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|Federal Highway Administration > Publications > Public Roads > Vol. 71 · No. 6 > Making the Case for Freight Investments|
Publication Number: FHWA-HRT-08-004
Making the Case for Freight Investments
by Ed Strocko
A new model to capture the additive costs and benefits could help prioritize highway improvement projects.
According to the Federal Highway Administration’s (FHWA) Freight Analysis Framework, the U.S. transportation network moved 17.5 billion metric tons (19.3 billion short tons) of goods in 2002. That equates to 48.1 million metric tons (53.0 million short tons) each day, worth more than $13 trillion. By 2035, freight volumes are expected to double to 33.6 billion metric tons (37.0 billion short tons), worth $38 trillion.
Businesses and individuals now demand more flexible and timely service, increasing the importance of an efficient and reliable freight transportation system. According to the FHWA report Freight Transportation: Improvements and the Economy, shippers (owners of freight being carried) and carriers (firms that carry freight) set a value of $25 to $200 per hour on freight transit time, depending on the product being carried. This value includes the cost of inventory in transit, such as insuring and holding the goods and any depreciation of perishable products — but excludes vehicle operating costs, such as driver wages or the opportunity cost of forgone revenue for the carrier. The value of transit time would be substantially higher if these costs were included. The fact that shippers and carriers value transit time so highly is indicative of the overall importance of logistics to business productivity and economic growth.
The growing demand for freight services contributes to congestion, and congestion in turn affects the timeliness and reliability of freight movement. Unexpected delays reduce productivity, increase operating costs, and decrease fuel efficiency. According to a 2001 FHWA white paper on the Highway Economic Requirements System (HERS), “Creating a Freight Sector within HERS,” unexpected delays can increase the cost of transporting goods by 50 to 250 percent.
Despite the importance of freight to the U.S. economy, the relationship between improvements in freight transportation and economic performance is not well understood. Traditional cost-benefit analyses typically measure the effects of roadway improvements on road users and carriers, but they do not take into consideration the effects on shippers, such as manufacturers, retailers, and other businesses. A smoother flowing corridor means faster trips for carriers and money saved on fuel and drivers’ wages. But manufacturers also benefit from more reliable transportation by adjusting their production schedules and becoming more efficient. Similarly, retailers are able to rely more on “just-in-time” delivery and leave less capital tied up in inventory or warehousing of goods.
Capturing these latter economic benefits, collectively referred to as “industrial reorganization” benefits, is at the core of a new FHWA modeling tool. The Highway Freight Logistics Reorganization Benefits Estimation Tool, now available from FHWA, estimates the broader economic benefits of freight improvements and promises to help increase the effectiveness of decisions about transportation investments.
“With an increasingly national and global economic base in America, freight movement has been growing faster than passenger travel and has become increasingly important for economic competitiveness,” says Glen Weisbrod, president of Economic Development Research Group and chair of the Transportation Research Board’s Committee on Transportation and Economic Development. “It has also become clearer to decisionmakers that it is shippers who are the true ‘users’ of freight transport and the beneficiaries of transport improvements. That fact alone calls for a very different kind of cost-benefit analysis for freight transportation.”
Paying Attention to Freight Transport
Understanding and improving freight flows is a high-priority issue for decisionmakers and planners at all levels of government. At the Federal level, the U.S. Department of Transportation (USDOT) is working to reduce congestion through the National Strategy to Reduce Congestion on America’s Transportation Network (known as the “Congestion Initiative”). The strategy involves a mix of approaches, such as using congestion pricing, expediting projects to optimize highway and aviation capacity, improving operations, and reducing barriers to private sector investment in transportation infrastructure.
States and localities also are focused on freight issues. A 2006/2007 survey under the Freight Partnership II, conducted by FHWA and the American Association of State Highway and Transportation Officials, found that 77 percent of policymakers at State departments of transportation (DOTs) identified freight as a priority for their organizations. This interest led many States to establish freight offices and develop statewide freight plans.
