Surface Transportation: Many Factors Affect Investment Decisions 
(30-JUN-04, GAO-04-744).					 
                                                                 
Passenger and freight traffic are expected to grow substantially 
in the future, generating additional congestion and requiring	 
continued investment in the nation's surface transportation	 
system. Over the past 12 years, the federal government has	 
provided hundreds of billions of dollars for investment in	 
surface transportation projects through the Intermodal Surface	 
Transportation Efficiency Act of 1991 and its successor 	 
legislation, the Transportation Equity Act for the 21st Century. 
Reauthorization of this legislation is expected to provide	 
hundreds of billions of dollars more in federal funding for	 
surface transportation projects. For this investment to have the 
greatest positive effect, agencies at all levels of government	 
need to select investments that yield the greatest benefits for a
given level of cost. This report provides information about the  
processes that state and regional transportation decisionmakers  
use to analyze and select transportation infrastructure 	 
investments. GAO identified (1) key federal requirements for	 
planning and deciding on such investments, (2) how benefit-cost  
analysis facilitates sound decisionmaking, and (3) other factors 
that decision-makers consider in evaluating and deciding on	 
investments.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-744 					        
    ACCNO:   A10688						        
  TITLE:     Surface Transportation: Many Factors Affect Investment   
Decisions							 
     DATE:   06/30/2004 
  SUBJECT:   Cost effectiveness analysis			 
	     Decision making					 
	     Economic analysis					 
	     Federal aid for transportation			 
	     Freight transportation operations			 
	     Ground transportation operations			 
	     Investment planning				 
	     Mass transit operations				 
	     Program evaluation 				 
	     Public roads or highways				 
	     Railroad transportation operations 		 
	     Regional planning					 
	     Transportation legislation 			 
	     Transportation research				 
	     Intergovernmental relations			 

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GAO-04-744

United States General Accounting Office

 GAO	Report to the Ranking Minority Member, Committee on Commerce, Science, and
                          Transportation, U.S. Senate

June 2004

SURFACE TRANSPORTATION

                    Many Factors Affect Investment Decisions

                                       a

GAO-04-744

Highlights of GAO-04-744, a report to the Ranking Minority Member,
Committee on Commerce, Science, and Transportation, U.S. Senate

Passenger and freight traffic are expected to grow substantially in the
future, generating additional congestion and requiring continued
investment in the nation's surface transportation system. Over the past 12
years, the federal government has provided hundreds of billions of dollars
for investment in surface transportation projects through the Intermodal
Surface Transportation Efficiency Act of 1991 and its successor
legislation, the Transportation Equity Act for the 21st Century.
Reauthorization of this legislation is expected to provide hundreds of
billions of dollars more in federal funding for surface transportation
projects. For this investment to have the greatest positive effect,
agencies at all levels of government need to select investments that yield
the greatest benefits for a given level of cost.

This report provides information about the processes that state and
regional transportation decisionmakers use to analyze and select
transportation infrastructure investments. GAO identified (1) key federal
requirements for planning and deciding on such investments, (2) how
benefit-cost analysis facilitates sound decisionmaking, and (3) other
factors that decision-makers consider in evaluating and deciding on
investments. We provided copies of this report to the Department of
Transportation for its review. The Department generally agreed with the
report's contents and provided technical comments, which we incorporated
as appropriate.

www.gao.gov/cgi-bin/getrpt?GAO-04-744.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Kate Siggerud, (202)
512-2834, [email protected].

June 2004

SURFACE TRANSPORTATION

Many Factors Affect Investment Decisions

Federal requirements specify the overall approach that states and regional
organizations should use in planning transportation infrastructure
projects, but generally do not specify what analytical tools planners
should use to evaluate projects. These key requirements include developing
strategic goals and objectives; considering a wide range of environmental
and economic factors; preparing long-and short-range plans; and ensuring
an inclusive process that involves many stakeholders.

The Office of Management and Budget, the Department of Transportation
(DOT), and GAO have identified benefit-cost analysis as a tool to help
decision-makers identify projects with the greatest net benefits. The
systematic process of benefit-cost analysis helps decision-makers organize
information about, and determine trade-offs between, alternatives.
Researchers also acknowledged challenges in applying benefit-cost
analysis, including quantifying some benefits and costs, defining the
scope of the project, and ensuring the precision of estimates used in the
analysis. Ongoing research by DOT and others is aimed at improving and
expanding state and regional decision-makers' application of benefit-cost
analysis.

Many of the transportation planners we interviewed said that factors other
than the analyses developed during the planning process often influenced
final investment decisions. For example, state and regional
decision-makers must consider the structure of federal funding sources.
Since federal funding often is tied to a single transportation mode, it
may be difficult to finance projects that do not have dedicated funding,
such as railroad improvement projects. In addition, decision-makers must
ensure that wideranging public participation is reflected in their
deliberations and that their choices take into account numerous views. In
some cases, voter support through referenda is required before a project
may proceed or financing can be secured. The physical constraints of an
area may also affect investment choices. Difficulties in expanding
capacity and limits on existing infrastructure may direct investments to
preserving and maintaining existing facilities or improving operations.
Finally, multistate transportation corridors present special challenges in
coordinating investment decisions.

Key Factors Affecting Transportation Planning Decisions

Contents

Letter

Results in Brief
Background
Federal Requirements Specify an Approach for Planning and

Deciding on Transportation Projects Benefit-Cost Analysis Is a Method for
Evaluating Alternatives and

Improving Transportation Infrastructure Decision-Making Many Other Factors
Shape Transportation Investment Choices Concluding Observations Agency
Comments and Our Evaluation

                                       1

                                      3 5

                                       7

17 25 39 40

Appendix I Scope and Methodology

Appendix IIEURSummary of Three Types of Economic Analyses for Comparing
Investment Alternatives

Appendix III Overview of Benefit-Cost Analysis

Appendix IV GAO Contacts and Staff Acknowledgments 54

GAO Contacts 54 Acknowledgments 54

Tables                                                                  
                       Table 1: Potential Stakeholders Involved during the 
                                                              Metropolitan 
                           and Statewide Planning Process                   8 
            Table 2: Key Factors To Be Considered in Planning and Deciding 
                   on Transportation Investments, as Identified in Federal 
                                    Requirements                           14 
                   Table 3: Key Elements for Benefit-Cost Analysis         20 
Figures                                                                 
              Figure 1: Federally Required Elements of Metropolitan and    
                           Statewide Transportation Plans                  11 

          Figure 2: Comparison of Three Types of Economic Analyses 43

Abbreviations

AASHTO American Association of State Highway and Transportation

Officials APTA American Public Transportation Association CALTRANS
California Department of Transportation CMAQ Congestion Mitigation and Air
Quality Improvement

Program CREATE Chicago Regional Environmental and Transportation

Efficiency DOT Department of Transportation EIS Environmental Impact
Statement EPA Environmental Protection Agency FAF Freight Analysis
Framework FHWA Federal Highway Administration FTA Federal Transit
Administration ISTEA Intermodal Surface Transportation Efficiency Act of
1991 ITS Intelligent Transportation Systems MPO Metropolitan Planning
Organization NCHRP National Cooperative Highway Research Program OMB
Office of Management and Budget NEPA National Environmental Policy Act
SCAG Southern California Association of Governments STIP State
Transportation Improvement Program STP Surface Transportation Program TCRP
Transit Cooperative Research Program TEA-21 Transportation Equity Act for
the 21st Century TIP Transportation Improvement Program TRB Transportation
Research Board

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

United States General Accounting Office Washington, DC 20548

June 30, 2004

The Honorable Ernest Hollings
Ranking Minority Member
Committee on Commerce, Science and Transportation
United States Senate

Dear Mr. Hollings:

The scope of the U.S. surface transportation system-which primarily
includes roads, mass transit systems, and railroads-is vast and
increasingly congested.1 Passenger and freight traffic are expected to
grow
substantially in the future, requiring continued investment in the surface
transportation system. For example, from 2000 to 2010, passenger travel
on roads is expected to grow by about 25 percent, and passenger travel on
transit systems is expected to increase by about 17 percent, according to
U.S. Department of Transportation (DOT) forecasts. DOT also estimates
that freight traffic will increase by 43 percent from 1998 to 2010.

Over the past 12 years, the federal government has provided hundreds of
billions of dollars for investment in surface transportation projects
through the Intermodal Surface Transportation Efficiency Act of 1991
(ISTEA) and its successor legislation, the Transportation Equity Act for
the 21st Century (TEA-21), which expired in 2003 but has been
subsequently extended.2 Reauthorization of this legislation-an issue
currently before Congress-is expected to provide hundreds of billions of
dollars more in federal funding for surface transportation projects over
the
next 6 years. For this investment to have the greatest positive effect on
emerging transportation problems, agencies at all levels of government
will need to select projects that provide the greatest benefits for a
given
level of cost. Making cost-effective investment choices will become even
more critical if, as some experts believe, the nation faces a sustained

1In this report, we specifically included highways, mass transit systems,
intercity passenger railroads, commuter railroads, and freight railroads
in our definition of surface transportation modes.

2State and local governments provide an even greater share of the funding
for surface transportation investments than the federal government. For
example, in fiscal year 1999, state and local governments contributed 75
percent of the total public sector spending for public roads and 85
percent of total public spending for transit systems.

period of deficits and fiscal imbalance, resulting from growing mandatory
commitments for Social Security and Medicare and increased homeland
security and defense commitments. These challenges require the nation to
think critically about existing government programs and commitments and
implement decision-making processes that will provide the most
costbeneficial outcomes.

The federal government has established a framework of planning
requirements and processes designed to improve the quality of decisions
about investing in transportation infrastructure investments. ISTEA and
TEA-21 specified much of this planning and decision-making framework.
Various analytical approaches have been refined over time to better
calculate the benefits and costs of transportation investments and provide
decision-makers with the tools to make better-informed choices. This
report responds to your request for information about the processes that
transportation decision-makers at all levels of government use to analyze
and select surface transportation infrastructure investments. As agreed
with your office we identified (1) key federal requirements for planning
and deciding on surface transportation infrastructure investments, (2) how
benefit-cost analysis facilitates sound transportation investment
decisions, and (3) other factors that transportation decision-makers
consider in evaluating and deciding on investments.

To identify the key processes for transportation infrastructure planning
and decision-making, we reviewed existing federal laws, regulations, and
guidance on the transportation planning process and interviewed federal,
state, regional, and local transportation agency officials to gain their
perspective on the different federal requirements. To identify how
benefitcost analysis facilitates sound transportation investment
decisions, we analyzed the existing economics literature and
transportation planning studies containing evaluations of benefit-cost
analysis, and we interviewed academics and representatives of a broad
range of transportation organizations to gain their perspective on issues,
including the generalizability of benefit-cost analysis and the
feasibility of comparisons among various transportation modes. To identify
other factors that decision-makers consider in evaluating and deciding on
investments, we (1) analyzed pertinent research on transportation planning
and decisionmaking, as identified by our own review of the research and by
transportation researchers we interviewed; (2) reviewed planning documents
and analyses used by state, regional, and local transportation
decision-makers; and (3) interviewed federal, regional, state, and local
transportation officials; representatives of private sector and civic
organizations; and other transportation experts involved in the planning

and decision-making processes. Many of these interviews and document
reviews were part of site visits that we conducted in three metropolitan
areas that are major centers of passenger and freight traffic-Chicago, IL;
Los Angeles, CA; and San Francisco, CA-to understand how investment
decisions were actually made in those locations. To ensure the reliability
of information presented in this report, we relied to a large extent on
studies from the economics and transportation literature that were
reviewed by peers prior to publication; and we corroborated much of the
testimonial information provided during our three site visits by obtaining
documentation of investment decision-making processes and results. We
conducted our work from September 2003 through June 2004 in accordance
with generally accepted government auditing standards. (See app. I for
more information about our scope and methodology.)

                                Results in Brief

Federal laws and requirements specify an overall approach for
transportation planning and decision-making that states and regional
agencies must follow in order to receive federal funds. This approach
includes involving numerous stakeholders, identifying state and regional
goals, developing long-and short-range state and metropolitan planning
documents, and ensuring that a wide range of transportation planning
factors are considered. The many stakeholders include not only state,
regional, and local agencies, but also private industry and the public.
The planning process begins with the definition of overall state and
regional goals and objectives. As part of this process, states and
Metropolitan Planning Organizations (MPO)3 must collect and analyze data
to help evaluate project priorities. These priorities are specified in
state and metropolitan long-range plans and short-range programs.
Long-range plans identify transportation needs for the next 20 years or
more, and shortrange programs identify specific projects to be initiated
in the near future, usually about 3 years. Both state and metropolitan
short-range programs must specify funding sources and be financially
constrained.4 In selecting

3MPOs are regional transportation policy bodies made up of representatives
from various governmental and other organizations. The Federal Highway Act
of 1970 required the development of such agencies in areas with
populations of 50,000 or greater to carry out cooperative planning at the
metropolitan level. These organizations were created to ensure that
federal funds would be spent through a transportation planning process
that was based on continuing, comprehensive, and cooperative planning.

