A $7.5 billion highway boondoggle doesn’t meet the basic test of cost-effectiveness

The Interstate Bridge Project is a value-destroying proposition:  it costs more to build than it provides in economic benefits

Federal law requires that highway projects be demonstrated to be “cost-effective” in order to qualify for funding.  The US Department of Transportation requires applicants to submit a “benefit-cost” analysis, that shows that the economic benefits of a project exceed its costs. We take a close, critical look at the benefit-cost analysis prepared for the proposed $7.5 billion Interstate Bridge Replacement project between Portland and Vancouver.

City Observatory’s analysis of the Interstate Bridge Replacement Benefit-Cost Analysis (IBR BCA) shows that it is riddled with errors and unsubstantiated claims and systematically overstates potential benefits and understates actual costs. . 

• It dramatically understates the actual cost of the project, both by mis-stating initial capital costs, and by entirely omitting operation and maintenance and periodic capital costs.
• The construction period is under-estimated, which likely understates capital costs, and overstates benefits 
• In addition, the study also omits the toll charges paid by road users from its definition of project costs, in clear violation of federal benefit-cost guidelines. 
• In addition, the IBR BCA study dramatically inflates estimated benefits. 
• It uses an incorrect occupancy estimate to inflate the number of travelers benefiting from the project. 
• The IBR BCA analysis also presents inflated estimates of safety benefits, based an incomplete and un-documented crash analysis. 
• In addition, ODOT’s study fails to separately present the benefits and costs of the project’s tolling and capacity expansion components, and omits an analysis of the distribution of benefits and costs among different demographic groups.

A correct evaluation of this project shows that its costs exceed its benefits by a wide margin.  What this means is that the proposed freeway widening is not cost-effective; not only is it not something that qualifies for federal funding, it also is a demonstrably wasteful, value-destroying expenditure of public funds.  The amount of money that the federal government, the States of Oregon and Washington, and highway users would pay in tolls, exceeds by a factor of more than two the actual economic benefits that would accrue to a subset of highway users.  This is a project that would make us worse off economically—exactly the kind of project that the cost-effectiveness standard is established to prevent.

Benefits are overstated

ODOT and WSDOT claim that the present value of benefits from the IBR project amount to more than $4 billion; nearly all of these benefits are attributed to travel time savings, congestion cost reductions and seismic resilience, and reduced crash losses.  ODOT’s estimates of both travel related savings and crash reductions lack documentation.

Travel Benefits:  The IBR BCA claims that the project will produce $2.4 billion in travel time benefits.  ODOT’s estimates are plagued with errors and a lack of documentation

• Travel benefits are minuscule to individual travelers—averaging about 20 seconds in a typical five-mile trip, according to the BCA.  These savings are imperceptible to individual travelers and are likely to be of no significant economic value.
• The estimates use the wrong value for peak hour vehicle occupancy, exaggerating peak travelers by 13 percent.  The BCA assumes 1.67 passengers per vehicle while USDOT guidelines prescribe a figure of 1.48 passengers per vehicle.
• The project fails to document the diversion of traffic to the parallel I-205 bridge as a result of charging tolls on I-5; this will cause longer trips for 33,000 diverted vehicles per day, and will increase congestion and travel times for the 220,000 persons crossing the I-205 bridge.  These costs will largely offset the travel time savings purported to accrue to travelers in the project area.

The Benefit Cost Analysis concedes that tolling the I-5 bridges will divert traffic to the I-205 bridge, but the project’s benefit cost analysis only models the effect of the project in the study area.  The added cost, pollution and other effects on the I-205 area are not included in the benefit cost analysis.

The Benefit Cost Analysis admits:

The Build scenario assumes tolling for the highway river crossing. The added cost from inclusion of tolls causes a reduction in I-5 auto trips as people shift to transit, use the alternative I-205 crossing, or change their destination to avoid the crossing

As described, this benefit-cost analysis is highly selective:  it counts beneficial time savings in the project’s “study area” but ignores the costs in added travel distances, travel times and congestion that will occur outside the study area when traffic diverts to avoid tolls.