Increasingly, State and local transportation planners are looking for input from the private sector as well. According to the Freight Partnership II survey, 45 States receive some type of input from the freight industry during long-range and project planning.
Ultimately, congestion increases the cost of consumer goods and reduces U.S. competitiveness in the global marketplace, says Tony Furst, director of Freight Management and Operations Office at FHWA. “We’re committed to working with States, the freight industry, and other stakeholders to develop the best means of meeting the Nation’s freight transportation needs.”
Need for a New Tool
Many of the transportation planning tools currently available do not systematically incorporate freight. For years, transportation planners used four-step travel demand models to predict the demand for transportation. These models involve divid-ing a study area into subareas, then (1) estimating how many trips will originate in each area, (2) projecting the areas where trips will terminate, (3) determining the modes of transportation, and finally (4) determining the routes for trips on the transportation network.
A significant downside of the four-step travel demand models is that they focus on passenger travel patterns, but freight movements do not behave the same way as passenger travel. “The context is changing,” said Kathleen Hancock, associate professor of civil and environmental engineering at Virginia Polytechnic Institute and State University, at a February 2007 freight webinar sponsored by FHWA. “Traditionally, many approaches have used the four-step model paradigm, which came out of the passenger modeling background. This does not fit the freight paradigm. We need to shift out of that mode and into some other types of models, which include logistics modeling, and hybrids of these.”
This is not to say that travel demand models should not be used, but freight managers are rethinking the older models and developing freight-specific and freight-sensitive models for cost-benefit analyses.
For highway projects, most cost-benefit analyses calculate the benefits of improvements based on reductions in travel time, vehicle operating costs, crash costs, and emissions. These are considered “first-order” benefits. They measure the direct effects of improvements in travel time and reliability on current users of the transportation system, and are effective at gauging impacts on both passengers and freight.
Models attempting to capture the benefits to trucking typically do not look beyond first-order benefits. The result is that the benefits of a better road network for freight transportation are assumed to be limited to the carrier and other road users. Benefits to shippers (which include manufacturers and retailers), such as faster and more reliable delivery, have not been taken fully into account even in the more sophisticated models.
Benefits to the shippers are more subtle and complex and are considered “second-order” or reorganizational benefits. These occur when shippers invest in improved logistics in response to transportation improvements. For instance, a manufacturer might consolidate and streamline its distribution network. Improved transportation might enable existing suppliers, warehouses, or production facilities to serve larger market areas, making it possible for a manufacturing firm to increase its output. Companies can reduce the amount of inventory they carry, freeing up capital for more productive uses.
Typically, investments make in-cremental improvements to the transportation system. The business benefits of these second-order improvements also are incremental, occur over time, and are spread across many industrial sectors and retail companies, making the benefits difficult to quantify.
These second-order benefits spill over into the increasingly complex logistics industry, which is responsible for managing the sourcing, handling, transportation, and storage of intermediate products and finished goods along the supply chain. In addition to the physical movement and storage of goods, logistics activities entail sophisticated information management and exchange activities, which can be managed in-house by shippers or outsourced to third-party companies specializing in logistics activities. The scope of services offered by third-party logistics providers varies, as some providers are strictly transportation firms, while others manage every aspect of the contracting firm’s (shipper’s) logistics activities.
Transportation improvements can lead to logistics cost savings, in terms of fewer trucks, fewer drivers, or less fuel needed to make a shipment. Typically, carriers pass along logistics cost savings to shippers, who in turn pass the benefits to consumers or investors and/or reinvest the money in their own logistics needs. When transporting goods becomes easier, manufacturers build and maintain fewer warehouses. Moreover, the carrying cost of maintaining production input stock on hand is reduced, as businesses can better rely on the shipping system to deliver goods when needed.
