Transportation Economics and Project Evaluation

1. Transportation Economics and Project Evaluation Evaluation process safety in evaluation process and intro to micro economics

2. Objectives of project evaluation • An objective and consistent method for the making of investment decisions • Which alternative design for a project should we select? • Which competing alternative approach should we invest in? • Which project or projects should we invest in? • What category of projects would it be most productive to invest in? • E.G., streets or water distribution

3. Exception Methodology • Manage by exception • Invest what you have always invested unless an exception arises • Example • City capital improvement budget – invest at the same level for every city service with a small increase for inflation. • Budget for contingencies where system exhibits a chronic problem (e.g. excessive congestion)

4. Pros and Cons of Exception Method • Pros • Easily understood by decision makers • Requires minimal amount of decisions support systems • Cons • No basis for making efficient decisions • No basis for making trade-offs between categories • Perpetuates past misallocation of resources

5. Traditional approach (popular) • Performance measurement • Manage the performance of existing system • Pavement roughness • Delay encountered while traveling in system • Travel speed • Travel times • Etc. • Establish minimum levels of performance • Invest in projects which provide the maximum improvement in performance for dollars spent.

6. Pros and Cons of Traditional Approach • Pros • Manages to measurable criteria • Builds on good management practice • Supportable to public and decision makers • Cons • Supports past legacies decisions • Difficult to make comparisons between investment categories • Supports past misallocations of resources

7. Economic Evaluation (big idea) • Levels of decisions • Operating and maintenance budget decisions • What level of performance • Project design level decisions • Design decisions regarding a project • User benefits of competing designs are assumed equal • Project selection decision • Give a number of alternatives for a project which one should be selected. • Mutually exclusive options • Network decisions • Given a number of projects, which one should be invested in and when • Non-mutually exclusive options • Program allocation decisions • Which category of investment should we invest in? • Safety improvements or congestion reduction?

8. Operating budgeting decisions • Operating allocation – Budget to Meet performance identified in selection decision • Project selection process assumes operating costs allocation when the selection is made

9. Time Example project selection Project 1 Reconstruction Performance level Maintenance Treatment Project 2 Performance level Each assumes its ongoing cost of maintenance

10. Project Design Selection Criteria • Select project designs which • Minimizes Life Cycle Costs • Assumes that all design alternatives provides similar user benefits • Meets budget requirements • Able to achieve minimum design standards

11. Project Selection Decision • Selects project from feasible alternatives • Projects are mutually exclusive • Example – Two different alignments • Benefit and costs streams of project alternative vary • Comparison methodologies • Benefit to cost ratio • Minimum present worth • Maximum internal rate of return • Comparison of incremental benefits and costs

12. Network Decision Making • Planning level decision making • Should we invest in reconstructing the freeway in Council Bluffs, Davenport, four-laning U.S. 30, etc. • Non-mutually exclusive decisions • Compare the benefits and costs of one project to another • Decision making criteria • Select project with greatest benefit to costs ratio • Continue to select project until budget is exhausted or there are not more cost beneficial projects.

13. Program Allocation Decisions • There will always be projects where the benefits exceed the costs so which category of activity should we invest? • Example – should we be investing more in education and less in transportation services? • Example – should we be investing more in winter maintenance and less in bridge maintenance?

14. Program allocation decision • Trade-offs between categories are very difficult • Rarely done based on economic information • Political and equity concerns conflict with pure economic rational (deep thought)

15. Benefit – Cost analysis • Since transportation benefits are reduced cost, costs and benefits often get confused. • Costs are associated with the facility • Capital costs • Construction costs • Right-of-way costs • Vehicle cost (if they are owned by the operator) • Maintenance costs • Facility operation

16. Benefit-Costs analysis • Reduced costs that are associated with benefits are related to the users • Travel time costs • Total hours and cost of system travel • Travel time reliability • Vehicle operating costs • Fuel • Oil • Insurance • Maintenance • Depreciation (vehicle ownership costs) • Tires • Crash costs

17. Estimates of User Cost Savings • Travel time reductions • Demand models • Travel time reliability – user benefits are difficult to measure • Vehicle costs • Measure through historical data • Value of reduced deaths and injuries • Technical costs are easy to measure • Human loss is difficult to measure

18. What is a human life worth • Industry must make trade-offs between safer cars and profits • Government must make trade-off between safer roads and expenditures on highways • Users make trade-offs between the likelihood of dying and travel convenience • How many of you would like to drive at 5 mph?

19. Example 1 of Calculation • Ford Pinto Gas Tank Guard case Ford calculations Ford costs Guard costs $11 per guard Project run of pinto – 12.5 million Total retrofit cost $135,000,000 User cost 44 excess fatalities 530 excess injuries 7,500 excess PDOs

20. Example 1 continued Societal cost of excess fatalities and injuries Fatal $200,000 (NHTSA and Safety Council average) Injury accident $67,000 (very high) PDO $700 Total societal costs = $49,500,000 B/C = 2.8 in favor of not doing the retrofit

21. Example 1 • Was Ford right or wrong? • Why?

22. Example 2 Right Turn on Red Estimated national savings User savings – 1.4 gallons/veh/year - 10 seconds/driver/day User costs - 22 excess fatalities - 900 excess injuries - 10,300 PDO B/C = 7.3 in favor of right on red

23. Comparison of two examples • Are you in favor of right on red? • Is right-on-red worth the extra fatalities? • Why is it that we feel better about the decision to adopt right-on-red and not about Ford’s decision? • How much should we be willing to spend to save a human life?