4To be financially constrained, state and MPO short-range programs must
include a financial plan that demonstrates which projects can be
implemented using existing revenue sources and which projects are to be
implemented using projected revenue sources.

projects for the plan, states and MPOs must consider a wide range of
planning factors specified by the federal government, such as conformity
with environmental and civil rights laws, preservation of existing
systems, and increasing accessibility and mobility, among others. While
federal requirements specify a wide range of these specific factors, they
generally do not specify what analytical tools-such as benefit-cost
analysis- planners should use to evaluate these factors. Instead, states
and MPOs are largely responsible for selecting the methods used to analyze
these factors.

The Office of Management and Budget (OMB), DOT, and GAO have identified
benefit-cost analysis as a useful tool for integrating the social,
environmental, economic, and other effects of investment alternatives and
for helping decision-makers identify projects with the greatest net
benefits. In addition, the systematic process of benefit-cost analysis
helps decision-makers organize and evaluate information about, and
determine trade-offs between, alternatives. Research and best practices
indicate key steps of the analysis to ensure that the analyst defines the
project objectives, identifies all reasonable alternatives, and
systematically evaluates and compares the projected effects of each
alternative. Challenges of benefit-cost analysis include difficulties in
identifying the distribution of benefits and costs of alternative projects
across affected locations and population groups, quantifying and assigning
a dollar value to some effects, defining the scope of the alternative
projects, and ensuring the precision of estimates used in the analysis.
Notwithstanding these challenges, benefit-cost analysis remains an
important and useful tool in helping select transportation infrastructure
projects. DOT agencies and the National Research Council's Transportation
Research Board have initiatives under way to improve benefit-cost analysis
done by planners and to expand its use.

Transportation planners with whom we talked, particularly at the regional
level, said that other factors, many of which are recognized in existing
transportation legislation, can play a major role in final investment
decisions. For example, transportation decision-makers consider the
availability of federal funding sources, which are largely structured to
direct funds to highways and transit systems, rather than railroads or
intermodal projects. Also, transportation decision-makers are aware that
they must achieve a consensus on improvements while incorporating public
participation into the process. In some cases, achieving support from the
voters through referenda is required before projects may proceed or
financing can be secured. This need for voter support is an especially
important factor in California, where sales taxes have become a primary

source of funding new transportation infrastructure. Furthermore, physical
limitations also affect choices of transportation investments.
Difficulties in expanding capacity and limits on existing infrastructure
may direct available investments toward preserving and maintaining
facilities or improving operations rather than building new
infrastructure. Nationwide, spending on system preservation-as a share of
highway capital spending-from all sources increased from 45 percent to 52
percent from 1993 to 2000. In Chicago, transportation planners cited
system preservation as a primary consideration in making decisions about
projects and in the Los Angeles and San Francisco regions, fully 80
percent of transportation funds are spent on system preservation,
maintenance, and operations. Finally, long, multistate transportation
corridors may present special planning and coordination challenges.
Achieving cooperation and coordination among multiple agencies,
communities, and transportation modes-each with its own priorities-makes
the planning and implementation of multistate and multiregion projects
difficult. In some cases, ad hoc state coalitions have emerged to try to
meet this need, especially in coordinating intelligent transportation
system technologies.5 However, planning for intrastate transportation
corridors fits more easily into the framework of state planning.

We provided copies of this report to the Department of Transportation for
its review and comment. The department generally agreed with the report's
contents and also provided technical comments, which we incorporated as
appropriate.

The nation's federal surface transportation investment policy has become
increasingly complex, changing from a narrow focus on completing the
nation's interstate highway system to a broader emphasis on maintaining
and more efficiently operating our highways, supporting mass transit,
protecting the environment, and encouraging innovative technologies. With
the interstate system largely completed in the 1980s-and continuing with
the passage of ISTEA in 1991 and TEA-21 in 1998-the federal government has
shifted its focus toward preserving and enhancing the capacity of the
transportation system by supporting a large network of highway, mass
transit, and other surface transportation programs and projects.

5Intelligent Transportation Systems are technology-based systems intended
to improve the safety, efficiency, and effectiveness of transportation
facilities.

  Background

The funding for transportation plans and projects comes from a variety of
sources including federal, state, and local governments; special taxing
authorities and assessment districts; and user fees and tolls. While
metropolitan areas receive transportation funds from state and local
sources, the federal government also is a significant funding source,
using revenues from federal highway tax receipts and supplemented by
general fund revenues. ISTEA and TEA-21 continued the use of the federal
Highway Trust Fund-which is divided into a Highway Account and Mass
Transit Account-as the mechanism to account for federal highway user tax
receipts that fund various surface transportation programs. The Federal
Highway Administration (FHWA) distributes highway program funds to state
transportation departments that, in turn, allocate the funds to urban and
rural areas on the basis of local priorities and needs.6 The Federal
Transit Administration (FTA) sends most urban transit funds directly to
local transit operators while state transportation departments administer
rural transit funds. In some cases, Congress may designate specific
transportation projects for funding. For example, TEA-21 allocated $9.4
billion over 6 years to 1,850 congressionally designated projects.
Finally, ISTEA and TEA-21 also allowed the use of certain federal highway
program funds for either highway or transit projects, referred to as
flexible funding.7

Key issues-such as traffic congestion, air pollution, land use and sprawl,
the economic viability of neighborhoods and commercial areas, and
facilitating national economic growth-are significantly affected by
decisions about how federal transportation funds are spent. These
decisions grow out of an overall transportation planning and
decisionmaking process involving states, MPOs, local governments, and
other stakeholders.

6A portion of the Surface Transportation Program funds is allocated
directly to Transportation Management Areas, which are urbanized areas
over 200,000 in population.

7Flexible funding is primarily available in FHWA's National Highway
System, Surface Transportation Program, Congestion Mitigation and Air
Quality Improvement Program, and for FTA's Urban Formula Funds.

  Federal Requirements Specify an Approach for Planning and Deciding on
  Transportation Projects

Federal laws and requirements specify an overall approach for
transportation planning agencies to use in planning and deciding on
projects. State, regional, and local government agencies must operate
within these requirements to receive federal funds. The laws and
requirements-which include ISTEA, TEA-21, and their associated
regulations-establish certain requirements governing the way states and
local governments plan and decide upon transportation projects. In
particular, the requirements describe various planning tasks that states
and MPOs must perform, including (1) involving a wide range of
stakeholders in the process; (2) identifying overall goals and objectives
and data to support transportation investment choices; (3) developing
long-and short-range transportation programs and plans; (4) specifying
financing for the transportation programs and projects; and (5) ensuring
that the transportation planning and decision-making process reflects a
variety of planning factors, such as environmental concerns. States and
MPOs must consider a wide range of planning factors laid out in federal
statutes and regulations. However, federal planning requirements generally
do not provide specific guidance on how transportation planners should
evaluate these factors.

    Transportation Planning Involves Multiple Stakeholders

ISTEA and TEA-21 provided stakeholders with greater control over
transportation decisions in their own regions than was done in the past
and recognized that multiple agencies were responsible for planning,
operating, and maintaining the entire transportation system. For this
reason, the laws established a planning process that emphasizes
cooperation and coordination among transportation stakeholders in the
investment decision-making process. To achieve this goal, both ISTEA and
TEA-21 sought to strengthen planning practices and coordination between
states and metropolitan areas and between the private and public sectors
and to improve connections between different forms of transportation. To
foster involvement by all interested parties, states and MPOs are expected
to provide opportunities for notice and public involvement throughout the
planning and project selection process. For stakeholders and other
interested parties (see table 1), federal regulations require a formal
public involvement process that includes reasonable access to technical
and policy information used in developing transportation plans as well as
adequate periods for public comment.

Table 1: Potential Stakeholders Involved during the Metropolitan and
Statewide Planning Process

                             Potential stakeholders

o  Elected officials,

o  Public transit operators,

o  Affected public agencies,

o  	Representatives of transportation agency employees,

o  Freight shippers,

o  Providers of freight transportation services,

o  Private providers of transportation,

o  Representatives of users of public transit,

o  Citizens, and

o  Other interested parties.

Source: GAO analysis of federal metropolitan and statewide transportation
planning statutes and regulations.

State departments of transportation-working with transportation
organizations, local governments, and the public-develop state
transportation goals and plans. Local governments, such as cities and
counties, and regional entities, such as MPOs, carry out additional
transportation planning and project implementation functions, especially
for highway projects. Transit agencies, in addition to operating transit
services such as bus, subway, light rail, commuter railroad, and other
forms of mass transit, also plan and implement capital projects. Other
organizations, such as nonprofit, environmental, and community
organizations, are involved in transportation decision-making through the
public participation process. Finally, private sector firms also may
participate as advisors in the planning and decision-making process,
especially when public decisions directly affect their interests.

MPOs, which are regional transportation policy bodies composed of
representatives from various governmental and other organizations, are key
players in the coordination of transportation plans and projects. MPOs are
designed to provide a setting for impartial transportation decisionmaking
by facilitating evaluation of alternatives, development of long-and
short-range planning documents, and public involvement. In particular,
MPOs provide the forum for the various providers of transportation

facilities8 to come together to develop a more comprehensive approach to
meeting regional transportation needs. Finally, DOT oversees state and
metropolitan transportation planning and provides advice and training on
transportation issues.

    Transportation Planning Requires Identifying an Overall Vision and Analyzing
    Alternatives before Deciding on Projects

In initiating the transportation planning process, states and MPOs are
expected to have a long-term vision that articulates broad goals for the
future of the transportation systems in the state or region. DOT guidance
states that in developing the long-term vision, states and regions are to
consider several factors, including projected population growth and
economic changes, current and future transportation needs, maintenance and
operation of existing transportation facilities, preservation of the human
and natural environment, and projected land uses. States and MPOs may also
conduct investment and planning studies to identify major transportation
corridors in the state or region.

In deciding which proposed transportation projects meet the needs and
reflect the long-range vision of the state or region, states and MPOs are
required to establish a process for collecting and analyzing data to
evaluate different transportation alternatives and using the resulting
information to establish priorities for improving the area's
transportation assets. As part of this process, transportation planners
may develop performance measures and transportation models to evaluate
existing or proposed projects. Performance measures are important
indicators of how well the transportation system is operating. Some
examples of useroriented performance measures are average trip travel
time, length of delay, and reliability of trip making. Transportation
models are simulations of the "real world" that can be used to show the
impact of changes in a metropolitan area on the transportation system
(such as addition of a new road or transit line or increases in population
or employment). Specific types of transportation models are not required
by federal planning regulations.

8Transportation facilities refers to all of the fixed physical assets of a
transportation system, such as roads, train stations, bus terminals,
bridges, and bike paths.

    Federal Laws Require That Transportation Needs and Proposed Projects Be
    Documented in Long-Range Plans and Short-Range Programs

After articulating a vision of overall transportation goals and
considering alternative ways of reaching those goals, federal laws and
regulations require that states and metropolitan areas document their
decisions about future transportation needs and their selection of
federally funded surface transportation projects through long-range
transportation plans and shortrange programs.9 A metropolitan long-range
transportation plan identifies transportation needs for at least the next
20 years, but does not necessarily identify specific projects. It is
expected to include a description of congestion management strategies as
well as capital investments and other measures necessary to (1) ensure the
preservation of the existing transportation system and (2) make the most
efficient use of existing transportation facilities to relieve congestion
and enhance the mobility of people and goods. A state long-range plan is
expected to be developed in cooperation with MPOs in the state and to be
intermodal and statewide in scope. (see fig. 1).

923 U.S.C. 134 (metropolitan planning); 23 U.S.C. 135 (statewide
planning); 23 C.F.R. 450 (planning assistance and standards).

      Figure 1: Federally Required Elements of Metropolitan and Statewide
                              Transportation Plans

Source: GAO analysis of federal regulations governing metropolitan and
statewide transportation planning.

In contrast to the long-range plan, a short-range program covers a more
limited time frame-usually about 3 years-and describes specific
transportation projects or phases of an included project, including the
scope and estimated costs of those projects. In a metropolitan short-range
Transportation Improvement Program (TIP), MPOs are required to identify
the criteria and process for prioritizing proposed transportation
projects, including the extent to which comparisons among modes were
considered. In addition, all surface transportation projects that are to
receive federal funding must be included in the metropolitan and state
programs to receive federal funds. At the state level, each state DOT is
expected to work cooperatively with its MPOs to develop a single State
Transportation Improvement Program (STIP), which is an intermodal program
of projects encompassing all the areas of the state. The STIP incorporates
TIPs developed by the MPOs within the state, and a project in a
metropolitan region must be included in the TIP before it may be included
in the state program. Once adopted by the state, the STIP is concurrently
submitted to FHWA and FTA for approval at least once every 2 years. In
addition to approving the STIP, FHWA and FTA are also responsible for
certifying that the state planning processes are conducted in accordance
with all applicable federal requirements.

