Ask the Experts–Integrating Economic Analysis into Transportation Planning

Why integrate economic analysis in transportation planning?

Elected officials, policymakers, and the general public are always asking why we should invest more money in transportation. They want to know "What is in it for me?" and "How do we pay for it?". Quantifying and communicating the economic significance of transportation investments can provide answers to these questions. Economic analysis is a critical component of making effective transportation decisions, informing transportation policies, and establishing accountability. By allowing transportation professionals to identify, quantify, and value the economic benefits and costs of transportation policies, programs, and projects over a multi-year timeframe, economic analysis can assist transportation agencies to better target scarce resources to their best uses in terms of maximizing benefits to the public and their customers and to account for their decisions. Also, understanding who benefits and by how much can inform how to pay for the investments.

Economic analysis can inform the entire spectrum of the transportation decision-making process. From a policy perspective, economic analysis can be used to determine overall investment levels and justify revenue increases. In program level decisions, economic analysis can provide insights into tradeoffs of allocating resources among programs. In planning, it can be applied to basic cost and performance data to screen and prioritize a large number of potential project alternatives, assisting in the development of program budgets and areas of program emphasis. This is applicable for the development of long range plans and capital investment programs. Similarly, economic analysis can play a critical role in screening alternatives to accomplish a specific project by providing information on cost effectiveness. In the design and engineering phase, it can facilitate the development of more cost-effective designs through life cycle cost analysis and assess risk associated with project delivery.

The Difference between Benefit/cost Analysis and Economic Impact Analysis

Benefit/cost analysis (BCA) attempts to capture both private and societal benefits and costs from a project or policy, regardless of which particular party realizes the benefits or costs, or the form these benefits and costs take. Even though not all benefits or costs can be quantified, BCA, used properly, reveals if an investment or policy change results in net benefits to the public from an allocation of resources that are greater than the public costs. In transportation investment decision-making, BCA may be used to help determine the following:

If a project should be undertaken at all (i.e., is it economically efficient);
When a project should be undertaken. BCA may reveal that the project does not pass the economic efficiency criteria now, but would be worth pursuing some time in the future due to projected growth in economic activity and resulting traffic; and
How investments should be prioritized and funded under fiscal constraints.

Economic impact analysis (EIA) is the study of the way in which the direct benefits or transportation efficiencies and costs of a transportation project affect the local, regional, or national economy. It quantifies the effects that a transportation project or action will have on job creation, wage levels, business activity, tourism, housing, and tax base expansion. EIA also can be used to gain insight into the broader business attraction impacts arising from increased accessibility and connectivity to markets as a result of transportation investments. EIA provides measures of job creation and economic expansion.

The Future of Economic Analysis

There is growing pressure to be able to demonstrate the economic benefits and cost effectiveness of transportation investment. In many states, Governors and Legislatures are requiring that investments be tied to or measured against economic development goals. This trend of performance-based investment decisions has been further evidenced in the recent Federal Transportation Investment Generating Economic Recovery (TIGER) Grant under the American Recovery and Reinvestment Act (ARRA) legislation, which required a rigorous analysis of benefits as part of the application process. Indications are that the use of economic analysis in Federal funding decisions will expand to include the Transportation Infrastructure Finance and Innovation Act (TIFIA) program, the joint HUD-DOT-EPA Sustainable Communities grants, and other discretionary programs that may be funded in the next Federal authorization bill. Moreover, as funding for transportation continues to lag behind the investment needs, agencies are looking for new funding alternatives and revenue streams, including public private partnerships. Economic analysis plays an important role in identifying projects with the highest probability of attracting private investment and generating new revenue streams. In addition to project selection, prioritization, and funding, the use of economic analysis is playing a larger role in asset management, performance measurement, climate change, and pricing strategies.

Cambridge Systematics has been a leader in transportation economics and we have a team of dedicated economists that continue to assist Federal agencies, states and local governments, and business and economic development organizations in developing guidelines, tools, and applications for integrating economic analysis in transportation decision-making and policy.

Paula E. Dowell, Ph.D. is the Director of Cambridge Systematics’ National Transportation Economics Practice with more than 15 years of experience in fiscal and economic analysis, including nearly 10 years of experience focused on transportation economics and freight transportation planning. Previously, Dr. Dowell served as a Post Doctorate Research Associate for the Center of Business and Economic Research at the University of Tennessee, Knoxville. She serves on the Transportation Economics Committee and the Transportation and Economic Development Committee of the Transportation Research Board.