24. Example 3 The 9 Pennsylvania Miners that were trapped were rescued after 77 hours of drilling • The initial cost estimate of performing the rescue was $10,000,000 with a low probability of success (assume 25% probability of success) • Assume value of human life is $2.5 million • 2.5*0.25*9 = $5.625 million • $5.625/$10 = B/C = 0.6

25. Why are we inconsistent in our perspective on human life • Anonymity • “Identifiable Victim Effect” • Jessica McClure, 9 Pennsylvania Miners • Assumed risk • When the individual has accepted a higher level of risk • Astronaut • Sky diver

26. How Should We Settle the Costs • The nine miners rescued • Actual cost – approximately $6 million • The mining company cannot afford to cover these costs. • U.S. Rep. John Murtha, of Johnstown, obtained a $2 million federal grant • State of Pennsylvania shelled out about $2 million • Remaining balance owed private contractors is about $2 million • How should we cover the unpaid cost? • Disney is paying each miner $150,000 for their story – should this money be used to cover the costs?

27. So on what basis should we make decisions? • We need to recognize that people are willing to buy some benefits with human life • Otherwise the speed limit would be 10mph.

28. How do we determine the value of Human Life • Societal value of life is the value to save one life. • Not a specific life • Not what you value your own life • It is a statistical life

29. Methods for valuing life • Willingness to pay – what are we willing to pay to reduce total deaths by one fatality • Since this is not a situation that is present in reality, we establish analogous situations. • Suppose that 5 million people were willing to buy a car with $100 safety improvement that would reduce their risk of dieing in car crash by one in 5,000. Thus we would be willing to pay $500 million to save 1,000 lives. Therefore, at a minimum society is willing to pay $500,000 for a life saved. • Included in the willingness to pay is the willingness to pay to avoid the pain and suffering to avoid injury or death.

30. Pain and Suffering • Accounting for the quality life • Quality-adjusted life years lost (QALY) • Value assigned to a perfect health year = 1 • Value assigned to a year of death = 0 • Injuries fit on the continuum between 1 and 0

31. Methods for valuing human life cont. • Direct-costs avoided • The amount of costs directly avoided by reducing by a single death. • Medical costs • Emergency services • Insurance administration • Etc. • Human capital approach • The amount of economic value lost by a single death or injury.

32. Item Individual Cost Percent of Total Medical $22,095 0.66% Emergency Service $833 0.02% Market Productivity $595,358 17.69% HH Productivity $191,541 5.69% Insurance Administration $37,120 1.10% Workplace Costs $8,702 0.26% Legal Costs $102,138 3.03% Travel Delay $9,148 0.27% Property Damage $10,237 0.30% Quality of Life $2,389,179 70.97% 2000 value of human life $3,366,351 100.00% NHTSA values for injuries and fatalities

33. What are states doing (1993 Survey) • Forty-five states assign a dollar value to fatality • Five states do not assign a dollar value but use priorities • Three clusters • Eighteen states clustered around $500,000 • Fourteen states clustered around $1.5 million • Eight states between $2 and $3 million • Mean value $1,209,704

34. Factors Causing Crashes • Driver • Vehicle • Roadway • Environment

35. Economic Cost of Crashes • Cost to society: $230.6 billion/ year • medical, rehabilitation and long term care cost ( $ 32.6 billion) • Work place lost productivity $59 billion • lost tax revenue (adding $200 from each household) • property damage $59.8 billion • Travel Delay $25.6 billion Source NHTSA

36. National Crash Frequency • Fatal Crashes – 37,795 • Injury Crashes – 2,003,000 • Property Damage Crashes – 4,282,000 • Total killed 42,116 (5,500 were peds and cyclists)

37. National Crash Frequency • Fatal • 1.51 Per HMVM • 14.79 per 100,000 people • 19.04 per 100,000 vehicles • 22.02 per 100,000 licensed drivers • Injury • 109 per hmvm • 1,065 per 100,000 people • 1,371 per 100,000 vehicles • 1,585 per licensed driver Source - FHWA

38. Fatal Crash Trends Source – FHWA Crash Facts Book

39. Crash Rate Trend Source – FHWA Crash Facts Book

40. Age Distribution of People Killed Source – FHWA Crash Facts Book

41. Fatality Rate by Age

42. Iowa Crashes (2000) • 445 fatalities • 100 had BAC > 0.1 • 63,371 crashes • 35,974 injuries

43. Iowa Fatal Crash Trends

44. Crash Rate Calculation • Accounts for volume • May account for vehicle miles traveled (VMT) Crash rate = where: n = analysis time period in years (5 years for the Iowa DOT) DEVnode = actual daily entering vehicles for nodes and average daily traffic for road segments (for road segments up to 0.6 miles long and spot locations) DEVlink = Absolute value of [(Link length/0.3)x(Actual DEV)] (for road segments 0.6 miles and longer)

45. Crash Rate Example 350 crashes over 5 years 10,000 vehicles enter the intersection daily Crash rate = = _____(350 x 106)_____ = 19.2 crashes per million vehicles (10,000) x 5 x 365

46. Severity • Measures seriousness of accidents • Iowa DOT (2001 values) • Fatality: $1,000,000 • Major Injury: $150,000 • Minor Injury: $10,000 • Possible Injury: $2,500 • Property damage: actual value or $2,000 if unknown

47. Crash Trend Mn/DOT Traffic Safety Fundamentals Handbook

48. Fatality Rates in Upper Midwest Mn/DOT Traffic Safety Fundamentals Handbook

49. Location of Crashes Mn/DOT Traffic Safety Fundamentals Handbook

50. Crash Rates by Functional Class Mn/DOT Traffic Safety Fundamentals Handbook