Benefit Cost AnalysisTiger II Grant Application

Port of AnchorageBarge Berths and Rail Extension Project

ByScott Goldsmith and Toby Schwoerer

Institute of Social and Economic ResearchUniversity of Alaska Anchorage

August 17, 2011

Benefit Cost Ratio:

$103.084 / $29.880 = 3.45

Project Description:

Funds will be used to complete construction of wet and dry barge berths at the north end of the Port of Anchorage (POA). The construction will include a cathodic protection system, roll-on-roll-off (RORO) ramp, and upgrading of the backlands to create 12.5 additional usable acres. The existing railroad line will be extended north to access the barge dock and this will also allow direct access of the railroad line to the container dock. Access through the barge dock to the uplands between the container dock and the barge dock will also be enhanced. These additions will reduce costs of operations at the port and increase port capacity.

Project Cost:

$29.88 million in 2011 $.

Construction Schedule:

All enhancements are assumed in this analysis to be completed in 2011 although actual construction would extend into the 2nd quarter of 2012 and benefits would begin 2012.

Benefit Cost Analysis Assumptions:

All benefits and costs are measured in 2011 dollars without inflation. Time period for analysis extends for 20 years from 2011 thru 2030. Future benefits and costs are discounted to present value at 7% annual discount rate. Project benefits are the difference between shipping costs and environmental costs without the project (no build alternative) and those realized with the project.

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Project Summary:

No Build Alternative (Baseline): Currently within The Project boundaries is: a dry barge berth with limited use, fendering and mooring on a galvanized steel bulkhead with no impressed current cathodic protection, and no utility trunk service (natural gas, power, water, sewer, telecommunications); a wet barge berth with an incomplete galvanized steel bulkhead with no impressed current cathodic protection, no utility trunk service, no fendering, and no mooring and no roll-on/roll/off (RORO) configuration, a rail line ending 3,880 LF short of connection to the berth/dock area, and 12.5 acres of undeveloped land adjacent to the berths. The dry barge berth currently accommodates one user: a company that leases 5 acres to stage and move rock to the Kenai Peninsula (2-3 trips per week during summer months).

The Project: The Port of Anchorage Barge Berths and Rail Extension Project (The Project) is comprised of three components: dry and wet barge berth with roll-on/roll-off capability, 12.5 newly created acres, and extended rail line. The Project creates fully functional, state-of-the-art dry and wet barge berths with roll-on/roll-off (RORO) capability for shipment of goods to locations throughout Southcentral and Western Alaska, and includes installation of impressed current cathodic protection to prevent corrosion of the dock structure, minimizing life cycle costs. These facilities improve reliability and cost competitiveness in the movement of goods from the barge berths to over 200 rural Western Alaskan communities. Constructing the barge berths would also facilitate upgrades to the remaining docks so the POA remains economically competitive in the long-term. Extending rail line to the barge berths creates an intermodal connection for transfer of goods directly to and from the barges and rail to Southcentral and Interior Alaska, including Alaska's five military installations. The Project creates 12.5 acres to accommodate the operational needs of barge operators and construction projects throughout the state.

Justification: Without The Project the ability to efficiently and most cost effectively serve the needs of residents in many locations throughout Alaska is constrained.

Use of barge docks largely restricted to low value activities such as handling and storage of bulk materials like rocks and gravel because backlands not developed.

Loading and unloading barges requires costly and inefficient pass-pass method utilizing barge and shore cranes.

Barge dock face subject to corrosion requiring significant maintenance and replacement costs.

Existing container traffic into Anchorage destined for rail transport must be moved by truck several miles to the rail terminal adding to costs and road congestion.

Most barge traffic into south central Alaska continues to come thru Seward (130 road miles from Anchorage) and Whittier (60 road miles), requiring transfer to Anchorage by rail or truck and subject to delay due to avalanche and other weather related problems.

Dock and upland capacity constraints at the port mean that growth in freight demand will be diverted to ports at Whittier and Seward. Transfer to Anchorage will require movement by rail or truck.

Access to western Alaska by barge limited. Port capacity to provide movement and storage of equipment and materials for natural

resource development and military operations limited.

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Please see Details of Benefits below for an analysis of how The Project affects long-term outcomes.

Project Users and Groups that Benefit: The Project would accommodate barge operators, including a Large Barge Operator that is locating and expanding its business at the Port of Anchorage (POA) as a result of The Project. Beneficiaries would include 237 rural Alaska villages, including 99 that are designated as Economically Distressed Areas, customers that receive commodities shipped through the barge berths, construction companies with projects in those rural villages and the rest of interior Alaska, union employees, the Alaska Railroad, military, the Municipality of Anchorage through increased revenue.