Under federal requirements, states and MPOs must specify funding amounts
and sources for transportation programs and projects. States and MPOs must
consider funding needs for both new projects and the maintenance and
operation of the existing transportation system. Financial planning is
part of both the short-and long-range planning processes and includes
identification of resources that are reasonably expected to be available.
Projects in the TIP and STIP are specifically linked to funding sources
and additional strategies for securing funds are included in the plan.

While federal requirements specify that all MPOs have an analytical
process in place to help prioritize and select projects, how projects
originate and are selected for inclusion in transportation plans and
programs may vary in different regions. In some instances, state DOTs are
heavily involved in the metropolitan planning process. For example, the
Illinois DOT heavily influences the planning process in metropolitan
Chicago. In contrast, by state law, California has chosen to give more
planning and decision-making power to counties by directly allocating a

greater share of transportation funds to the counties.10 Another defining
characteristic of transportation project development in the sites we
visited in California is direct citizen involvement in selecting
transportation projects through local ballot initiatives.

    Many Factors To Be Considered Throughout the Planning and Decision-Making
    Process

Federal legislation has identified many factors that states and
metropolitan areas are to consider in planning and deciding on surface
transportation investments. As shown in table 2, these factors include
environmental compliance, safety, system maintenance and operations, and
land use, among others.11

10California state law requires that 75 percent of state transportation
funds be allocated directly to counties under the Regional Transportation
Program, with the remaining 25 percent allocated to the state
transportation planning agency for its interregional transportation
program. Counties within the MPO region do the actual project planning.

11See Federal Highway Administration and Federal Transit Administration,
The Metropolitan Planning Process: Key Issues, (Washington, D.C.: November
2001).

Table 2: Key Factors To Be Considered in Planning and Deciding on
Transportation Investments, as Identified in Federal Requirements

Key factors

o  	Ensure compliance with provisions of the National Environmental Policy
Act, Clean Air Act, and Civil Rights Act;

o  	Support the economic vitality of the metropolitan area, especially by
enabling global competitiveness, productivity, and; efficiency;a

o  	Increase the safety and security of the transportation system for
motorized and nonmotorized users;a

o  Increase the accessibility and mobility options available to people and
for freight;a

o  	Protect and enhance the environment, promote energy conservation, and
improve quality of life;a

o  	Enhance the integration and connectivity of the transportation system,
across and between modes, for people and freight;a

o  Promote efficient system management and operation;a

o  Emphasize the preservation of the existing transportation system;a

o  Promote congestion relief and prevention through management
strategies/systems;

o  Consider the likely effect of transportation policies on land use and
development;

o  Consider using innovative mechanisms for financing projects;

o  Expand, enhance, and increase use of transit services;

o  	Examine the overall social, economic, energy, and environmental
effects of transportation decisions;

o  Consider access to ports, airports, and intermodal transportation
facilities;

o  Preserve rights-of-way access for future transportation projects;

o  	Consider connectivity of roads in areas outside MPO planning
boundaries and in other states; and

o  Consider recreational travel and tourism needs.

Source: GAO analysis of federal regulations governing metropolitan and
statewide transportation planning.

aPlanning factors designated in TEA-21.

For example, transportation planners and decision-makers must develop
alternatives and select projects that conform to the requirements of a
variety of laws, such as the National Environmental Policy Act (NEPA) of
1969 and Title VI of the Civil Rights Act.12 Under NEPA, federal agencies
must assess the impact of major federal actions significantly affecting
environmental quality. Agencies document these analyses in environmental
impact statements. This analysis serves two principal purposes: (1) to
ensure that agencies have available detailed information concerning
potentially significant environmental impacts to inform their

12The Civil Rights Act of 1964: 42 U.S.C. 2000(d).

decision-making, and (2) to ensure that the public has this information so
that it may play a role in both the decision-making process and the
implementation of the decision.

In analyzing the effects of a proposed action and alternatives, agencies
must assess a variety of effects-including ecological, economic, and
social. Agencies may include or refer to benefit-cost analyses in
environmental impact statements. However, for purposes of complying with
NEPA, the weighing of the merits and the drawbacks of the various
alternatives need not be displayed in a monetary benefit-cost analysis and
should not be when there are important qualitative considerations.13 When
it is uncertain whether the proposed action would have significant
environmental effects, agencies use environmental assessments to determine
whether the proposed action would have such effects and therefore whether
an environmental impact statement is necessary. Environmental assessments
are relatively brief documents that need not include detailed effects
analyses. Most transportation projects do not require the preparation of
the more detailed environmental impact statement. In addition to
requirements for environmental assessments or environmental impact
statements, in metropolitan regions that have significant air quality
problems, transportation plans and programs must conform to the State Air
Quality Plans, which outline strategies for reaching compliance with air
quality standards established by the U.S. Environmental Protection Agency
(EPA).14 To meet these standards, states and MPOs in these designated
regions must identify transportation projects that will help reduce motor
vehicle emissions.

Title VI of the Civil Rights Act of 1964 prohibits discrimination on the
basis of race, color, or national origin in programs and activities that
receive federal financial assistance. To comply with Title VI, DOT issued
regulations requiring recipients of federal transportation funds to
provide assurances of compliance, periodic compliance reports, and access
to relevant information about compliance. The regulations require that
each MPO state that its planning process is in compliance with Title VI,
as well

13See 40 C.F.R. 1502.23 dealing with Environmental Impact Statements and
Cost-Benefit Analysis.

14The Clean Air Act of 1990 and Title 23 of the U. S. Code both require
that transportation and air quality planning be integrated in areas
designated by EPA as air quality nonattainment or maintenance areas.
Nonattainment areas are geographic areas that do not meet the federal air
quality standards, and maintenance areas are areas that formerly violated
but currently meet the federal air quality standards.

as other statutory requirements. Both Title VI and NEPA require
involvement and input from the public, interest groups, resource agencies,
and local governments throughout the transportation planning and project
development process.

    Transportation Planners Generally Have Discretion in Selecting Analytical
    Tools

Other than the NEPA requirements for environmental analyses, federal
requirements give states and MPOs considerable flexibility in selecting
specific analytical tools and elements used to evaluate projects and make
investment decisions. For most surface transportation projects, current
planning regulations require only that states (in coordination with MPOs)
establish a process to conduct data analyses and evaluate alternatives for
transit and highway projects. In defining the factors to be included in
such an analysis, the requirements specify in general terms that states
should consider identified social, economic, energy, and environmental
effects of transportation decisions. Federal planning requirements also
state that the metropolitan planning process should consider the
cost-effectiveness and financing of alternative investments to meet
transportation demand, support efficient transportation system
performance, and consider the related impacts on social and economic
development, housing, and employment goals. However, the requirements do
not provide guidance to the states and MPOs on the types of analyses that
are required or how they are to be prepared.

An exception to this approach applies to major transit system projects
eligible for capital investment grants and loans under FTA's New Starts
program. Under this program, FTA identifies and funds fixed guideway
transit projects, including heavy, light, and commuter rail, ferry, and
certain bus projects (such as bus rapid transit). In contrast to other
FHWA and FTA programs where funds are distributed through statutory
formulas, funding commitments for the New Starts program are made for
specific projects, and projects are evaluated at various stages in the
development process. For New Starts projects, federal requirements are
more specific in terms of the types of data to be collected, the criteria
for conducting an analysis, and the factors involved in evaluating a
proposed project. For example, to be considered for possible New Starts
funding, local project sponsors must prepare an alternatives analysis on
the

  Benefit-Cost Analysis Is a Method for Evaluating Alternatives and Improving
  Transportation Infrastructure Decision-Making

benefits, costs, and impacts of alternative strategies to address a
transportation problem in a given corridor.15

While FHWA and FTA guidance does provide some technical assistance on the
use of various analytical tools and models, neither FHWA nor FTA advocates
the use of any particular set of analytical tools, except for the New
Starts program. In addition, according to a 1999 National Cooperative
Highway Research Program report, decision-makers are often uncertain about
the appropriate use of analytic tools, including their usefulness,
reliability, and data requirements.16 Furthermore, FHWA officials note
that there currently is no minimum set of elements that are required to be
included in an analytical model. In fact, FHWA officials point out the
difficulty of establishing a consensus on modeling standards, especially
since the use of tools or models varies from one region to the next. As a
result, states and MPOs have largely been responsible for identifying and
performing their own analyses during the planning process.

Although the federal framework does not require the use of any particular
tool, federal guidance advocates using benefit-cost analysis to evaluate
investments. Benefit-cost analysis facilitates sound transportation
investment decisions by integrating the effects of a potential alternative
into a common monetary measure for comparison with other alternatives. In
assessing the relative benefits and costs of each alternative, the analyst
attempts to integrate social, economic, energy, and environmental impacts,
in accordance with federal guidance, directly into the benefit-cost
analysis. Research and best practices indicate that key steps of the
analysis include defining the project objectives, identifying all
reasonable alternatives, and systematically evaluating and comparing the
projected effects of each alternative. Upon completion of the analysis,
the decisionmaker can derive useful information about the trade-offs among
alternatives and identify the alternative that results in the greatest
estimated net social benefit to society. Researchers acknowledge several
practical challenges of benefit-cost analysis, such as difficulties in

15FTA proposes New Starts projects to the Congress for funding on an
annual basis, based on an evaluation of their technical merits, including
mobility improvements and cost effectiveness, and the stability of the
local financial commitment.

16Transportation Research Board, Guidance on Using Existing Economic
Analysis Tools for Evaluating Transportation Investments, prepared for the
National Cooperative Highway Research Program, NCHRP 2-19 (2) (Washington,
D.C.: October 1999).

quantifying some benefits and costs and defining the scope of the project.
However, major transportation groups, such as DOT and the National
Research Council's Transportation Research Board (TRB), continue to work
on guidance and provide resources to improve and simplify benefitcost
analysis and other analytic tools for practitioners.

    Federal Guidance Supports the Use of Benefit-Cost Analysis

While federal planning regulations for transportation generally do not
require the use of specific analytical models, several federal sources
have identified benefit-cost analysis as a useful tool to help
decision-makers determine trade-offs between alternatives and identify
projects with the greatest estimated net social benefits. For example,
Executive Order 12893 states that expected benefits and costs should be
quantified and monetized to the maximum extent practicable when evaluating
federal infrastructure investments in the areas of transportation, water
resources, energy and environmental protection.17 Moreover, guidance from
OMB on the planning of federal capital assets suggests that the selection
of alternatives should be based on a systematic analysis of expected
benefits and costs.18 DOT encourages and provides guidance on the use of
benefit-cost analyses in decision-making for transportation planning.19 In
addition, in the past, we have encouraged the use of benefit-cost analysis
in other areas such as freight transportation.20

17Executive Order 12893, Principles for Federal Infrastructure Investments
(Washington, D.C.: Jan. 26, 1994).

18See Office of Management and Budget, Capital Programming Guide,
Supplement to Office of Management and Budget Circular A-11, Part 3:
Planning, Budgeting and Acquisition of Capital Assets (Washington, D.C.:
July 1997).

19For example, see FHWA Toolbox for Regional Policy Analysis, FHWA
Economic Analysis Primer.

20See U.S. General Accounting Office, Freight Transportation: Strategies
Needed to Address Planning and Financing Limitations, GAO-04-165
(Washington, D.C.: Dec. 19, 2003).

    Benefit-Cost Analysis Integrates Multiple Effects Using a Systematic
    Approach to Evaluate Alternatives

Unlike most other types of analysis, benefit-cost analysis allows analysts
to integrate multiple effects into a common monetary measure for
assessment of a wide variety of alternatives. As discussed earlier in this
report, federal guidelines encourage decision-makers to consider the
potential social, environmental, and safety effects of transportation
projects. Many tools and methods exist to analyze these effects
separately, including models that forecast travel demand, emissions
measurement tools, and other types of analyses. (See app. II for a
comparison of benefitcost analysis to other economic analyses.) However,
benefit-cost analysis integrates and monetizes the quantifiable benefits
and costs of each alternative, including the results of some of these
other models. Therefore, benefit-cost analysis provides a more thorough
assessment of the alternatives than an analysis of any single impact area.

Benefit-cost analysis is a systematic approach to evaluating alternative
investments that attempts to quantify and monetize benefits and costs
accruing to society from an investment. This analysis examines the
immediate effects of the investment on the people using the investment and
the effects that accrue to nonusers as a result of the investment.
Examples of effects on users of transportation investments are reduced
travel time and improved safety for drivers and transit passengers. An
example of an effect on a nonuser is a change in pollution levels. From
research and guidance on transportation investment analysis and our own
previous work, we identified 10 steps that an analyst should perform for
sound benefit-cost analysis, as shown in table 3.21 (See app. III for a
detailed discussion of each of the key elements of the analysis.)

