Exh¡bit 2 - City of Pasadena

Exh¡bit 2 - City of Pasadena

Exh¡bit 2 THE MAXIMA GROUP LLC Reol Eslole ond Business Solulions 23 Jvly 2015 To: Project Teom From: Potricio Flynn Subject: lnitiol Comment...

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THE MAXIMA GROUP LLC Reol Eslole ond Business Solulions

23 Jvly 2015


Project Teom


Potricio Flynn

Subject: lnitiol Comments on Metro's Zl0 AlternotÌves Cost Benefit Anolysis (CBA) I hove reod the Metro 7,l0 Alternotives Cost Benefit Anolysis (CBA) doted June 19,2015 ond offer the following preliminory comments obout the finonciol ond economic ospects of the onolysis ond the report.




for The net present volue opprooch to evoluoting projects hos three key ottributes: NPV considers both cosh flows ond liming NPV uses oll the cosh flows of the project NPV discounts the cosh flows properly The chollenge with public infrostructure projects is to occurotely copture oll of o project's cosh flows; determine on oppropriote period of time for the onolysis; ossign o discount rote thot reflects project risk; ond determine o residuol volue thot coplures future benefits beyond the onolysis period. 2.

me sel lude ih vestment ¡nc{c ^cô^^ in*ar'l u¡ilh tha fi rnnal nl*arn olive ln oddition to the significont differences in the initiol copitol cost ossocioted with the tunnel ond the TSM/TDM ond BRT olternotives, eoch project hos o differenl requirement for periodic copitol investmeni lo keep the infrostructure in working order. This coptures costs obove ond beyond regulor operolions ond mointenonce, ond includes replocement of roodwoys, equipment, ond other costly copitol items. nnni*nl


The CBA discusses copitol replocement costs in Section it stotes thot "Reconstruction of povemenl os ossumed to cosl $i,2s0,000 per lone mile ond toke ploce every twenty yeors with trucks present ond every thiriy yeors for the freewoy olternotive withoui trucks." Given the twenty yeor onolysis period, it seems os lhough the significont required copitol reinvesiment ossocioled with the tunnel olternotives will not be fully reflecled in the onnuol cosh flows. Poge

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The employment benefit is directly correloted to copitol cost, skewing the benefits to the most costly olternotives. Employment benefits ore directly correloted to copitol expenditures. The dispority in copitol costs insures thot the higher cost projects will generote more jobs thon lower cost olternoiives. lu

useful life, fovoring the higher cost olternotives. The residuol volue colculolion in the CBA seems io refer to the remoining useful life of the project rother thon the estimqted volue of future benefits. Residuol

volue is better estimoted by copitolizing the net operoting income (expected future revenues or benefits less operoting costs) to opproximote the volue of project benefits beyond the onolyticol period. This copitolized volue is decreosed by the copitol costs required for on-going operotions. Even if the copitol reinvestmeni is not reflected in the onolysis period (see comment 1), it con ond should be included in the determinotion of residuolvolue. The CBA discusses residuol volue with respect to the tunnel olternotives, but does not provide much detoil for the olternotives. The tunnel residuol volue is esiimoted be the remoining useful life of the osset, ond nol the volue of the future benefits it will provide less the copitol reinvestment required to keep it operotionql in the future. This is inconsistent with the principols of net present volue onolysis.

Furthermore, the significonl differences in cost for the ronge of projecis ossures thot the tunnel olternotives with their huge initiol copiiol costs will hove residuol volues thot overwhelm the lower cosl olternotives.


The discount rote used does not reflect the differentiol in risk ossocioled with lhe vorious options. The CBA ossumes lhot oll projecis will be discounted of lhe some rote (four percent). This is conceptuolly incorrect ond inconsistenl wilh the view of copitol morkets. The discount role is correloted To the riskiness of the project: the higher the risk, the higher the discount rote. li is cleor thol o TSM/TDM projeci, for exomple, is significontly less risky in both construction ond operotion thon o tunnel. Assuming thot benefils from both projects would be volued of the some discount rote is incorrect ond skews the onolysis to fovor the more risky tunnel olternotives.

Copitol morkets ossume o discount rote for the project thot looks of The weighted overoge cosl of copitol. Very lorge infrosiructure projects typicolly hove privote sector investmenl ond porticipotion. The required return on privole copitol is often 20 percent or more. This higher return requirement reflects both the riskiness of the project ond meons thot the weighted overoge cost of copitol is significontly higher thon lower cosls olternotives thot ore publicly funded. Poge 2 of 3

Using the some discount roie for oll of the olternotives in the CBA ignores lhe significont risk ossocioted with construction ond operotions of the tunnel olternotives ond overstotes their net present volue. 6



venting. The methodology for estimoting the emissions-reloted costs ond benefits of the proposed olternotives seems very simplistic, relying on the Col B/C model to estimote the difference in emissions between the vorious olternotives bosed on chonges in VMT. This opprooch does not occount for lhe concentrotion in emissions likely to result from the venting plon for ihe tunnel oliernotives. These vents hove the potentiol to concentrote chemicol pollution, diesel micro-porticles, ond broke ond tire porticles of the tunnelventing sites. Numerous studies hove identified the public heolth costs ossocioted with oir pollution. The USC Environmentol Heolth Centers of the Keck School of Medicine hove been prominent in the reseorch of the heolth ospects of neor-roodwoy oir pollution. Studies cleorly show the higher risk of osthmo; eor, nose ond throot infections; heort ottock; ond stroke in locotions impocted by concentroted truck ond oulo troffic. A July 2015 study by the Environmentol Heolth Centers detoils the impoct of neor-roodwoy pollution on coronory heori heolth. The sociol ond economic costs ossocioted with chronic heolth conditions, while chollenging to estimote, ore reol ond significont. This includes direct costs such os hospitolizotion ond long-term treotment os well os indirect costs such os lost lime of work, obsenteeism of work/school, ond loss of productivity. The Col B/C estimote of emissions impocts does not oddress public heolth considerotions

given the venting plon for the proposed tunnel olternotives.

The misopplicotion of the NPV opprooch ond the use of incorrect ossumptions, the incomplete onolysis of long-term costs such os the public heolth impocl of vented emissions, olong with ihe issues roised in the Nelson Nygoord memo doted June 23, 2015 cost significont doubt on the integrity of the ZIO Exlension cBA ond suggesf there should be o different opprooch lo the economic comporison of project olternotives. The rotio of benefils to cosls, os discussed in the Nelson Nygoord memo, is o better indicotion of the relotive merits of lhe olternotive projects.

Poge 3 of 3