Consider, for example, a highway that is repaired and reinforced to carry more weight from truck traffic. The logistics managers take into account weight maximums and regulations when they make shipment decisions. Higher weight maximums mean that trucks can be loaded more heavily. Heavier loads mean fewer trucks are needed for shipping the same volumes, and fewer trucks could lower expenditures on gas and driver wages.
In the short term, shippers and carriers have little freedom in responding to changes in the transportation network; delivery schedules and routings can be changed, but origins and destinations are fixed. In the somewhat longer run, carriers can modify the characteristics of the truck fleet by using one truck instead of two or using fewer drivers. Over the long term, shippers can alter the number, size, and location of factories and warehouses.
In the long term, transportation improvements also produce “third-order” benefits, when improved service enables businesses to deliver new or improved products. For instance, fresh pineapples and canned pineapples are essentially different products. Improved transportation service that enables a company to deliver fresh pineapples to the market instead of the processed fruit would create a new product market. Similarly, it might be feasible to use a piece of heavy construction equipment in a remote area only if replacement parts are available on a timely basis to ensure reliable operation. Improved transportation access to a remote area could make it possible for a manufacturer to guarantee a level of reliability and thus sell its products there. Customers also might be willing to pay more for equipment that would be more reliable.
To ensure that investments in infrastructure are sufficient to support economic growth, policymakers need tools and models that accurately measure all three types of benefits. State and local transportation planners also need tools that enable them to understand the national impacts of their policies. Recognizing these needs, FHWA began investigating ways to capture the range of economic benefits associated with transportation improvements.
The Road to Tool Development
In 2001, FHWA assembled an expert panel to review a white paper titled “Benefit-Cost Analysis of Highway Improvements in Relation to Freight Transportation: Microeconomic Framework,” which laid out the theory behind benefits associated with industrial reorganization.
Then, in 2002, FHWA held a roundtable on the importance of freight transportation to the Nation’s economy. There, 36 transportation professionals from the public and private sectors discussed two other papers — “Economic Effects of Transportation: The Freight Story” and “Transportation Infrastructure, Freight Services Sector, and Economic Growth: A Synopsis” — that were the underpinning for the reorganizational benefit.
Following feedback garnered from the roundtable, FHWA undertook a national analysis of the long-term benefits of highway freight improvements by examining the interactions between transportation demand, costs, and the condition and performance of the Nation’s highway system. The analysis looked beyond the travel time savings captured in the conventional cost-benefit analysis framework and developed a methodology for quantifying the effects of improvements to the transportation system in relation to (1) immediate cost reductions to carriers and shippers, (2) the impacts of improved logistics while keeping output fixed, and (3) additional gains from reorganization such as increased demand and new or improved products.
FHWA researchers subsequently used this methodology to construct a regional analysis of freight demand with respect to highway performance, with a goal of determining regional differences in the demand structure. Ultimately, the aim was to develop regional estimations of the additive value of performance improvements beyond the value of time savings.
Concurrently, in 2004, USDOT initiated the Freight Model Improvement Program (FMIP) to enhance the state of the art and state of the practice in freight modeling at the national, regional, and local levels. FMIP is a forum for transportation planners and practitioners to share best practices and gain a better understanding of current and future freight movements in their areas. Several States, including Florida, Indiana, Iowa, Kentucky, Minnesota, Ohio, Oklahoma, Oregon, and Washington, already have developed dedicated freight models.
Using the data gathered through the national analysis, FHWA researchers developed the Highway Freight Logistics Reorganization Benefits Estimation Tool, a planning model that estimates the additive benefits of freight reorganization. The Microsoft® Excel®-based tool and the economic framework underlying it can help highway planners achieve a more complete picture of the returns on highway investments. The tool is available free on FHWA’s Web site at http://ops.fhwa.dot.gov/freight/freight_analysis/econ_methods.htm.