21See U.S. General Accounting Office, Consumer Product Safety Commission:
Better Data Needed to Help Identify and Analyze Potential Hazards,
GAO-HEHS-97-147 (Washington, D.C.: Sept. 29, 1997).

          Table 3: Key Elements for Benefit-Cost Analysis Key elements

o  Define project objectives;

o  Establish the base case for comparison;

o  Identify alternative projects;

o  Define a time frame for analysis;

o  Identify impacts of alternatives;

o  Quantify and monetize impacts as benefits and costs to the extent
possible;

o  Discount benefits and costs to present values;

o  Compare benefits and costs of each project, using a common monetary
measure;

o  	Assess the sensitivity of the analysis to changes in assumptions and
forecasted inputs; and

o  Identify the alternative that results in the estimated greatest net
social benefit.

  Source: GAO Analysis of economic literature and federal guidance documents.

    Benefit-Cost Analysis Can Yield Valuable Information for Decision-Makers

In addition to assigning a single monetary value to each potential
project, benefit-cost analysis provides decision-makers with valuable
information for comparing investment alternatives. Specifically,
benefit-cost analysis informs decision-makers about the relative merit of
alternatives by systematically assessing and placing monetary value on the
favorable and unfavorable effects of various investment options. That is,
researchers state that benefit-cost analysis can help decision-makers
better understand the implications of each alternative and make trade-offs
between investment options more transparent. This process encourages
objective analysis and can expose possible biases in decision-making.

The systematic process of benefit-cost analysis also helps decision-makers
because it organizes information about the alternatives and converts
dissimilar values, such as hours of travel time and number of accidents,
to a comparable dollar measure. Researchers highlight benefit-cost
analysis as a useful organizational tool because it aggregates key
information relevant to the investment decision in a meaningful way. In
addition, benefit-cost analysis offers a comparison of the benefits and
costs that might accrue over time-including projected future operating
costs and benefits to society that might not materialize immediately-and
converts them to values in a single time period for more accurate
comparison. In commenting on a draft of this report, FHWA noted that the
discipline of going through the steps of benefit-cost analysis also could
disclose important, timely information for public officials, planners,
designers, and

the public, even if the data and methods used in the analysis are
imperfect. Such timely information can facilitate decision-making.

During our site visit to Chicago, railroad officials noted the value of
benefit-cost analysis in a practical application. The Chicago Regional
Environmental and Transportation Efficiency project (CREATE) is a $1.5
billion plan that includes more than 70 infrastructure improvement
projects to increase the efficiency and reliability of freight and
passenger rail service, reduce highway congestion, and provide safety and
environmental benefits in the Chicago area.22 Benefit-cost analysis was
key in the decision to proceed with this public-private partnership,
according to several railroad executives. Project sponsors used an
extensive model of the Chicago regional railroad network to help determine
the effects of various upgrades to the network. The model showed the
extent to which CREATE would resolve freight rail congestion
problems-rather than merely pushing them to another location in the
regional railroad network. Using the results of this model, benefit-cost
analysis was critical in identifying the highest return on investment for
individual project segments across the Chicago rail system and helping to
illustrate public and private benefits. Benefit-cost analysis also helped
provide a calculation of the level of benefits that private railroads
would receive from the project, thus providing an estimate of the level of
financial contribution that the railroads should make.

While the results of benefit-cost analysis aid decision-makers in
selecting between alternatives, guidance on benefit-cost analysis advises
decisionmakers to augment the results of the analysis by considering other
factors when weighing investment alternatives. Such other factors, like
public participation and equitable distribution of benefits, are those
that cannot be quantified or incorporated directly into the analysis due
to practical challenges of benefit-cost analysis or limitations of the
underlying information.

Benefit-Cost Analysis Has Although guidance from many federal agencies
encourages the use of

Practical Challenges 	benefit-cost analysis as a useful tool for assessing
the potential effects of transportation projects, such analysis has
several practical challenges. One

22Chicago's rail system is the nation's largest freight hub, and the
region also handles 73 million railroad passenger trips annually. Major
bottlenecks have developed as a result of the region's need to move 1,200
trains each day.

challenge is that while benefit-cost analysis evaluates the net benefits
of projects, it does not usually consider the distribution of benefits
across locations or populations or other equity concerns that may exist
with transportation investment projects.23 Moreover, the outcome of
benefitcost analysis is a net value and therefore inherently eliminates
any distinction between groups of citizens to whom benefits accrue. By
summing the individual gains and losses to determine the effect on society
as a whole, benefit-cost analysis assumes that each individual's gains or
losses should be valued equally with any other individual's gains or
losses.24 For example, FHWA guidance notes that benefit-cost results might
disproportionately rank projects in urban areas over those in rural areas
because of the higher level of benefits urban projects may generate.

Another practical challenge of benefit-cost analysis is monetizing some
impacts of transportation improvements, such as reductions in emissions,
travel time saved, and increased safety and reductions in fatalities.
Although agency guidance exists, researchers do not always agree on the
appropriate methods and assumptions for valuing these effects. For
example, a report by the National Cooperative Highway Research Program
(NCHRP) cites several outstanding issues in placing economic value on the
time people spend traveling, such as (1) the fraction of the wage rate
that should be used for work-related travel and personal travel, (2)
whether to apply the same time value for very short periods of time saved
as for longer periods, and (3) how to account for variation of travel
time.25 Furthermore, debate surrounds the appropriate value of saving one
statistical life through an improvement in safety; some advocates assert
that human life is priceless and cannot be measured in monetary terms,
while some researchers state that monetizing the impact of a reduction in
fatalities leads to more complete analysis.26 In commenting on a draft of
this report, FHWA said that although there is some debate about the

23Analysts could address these distributional problems within benefit-cost
analysis by mathematically weighting the benefits and costs to a
disadvantaged group differently than the benefits and costs to other
segments of the population. However, in practice, it is very difficult to
determine appropriate weights and equitably assign them to different
population groups.

24GAO-HEHS-97-147.

25Transportation Research Board, Assessing the Social and Economic Effects
of Transportation Projects, NCHRP B25-19 (Washington, D.C.: February
2001).

26For additional discussion on this topic, see OMB, Economic Analysis of
Federal Regulations Under Executive Order 12866 (Washington, D.C.: Jan.
11, 1996).

monetary value of some impacts of transportation improvements, there is
also much about the valuation of impacts that economists can agree on. For
example, FHWA noted that monetary values available in agency guidance can
be assigned to the performance measures-such as travel time saved-that are
already calculated by regional models in order to aid the evaluation of
proposed transportation projects.

Another challenge of implementing benefit-cost analysis is properly
scoping the alternatives to analyze. Benefit-cost analysis is typically
practiced as a way to compare one project against one or more individual
projects rather than evaluating a system of projects. FHWA guidance
cautions against evaluating a project that is actually a combination of
two or more independent projects because an inefficient project might be
hidden in the aggregate result. If multiple projects are aggregated and
the net benefits of the group of projects are calculated, the result might
indicate that the group of projects results in greater total benefits than
the total costs incurred. However, one or more of the individual projects
might not result in benefits greater than its costs if it were analyzed
separately. Other research shows that analyzing each project independently
and selecting projects without regard to the interrelation of the project
outcomes can lead to selection of a combination of projects that do not
maximize net benefits to society.27 In other words, one project, such as
traffic signal coordination, might complement another project, such as a
dedicated bus lane. In such a case, independent assessment of each project
would not reveal the full benefits of implementing both projects.
According to FHWA, in cases where projects are significantly interrelated,
but not dependent on each other to produce net benefits to society, the
effects of one project on another (e.g., changes in traffic) should be
included in the analysis.

Finally, because benefit-cost analysis integrates the effects of many
different impact areas, it carries with it the challenges of forecasting
and measuring the effects in those areas. For example, travel demand
models forecast future use of the transportation system; therefore, their
outputs become inputs to benefit-cost analysis. According to a TRB report,
though travel demand models have been commonly used for 4 decades, few
universally accepted guidelines or standards of practice exist for these

27Hof, John G. and Douglas B. Rideout, "Limitations of the With and
Without Principle in Benefit-Cost Analysis," Public Finance Quarterly (17,
2) April 1989, pp. 216-226; and Cohn, Elchanan, "Benefit-Cost Analysis: A
Pedagogical Note," Public Finance Review (31, 5) September 2002, pp.
534-549.

models or their application.28 Practitioners' views on appropriate methods
vary because each organization conducting analysis tailors the forecasting
approach to its region's characteristics, available data, and the
preferences and knowledge of the staff doing the analysis. The resulting
uncertainty over the best approach to forecasting is an important
challenge because such uncertainty can lead to imprecise or inaccurate
inputs, which can severely affect the outcome of the analysis. For
example, research on an emissions model highlights uncertainties in the
data used to estimate reductions in vehicle emissions from congestion
mitigation and concludes that these uncertainties lead to large
uncertainties in the model outputs.29

    Research Studies Are Available to Improve Benefit-Cost Analysis and Other
    Analytic Tools

Several major transportation organizations-TRB, FHWA, FTA, the Association
of Metropolitan Planning Organizations, the American Association of State
Highway and Transportation Officials (AASHTO), and the American Public
Transportation Association (APTA)-conduct research to help MPOs address
some of the practical challenges of implementing benefit-cost analysis, as
well as other analytic tools. For example, FHWA has developed a "Toolbox
for Regional Policy Analysis" that offers guidance on a variety of
techniques, including benefit-cost analysis, that MPOs can use to evaluate
investment alternatives. MPOs also may adopt best practices developed by
other MPOs or use consultants to assist with analysis and modeling.
Initiatives such as the Transportation Planning Capacity Building
Program-sponsored by FHWA and FTA- offer peer exchanges, roundtables, and
workshops to facilitate such information sharing. In addition, many
studies that are relevant to analysis and decision-making come from two
major applied, user-oriented research programs-the NCHRP, which focuses on
highway research and the Transit Cooperative Research Program (TCRP).30 In
both programs, practitioners and other potential users of research results
are involved in identifying their research needs, participating in
selecting projects, and

28Transportation Research Board, First Report of the Transportation
Research Board's Committee for Review of Travel Demand Modeling by the
Metropolitan Washington Council of Governments, (Washington, D.C.: Sept.
8, 2003).

29Committee to Review EPA's Mobile Source Emissions Factor (MOBILE) Model,
Modeling Mobile-Source Emissions, (Washington, D.C.: 2000).

30TRB administers both programs. State transportation departments that are
AASHTO members have sponsored NCHRP in cooperation with FHWA since 1962
and make about $30 million available annually to sponsor its projects. FTA
provides about $8 million annually and has worked with APTA's nonprofit
education and research organization since 1992 to sponsor TCRP research.

  Many Other Factors Shape Transportation Investment Choices

helping guide projects. When research is complete, TRB publishes and
widely disseminates the research findings.

Several experts have indicated that while transportation researchers have
devoted considerable attention to developing detailed guidance on analysis
and modeling, they anticipate an increasing emphasis on this issue. They
emphasized that TRB is likely to lead a major analysis to review and
improve the state of the practice in modeling transportation impacts,
benefit-cost analysis, and other tools.

While transportation decision-makers consider analyses, such as
benefitcost analyses, in investing resources to meet transportation needs,
analyses often do not have a decisive impact on the final investment
choices made by states and MPOs. According to transportation research,
planning officials, and our prior work, other factors play a greater role
in shaping decisions. For example, the federal funding structure for
surface transportation and federal program incentives tend to focus
decisionmakers' attention on highway and transit projects and stakeholders
rather than on railroads or other freight concerns. Moreover, there are
relatively few instances in which decisions involve trade-offs among the
various transportation modes to meet passenger and freight mobility needs,
according to local planning officials. Decision-makers also are required
to seek public input and involve a wide range of public and private
stakeholders in reaching a consensus on investments. Ensuring that
investment choices will maintain the existing infrastructure or improve
its operation, rather than expand the transportation system's capacity,
also appears to be an important priority for decision-makers. Finally,
decisionmakers are recognizing the importance of longer, multistate
transportation corridors and the special challenges that they pose for
investment decisions.

Analysis Assists, but Does MPOs, especially in major metropolitan areas,
produce a substantial

Not Drive, Many amount of analysis and modeling, according to
transportation experts we

Transportation Decisions 	interviewed. The results of such analyses can be
a factor in transportation investment decision-making. For example, as
noted previously in this report, transportation decision-makers in Chicago
stated that the results of benefit-cost analysis had factored into their
decision to implement the CREATE project. However, such analyses do not
appear to play a decisive

role in many investment decisions, although they may help rule out bad
investments and point out serious problems.31 For example, planners in Los
Angeles noted that the projects selected for the TIP were not necessarily
the ones with the highest benefit-cost ratios, although their analysis
showed that every project in the plan did generate more benefits than
costs. In addition to the limitations of benefit-cost analysis we
discussed previously in this report, decision-makers may not be relying
upon analyses, in part, due to various concerns about the usefulness and
reliability of the analyses, according to the transportation research
literature and our interviews with experts and officials in Chicago, Los
Angeles, and San Francisco.

