Costs and Benefits, Part 2

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

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

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

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

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

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

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

Here is how Staples presents the numbers.

Benefit/Cost Summary (page 7)

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

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

1. Time Benefit

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

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

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

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

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

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

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

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

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

2. Distance Benefit

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

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

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

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

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

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

---

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

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

Upcoming posts in this series: 

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

Notes:

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

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Comments

[Ross Williams]

"There is no direct or indirect financial return to the government for this savings. ... The time savings is a purely social benefit for the people of Staples"

Isn't that the purpose of all government spending? Police and Fire protection, parks and schools don't bring any direct or indirect financial return to the government either.

"Or will they enjoy reduced travel times? I'll make a point we are going to return to in a subsequent post by noting that, despite dramatic improvements in transportation systems, travel times have not been reduced. "

I think you are misinterpreting the data. It ought to be obvious that you cant' "save" time the way you save money. Any time saved is used for some other purpose. Thus, over the course of the past century commute times remained relatively stable, while commute distances increased dramatically. Of course, the further people drove the more roadspace they used/required during commute times. The result in congested urban areas was that efforts to reduce congestion in one place often simply created more congestion elsewhere as people drove further. This effect creates a lot of new business for MNDOT's engineers and their customers.

"What happens with improvements like this is that, over time, people simply move further from where they work. In the long run this improvement will hurt Staples by encouraging people to move outside of town."

This is the argument against sprawl inducing investments in urban areas. But it is not clear it applies to Staples. To the contrary, most small town businesses depend on a market well beyond their borders for both customers and employees. Making that market larger or allowing them to more efficiently serve it is a benefit. Moreover the reason jobs are in town, rather than spread out across the countryside, is precisely because proximity creates efficiencies that make businesses more competitive. Improving connectivity within the market is going to help, not hurt.

I think there is a lot in the New Urbanism that is useful to small towns. But careful thought needs to go into adopting principles for our small rural towns that were developed based on the experience of large urban areas. It may be Staples doesn't need, shouldn't want and can't afford a railroad crossing. But if one puts that projects in the context of a transportation network, then the real question is whether it is a reasonable investment to mitigate the burdens placed on the community by the train track running through the middle of town.

[Charles Marohn]

Ross,

I think it is okay for people to argue that there is a social benefit. Infrastructure spending, however, tends to shroud itself in these fake cost/benefit analyses in an attempt to show a financial return. This is a fraud. If we want to spend money at the federal level so that local people can get places more quickly or live further away from where they work, then let's debate that. Let's not use fuzzy math to pretend that there is some type of financial return we all benefit from with projects like these.

I agree with you that time can't be saved the way money can be saved....that is my point entirely. It is not legitimate to argue that we invest $10 million and we get back $55 million when most of what we get back is "saved time".

You wrote:

To the contrary, most small town businesses depend on a market well beyond their borders for both customers and employees.

If this is true, and it may be, it is not financially sustainable. I would argue that small towns need to start reconfiguring themselves to be more locally resilient and less reliant on this type of mega-project / subsidy to stay afloat. The long-term financial ramifications are bankrupting governments at every level (wait for tomorrow's post) and not having a proportionately satisfying benefit.

The big problem with Staples, and all small towns, is the opposite of what you suggest. You indicate that we need to resist "adopting principles for our small rural towns that were developed based on the experience of large urban areas." We agree, but adopting the urban model is essentially what planners and engineers have been doing since they standardized the Robert Moses approach in the 1950's and '60's and then implemented it in all of Small Town America. We need a different approach, one that restores the traditional pattern of development our small towns were historically based on.

If this project is a mitigation payment to Staples for the inconvenience of delay, then let's call it that. Let's just not hide behind a brittle veneer of mathematical gimmickry and pretend there are broad financial benefits for everyone with this type of project.

[Ross Williams]

"If this is true, and it may be, it is not financially sustainable."

Well, there are plenty of ghost towns that lost their role as a marketplace for a surrounding area. But your argument that local communities should just accept their fate ignores the sunk investment that people have already made. It also ignores any potential those communities have to be viable.

"We need a different approach, one that restores the traditional pattern of development our small towns were historically based on."

On that we agree. But that means getting it right. I am never sure what people mean when they point at Robert Moses approach, they seem to define it differently depending on what they think was wrong with it. The problem for small towns is that they are being suburbanized. That is certainly not a result of reliance on "mega-projects". I doubt very many cities would consider a bridge over the railroad a Robert Moses style mega-project in any case.

The problem for many small towns is that they have a declining urbanized core (the downtown and surrounding neighborhoods) and they are directing investment to new development at the urban edge. This appears to be the opposite of investments such as this one you describe in Staples that create better connections within the city.

We have invested vast sums in building bypasses around communities that have sucked the life out of them. The idea seems to be that they will all develop into quaint downtowns with a lot of antique stores. Instead people speed past them on the new bypass on their way to a suburban-style marketplace down the highway.

The declining urban core in ssmall towns is very similar to Detroit and the direction the Twin Cities are headed. If successful, the city becomes an employment center and marketplace for people who commute from the surrounding area. If unsuccessful, the core simply hollows out as a low rent district for failing businesses with the regional business center moving to the new suburban development.

But restoring that old pattern of development, and making the urban core vibrant again, requires investments that pull the core of the marketplace back to the center of the community. Then it can serve the neighborhoods around it, making them more attractive places to live, in addition to fulfilling the function of regional marketplace. Just as the suburbanization required public investments to make greenfields available for development, public investment is going to be required to rebuild the urban core.

"If this project is a mitigation payment to Staples for the inconvenience of delay, then let's call it that."

Is there really a need to state the obvious? There would be no need for the bridge if there wasn't a railroad. What you seem to be arguing is that the cost of mitigating the burden be placed entirely on those who benefit from that mitigation, while those who got the benefit from the creation of that burden should not have to pay for their benefit at all.

This condition, not Robert Moses, is actually what created the suburbanization process both in large cities and for many small towns. The benefits went to people and businesses who moved to the urban edge or exurban surrounding area, while the burdens of that development fell on the residents and businesses at the urban core. It was that disparity that has made suburbanization so attractive.

[Steve]

This is a fantastic point.

"Is there really a need to state the obvious? There would be no need for the bridge if there wasn't a railroad. What you seem to be arguing is that the cost of mitigating the burden be placed entirely on those who benefit from that mitigation, while those who got the benefit from the creation of that burden should not have to pay for their benefit at all."

[Charles Marohn]

Yes, but don't forget, there would be no city if there were not a railroad. The railroad company is who built the city. It is the abandonment of the traditional pattern of development, and the auto-centric development pattern we then adopted, that induces a never ending need for this type of "improvement".