The Underlying Economic Framework
The Highway Freight Logistics Reorganization Benefits Estimation Tool estimates the benefits associated with highway investments by establishing a relationship between two factors. First the model uses estimates of the elasticity of demand for truck freight movement with respect to highway performance. As a highway becomes more congested, this will tend to reduce the demand for freight movement. For instance, some firms might keep more inventory and schedule fewer deliveries if there are frequent congestion delays. Another important relationship is the elasticity of demand with respect to price and a set of other region-specific variables. In the same way that a consumer who is faced with a higher price for oranges might purchase fewer oranges, as the price of freight movement rises, shippers may choose to purchase less transportation.
If the price of a good or service increases, consumers will typically use less of it, but how much less depends on how “elastic” (or flexible) their demand is. Demand for a commodity is influenced not only by its price but also by the prices of suitable substitute goods or services. For example, in a freight corridor offering both rail and truck options, rail rates will influence demand elasticity for truck service, and vice versa. However, in a corridor with only truck service, the demand elasticity for truck service will be less because there is no available alternative to trucking.
Freight Significant Corridors Included in the Regional Analysis
Similarly, for supply chain managers, the demand elasticity for transportation services is influenced not only by freight transport costs but also by the relative costs of other production inputs, such as warehousing. When transport costs go down, transport becomes a cheaper input to the greater supply chain and therefore might be substituted for warehousing. These kinds of changes in demand happen over the long run and can influence substantially the level of benefits accruing from transportation improvements.
FHWA developed the tool to accommodate outcomes from consumer surplus models, where the practitioner (the model user) explicitly accounts for induced demand using standard estimates for transportation demand elasticity. In essence, the model helps practitioners estimate the change in consumer surplus resulting from a candidate highway investment. Consumer surplus is the benefit that consumers receive from being able to purchase a product for a price that is less than they would be willing to pay. For example, if a consumer is willing to pay $1 to use a road but is charged only $0.50, the consumer surplus associated with use of the road is $0.50 for this consumer. Traditional cost-benefit models calculate the benefits of transportation improvements based on estimates of consumer surplus.
The outputs of the Highway Freight Logistics Reorganization Benefits Estimation Tool indicate the additional benefit related to reorganizing logistics that can be expected following a planned improvement in the transportation infrastructure. A practitioner then can add these outputs to cost-benefit analyses that do not independently account for the value of improved freight movement.
Because freight benefits accrue to businesses outside a specific region of the Nation, FHWA’s research analyzed data at the corridor level. FHWA focused on 59 freight-significant corridors in the eastern, central, and western United States.
FHWA researchers collected data on corridor performance, demand for freight movement, freight prices, and regional economic activity. They then applied a regression analysis and estimated elasticities of demand for each of the three regions.
The regression analysis indicated that demand for shipping services varies with the expected speed of delivery, and the level of variance differs by geographic area. Overall, as highway performance improves, demand for freight movement increases.
From the regional estimates, FHWA developed the underlying data inputs for use on individual projects. Using State-specific data and regionally estimated elasticities, FHWA customized the model to provide assessments of future infrastructure improvements. In addition, the model incorporates data on commodities (goods being moved on the road) as influencing variables (volume and value).
Using the Tool
The model features three screens: Estimation Inputs, Conventional CBA (cost-benefit analysis) Inputs, and Summary of Results. The Estimation Inputs screen gathers key information from the model user regarding the specific roadway improvement being analyzed. The user inputs information such as the State where the project is located, the roadway segment length, baseline truck traffic, classes or types of trucks (mix of vans, 18-wheelers, etc.), and average speed.
A transportation improvement project, the tool assumes, will have a beneficial impact on freight traffic that travels along the segment. Because business reorganization benefits depend on the volume and type of freight being hauled in a specific corridor, the tool requires practitioners to enter segment-specific information that captures the likely dollar value of time associated with different types of freight movement and vehicle operating costs. A segment improvement project can affect any of the value components identified in the Estimation Inputs section: value of time, vehicle operating costs, and reliability of travel time.