State DOTs and MPOs have expressed uncertainty about the usefulness of
analytical tools in guiding their transportation planning and
decisionmaking. For example, states and MPOs view existing analytical
tools as having limited usefulness in comparing investment alternatives
among transportation modes and between passenger and freight investments.
TRB's applied research programs are trying to address this need through
development of specific tools to help in making multimodal trade-offs. In
addition, understanding how and when to use analysis is challenging for
decision-makers.32 During our site visits, we found few instances in which
investment decisions involved direct cross-modal trade-offs, such as
railroad versus highway. According to a NCHRP survey published in 2001,33
88 percent of state DOT respondents and 85 percent of MPO respondents
reported that more useful guidelines-such as a guidebook for agency use in
applying methods and analytic techniques-was either badly needed or would
help to enhance the agency's ability to evaluate the social and economic
effects of transportation system changes. Accordingly, the study concluded
that decision-makers need to be able to better select when, how, and why
to use particular analytic tools in investment decisions.

31For example, financial analysis and air quality conformity analysis
might reveal concerns that would play an important role in some investment
decisions.

32Transportation Research Board, Guidance on Using Existing Economic
Analysis Tools for Evaluating Transportation Investments, NCHRP 2-19 (2),
(Washington, D.C.: October 1999).

33Transportation Research Board, Assessing the Social and Economic Effects
of Transportation Projects, NCHRP B25-19, (Washington, D.C.: February
2001).

There are also concerns about data used in the analyses. Insufficient
state and local data-particularly freight-related data-limits the quality
and amount of analysis and modeling, according to NCHRP research and our
December 2003 report.34 The lack of metropolitan level data, which is
needed to analyze investment alternatives, has been a continuing concern
in transportation research. For example, data needed to identify heavily
traveled highways and freight bottlenecks, and to develop and evaluate
alternative solutions for addressing such congestion (e.g., comparing the
benefits of improving highway operations to the benefits of adding new
road capacity), is not always available. Furthermore, data needed to apply
a specific analytic tool may not be available or funds may not be
sufficient to acquire or collect needed data. Compounding the problem,
existing modeling software cannot always successfully accommodate the data
limitations to yield results that are credible and usable. In the NCHRP
survey of state DOTs and MPOs published in 2001, 82 percent of state DOT
respondents and 97 percent of MPO respondents reported that better data to
analyze social and economic effects either were needed badly or would help
enhance the agency's ability to evaluate the social and economic effects
of transportation system changes.

Freight data pose special challenges because shifting product mix, trade
patterns, and consumer demands make freight a fast-changing area. The U.S.
Bureau of Transportation Statistics reported in 2003 that there is a
consensus that existing freight data often are too outdated to capture
current freight status, many data elements are missing, and data often
cannot be compared across modes.35 TRB and we have made recommendations to
improve freight data. TRB recommended that resources be focused on
developing a national freight data program that targets the needs of
transportation analysts and planners.36 We recommended in our December
200337 report that DOT facilitate the collection of freight-relevant data,
which would allow state and local planners to develop and use better
evaluation methods such as demand forecasts, modal diversion forecasts,
and estimates of the impacts of

34GAO-04-165.

35U.S. Department of Transportation/Bureau of Transportation Statistics,
Transportation Statistics Annual Report 2003 (Washington, D.C.: October
2003).

36Transportation Research Board, Letter Report on the Freight Analysis
Framework (Washington, D.C.: Feb. 9, 2004).

37GAO-04-165.

investments on congestion and pollution, thus providing a better basis for
making transportation investment choices. FHWA has developed a Freight
Analysis Framework (FAF) designed to estimate the flows of commodities and
related freight transportation among states, substate regions, and major
international gateways. The FAF also forecasts changes in the flows due to
changes in economic conditions, transportation facilities, or other
factors. FHWA is currently working to improve the FAF by improving the
accuracy of freight flows, updating sources used in the model, and
possibly incorporating new data sources and forecasting methods.

Other considerations affect decision-makers use of analyses, such as how
competently the analyses are interpreted and how well analyses are
communicated, according to a transportation researcher. TRB and we have
expressed a concern about impending shortages of skilled transportation
professionals with expertise to choose and use analytic tools and
communicate their results. Timing also can have an impact on the use of
analysis. A local official observed that analyses that come later in the
decision-making process may be viewed as the most relevant because they
reflect the most current information available as projects are being
considered.

Concerns also have been raised about the ability of MPOs to produce and
disseminate quality analyses that aid investment decision-making, given
their broad scope of responsibilities and current funding levels. A recent
study of metropolitan decision-making in transportation38 concluded that
although MPOs have been given new planning responsibilities in areas such
as environmental justice, job access, freight planning, and systems
operations, highway program funding for metropolitan planning has not
increased. DOT officials also told us that local budget constraints
complicate the ability of MPOs to deliver quality data analysis because
analysis is usually the first thing to be cut. During our Chicago site
visit, a transportation consultant expressed concern that the MPO for that
area is very thinly funded for the work that it is being asked to perform.

38Bruce Katz, Robert Puentes, and Scott Bernstein, The Brookings
Institution Series on Transportation Reform, Improving Metropolitan
Decision Making in Transportation: Greater Funding and Devolution for
Greater Accountability, (Washington, D.C.: October 2003).

    Federal Financing Structure and Other Factors Limit Intermodal Investment
    Decision-Making

In evaluating and deciding on investments, the structure of federal
funding and the lack of freight stakeholder involvement are important
factors that focus decision-making principally on highways and transit and
on stakeholders associated with these modes. In addition, during our site
visits, we found few instances where investment decisions considered
direct trade-offs between modes or between passenger and freight issues.

ISTEA, TEA-21, and federal planning guidance all emphasize the goal of
establishing a system wide, intermodal approach to addressing
transportation needs. However, the reality of the federal funding
structure-which directs most surface transportation spending to highways
and transit, rather than railroad infrastructure-plays an important role
in shaping MPO investment choices. In fiscal year 2001, for example,
federal transportation grants to state and local governments totaled about
$27.8 billion for highway programs, $7.0 billion for transit programs, and
$37 million for railroad programs. The federal financial support for
highways and transit systems comes mainly from federal highway user fees
(i.e., fuel taxes deposited into the Highway Trust Fund), with the revenue
generated from these fees generally targeted for highway or transit
projects. While most federal funding sources and programs are linked to
highway or transit uses, some funding flexibility between highway and
transit is allowed under programs such as the National Highway System,
Surface Transportation Program (STP), and Congestion Mitigation and Air
Quality Improvement (CMAQ) programs. Federal programs provide limited
support for investment in railroad infrastructure, with railroad
investments largely financed by the private sector.

In addition to the federal transportation grants to state and local
governments discussed above, the federal government also provides some
support to Amtrak for intercity passenger rail service. For example, in
fiscal year 2003, the federal government appropriated about $1 billion to
Amtrak to cover operating and capital expenses. However, the role of the
federal government in providing financial support to Amtrak is currently
under review amid concerns about the corporation's financial viability and
discussions about the future direction of federal policy toward intercity
rail service.39 Regarding freight rail projects, the private sector owns,

39The Amtrak Reform and Accountability Act of 1997 prohibited Amtrak from
using federal funds for operating expenses, except an amount equal to
excess Railroad Retirement Tax Act payments, after 2002. However, Congress
specifically appropriated funds for Amtrak to cover operating expenses in
fiscal year 2003 (see the Consolidated Appropriations Resolution, 2003,
P.L. 108-7).

operates, and provides almost all of the financing for freight railroads,
with the public sector providing the supporting infrastructure-such as
highways, ports, and intermodal facilities. Innovations in ISTEA and TEA21
allowed states more flexibility to use federal funds for freight projects,
established public-private partnerships, and allowed the expenditure of
federal aid on nonhighway freight projects in certain circumstances.40

A number of concerns have been raised about the availability of funding
for railroad infrastructure, particularly for intermodal investments that
could improve freight mobility. For example, AASHTO has reported that,
although the railroad industry's return on investment has improved, it
still is below the cost of capital, a factor that might adversely affect
future railroad infrastructure investment levels.41 In addition, we
reported in December 2003 that access to funding sources for freight
railroads-such as the National Corridor Planning and Development Program
and the Coordinated Border Infrastructure Program-has been limited
because, according to FHWA, these programs are oversubscribed and much of
the funding for these programs has been allocated to congressionally
designated projects.42 In addition, National Corridor Planning and
Development Program funds may not be used for improvements on railroads'
heavy-use "mainline" tracks. Furthermore, given the intermodal nature of
freight projects, the overall lack of flexibility for using federal
transportation funding across modes limits the availability of funding for
improving railroad and freight infrastructure. For example, the
eligibility criteria under the Transportation Infrastructure Finance and
Innovation Act do not allow assistance to privately owned facilities, such
as privately owned rail infrastructure. Local planning officials we
interviewed expressed concerns that limited public funding for freight
railroad investments might limit regional options for addressing
infrastructure requirements. For example, one local planning official told
us that the lack of flexible funding limited that city's ability to
address freight-related problems. A regional planning official noted that
while CMAQ money has

40Federal programs that can support railroad-related infrastructure that
meet eligibility requirements include the Transportation Infrastructure
Finance and Innovation Act, Railroad Rehabilitation and Improvement
Financing, and the Rail-Highway Grade Crossing Program.

41American Association of State Highway and Transportation Officials,
Transportation: Invest in America: Freight-Rail Bottom Line Report
(Washington, D.C.: 2002).

42GAO-04-165.

some flexibility, the federal funding structure narrows the ability to
make optimal intermodal choices.

Our December 2003 report43 on freight transportation pointed to another
concern about freight decision-making-that state and local transportation
planning and financing is not well suited to addressing freight
improvement projects. At the local level, planning is oriented to projects
that clearly produce public benefits, such as passenger-oriented projects.
While freight projects also may produce public benefits by reducing
freight congestion, they often can have difficulty securing public funds
because they may generate substantial private sector benefits. For
example, in California, local planning officials told us that State
Transportation Improvement Program (STIP) funds could not be used for
freight railroad improvements unless there were distinct benefits for
passenger movement. Unlike passenger projects, it may be more difficult to
identify clear-cut public benefits associated with freight railroad
projects and balance them with private benefits. In California, local
planning officials said they consider railroad improvements to be at a
disadvantage in public referenda on transportation improvements because
public support for freight and railroads is lacking. Chicago officials
acknowledged that the lack of federal funds for freight projects limits
the region's investment options and local governments' interest in
spending their own funds on freight projects, such as the CREATE project.
Finally, railroad industry investment criteria are not always aligned with
the goals of the states and MPOs. While freight railroad industry
investments may meet the internal industry tests of providing revenues,
profits, and financial feasibility, they may not deal adequately with
national transportation concerns, such as improving mobility, reducing
nationally significant chokepoints, and enhancing system capacity.

Several other considerations limit freight stakeholder involvement in
local investment decisions-potentially affecting the MPOs' ability to take
a system wide, intermodal approach to addressing transportation needs.
Although MPOs are required to consider freight needs, reflecting the
concerns of freight stakeholders-such as freight railroads-in
decisionmaking has proven challenging. For example, the Chicago region has
been particularly active in involving freight railroads in the MPO's
Intermodal Advisory Task Force. But a railroad official, who described the
railroad companies' interaction with the MPO, nevertheless saw the need to
modify

43GAO-04-165.

the long-standing, local decision-making process so that freight railroads
have a clearer role in investment decisions. Railroad officials in Chicago
also cited the unfamiliarity of planners and decision-makers with freight
operations as an obstacle to freight investments. They noted that many
local officials and transportation agencies do not have a clear
understanding of how freight operates, including the complexities of a
consumer goods distribution system that typically starts in Asia or other
areas of the world. However, several Chicago officials believed that the
CREATE project may help change this situation by providing a plan to
improve freight rail efficiency and freight rail's interface with
passenger transportation, and by giving freight more visibility with local
officials.

The freight industry may face other challenges in participating in
transportation decision-making. For example, freight railroad companies
operate in many states-each with numerous MPOs in their borders. A
railroad executive noted that if all MPOs were serious about freight
issues, companies could not handle the demands on their resources to
participate. The freight industry also has long-standing concerns about
working with the public sector. A railroad official we interviewed said
that federal rail regulation left a lingering legacy of industry distrust
of the government. In addition, freight railroads have long made their own
investment decisions and supplied their own capital-with no public sector
influence. As private entities that own most of the nation's railroad
infrastructure, freight railroads typically have not worked with the
public sector because of concern about requirements and regulations that
are tied to federal funds, unless a proposed infrastructure project will
yield financial returns for the company. In addition, the lengthy planning
and construction time associated with public infrastructure projects does
not match the shorter planning and investment horizons of private
companies.

