternatives with different benefits
      • Select among competing projects in same mode
      • Select among competing projects in different modes
    FEDERAL HIGHWAY ADMINISTRATION
  • 20. Key Role of Discount Rate in BCA
    • Discount rate reflects the productivity of capital, people’s preferences for current over future consumption, and the scarcity of investable resources
    • If an investment doesn’t yield discounted benefits that exceed discounted costs, this means resource allocation is not economically efficient
    FEDERAL HIGHWAY ADMINISTRATION
  • 21. How to Get to “Optimal” with BCA
    • Optimization is possible with BCA
      • Apply BCA to all reasonable project design alternatives
      • Use appropriate discount rate
      • Identify all significant benefits and costs
      • Quantify all benefits and costs to degree possible, consider all else qualitatively
      • Use appropriate means to compare costs and benefits for identical analysis periods
    FEDERAL HIGHWAY ADMINISTRATION
  • 22. BCA and Unconstrained Budget
    • Unconstrained budget
      • Apply BCA to all reasonable project design alternatives
      • Pursue project design alternative with highest positive NPV
      • Pursue all projects where at least one design alternative has positive NPV
    • Useful in identifying project inventories
    FEDERAL HIGHWAY ADMINISTRATION
  • 23. BCA and Constrained Budget
    • Constrained budget
      • Similar to unconstrained budget application of BCA except that analyst must select among design alternatives of multiple projects to obtain highest overall rate of return (NPV) for fixed investment levels
      • Design alternatives and projects are selected according to highest B/C ratio
      • Not all projects with positive NPVs will be pursued
      • Calculation can become complicated for large programs
    FEDERAL HIGHWAY ADMINISTRATION
  • 24. Challenges of BCA
    • Calculation of benefits and costs over life cycle is often difficult
      • Agency costs associated with projects can be hard to ascertain
      • User costs and benefits are critical
        • User benefits are purpose for building the road but may be hard to measure and value
        • Uncertain forecasts of traffic, delays, and crash rates
        • Valuation of time and safety is often controversial
      • Externalities and social impacts resist quantification
      • Network effects and induced demand
    FEDERAL HIGHWAY ADMINISTRATION
  • 25. Benefits of BCA
    • Given challenges, why pursue BCA?
      • Desire to get best return from scarce resources
      • With respect to the imprecision of estimates, not doing benefit-cost analysis does not lessen uncertainties; it only masks them
      • By quantifying those costs and benefits that can be monetized, BCA provides stronger basis for making qualitative judgments about the importance of non-monetized benefits
    FEDERAL HIGHWAY ADMINISTRATION
  • 26. Tips for Good Quality BCA
    • Do not start with predetermined conclusion
    • Clearly define problem, realistic baseline (no build), all reasonable alternatives, and benefits and costs measures
    • Monetize benefits and costs as much as possible, without regard to source of funds
    • Use credible data
    • Deal appropriately with uncertainty
    • Communicate results understandably
    FEDERAL HIGHWAY ADMINISTRATION
  • 27. BCA Products
    • Numerous BCA programs are available for project level analysis
      • AASHTO Redbook and other guides
      • MicroBENCOST implements AASHTO Redbook
      • State Agency-developed models such as Caltrans’ CalBC, WSDOT Benefit/Cost software, etc.
    • Corridor or system level models such as STEAM, StratBENCOST, and Net BC
    • FHWA has issued the Highway Economic Requirements System/State Version HERS/ST) model for program level BCA
    FEDERAL HIGHWAY ADMINISTRATION
  • 28. HERS/ST
    • HERS/ST is a direct extension of the national-level HERS model
      • Applies BCA to the selection and implementation of highway capital improvements
      • Provides a common, objective platform for State DOTs to communicate with State legislatures and other officials regarding the impacts of alternative highway investment levels
      • Analysis is rigorous and considers travel time, safety, vehicle operating, emissions, and highway agency costs
    FEDERAL HIGHWAY ADMINISTRATION
  • 29. HERS/ST Logic OVERVIEW Current Conditions Traffic Forecast Simulate Future Conditions and Performance Identify Deficiencies Identify Potential Section Improvements Select System Improvements FEDERAL HIGHWAY ADMINISTRATION
  • 30. Use of HERS/ST
    • The HERS/ST software has been tested by 17 States and is now being revised in response to their comments
    • A national conference will be held in the Fall of 2002 to deliver the model to all 50 states
    FEDERAL HIGHWAY ADMINISTRATION
  • 31. Note on Risk Analysis
    • Risk analysis is not a separate EEA tool, but is a means of addressing uncertainty associated with economic outcomes in LCCA or BCA
      • Probabilistic LCCA and BCA allow the value of individual data inputs to be defined by a frequency (probability) distribution
      • An entire probability distribution of NPVs is generated for the project alternative along with the mean or average NPV for that alternative
    • Helps to resolve issues associated with uncertainty about user costs and future demand
    FEDERAL HIGHWAY ADMINISTRATION
  • 32. Economic Development Analysis
    • BCA typically does not incorporate or reveal data on economic development impacts
    • Consensus among economists is that accounting for user costs and benefits also captures other value-adding effects of transportation improvements (which are transfers from users)
    • However, Decision Makers often want information on how transferred benefits will affect jobs, personal income levels, tourism, property development, etc., at the local level
    • Development analysis complements BCA
    FEDERAL HIGHWAY ADMINISTRATION
  • 33. Reasons for Development Analysis
    • Benefits and costs experienced at local level are important investment decision criteria
      • How benefits affect locality and State
      • Specific groups may be affected adversely
    • Legally-mandated planning and regulatory review
    • Public education
    • Post-project evaluation
    FEDERAL HIGHWAY ADMINISTRATION
  • 34. Economic Development Impact
    • Transportation investment is often viewed as a means to promote economic development
      • There is a healthy debate as to the impact of new transportation investment on economic development at the national level
        • Strong effects in 1950’s and 1960’s
        • Since 1980, stimulus effects remain but have declined
      • Effects are very pronounced at local level, where most studies reveal highway investment stimulates private investment and can shape and channel growth
    FEDERAL HIGHWAY ADMINISTRATION
  • 35. Economic Development Methods
    • Survey and interview methods
    • Market and comparable case studies
    • Regional economic models
      • Dynamic simulation models (e.g., REMI)
      • Static Input-Output models (e.g., RIMS II)
    • Hybrid modeling systems
    FEDERAL HIGHWAY ADMINISTRATION
  • 36. FHWA Support to EEA/BCA
    • Office of Asset Management will be building a “community of practice” website where it will list information on valuation of user costs and benefits and good practice methods for BCA and other methods of EEA
    • Site will identify available software and resources to conduct BCA
    FEDERAL HIGHWAY ADMINISTRATION
  • 37. Conclusions
    • EEA has an important role in Transportation Asset Management
    • EEA informs Decision Makers, but does not make decisions
    • EEA tools are versatile and can accommodate a large number of variables as well as uncertainty
    • FHWA will work with AASHTO to promote EEA and other elements of Transportation Asset Management
    FEDERAL HIGHWAY ADMINISTRATION