Changes can be entered as either percentages (changes in vehicle operating cost, travel time, and reliability) or specific changes to detailed inputs (for vehicle operating cost, changes could include fuel efficiency or reduced tire wear) after the roadway improvement is completed. The tool offers predefined values for all input data, but users should key in data specific to their segments, as these values vary greatly segment by segment.
The tool’s second screen enables the user to input freight benefits from a conventional highway cost-benefit analysis. These benefits would come from an analysis through an existing cost-benefit analysis model. Users can obtain simple results without completing this screen; however, entering project-specific data in this section facilitates taking full advantage of the new tool’s capabilities. Outputs from an existing cost-benefit analysis model help determine baseline demand and performance, expected improvement, and currently measured freight-specific benefits. Only benefits for freight should be entered on this screen, not highway user benefits.
The Summary of Results screen presents the outcomes based on the user inputs from the previous two screens. The model uses the regional elasticities to estimate long-run demand shift and calculate the ratio of long-run benefit to cost savings and consumer surplus. In this way, the model adds the reorganization benefit to the traditional benefit and presents the results as tables and graphs for the estimates of consumer surplus and reorganization effects and the reorganization and conventional freight benefits.
The tool is an off-the-shelf product for planners, but it also can be used as the starting point for customized analyses of freight impacts. More accurate measurements of benefits will help planners make the case for critical freight-related projects that will improve reliability and predictability of travel times.
“The important thing is not only the tool itself, but to get planners thinking about how to evaluate freight in a project,” says Rolf Schmitt, freight analysis team leader in FHWA’s Office of Freight Management and Operations. “Freight is different from passenger transportation, and transportation planners are looking for new approaches to incorporate freight into their analyses.”
Adds Sergio Ostria, a senior vice president at ICF International who helped develop the tool, “All the literature on business logistics reorganizations suggests that firms will take advantage of improved transportation by reorganizing their business processes to become leaner, reduce inventories, and use more transportation. The results of this study provide a way to quantify this effect with publicly available data. More importantly, the freight tool provides an off-the-shelf resource for planners to use.”
Although improving cost-benefit analysis models will provide much-needed help in assessing the links between transportation and the economy, it is not the only answer. Cost-benefit analysis should be supplemented with insights from other analytical perspectives, such as macroeconomic modeling, and other new approaches that are sensitive to the economic and geographical context of new transportation investments and their effects.
FHWA’s Office of Freight Management and Operations continues to seek ways to better incorporate freight in the transportation planning process through policy discussions, outreach, public awareness, technical analysis, and tool development. Making good investment choices for the transportation system remains critical to enhancing the Nation’s economic productivity and global connectivity.
A better understanding of the link between transportation investments and the economy will help decisionmakers select the most cost-effective investments and prioritize freight projects. However, improved freight transportation can-not be achieved through technical expertise alone. Enhanced collaboration between the private and public sectors also is needed. Transportation planners need to understand how policies at different levels of government and between jurisdictions interact. In addition, private sector involvement is necessary to help understand freight needs and build support for critical freight projects.
“With freight becoming a priority in so many policymaking institutions, a consensus for better freight planning is emerging,” says FHWA’s Furst.
Ed Strocko is a transportation specialist in FHWA’s Office of Freight Management and Operations. He focuses on freight transportation infrastructure projects, economics, and finance to support FHWA, State DOTs, and metropolitan planning organizations in implementing and modifying initiatives and programs to improve freight operations. He also supports the Federal-Aid Highway Program, primarily in the areas of eligibility, grant mechanisms and agreements, Transportation Improvement Programs, Statewide Transportation Improvement Programs, and public-private partnerships.
For more information, visit http://ops.fhwa.dot.gov/freight/freight_analysis/econ_methods.htm or contact Ed Strocko at 202–366–2997 or email@example.com.
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