Costs and Benefits, Part 2

Last week we started our examination of the types of financial analysis that are done to justify infrastructure projects in typical funding programs such as TIGER II. Our analysis today focuses on a project in the city of Staples. The Staples project presents a mechanism to demonstrate, in depth, how a typical cost/benefit analysis is done. This and subsequent posts will vividly show why, after decades of doing projects that engineers, financial advisors, economic development advocates and others tell us have tremendous "return-on-investment", we have an unfathomable amount of liability for maintaining existing infrastructure and not anywhere near enough money to meet those obligations.

In short, we're going to show you why we're broke.

If you have not already, please read our background piece that includes information on the Staples overpass and also our discussion on the theory behind cost and benefit analyses. In that last post, we stated that a public cost benefit analysis includes costs and benefits that are both financial and social. We noted that: 

...the analysis for projects like this one are essentially rigged to convert social benefits to financial benefits, thus claiming tremendous financial gain when none actually exists.

Our equation for a government ROI analysis was as follows, where "constrained" is meant to indicate that there are political and constitutional constraints on where we can construe benefit and exact costs:

Government ROI: financial benefit + (constrained) social benefit > financial cost + (constrained) social cost

The Staples application (page 7) indicates that the project has a Net Present Value of over $48 million. What this is meant to indicate is that the expenditure of $9.9 million on the project will have a net return of $48 million. It is meant to sound like a "no brainer". Government is said to be spending wisely when it gets five times its money back on a project.

Here is how Staples presents the numbers.

Benefit/Cost Summary (page 7)

  1. Time Benefit: $47,311,788
  2. Distance Benefit: $6,579,887
  3. Safety Benefit: $1,108,867
  4. Carbon Reduction/Emissions Benefit: $122,111
  5. Maintenance and Operation Benefit: -$121,172
  6. Total Benefits: $55,001,480
  7. Construction Costs: $9,850,000
  8. Remaining Capital Value: $3,521,812
  9. Benefit/Cost Ratio = (#6) / (#7-#8) = 8.7
  10. Net Present Value: $48,673,292

Today we are going to look at only the benefits side of this equation. In our analysis we will categorize benefits as either "financial" -- where the government gets an actual monetary return on the investment -- or "social" -- where there is no monetary return but a social objective is met. Nearly all of the "benefits" of the Staples project fall into the "social" category.

1. Time Benefit

By far the biggest "benefit" said to be realized by the Staples overpass project is time savings by those that today must wait to cross the railroad tracks and highway. From the Staples application (page 11):

Additionally, time is money! Based on anticipated traffic volume on the new corridor, travelers will save over 3.4 million hours of travel time which equates to a Present Value of Time benefit, over the 20 year study period, of over $47 million.

So the people of Staples will not have to wait at the train crossing and this time saved equates to $47 million in savings.

Before we look at the numbers, pause for a second and understand that 85% of the benefits of the project - in dollar terms - is people saving time in traffic. There is no direct or indirect financial return to the government for this savings. Sure, the application argues that the "delays have a direct impact on the productivity of our local businesses and schools" (page 11), but nobody is arguing that this increased productivity will result in $47 million in increased sales, income and property tax receipts. Or any real increase. The time savings is a purely social benefit for the people of Staples who will now enjoy reduced travel times from the construction of the overpass.

Or will they enjoy reduced travel times? I'll make a point we are going to return to in a subsequent post by noting that, despite dramatic improvements in transportation systems, travel times have not been reduced. What happens with improvements like this is that, over time, people simply move further from where they work. In the long run this improvement will hurt Staples by encouraging people to move outside of town.

Let's look at the numbers, though. The application that Staples submitted indicated that 4,460 cars per day get stopped at the railroad tracks for an average of 4.7 minutes. Perhaps more precisely, they indicate that 4.7 minutes will be saved per trip. The application also indicates that, in a 24 hour day, a train will be blocking the road for "at least 3.7 hours per day" (page 2). That means for at least 15% of the day, the tracks are blocked.

Mn/DOT's latest traffic counts indicate that 6,200 vehicles per day cross the tracks (7,000 in 2010 estimated). If we take the 7,000 estimate, this means that the application is asserting that 64% of the traffic (4,460/7,000) gets stuck waiting for the train. In reality, the people of Staples are just not that unlucky.