In addition to the focus on highways and transit over railroad investment
choices, during our site visits we also found that cross-modal comparisons
play a limited role in transportation investment decisions. We found
limited instances in which investment decisions involved direct trade-offs
in choices between modes or users-such as railroad versus highway or
passenger versus freight. Officials in Chicago indicated that railroad and
highway investments, and passenger and freight projects, rarely are in
direct competition-perhaps because railroads and highways often serve
different needs or markets. An official in Los Angeles commented that
planners there avoid making modal comparisons because they view them as
comparing "apples to oranges." In Chicago, an official described only a
few situations that posed modal choices and trade-offs for decision-

makers, for example, deciding between a transit alternative versus adding
lanes to an existing tollway.

Several researchers told us that whether planners and decision-makers make
cross-modal and passenger-freight comparisons may be a moot point because
local conditions, such as the physical environment often dictate modal
choices. For example, metropolitan areas that are adjacent to a seaport
may have few choices about whether to use highways or railroads to move
products to and from the port. Space constraints and existing
infrastructure, as well as the characteristics of freight (i.e., ports
that handle bulk commodities such as coal or grain usually use railroads,
while ports that handle computers usually use trucks), foreclose choices.
Overall, moving freight usually offers fewer transportation choices than
moving passengers, an expert noted. In addition, the demographic or other
characteristics of specific transportation markets-such as a growing area
with many transit commuters-also may determine modal choice.

    Public Input and Other Political Considerations Shape Investment Decisions

Metropolitan decision-making is designed to be a collaborative process
that involves the public and its diverse concerns in identifying actions
to improve transportation system performance. MPOs are required to seek
public comment and have clear federal guidance on involving the public- it
is integral to their mission and one of their core functions. Moreover,
the definition of the public is wide ranging-virtually all private and
public individuals and organized groups that are potentially affected by
transportation decisions in a given area.44 Federal regulations also state
that MPOs must cooperate with the state and local transportation providers
such as transit agencies, airport authorities, maritime operators,
rail-freight operators, Amtrak, port operators, and others. MPOs are
directed to provide the public with meaningful opportunities to provide
input on transportation decisions and are expected to consider public
input on the full range of financial, social, economic, and environmental
consequences of their investment alternatives.

Public participation can introduce considerations such as quality of life
and other issues that are difficult to quantify in making transportation
choices. It also puts decision-makers in the position of balancing
different

44FHWA, FTA, AASHTO, APTA, The Association of Metropolitan Planning
Organizations, The Metropolitan Transportation Planning Process: Key
Issues (Washington, D.C.: November 2001).

public agendas about funding and values, according to a transportation
researcher. Funding conflicts may arise between modes or from concerns
about spreading benefits across the metropolitan area. Value conflicts may
result from public concern about a potential project's impacts on a
neighborhood or the environment.

As we observed in our site visits, public participation can play an
influential role in transportation investment decisions. In California,
public views often are expressed in county-level ballot box initiatives on
the sales taxes and municipal bonds that finance transportation projects.
Whether voters approve these initiatives is a significant factor in the
investment decision-making process because of the growing prominence of
local sales taxes in funding transportation projects. Local sales taxes
have surpassed user fees as the primary source of funding for new
transportation project construction in California because fuel tax
revenues have not kept pace with travel volume and systems costs. The need
for voter support may result in a greater number of transportation
investment proposals that clearly identify public benefits for local
constituents. In Chicago, an official noted that when an expressway
extension with a High Occupancy Vehicle lane was proposed, attendees at
public meetings opposed the project and endorsed additional mass transit
service instead.

Besides public input, other political considerations also shape investment
decisions. The metropolitan planning process emphasizes the importance of
achieving stakeholder agreement on the set of projects that constitute the
MPO's plan. One researcher said that achieving consensus often is
difficult-especially with regard to completing large-scale projects-even
when decision-makers are like-minded professionals. Arriving at a
consensus puts a premium on how well local elected and appointed officials
negotiate and build coalitions to obtain support for projects. Several
researchers noted that this need for consensus may elevate the importance
of certain political considerations-such as ensuring a rough equity in use
of local and state funds for the distribution of transportation projects
throughout a metropolitan area-in selecting projects for funding.

In addition, state and metropolitan transportation politics may make some
organizations, such as state DOTs, large units of local government such as
cities and counties, or large transit agencies more influential in
planning and project selection than others. This uneven influence may mean
that a project's priority can be determined by which agency sponsors the
project. Our site visits also suggest that the relative influence of
decision-makers varies across locations. For example, officials in Chicago
described the Illinois DOT as having strong influence on metropolitan
planning.

Furthermore, a recent study indicated that federal and state agency
decisions can be very important in determining the scope and composition
of key decisions in the Chicago area. By contrast, officials in Los
Angeles and San Francisco described local planning agencies, especially
countylevel Congestion Management Agencies, as most influential.

Finally, state decisions to distribute funds across the state may shape
investment decisions. For example, California state law requires that 75
percent of State Transportation Improvement Program funds be directly
allocated to counties, who work through the county Congestion Management
Agencies. However, according to CALTRANS officials, the total funding
allocated to the counties is first divided between the counties of
northern and southern California, with the 13 southern counties receiving
60 percent of the funds and the balance of California counties receiving
40 percent of the funds. Thus, while modal choices are primarily made at
the regional or county level, the choices are constrained by state funding
splits, according to CALTRANS officials.

    Investments to Preserve Existing Infrastructure Are a Priority

Due to infrastructure and space concerns, and time lags associated with
new construction projects, state and regional transportation
decisionmakers are increasingly giving priority to highway investments
that preserve, enhance, and maintain the existing infrastructure over
investments in new construction. According to FHWA data, of the $64.6
billion spent nationally in 2000 on highway capital improvements, 52
percent ($33.6 billion) of all funds were spent on system preservation, 40
percent ($25.9 billion) on new roads and expansion of existing roads, and
8 percent ($5.1 billion) on the installation of system enhancements, such
as safety enhancements.45 The amount spent on system preservation rose
from 45 percent of capital improvements nationally in 1993 to 52 percent

45Capital expenditures on highways include those for (1) system
preservation, which includes capital improvements on existing roads and
bridges, intended to preserve the existing infrastructure, but does not
include routine maintenance; (2) system enhancements, which are traffic
operations improvements, such as the installation of intelligent
transportation systems (ITS) and environmental enhancements; and (3)
system expansion, which includes construction of new roads and bridges, as
well as additional lanes on roads. Noncapital expenditures are for
maintenance and operations of highways, including functions necessary for
day-to-day operations, such as keeping roads free of obstacles, performing
pavement and shoulder maintenance, operating ITS, and performing incident
management (the quick removal of incapacitated vehicles from the highway)
to improve safety and traffic flow.

in 2000.46 In addition to the money spent on system preservation, all
levels of government spent $24.2 billion on routine maintenance in 2000.

In our site visits, we found that system preservation and operations and
maintenance activities were high priorities for local transportation
officials. For example, in Chicago, planners told us that in the
spaceconstrained Chicago area, the primary strategy has been to
periodically rebuild existing infrastructure rather than build new
infrastructure. In California, both the Southern California Association of
Governments (SCAG) and the Metropolitan Transportation Commission in
Northern California spend approximately 80 percent of their regional
budgets on maintenance and operations. SCAG officials pointed out that
regions such as Los Angeles and San Francisco tend to focus less on
capital improvements due to capacity and infrastructure limitations. Some
situations offer few alternatives for expansion from the onset.
Infrastructure that is old and inadequate, such as underpasses or tunnels
with insufficient clearance, often has limited expansion potential.47
Further complicating new construction is the limited supply of available
land. Densely populated urban areas, where space is at a premium, offer
few alternatives for expansion due to geographic constraints on the
surrounding development.48 In addition, land-use planning and zoning
issues can be highly contested in a space constrained real estate market.
Capacity constraints and costs of new construction are forcing
decisionmakers to look at alternate solutions and place a premium on
maintaining and improving the existing transportation system.49

System preservation and maintenance and operations improvements are also
preferred because they offer quicker remedies than new capital projects,
which can take almost 20 years to plan and build. A key reason for the
length of time to complete projects is the set of federal and state
requirements, which include clean air, water quality, historical
preservation, New Starts reporting, and public input requirements that

46FHWA and FTA, Status of the Nation's Highways, Bridges, and Transit:
Conditions and Performance Report, 2002 Report to Congress (Washington,
D.C.: 2002).

47GAO-04-165.

48GAO-04-165.

49American Society of Civil Engineers, Statement of American Society of
Civil Engineers Before the Banking, Housing and Urban Affairs Committee,
U.S. Senate (Washington, D.C.: Oct. 8, 2002).

were discussed earlier.50 However, the length of time for project
development is also influenced by the diffusion of authority over
transportation decisions and the resulting complexity of the
decisionmaking process. Changes in local priorities, lack of local
matching funds, and locally driven changes in project scope are often
associated with project longevity. Requirements for benefit-cost and other
economic analyses could extend the length of time for project development.
One local planning official noted that the long lag time for new projects
acts as a disincentive for planners and officials when considering
capacity expansion projects. Transportation decision-makers operate in an
environment where they must consider preexisting factors and needs when
making transportation investment decisions.

    Planning for Longer Transportation Corridors Presents Additional Challenges
    and Opportunities

Finally, corridors that extend across multiple state and local boundaries
pose challenges for intermodal transportation decision-making due to
coordination and cross-jurisdictional issues. A majority of investment
decisions are made at the state and local levels, with local planners
tending to focus on local and regional planning needs, as opposed to
larger corridor needs. Getting the cooperation of and coordinating with
multiple agencies, communities, and transportation modes-each with its own
priorities-makes the planning and implementation of multistate and
multiregion projects difficult.51 Further complicating this type of
planning is the variety of approaches used by the local and regional
agencies in analyzing projects. The type of transportation modeling used
in one location may not be available or used in another.

Particularly problematic are interstate corridors that do not provide
clearcut benefits for all states that the proposed corridor crosses, but
require that the costs be borne by all states involved. Although state
DOTs work to address freight mobility challenges on a statewide basis,
many corridors cross state boundaries; and unless states are part of a
multistate coalition, states may not address projects that involve
multijurisdictional corridors.52

50U.S. General Accounting Office, Highway Infrastructure: Preliminary
Information on the Timely Completion of Highway Construction Projects,
GAO-02-1067T (Washington, D.C.: Sept. 19, 2002).

51C.F.R. 450.310 requires "planning agreements" between the state and
MPOs, between MPOs in the same metropolitan area, and between MPOs and
designated air quality agencies.

52GAO-04-165.

For example, an Illinois transportation official explained that developing
high-speed rail service to the east of Illinois is contingent on whether
other states will share the costs. To date, only one other state has been
willing to contribute. Similarly, freight infrastructure needs may involve
projects along a freight corridor that cuts across the jurisdictions of
several transportation-planning agencies and, in some cases, states.

For the most part, planning for longer multistate corridors is conducted
by ad hoc state coalitions. In the past, the impetus for creating such
multistate coalitions has come from state departments of transportation,
and the federal government's role in making these interstate decisions is
limited. Generally these ad hoc groups do not receive federal funding.
However two groups, the Interstate 95 Corridor Coalition and the
Chicago-Gary-Milwaukee Coalition, did receive funding in TEA-21. The
Interstate 95 Corridor Coalition, which runs from Maine to Florida, was
initially created to examine ITS systems along the corridor but has now
widened its focus to include intermodal issues. The coalition developed a
railroad operations study for the region, which identified deteriorating
transportation system performance in the mid-Atlantic region, noted that
all modes of transportation needed to be improved to deal with the
situation, and suggested that railroads could play a larger role in
meeting the region's transportation needs.53 Studies such as this one
illustrate the opportunities for these multistate coalitions to analyze
problems in a larger corridor.

Other such state groupings exist. For example, state DOTs along Interstate
10 have organized an I-10 partnership to conduct research on managing
freight movement along the corridor running from California to Florida.
The I-10 partnership group developed a transportation planning study based
on vehicle volume, traffic flow, and alternative scenario testing for
freight movement. Rather than focusing on one particular mode, the study
included highways, railroads, and barges in its analysis of freight
traffic, and explicitly attempted to be mode neutral. While the
partnership study projected the effects of different possible
infrastructure improvements along the corridor, individual states are
ultimately responsible for deciding whether to implement the study's
findings.

53Cambridge Systematics Inc., Parsons Brinkerhoff Quade and Douglas, Inc.,
and the I-95 Corridor Coalition, Mid-Atlantic Rail Operations Study
(Mid-Atlantic: April 2002).

In contrast to these multistate groupings, planning for intrastate
projects fits more easily into the framework of state planning. For
example, in the case of passenger rail corridor development in California,
intrastate passenger rail is funded primarily by the state DOT and the
localities and operated by state and local joint powers authorities. In
some cases, Amtrak serves as the operator for these state-supported
routes. Some of these routes are Amtrak's most heavily traveled outside
the Northeast Corridor, including the Capitol Route in Northern
California, the San Joaquin Route in Central California, and the Pacific
Surfliner Route in Southern California. Planning for proposed routes, such
as high-speed and passenger railroad, is facilitated when the route
remains within a single state because such projects fit readily into the
existing state planning framework. However, many of the corridors that
would benefit from such projects involve more than one state.

