Bacon's Rebellion

ROI — Letters that Should be Tattooed on Every Politician’s Forehead

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by

James A. Bacon
in

Traffic congestion in the United States cost Americans roughly 3.5 billion hours a day of delay in 2000, and the number gets worse every year. The knee-jerk reaction of politicians in Virginia, as it is elsewhere in the country, is to build more roads. Fortunately for them, politicians are accountable only to voters and journalists, who are ignoramuses for the most part, and not to shareholders, bankers or money managers who might ask the tough question: What Return on Investment are you generating on your capital spending for road and highway improvements?

In a 2006 paper, “The effect of government highway spending on road users’ congestion costs,” two Brookings Institution scholars, Clifford Winston and Ashley Langer, tried to answer that question. Here’s what they found: A dollar spent on highways in a given year generates only 11 cents in reduced congestion costs to motorists.

The issues raised by the paper cannot be ignored. Governments have finite resources. They need to invest those resources where they generate the greatest social benefit. Failure to measure social Return on Investment means that billions of dollars are wasted on marginal programs while critical needs go unmet.

Why is the ROI on highway spending so low? The authors proffer the following:

Highway spending is compromised by inefficiencies related to pork barrel politics, by slow and inappropriate responses to demographic changes, by excessive maintenance expenditures caused by poor road design, and by inflated labor costs attributable to the Davis Bacon Act.

But the most fundamental obstacle to effective highway spending is that the US intracity road system is largely complete and the nation’s urbanized areas have little available land to expand their infrastructure. … In most congested cities, it is extremely difficult or prohibitively expensive to widen major freeways and arterials to reduce congestion or for such construction to keep up with traffic growth.

It is important to remember that 11 percent is an average number, and the return on investment varies widely from project to project. Additionally, one can quarrel with aspects of the Winston/Langer methodology. But the larger implications of their study cannot be wished away: The social Return on Investment for highway spending (and transit spending, for that matter) varies widely from project to project, and many projects could never be justified if gauged on a Return on Investment basis.

Lessons for Virginia: All projects should be ranked and funded according to a Return on Investment basis. Projects should provide a minimal rate of return — otherwise they represent no more than a wealth transfer from citizens to the special interest groups who make the case for them.

(Hat tip: Quintin Kendall.)

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5 responses to “ROI — Letters that Should be Tattooed on Every Politician’s Forehead”

  1. Groveton Avatar
    Groveton

    ROI is best performed in advance of the investment being irrevocably made. This study looks back on billions of dollars invested and says the recent investments are not yielding much in the way of return. That’s an important finding but it requires years and years of data. Some things have to be decided without such an abundance of background data. There should still be ROI calculations but they are a lot squishier without the decades of data that accompany highway spending.

    I would certainly quibble with the methodology, especially:

    1. No delay data beyond the 1996 figures.
    2. Washington, DC metropolitan area statistics missing (among several others) due to a lack of data.

    I also wonder about the “in year” aspect of their 11% number. They say that one dollar spent in a given year reduces congestion costs by 11 cents in that year. ROI calculations almost always have to be multi-year analyses.

    In fairness, I read the whole paper but read it quickly. So, I may be misunderstanding their approach to multi-year issues.

    Having said all that, is there really any question whether continued road construction reduces congestion (on an overall basis)? We spend a lot of money building roads and the congestion gets continues to get worse. That much seem evident without the elaborate math of the study.

    The study is very retrospective in nature. Nothing wrong with that. However, it requires government to try a policy and then to examine the results. Nothing wrong with that.

    However – “In Virginia, 963 people died in traffic crashes last year — 16 more than in 2005 — a 1.7% increase.”.

    I guess we need to keep the abuser fees in place and then look back in a few years (or decades) and see if they worked.

  2. Jim Wamsley Avatar
    Jim Wamsley

    “Lessons for Virginia: All projects should be ranked and funded according to a Return on Investment basis. Projects should provide a minimal rate of return…”

    This would be a major shift in the process. NVTA picked projects that were ready to proceed. Not the ones that provided the most return or had the most moons.