Types of Economic Effects: The quantifiable economic effects of the project include:

State of good repair benefits of $8.2 million

Economic competitiveness benefits of $93.6 million

Sustainability benefits of $1.3 million

Non quantifiable benefits are also briefly discussed in this paper.

Benefit Cost Model:

Project benefits were calculated using an Excel model originally developed for the TIGER I application process that was expanded and modified for this analysis. All model assumptions nad methods are identified and documented in the model spreadsheet. Xxxxxxxxxxxxx Further detail and description of assumptions is contained in Benefit Cost Analysis of Proposed TIGER Discretionary Grant Funds, September 2009.

Detail of Benefits Attributable to Project:

(1) State of Good Repair

1a. Cathodic Protection—($8.21 million)

Installation of a cathodic protection system on the dock face reduces corrosion of the structural steel pilings. This increases the operating cost of the dock but lowers the replacement cost for deteriorating pilings. The savings is based on a published life cycle cost analysis comparing construction using galvanized steel piles, baseline, with construction using galvanized steel with an impressed current cathodic protection system, The Project (See Port of Anchorage Expansion Project, Corrosion Control Report and Life Cycle Cost Analysis, December 2007). The published analysis was adjusted for consistency with the assumptions in the benefit cost analysis by netting out inflation, setting the discount rate to 7% and restricting the life cycle cost calculation to 20 years.

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(2) Economic Competitiveness

2a. Rail Extension—($10.91 million)

Container freight currently moving over the port that is transferred to rail for shipment throughout south central Alaska must move about 3.5 miles by truck to the rail terminal adding to cost and congestion. Extension of the rail line to the north end of the port would eliminate the need for this truck transfer. This would save labor costs, time, and fuel, as well as reducing congestion on the roads in the port area, eight of which are the most congested intersections in the city, and expanding the value of the existing space at the container freight dock. We limit our estimate of the benefit of the rail extension to the difference between the cost of moving a container 3.5 miles by rail and the cost of moving it by truck which involves additional loading and unloading.

Currently 10,000 containers move by truck from the port to the rail terminal annually at a cost of $125 per container or $28.54 per ton. Extension of the rail line would reduce the cost to $2.75 per ton for an annual savings of $1.13 million. The annual fuel savings would be 2,500 gallons.

We assume the undiscounted savings will be constant each year since the container dock is currently operating at capacity. However there would also be savings from any new freight coming over the port that moves by rail which we have not quantified.

2b. Redirected Barge Traffic—($30.58 million)

Completion of the barge docks, uplands, and rail extension would allow barge traffic currently coming from the west coast into south central Alaska thru Whittier (60 road miles from Anchorage) to come directly thru Anchorage. This would eliminate the transshipment of this freight by rail from Whittier to Anchorage. (Some barge traffic also comes into Seward, 130 road miles from Anchorage, either by road or rail.)

Transhipment from Whittier adds to the shipping cost and time, and delays are often encountered in the winter due to avalanches. The benefit we calculate is the cost saving from redirecting a portion of the traffic that currently comes through Whittier to direct barge service from Seattle to Anchorage. Although the distance and barge time by this route is somewhat longer (about one day), this additional cost is more than offset by the savings from avoiding the time and expense of the rail link from Whittier to Anchorage.

Currently 243,000 tons annually moves by rail from Whittier to Anchorage. We assume half of the current tonnage would be diverted to the Anchorage barge dock. The cost per ton of freight from Dixon Entrance (the international boundary between Alaska and Canada through the Inside Passage sea route from Seattle to south central Alaska) delivered to Anchorage by barge is $13 compared to barge and rail delivery thru Whittier of $57, for a savings of $43 per ton. We assume the realized savings per ton would only be half of this amount due to unidentified relocation costs for services. This savings takes

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into account the additional fuel cost of the barge to Anchorage alternative which is .26 gallons per ton.

The initial year savings would be $2.64 million and this would increase at 2.5% annually as the economy of south central Alaska grows.

Further evidence of potential savings from the redirection of barge traffic comes from the fact that a current barge operator is interested in expanding his operations at the port of Anchorage contingent on the barge dock upgrade. This would increase competition in the freight market and put downward pressure on the price of moving barge freight.

2c. Redirected Container Growth—($47.24 million)

As the south central economy grows, demand for container freight coming from the west coast through the port of Anchorage will increase at a rate estimated at 2.5% annually. However the POA container dock is already operating at capacity so this growth will be diverted to other south central ports—Whittier, Seward, Valdez, and Pt. McKenzie. Upgrading of the barge dock would allow some of this incremental container traffic to come directly into Anchorage by barge, avoiding the cost of transshipment by rail or truck from other ports.