  Concluding Observations

ISTEA and TEA-21 both articulated a goal of moving from a traditional
focus on single transportation modes to a more efficient, integrated
system that draws upon each mode to enhance passenger and freight
mobility. These key pieces of legislation also provided MPOs and states
discretion in selecting projects to address local needs and conditions. In
exchange, MPOs and states are expected to follow federal planning and
program requirements to reflect the national public interest in their
decisions. The approach for investment planning and decision-making that
emerged from ISTEA and TEA-21 provides guidance on a systematic process
for making transportation investment choices and a host of factors to
consider, while generally allowing MPOs and states considerable discretion
in choosing the analytical methods and tools that will be used to evaluate
and select projects.

Our work has shown that while much analysis is done by states and MPOs,
the results of those analyses do not appear to play a decisive role in
many investment decisions, except to rule out the most problematic
projects. Instead, other factors play a major role in shaping investment
choices, including the federal government's funding structure that
provides incentives for investing in highway or transit projects rather
than railroad infrastructure or intermodal projects, public or political
support for certain projects, and the practical realities of simply
preserving the existing infrastructure. In addition, the data and other
limitations associated with using analytical tools, such as benefit-cost
analysis, may discourage their use by decision-makers. DOT, TRB, and other
major transportation organizations are doing research to improve
analytical tools and methods and to help states and MPOs use them to
better evaluate

investment alternatives. In a prior report, we also encouraged the use of
benefit-cost analysis in freight transportation decision-making and
recommended that DOT facilitate the collection of freight data that would
allow state and local planners to develop better methods for evaluating
investments. It is possible that overcoming the challenges of using
analytical tools would make them more attractive to decision-makers, thus
leading to improved investment decision-making.

We provided copies of this report to the Department of Transportation for
its review and comment. The department generally agreed with the report's
content and said that the report provided a useful overview of the
literature and practice involving transportation investment decisions. The
department also provided technical comments, which we incorporated into
this report as appropriate.

  Agency Comments
  and Our Evaluation

As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the
date of this letter. At that time, we will send copies of this report to
congressional committees with responsibilities for surface transportation
programs; DOT officials, including the Secretary of Transportation and the
administrators of FHWA, Federal Railroad Administration, and FTA; and
the President of Amtrak. We will make copies available to others on
request. This report will also be available on our home page at no charge
at http://www.gao.gov.

If you have any questions about this report, please contact me at
[email protected] or by telephone at (202) 512-2834. GAO contacts and
acknowledgments are listed in appendix IV.

Sincerely Yours,

Katherine Siggerud
Director, Physical Infrastructure Issues

                       Appendix I: Scope and Methodology

Our scope of work included reviewing the processes that decision-makers at
all levels of government use to analyze and select surface transportation
infrastructure investments. Our overall approach was to review and
synthesize federal requirements, Department of Transportation (DOT)
guidance, and the economics literature and transportation planning
studies; interview federal transportation officials, national association
representatives, and transportation experts to obtain their perspectives;
and conduct site visits in three major metropolitan regions to understand
how investment decisions are actually made in those regions.

To identify the key federal requirements for planning and transportation
infrastructure decision-making, we reviewed federal laws and regulations
relating to the metropolitan and state planning and funding process, as
well as federal guidance provided by the Federal Highway Administration
(FHWA) and Federal Transit Administration (FTA) to states and Metropolitan
Planning Organizations (MPO) on the transportation planning process. We
interviewed transportation officials in the following U.S. DOT offices:
Federal Railroad Administration, FHWA, FTA, and the Office of
Intermodalism. We also interviewed national stakeholders including Amtrak,
the Association of American Railroads, the Association of Metropolitan
Planning Organizations, the American Public Transportation Association,
and the American Association of State Highway and Transportation
Officials. To get regional perspectives on the federal requirements and
guidance for transportation planning, we interviewed state and regional
transportation officials in California and Illinois.

To identify how benefit-cost analysis facilitates sound transportation
investment decisions, we reviewed the economics literature, academic
research, and transportation planning studies containing evaluations of
various economic analytical tools, with an emphasis on benefit-cost
analysis. A GAO economist read and reviewed these studies, which we
identified by searching economics literature databases and consulting with
researchers in the field, and found their methodology and economic
reasoning to be sound and sufficiently reliable for our purposes. We
interviewed researchers and consultants from the National Research
Council's Transportation Research Board (TRB), DOT, university research
centers, national transportation organizations, and selected state DOTs to
get their perspective on these analytical tools, the general applicability
of benefit-cost analysis, and the feasibility of cross-modal comparisons.
In addition, we reviewed our previous studies that had key findings
relating to the use of analytical tools in investment decision-making and
consulted

Appendix I: Scope and Methodology

with our Chief Economist regarding the value of benefit-cost analysis and
its challenges.

To identify other factors transportation decision-makers consider in
evaluating and deciding on investments, we interviewed federal
transportation officials and the other national stakeholders identified
above. We interviewed transportation researchers from the TRB and, based
on their input and that of federal transportation officials, interviewed
additional researchers from university research centers-and other think
tanks-as well as representatives from civic and private sector
organizations who are knowledgeable about transportation investment
issues. We also conducted site visits in three major metropolitan regions:
Chicago, IL; Los Angeles, CA; and San Francisco, CA. These sites are major
centers of passenger and freight traffic and contain a wide variety of
planning agencies, transportation issues, and modes. During our site
visits, we conducted semistructured interviews with officials from state,
regional and local transportation planning agencies, including state
departments of transportation, MPOs, city or county transportation
planning agencies, and organizations involved in railroad investment
issues. From these interviews, we obtained information on each region's
planning and decision-making processes, the factors that drove
decision-making in that region, the extent to which analytical tools were
used, and other issues affecting the planning and decision-making
processes. In addition, we also analyzed planning documents and analytical
tools used by these regional decision-makers. The information collected
and analyzed from our site visits was intended to illustrate how
investment decisions were made in those areas.

To ensure the reliability of information presented in this report, we
relied to a large extent on studies from the economics and transportation
literature that were reviewed by peers prior to publication. A GAO
economist reviewed these studies and found them methodologically sound. We
also corroborated much of the testimonial information provided during our
three site visits by obtaining documentation of investment decision-making
processes and results, although we did not test the reliability of
specific data contained in reports prepared by officials from those three
sites. Additionally, we obtained statistics presented in the introduction
of this report about passenger and freight travel growth from DOT; because
this information is included as background only, we did not assess its
reliability. We conducted our work from September 2003 through June 2004
in accordance with generally accepted government accounting standards.

Appendix II: Summary of Three Types of Economic Analyses for Comparing
Investment Alternatives

While benefit-cost analysis aims to monetize and compare all direct
benefits and costs to identify the alternative that results in the
greatest net social benefit, other types of analysis consider different
types of impacts to yield different criteria for comparison. Two common
types of analysis are economic impact analysis and cost-effectiveness
analysis. Figure 2 illustrates the differences between benefit-cost
analysis, economic impact analysis and life-cycle cost analysis, a special
case of cost effectiveness analysis.

Figure 2. Comparison of Three Types of Economic Analyses

Economic impact analysis assesses how some direct benefits and costs of
investment alternatives convert to indirect effects on the local,
regional, or national economy or on a particular sector of the economy.1
Examples of indirect impacts are changes in wages and employment,
purchases of goods and services, land use, and changes in property values.
These impacts result from increased or decreased levels of economic
activity caused by the investment and can accrue within or outside of the
immediate area of the investment. Economic impact analysis often

1The use of the terms "direct" and "indirect" to classify types of
benefits and costs is common in transportation economics literature but
might not apply generally to economic analysis in other fields.

Appendix II: Summary of Three Types of Economic Analyses for Comparing
Investment Alternatives

includes a number of factors other than those that meet the stricter
criteria for inclusion in a benefit-cost analysis. As a result, advocates
or opponents of a project can use this type of analysis to illustrate
implications of an investment other than the estimated net social benefit.

However, economic impact analysis is not an appropriate technique for
identifying which alternative provides society with the greatest net
benefit because often the values of benefits to society are counted twice
in different forms in this analysis. Guidance from both TRB and FHWA
states that the net direct user benefits included in benefit-cost analysis
have the same monetary value as the net indirect benefits and caution that
the two are not additive when analyzing an investment for economic
efficiency. In other words, indirect impacts are not included in
benefit-cost analysis because economists generally agree that they are
market transformations of direct benefits. Thus, while economic impact
analysis can provide interesting information for policy makers regarding
the effects of potential investments on the local, regional, or national
economy as well as on specific industries, researchers state that economic
impact analysis can be considered complementary to, but different from
benefit-cost analysis.

Cost-effectiveness analysis is similar to, but less comprehensive than,
benefit-cost analysis. This type of analysis attempts to systematically
quantify the costs of alternatives. However, cost-effectiveness analysis
does not attempt to quantify the benefits of alternatives. Rather, it
assumes that each alternative results in achieving the same stream of
benefits. Thus, cost-effectiveness analysis identifies the lowest cost
option for achieving a given level of benefits rather than identification
of the alternative that achieves the greatest benefit per dollar of cost
to society.

Life-cycle cost analysis, essentially a subset of benefit-cost analysis,
is a specific example of cost-effectiveness analysis. Life-cycle cost
analysis involves several of the same steps included in benefit-cost
analysis, but excludes any assessment of benefits because each of the
alternatives compared is expected to result in the same level of benefits.
The key elements of life-cycle cost analysis are identifying alternatives,
defining a time frame for analysis, identifying and quantifying the costs
of each alternative, discounting costs to present values, assessing the
sensitivity of the analysis to changes in assumptions, and identifying the
alternative that results in the lowest cost over the life-cycle of the
project. When identifying and quantifying the costs of each alternative
for transportation

Appendix II: Summary of Three Types of Economic Analyses for Comparing
Investment Alternatives

projects, best practices indicate that analysts should consider
construction, rehabilitation, and maintenance costs as well as costs to
users associated with work zones during construction and maintenance.2
Like benefit-cost analysis, these user costs include travel time costs,
costs associated with crashes, and vehicle operating costs.

2See appendix III for a description of best practices for the other steps,
as the procedures for these are consistent with their parallel steps in
benefit-cost analysis.

Appendix III: Overview of Benefit-Cost Analysis

From our review of research and best practices on transportation
investment analysis, we identified 10 elements integral to sound
benefitcost analysis. Analysts include these steps to ensure a thorough
evaluation of the social benefits and costs of investment alternatives and
to systematically assess the trade-offs between investment alternatives.
Using benefit-cost analysis, as described below, analysts determine the
project that will result in the greatest benefit to society for a given
level of cost.

Analysts first should identify the project objectives to ensure a clear
understanding of the desired outcome and to aid in determining appropriate
alternative projects to be considered. Reports from TRB and FHWA identify
several possible surface transportation project objectives including
addressing an existing congestion problem, investing to accommodate
expected future demand, generating economic development, improving safety
in an area, or increasing mobility for disadvantaged citizens. Identifying
the intended outcome at the outset leads to analysis focused on
alternative projects that can achieve the stated objectives. For example,
if the primary objective were to ease congestion, adding a highway lane or
new transit option might be reasonable alternatives to consider; however,
if the objective were to improve safety in an area, perhaps other
alternatives would be more appropriate. Federal Aviation Administration
(FAA) guidance on benefitcost analysis cautions that the analyst should be
careful not to identify the objective in a way that prejudges the
alternatives for achieving the objective. For example, an objective stated
as construction to address an existing congestion problem ignores the
possibility of nonbuild alternatives that might improve the use of the
existing system.

Establishing a realistic base case provides a reference point against
which the incremental benefits and costs of alternatives will be measured.
According to FAA guidance, the base case is the best course of action that
would be pursued in the absence of a major initiative to meet the
investment objectives identified.1 In other words, the base case should
represent existing infrastructure, including improvements that are already
planned, as well as on-going maintenance. FHWA guidance states that the
base case should be realistically defined including, for example,
allowances for changes in traffic patterns with congestion. Failure to
allow

1The base case is sometimes referred to as the "do nothing" or "no-build"
scenario; however, a more accurate name is the "do minimal" alternative.

Appendix III: Overview of Benefit-Cost Analysis

for such changes in the base case can lead to overly pessimistic
assessments of the base case in comparison to alternatives.

