Why integrate economic analysis in transportation planning?
Economic analysis is a critical component of making effective transportation decisions. Economic analysis considers all key quantitative and qualitative impacts of transportation investments and policies. It allows transportation agencies and service providers to identify, quantify, and value the economic benefits and costs of transportation policies, programs, and projects over a multi-year timeframe. This information allows transportation agencies to better target scarce resources to their best uses in terms of maximizing benefits to the public and their customers and to account for their decisions. In turn, understanding the benefits and return on investments informs funding decisions. In other words, economic analysis helps answer what do we get from the investment or policy and how do we pay for it.
Economic analysis can inform the entire spectrum of the transportation decision making process by clearing defining the trade-offs. In planning, it can be applied to basic cost and performance data to screen and prioritize a large number of potential project alternatives, assisting in the development of program budgets and areas of program emphasis. This is applicable for the development of long range plans and capital investment programs. Similarly, economic analysis can play a critical role in screening alternatives to accomplish a specific project, providing information for the environmental assessment process. In the design and engineering phase, it can facilitate the development of more cost-effective designs and analyze the cost escalation risk.
How can economic analysis be effectively used?
To many, economic modeling is a black box that be manipulated to provide desired outcomes and in some cases, that can be true. This has led to a lack of trust and buy-in from many stakeholders. By employing a framework that has been crafted over many years and projects, I have successfully employed economic analysis to advance numerous highly visible, multimillion dollar transportation projects forward. This approach, designed to promote more informed decision-making, is built on four guiding principles:
1.Data-driven, stakeholder-led process to build support for findings by ensuring the study process is:
b. Objective; and
2.Use existing accepted data and tools to the extent possible while maintaining the objectivity and defensibility;
3.Define a few good metrics that reflect what stakeholders understand and care about; and
4.Address uncertainty by incorporating risk analysis tools to assess key assumptions.
Through experience, I know that the single most important factor necessary to go from study to action is balancing broader regional needs with local priorities. This can be accomplished by engaging informed stakeholders at key decision points and working with the stakeholders individually and as a group to identify “common ground” and potential conflicts early on. Additionally, employing proven consensus building, conflict resolution, and risk analysis methods to ensure everyone’s opinion is considered is essential to avoid or mitigate any mistrust of the economic modeling process.
What is the difference between benefit/cost analysis and economic impact analysis?
Benefit cost analysis (BCA) attempts to capture all benefits and costs accruing to society from a project or policy, regardless of which particular party realizes the benefits or costs, or the form these benefits and costs take. Used properly, BCA reveals if an investment or policy change is economically efficient in that the net benefits to the public from an allocation of resources is greater than the cost. In transportation investment decision making, BCA may be used to help determine the following:
If a project should be undertaken at all (i.e., is it economically efficient);
When a project should be undertaken. BCA may reveal that the project does not pass the economic efficiency criteria now, but would be worth pursuing some time in the future due to projected growth in economic activity and resulting traffic; and
How investments should be prioritized and funded under fiscal constraints.
Economic impact analysis (EIA) is the study of the way in which the direct benefits or transportation efficiencies and costs of a transportation project affect the local, regional, or national economy. It quantifies the effects that a transportation project or action will have on local or regional employment patterns, wage levels, business activity, tourism, housing, and tax base expansion. EIA can also be used to gain insight into the broader business attraction impacts arising from increased accessibility and connectivity to markets as a result of transportation investments.
Why should you be using economic analysis?
There is growing pressure to be able to demonstrate the economic benefits of transportation investment. In many states, Governor and Legislatures are requiring investments be tied to or measured against economic development goals. This trend has been further evidenced in the recent Federal TIGER Grant program which required a rigorous analysis of benefits as part of the application process. Indications are that the use of economic analysis in federal funding decisions will expand to include the TIFIA program and other discretionary programs that have been established through the FAST Act. Moreover, as funding for transportation continues to lag behind the investment needs, agencies are looking for new funding alternatives and revenue streams including public private partnerships. Economic analysis plays an important role in identifying projects with the highest probability of attracting private investment and generating new revenue streams. In addition to project selection, prioritization and funding, the use of economic analysis is playing a larger role in asset management, performance measurement, climate change and pricing strategies.
An abridged version of this piece was originally posted to LinkedIn.