Resiliency Benefits:  The IBR BCA claims savings for lives lost in a potential earthquake, savings on the cost of a replacement bridge, and added savings in traveler delay in the event that the bridges collapse in an earthquake.  All these estimates are exaggerated, including probability of a major seismic event, likelihood of collapse, fatality rate in the event of a seismic event, number of persons on the bridge at the time of an event, the cost of replacing the bridge, and the scale of added travel that would result from traffic disruption if the bridge collapses.  

Safety Benefits:  The IBR BCA claims that the project will reduce crashes on I-5 and will produce benefits with a present value of approximately $53 million.  The IBR-BCA asserts that it has used the ISATe model to predict a 17 percent decline in crashes in the project area. Also, it has not documented what features of the project produce the supposed ISATe benefits, and it has failed to calibrate the ISATe model for I-5, and the ISATe methodology can’t be used to accurately compute crash reduction on highways with ramp-metering, which I-5 has. 

Costs are understated

The IBR BCA  claim that the present value of the initial capital costs of this project are $2.7 billion.  That is a significant understatement.  The project’s construction cost, according to other IBR BCA documents is as much as $7.5 billion.  IBR BCA’s failure to comprehensively account for project costs violates federal benefit cost guidance which requires that costs include “the full cost of the project. . . regardless of who bears the burden . . including state local and private partners . . ”  This should include tolls paid by users.

Costs Exceed Benefits by a Wide Margin

After we correct IBR BCA’s study for under-counted costs, and unsubstantiated benefit claims, the project’s benefit-cost ratio falls to dramatically less than one, which is the minimum standard for meeting the statutory requirement that the project be cost-effective.  Our corrected estimates show that the actual cost of the project ranges as high as $5 billion. The actual benefits of the project, are roughly $2 billion.  This means that the project has a benefit-cost ratio of between 0.4 and 0.3, well below the minimum threshold of 1.0.  The correct analysis shows that the I-5 Bridge Replacement project is a value-destroying endeavor:  it costs users and taxpayers far more than it provides to the public in benefits.  It is not cost-effective, and should not be approved by FHWA.

Failing to disaggregate benefits and ignoring distributional impacts

Federal regulations require that a benefit-analysis separately report the benefits and costs of independent elements of a project.  This is to prevent a prospective applicant from combining an ineligible project (with costs that exceed benefits) with an eligible project (with a positive benefit-cost ratio) in order to get a larger amount of federal funds.  The IBR project consists of at least two elements with independent utility:  a plan to toll I-5, and the proposed widening of the highway, intersections and approaches.  Nearly all of the travel time benefits associated with the project result from tolling, according to IBR BCA’s own analysis.  Appraised separately, the tolling would have a far more favorable benefit-cost ratio than the highway expansion. To comply with federal requirements, IBR BCA should produce separate benefit cost estimates for each component of the project.

Federal regulations strongly encourage applicants to examine the distribution of benefits and costs among different segments of the population.  IBR BCA included no distributional analysis in its benefit-cost study.  Nearly all of the travel time, and congestion reduction benefits accrue to peak hour travelers.  Yet a majority of the the cost of tolls are likely to be paid by travelers who use the I-5 during off-peak hours; these off-peak travelers get no travel time benefits.  In effect, they are made worse off:  they have to pay a toll even though they get no better service than under the no-build scenario.

Conflict of interest and risk of fraud

The benefit-cost analysis is more than a mere formality:  it is a legal requirement for the $7.5 billion project to qualify for federal aid.  False representations made in the IBR BCA could represent fraud. It is concerning that the benefit-cost analysis is prepared by a private sector contractor with a direct financial interest in the construction of the IBR. The Benefit-Cost Narrative report indicates that the report was “Prepared by WSP.” Financial records obtained from the IBR project pursuant to a public records request show that WSP has current contracts to perform paid work on the Interstate Bridge Replacement Project valued at $76,282,807.03. Indeed, WSP is the single largest contractor for the project. In the event that federal funding is not forthcoming, it is unlikely that the project will proceed, and WSP will lose this lucrative source of income. WSP is not, and cannot be, an independent and objective evaluator of the benefits and costs of this project. It has a blatant conflict of interest, which is not disclosed.

City Observatory Analysis of Interstate Bridge Project Benefit-Cost Analysis