Given the project objectives and the base case, analysts should identify
the investment alternatives capable of achieving the stated objectives to
define the scope of the analysis. In generating the list of possible
alternatives, analysts should consider options across different
transportation modes. For example, alternatives for a congested
metropolitan route could include adding a lane to the existing highway,
providing new or better bus service, or building a light rail line.
Moreover, passenger alternatives for a congested intercity corridor could
include high-speed rail, new or expanded air travel, or a new or expanded
highway. In addition to evaluating multiple modes, low-cost noncapital
intensive alternatives should be considered. These alternatives include
Intelligent Transportation Systems (ITS) and demand management approaches.
ITS solutions are designed to enhance the safety, efficiency, and
effectiveness of the transportation network and are relatively low-cost
options for maximizing the capacity of the existing infrastructure.2 ITS
solutions include coordinating traffic signals to improve traffic flow,
improving emergency management responses to crashes, and using electronic
driver alert boards to notify drivers of congested routes. Similarly,
demand management alternatives can relieve congestion without major
infrastructure investments. Demand management alternatives are ways of
reducing the number of vehicles traveling on a congested route during the
most congested times or peak periods. Demand management alternatives
encourage drivers to drive during less congested times, or on less
congested routes, or to ride together in carpools or vanpools. Charging
single occupancy vehicles a toll during congested times on congested
routes, providing free or discounted convenient parking for persons riding
in carpools or vanpools, and subsidizing transit usage are possible demand
management alternatives.3 Finally, both passenger and freight options for
addressing congestion should be considered. Our past work on freight
transportation shows that truck use significantly affects highway
congestion. For example, officials at the Ports of Los Angeles and Long
Beach estimate that truck traffic accounts for about 30 to 60 percent of
the total traffic on two particularly

2U.S. General Accounting Office, Surface and Maritime Transportation:
Developing Strategies for Enhancing Mobility, GAO-02-775 (Washington,
D.C.: Aug. 30, 2002).

3GAO-02-775.

Appendix III: Overview of Benefit-Cost Analysis

congested major highways, which serve as connectors to the two ports.4
Moreover, independent studies report that shifting greater amounts of
freight from highways to rail could relieve highway congestion.5

Following the identification of alternative projects, analysts should list
the relevant impacts of each alternative to ensure that all aspects of a
project are considered in the analysis. As previously stated, benefit-cost
analysis considers all direct user impacts and externalities, but it does
not consider indirect impacts because these are transfers of direct
impacts and their inclusion would constitute double counting.
Transportation economics research and government agency guidance we
reviewed identified the following list of direct user impacts that should
be considered for transportation investment decisions: construction,
operations and maintenance costs; travel time savings and construction
travel time cost; vehicle operating costs; safety improvements; and
environmental impacts, such as noise pollution and air pollution. Tolls,
fares, or any other user fees should not be included as impacts of the
projects, because these are payments made by consumers to receive the
benefits already counted in the list above.

After identifying the user impacts for each alternative, the analyst must
define a single time frame or life cycle for all alternatives over which
the benefits and costs will be compared. This element of the analysis is
necessary for equal comparison of projects with differing expected future
streams of benefits and costs from current investment. Typically, a region
constructing major infrastructure investments incurs a majority of the
costs of the project within the first years of the life cycle and reaps
the majority of the benefits later in the life cycle of the project;
therefore, the analyst should choose a time frame that allows for the
measurement of benefits and costs expected to materialize throughout the
useful life of the investment.

The impacts of each alternative should be quantified and monetized as
benefits and costs to the greatest extent possible to enable the analyst
to compare the value of each project to the alternatives. In addition to

4GAO-04-165.

5American Association of State Highway and Transportation Officials,
Transportation Invest in America: Freight-Rail Bottom Line Report
(Washington, D.C.) and Brown, Thomas R. and Anthony B. Hatch, Rail
Intermodal: On the Fast Track
http://www.tomorrowsrailroads.org/industry/railstudies.cfm.

Appendix III: Overview of Benefit-Cost Analysis

compiling the obviously quantitative impacts, like construction and
operations costs, the analyst must quantify other identified impacts of
alternatives, like emissions reduction. The analyst must then convert
those values to dollars so the impacts are expressed in common units.
Forecasting tools and benefit-cost analysis models facilitate the process
of quantifying and monetizing benefits and costs. Forecasting tools
predict future behavior of system users, like travel demand and ridership,
for the investment alternatives. Values from the forecasts are used as
inputs into a larger model that quantifies and monetizes direct user
impacts and quantifiable externalities. Therefore, the accuracy of the
forecasts directly affects the accuracy of the analysis. Several widely
accessible models of highly varying complexities measure and quantify
predicted benefits and costs.6 These models rely on some assumptions, but
also require users to enter location and project specific data to generate
estimates, which are used to assess the overall net benefit of
alternatives. Therefore, the outcome of the analysis depends, in part, on
the quality of the model used for calculations of benefits and costs.

After monetizing the direct user benefits and costs, the analyst converts
all values to present dollar values to allow an accurate comparison of
projects with different levels of future benefits and costs. The dollar
values of the benefits and costs of each alternative cannot simply be
summed over the life of the project to calculate the total. Benefits and
costs incurred in the future have lower values than those incurred in the
present because, in the case of benefits, the benefits cannot be enjoyed
now and, in the case of costs, the resources do not need to be expended
now. In other words, benefits and costs are worth more if they are
experienced sooner because of the time value of money. Therefore, analysts
must convert future values into their present equivalents to compare
benefits and costs expected in the future with benefits and costs incurred
in the present. This conversion requires the use of a discount rate, which
represents the interest rate that could be earned on alternative uses of
the resources. Researchers explain that the discount rate can have a
strong influence on the outcome of the analysis and note that higher
discount rates tend to favor short-term projects and lower rates favor
long-term projects. Thus, analysts should use care in choosing a discount
rate that will not bias the outcome of the analysis and will accurately
account for

6For a listing and evaluation of some models, see National Cooperative
Highway Research Program, Guidance on Using Existing Economic Analysis
Tools for Evaluating Transportation Investments (Washington, D.C.: October
1999).

Appendix III: Overview of Benefit-Cost Analysis

the benefits and costs expected in the future. Office of Management and
Budget (OMB) provides guidance on choosing appropriate discount rates for
different types of investments.7

After all benefits and costs have been discounted to present values, the
analyst should evaluate the benefits and costs of each project using a
common measure to allow for comparison across different alternatives. Net
present value and benefit-cost ratio are two useful measures for project
comparison. Net present value is the discounted sum of all benefits less
the discounted sum of all costs associated with an alternative and is
generally the preferred measure. If the net present value is positive,
then the project is economically efficient in that the gainers from the
project could potentially compensate those who incur costs and still
benefit from the project. That is, the benefits throughout the life cycle
of the project exceed the costs incurred in the same time frame. A
benefit-cost ratio is the discounted sum of benefits divided by the
discounted sum of costs. If the benefit-cost ratio is greater than one,
benefits outweigh costs and the project is economically efficient. In
essence, the benefit-cost ratio indicates whether $1 invested in one
project earns a higher rate of return than $1 invested in a different
project. Researchers and government agency guidance caution analysts to
assign costs and benefits consistently when calculating benefit-cost
ratios because inconsistency can result in incorrect comparisons between
alternatives. For example, if maintenance costs are included in the cost
component, the denominator of the fraction, for one project, but are
netted out of the benefits, the numerator of the fraction, for a different
project, the two benefit-cost ratios will not be comparable.

Due to the inherent uncertainty in calculating the inputs to benefit-cost
analysis, a critical element of investment analysis is assessing the
sensitivity of the analysis to changes in the assumptions and forecasts.
In addition, uncertainty can also affect the economically suggested choice
of the project resulting in the greatest net benefit to society. Several
methods, which vary in their complexity, exist for conducting sensitivity
analysis including simple sensitivity analysis and Monte Carlo simulation.
Simple sensitivity analysis involves recalculating the net present values
or benefit-cost ratios after adjusting uncertain inputs to reflect
alternative values, as well as the expected value typically used in the
original analysis.

7OMB, Circular A-94 Guidelines and Discount Rates for Benefit-Cost
Analysis of Federal Programs (Washington, D.C.: 2002).

Appendix III: Overview of Benefit-Cost Analysis

Using this approach, the analyst can determine whether or not the
alternative would still be economically efficient if the actual values
were different from their predicted values. For example, transportation
researchers widely accept that ridership forecasts for transit projects
can be very uncertain. An analyst using simple sensitivity analysis can
determine if the net present value of a transit alternative would still be
positive even, if ridership in the future were lower than predicted.

Monte Carlo simulation or probabilistic-based risk assessment is a more
comprehensive and preferred approach to sensitivity analysis. With Monte
Carlo simulation, the analyst assesses the probability distribution of
each uncertain input and recalculates the benefit-cost analysis multiple
times while drawing values that fall within the probability distribution
for each of the uncertain inputs. The results are examined in the context
of their probability distribution covering all potential outcomes of the
analysis as well as reporting the average or other values. This approach
allows the analyst to judge alternatives not only on their average net
present value, given multiple possible input value combinations, but also
on the likelihood that the project will achieve outcomes such as a
positive net present value.

Real options analysis incorporates uncertainty directly into benefit-cost
valuation. It acknowledges and internalizes both the cost of making
irreversible investments under uncertain conditions and the value of
option-creating actions.8 This type of analysis incorporates timing of the
decision as a factor rather than assuming investments are now or never
decisions that cannot be delayed. In addition, real options analysis
recognizes that a cost is associated with making decisions when the
information that decision-makers use as a basis for the decision is
uncertain and may change in the future. The analysis attempts to quantify
the inherent opportunity cost of making an investment decision. In other
words, real options analysis accounts for the lost opportunity to make a
different decision at a later time when more or better information is

8Option-creating actions are steps that decision-makers can take to
improve the information available for making a decision, including
resolving uncertainty, enabling flexibility, and uncovering new and
relevant information. For example, if existing levels of demand do not
support a light rail line for a planned new highway corridor but planners
expect that such demand might materialize in the future, an
option-creating action would be to build the highway compatible with the
possibility of constructing a light rail line in the median. Brand,
Daniel, Shomik Raj Mehndiratta and Thomas E. Parody, "Options Approach to
Risk Analysis in Transportation Planning," Transportation Research Record
1706, Paper No. 00-1075.

Appendix III: Overview of Benefit-Cost Analysis

available. For an investment to be advisable under real options analysis,
the net present value of the investment must exceed the value of keeping
the investment option alive until more certain information is available.

While the real options approach is becoming more common in private sector
investment decision-making, research suggests that this approach is not
widely used in the public sector. Researchers have highlighted several
ways that public sector transportation investment decision-makers could
use real options analysis. First, decision-makers can use incremental
planning and staged implementation of phases of projects to maintain the
option to defer a decision and wait for new information or to terminate a
partially-completed project if new information reveals that the investment
is no longer beneficial to society. Decision-makers can also actively
create flexible options by taking steps like acquiring a right-of-way but
not building until more is known about the potential project, including
demand conditions, potential costs, and expected benefits of alternatives.
Finally, planners can use options to take incremental actions that
increase learning. One study uses the case of San Diego's conversion of a
highoccupancy vehicle (HOV) lane to a high-occupancy toll (HOT) lane as an
example of taking incremental action that increases learning. By using
existing infrastructure and adding a pricing component, decision-makers
tested users' reactions to optional congestion pricing before implementing
a congestion-pricing model that would affect all drivers.

Finally, after the analysis has been completed and the results have been
checked for sensitivity to uncertain inputs, analysts should use the
results of the analysis to compare alternatives and identify the project
that results in the greatest estimated net social benefit. As stated
above, any project that has a positive net present value or benefit-cost
ratio greater than one is expected to provide net benefits to society.
However, transportation decision-makers have budget constraints and
typically cannot implement all projects resulting in net benefits. Rather,
they must rank alternatives and identify the best project that can be
implemented given the budget constraint. In general, projects with higher
net present values or benefitcost ratios should be chosen over projects
with lower net present values or benefit-cost ratios. If projects are not
mutually exclusive, then a combination of projects, the total cost of
which does not exceed the budget constraint, might lead to the greatest
net social benefit. In this case, the decision-maker should examine all
feasible combinations of projects, sum the net present values for each
combination, and identify the combination that yields the highest total
net present value. In addition, according to Executive Order 12893, OMB
guidance, and our past research, in the likely event that not all benefits
and costs could be

Appendix III: Overview of Benefit-Cost Analysis

quantified and monetized when developing the benefit-cost analysis, the
decision-maker should consider the nonquantifiable factors in addition to
the numeric results of the analysis when evaluating alternatives.

Appendix IV: GAO Contacts and Staff Acknowledgments

  GAO Contacts Acknowledgments

(545037)

Katherine Siggerud, (202) 512-2834 Rita Grieco, (202) 512-9047

In addition to those named above, Christine Bonham, Jay Cherlow, Robert
Ciszewski, Lindy Coe-Juell, Sarah Eckenrod, Colin Fallon, Scott Farrow,
Peter Guerrero, Libby Halperin, Hiroshi Ishikawa, Sara Ann Moessbauer,
Stacey Thompson, and Dorothy Yee made key contributions to this report.

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