With an average of 52 trains (page 2) and delays totaling 3.7 hours (page 2), that is a delay of 4.3 minutes per train. If we assume that Staples residents are very unlucky and 30% of them (double what the average would suggest) are delayed by a train for the average time of 2.1 minutes (not everyone shows up right when the crossing arms fall), the total calculated benefit is cut by more than half. If we consider that Staples residents may be able to predict, to a degree, the regularity of the train schedule and plan ahead to avoid most of the delay, the principle "benefit" of the project collapses.

In short, these are bogus numbers used to inflate a return that is purely social. There is no financial return to the Federal or State government for reducing driving times in Staples.

2. Distance Benefit

The distance benefit parallels the time savings benefit in that there is an assumption of reduced driving distance due to the improvement. The distance benefit is calculated to be $6.6 million, which is 12% of the total benefit calculated. Together, the time savings benefit and the distance benefit comprise 98% of the reported benefit on the project.

The distance benefit is derived from assuming a cost per mile for driving, in this case $0.287 per mile (we derived this from backing out their spreadsheet data). The project is reported to save people 0.76 miles per trip (again, derived from their spreadsheet). The saved mileage per trip is multiplied by the total trips and then taken over 20 years to yield the total benefit.

Again, pause and understand that while the benefit is expressed in dollars, this financial gain is not actually realized by anyone. Nobody in Staples is going to have an additional twenty two cents in their pocket each time they get out of their car. There is certainly no financial return realized by the Federal government. This is a project done so that the people of Staples can theoretically drive less.

Which, of course, they won't. In a subsequent post we will address the land use ramifications, but to build on what was already said in the analysis of the time savings benefit, when it is easier to get someplace people simply drive more. 

I am not going to go through these numbers in the same way I did the time savings numbers, but it should be pointed out that it is not clear where the time savings comes from. People living on the south side of town now cross on the east edge of town. The new overpass is being constructed on the far western side of town. It is not clear to me how this will save people any distance, certainly not for the volume of people they are alleging.

In summary, there is no financial return for reducing the amount people in Staples have to drive, even if it is 3/4ths of a mile per trip. There is a social return, but the analysis in the Staples application vastly overstates it. 

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So far we have examined 98% of the reported "benefit" on the Staples TIGER II project and found that it contains no real financial return. The United States government is paying $8.9 million and the State of Minnesota is paying $1 million and neither is going to see a measurable increase in revenue from the expenditure. The return on the project is strictly a social benefit; reduced travel time and distance for local residents and people traveling through town.

Tomorrow we will look at the other 2% of the reported benefits; the safety benefit, the carbon reduction benefit and the maintenance and operation benefit. 

Upcoming posts in this series: 

  • Review of safety, carbon reduction and O&M benefits (Tuesday, November 9)
  • Review of the project cost analysis (Wednesday, November 10)
  • A real cost/benefit summary (Thursday, November 11)
  • Land use impacts from the project
  • The bad incentives in the current approach
  • Proposal for a reconfigured TIGER III 

 

Notes:

  1. We used the term "bogus" to describe the numbers submitted by the city of Staples. Our readers need to understand that we are not accusing Staples of doctoring the numbers. The city of Staples has simply followed the process as prescribed by the program and inherent to common industry practice. This is what is done in every application, which is the core problem we are trying to illuminate.
  2. Along those lines, we'll reiterate that the people of Staples have done nothing immoral by submitting this application or by accepting the TIGER II money. The city is simply responding to the incentives that the State and Federal governments have established. We take issue with this system of perverse incentives, not with the way the city of Staples has responded to it.
  3. Finally, we don't discount the "benefits" of this program as measured by the residents of Staples. We are certain they see the benefits of this project, at least in the near-term. What we question is the relative wisdom and the financial structure of projects such as these that have strictly local, social benefits and no real financial return for the broader population that is shouldering the costs in an era of increasing austerity. The reality is that we have to get a real financial rate of return on our infrastructure investments if we want to be prosperous as a country.

Posts in this series: 

  • Part 1: Background on cost/benefit analyses
  • Part 2: Review of time savings benefit and distance benefit
  • Part 3: Review of safety, carbon reduction and O&M benefits
  • Part 4: Review of the project cost analysis 
  • Part 5: Finale

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Charles Marohnminnesota, transportation