    ROI should be applied across the board. To Dulles Rail as well as to highways. To freight rail as well as to I-81.

  3. E M Risse Avatar
    E M Risse

    Very important post and good comments.

    Jim is right on his observations.

    The authors, however, missed the biggest issues and used confusing words in doing it:

    “But the most fundamental obstacle to effective highway spending is that the US intracity

    [INTERREGIONAL not inter”city”]

    road system is largely complete and the nation’s urbanized areas have little available land to expand their infrastructure. …

    [DEPENDS ON HOW THE INFRASTRUCTURE IS DESIGNED]

    In most congested cities,

    [NO, URBAN AREAS, URBAN AGGLOMERATIONS or CORES OF NEW URBAN REGIONS, “city” borders have almost nothing to do with the issue]

    it is extremely difficult or prohibitively expensive to widen major freeways and arterials to reduce congestion

    [WIDENING RADIALS OR ARTERIALS WILL NOT REDUCE CONGESTION EVEN IF THEY COULD BE CHEAPLY WIDENED OR LENGTHENED FOR REASONS WE SPELL OUT IN “The Problem With Cars” forthcoming]

    or for such construction to keep up with traffic growth.

    [It is an impossibility for for construction to keep up with traffic growth as a matter of physics. The wider and longer the roadways and the more parking, the more distance between origins and destinations.]

    Brookings has been trying to avoid addressing the impact of human settlement pattern for almost 40 years.

    In the meantime, ROI — even with the limitations that Groveton notes — is a good place to strat.

    Jim W is right. Apply it to all Mobility and Access projects.

    It will force US DOT and all the State DOTs to stop claiming what they are doing will help.

    Perhaps when they do that, a more rational approach can be grafted on.

    For a pure statement of the sillyness that Jim Bacon is upset about see Pierce R. Homers comments to the Loudoun County Chanber of Commerce breakfast reported on page B 5 or yeaterdays WaPo.

    Truly frightening.

    EMR

  4. Anonymous Avatar
    Anonymous

    I’ve been pointing out for years that road building and congestion relief are largely unrelated. Building an adequate and safe road system and reducing congestion are two entirely separate tasks.

    Congestion is not caused by roads or lack of roads. It is caused by cramming too much commercial activity in too small a space.

    Notice that the main reasons roads have not provided the benefits have nothing to do with the roads themselves. The main problrems are related to organizational issues: and the lack of available land. In other words, we need more space.

    Clifford Winston is the same author I have frequently quoted here regarding the value of transit spending and transit operations.

    EMR’s contention that “It is an impossibility for for construction to keep up with traffic growth as a matter of physics.” is simply wrong. It is only true if you assume that traffic growth will always grow enough to inundate every road. We have plenty of uncongested roadways to show that this isn’t always true.

    so yes, if you want to reduce congestion, then building roads probably isn’t the best or first method to look at, but it isn;t one that should necessarily be always excluded either.

    RH

  5. Anonymous Avatar
    Anonymous

    So, here is the latest word on ROI and transportation projects, ccording to this week’s Time magazine, in an article about America’s failing infrastructure.

    “…Sir Ron Eddington, former head of British Airways, completed a study on transport for the U.K. He evaluated all kinds of projects — from fancy high speed trains, to simple bike paths — and calculated the returnon inestment. What he found was surprising “Small can be beautiful”. Large projects like new rail lines tended to be less beneficial for the money than modest ones, like widening an old road. The British government is now evaluating and funding more projects on the basis of this more rational notion of overall value.”

    SURPRISE!!!

    ————————-

    The article also noted the number of deaths in recent weeks from failing infrastructure, and noted the number of times that officials responded to disaster by noting there was no evidence of terrorism at play.

    Evidently we are killing ourselves through neglect, fater than the terrorists are on purpose.

    RH

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