Office of Operations Freight Management and Operations

1. Introduction

FHWA wants to develop the ability to identify and measure the full benefits of improvements in freight transportation. More specifically, the agency wants to estimate the costs and benefits of investing in improvements in intermodal links between the highway system and railroads, ports, and airports, as well as in highway corridors where significant volumes of freight move. Although estimating costs may present some difficulties (e.g., cost allocation issues), the real analytical challenge is the estimation of benefits.

Improvements in freight carriage can be expected to have important economic effects. Lower costs or better service, or both, in freight movement must have a positive effect on all firms engaged in manufacture and distribution of goods. Reducing per-mile cost of goods carriage means that any factory or distribution point can serve a wider market area, with potential gains from scale efficiencies. It also means a factory can draw supplies from a wider area with potential gains in terms of the cost and/or quality of parts and materials coming to the factory.

Beyond lower dollar costs to shippers, reductions in transit time and/or increases in schedule reliability will also have significant impacts. These gains in terms of time allow firms to manage their inventories and supply chains more efficiently. Increased reliability, for example, reduces the requirement for "buffer" stocks, inventory held to protect against delivery failure. Lower transit times reduce some costs, e.g., drivers' wages for a given trip length. Further, as with lower dollar costs, less time for a move extends the "reach" of a factory or warehouse.

Consequently, much of a firm's response to transportation-cost reduction will be reorganization of its logistics. It will respond to the lower costs by moving goods longer distances, using fewer warehouses, and carrying less inventory for a given level of sales. It will buy more transportation and realize gains from improved logistics. But firms can make other changes in the ways they do things; lower costs might lead to product improvements, for example. We need to be clear about the different kinds of effects that may flow from freight-transportation improvement; they have to be treated differently in the analysis. The following classification scheme for benefits and other effects should facilitate understanding of the problem and the analytical approach to it.

Table 1. Effects of Improved Freight Transportation
First-order Benefits Immediate cost reductions to carriers and shippers, including gains to shippers from reduced transit times[1] and increased reliability.
Second-order Benefits Reorganization-effect gains from improvements in logistics[2]. Quantity of firms' outputs changes; quality of output does not change.
Third-order Benefits Gains from additional reorganization effects such as improved products, new products, or some other change.
Other Effects Effects that are not considered as benefits according to the strict rules of benefit-cost analysis, but may still be of considerable interest to policy-makers. These could include, among other things, increases in regional employment or increases in rate of growth of regional income.

In these several ways, freight improvements can spread reductions in cost and gains in productivity through all the economic sectors that produce or distribute goods. Improvement in highway-freight carriage is one of the ways that government can make a truly valuable contribution to the efficiency of the American economy. While this may seem obvious, the impacts of freight-transportation improvements have been neglected, or been given scant attention, both in the scholarly literature on social benefits of highway improvements and in more general discussion.

1.1 FHWA's Freight Benefit/Cost Study

The underlying objective of FHWA's Benefit/Cost Study (hereafter referred to as the "Freight BCA Study") is to develop a comprehensive analysis tool that can capture the full benefits and costs of freight transportation improvements. Such a tool will help to ensure that decision-makers (at all levels of government) can conduct both project planning and assessment processes in a manner that better recognizes the unique contributions of freight transportation to a region's economy.

The Freight BCA Study comprises three tasks:

  • Task 1: Historical and Current Approaches to Freight B/C Analysis—the objective of this task is to conduct a comprehensive literature review and analysis that can inform the development of the benefit/cost analysis (BCA) framework.
  • Task 2: Method and Data—under which we will develop a benefit-cost model that will treat the first and second-order benefits of freight-transportation improvements in a single analytical framework, and we will identify the data needed to use this model. Further, we will make an initial effort to estimate the key parameters required to calculate productivity gains.
  • Task 3: Integration and Development of Initial Approach—whose goals will be to 1) develop methods for addressing the third-order benefits and other effects that will be treated outside the model and 2) bring these results together with the model results in a way that will be meaningful and useful for policy makers and others.

An important first step in the development of the BCA framework is a thorough review of previous literature on:

  1. assessments of the economic impacts of transportation investments,
  2. methodologies used to quantify impacts from these investments, and
  3. industry experiences that demonstrate how economic agents respond to transportation investments in the field.

This report provides a compilation of the literature. We have structured the literature review as follows:

  • Studies on Economic Growth/Productivity and Social Impacts (Section 2)
  • Theoretical and Freight Transportation Studies (Section 3)
  • Literature on Industry Experiences and Case Studies (Section 4)
  1. Carrier effects include reduced vehicle operating times and reduced costs through optimal routing and fleet configuration. Transit times may affect shipper in-transit costs such as for spoilage, and scheduling costs such as for inter-modal transfer delays and port clearance. These effects are non-linear and may vary by commodity and mode of transport.
  2. Improvements include rationalized inventory, stock location, network, and service levels for shippers.

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