We assume this incremental freight traffic would be redirected to the POA barge dock beginning in 2013 at a level starting at 39,000 tons. The barge dock would be able to handle growth in traffic for a decade and thereafter the level would remain constant due to a constraint on the availability of lay down space behind the dock. We assume half the lay down space would be allocated to this use.

Because this incremental traffic would come by barge the cost savings per ton would be less than if the container dock capacity were expanded to handle additional containers.

2d. Western Alaska Access—($4.83 million)

Completion of the barge dock would improve access from south central Alaska to those western Alaska communities that are currently served only infrequent by barge service or extremely expensive air service. Although developing a quantitative estimate of the value of expanding the frequency and reliability of service to these communities was not possible for this study, we were able to identify and quantify several types of potential savings associated with this improved access. We conservatively assigned a value of $500 thousand per year as the benefit of this improved access.

The annual cost of the US Postal Service Bypass Mail System is $150 million. That program subsidizes the cost of parcel post mail delivery of perishables to bush Alaska by small plane. That cost is passed on to parcel post customers in the rest of the nation through higher postal rates. The Postal Service is continuously looking for alternatives to

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air service to hold down or possibly even reduce the cost of this program.1 Recent proposals have included the use of hovercraft on interior rivers and trucking on the road from Fairbanks to the North Slope. Barge service to western Alaskan communities offers an attractive possibility to save some program costs.

The cost of basic goods like groceries, building materials, and fuel increases with distance from the commercial centers. According to the quarterly market basket survey of the Cooperative Extension Service of the University of Alaska, a standard market basket of groceries costs twice as much in Kotzebue in western Alaska as it does in Anchorage, and a 2x4 costs 4 times as much.2 In addition, the differential in price fluctuates considerably from quarter to quarter, partly because the availability of goods depends upon the transportation links. When supplies are scarce because freight deliveries are delayed or unavailable, prices tend to be higher, reflecting the value placed on availability and access.

A large share of the higher cost of construction in rural Alaska is due to the cost of barging construction supplies and materials to the work site. However transport cost also factors into other elements of the cost differential. For example, it is much more difficult to coordinate the timing of the elements of a construction project when transportation access is limited. In some instances an entire construction season might be lost due to difficulties associated with getting materials and equipment to the site expeditiously. The Denali Commission, a joint Federal-State agency with an annual budget of about $100 million to build infrastructure for economic development in rural Alaska, has estimated construction costs in remote sites may be double those in Anchorage.3 Improvements in access could considerably reduce that differential.

2e. Not Quantified

Enhanced Military Preparedness--The Port of Anchorage has been designated as a “Strategic Military Seaport”. This designation is assigned to those ports that the Department of Defense utilizes for the quick movement of military equipment and personnel overseas in times of crisis, and for the Department of the Army’s Military Surface and Distribution Command. The Port of Anchorage serves Fort Richardson,

1 U.S. Postal Service. 2006. Memorandum for john E. Potter, postmaster general, Chief Executive Officer Subject: White Paper – USPS Cost Burdens (Product Number MS-WP-06-001, available at: http://www.muni.org/Departments/port/TIGERIIBCA/5%20USPS%20Cost%20Burdens.pdf

2 Corporative Extension Service (2010) Alaska Food Cost Survey, available at: http://www.uaf.edu/ces/fcs

3 Nana Pacific. 2008. Update and Revise Cost Containment Benchmarks, available at: http://www.muni.org/Departments/port/TIGERIIBCA/6%20Cost%20Containment%20Benchmarks.pdf

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Elmendorf Air Force Base, Fort Wainwright, Eielson Air Force Base, and Fort Greely. The port is also the gateway to the largest training ground in the US in the interior of the state.

Expanding the capacity of the port, including the rail line extension, will allow the military to move personnel and materials more expeditiously without interference or delays caused by competing uses of facilities. Since the value of military preparedness is not subject to a market test, it is difficult to put a monetary value on the military willingness to pay for this enhanced capacity.

Reduced Costs for Existing Alaska Businesses and Households--Virtually all consumer goods and business supplies must be shipped to Alaska from the contiguous states, resulting in a higher cost of doing business and a higher cost of living in Alaska than elsewhere. Anything that reduces those costs frees up business profits and consumer purchasing power that can be directed at new investment and consumer spending that would both stimulate the current economy and increase the rate of economic expansion.

Resource Development--High transport costs reduce the profitability of developing natural resources in the state—petroleum, seafood, timber, minerals—compared to other locations in the U.S. and abroad. Lowering shipping costs can enhance the competitiveness of some of these businesses. This could result in production increases in Alaska that are not offset by reductions in economic activity in other locations. The result would be a real increase in national income rather than a diversion of resources from other activities. Enhanced resource production could also lead to a reduction in imports from abroad which would positively impact the US balance of trade.

A number of large economic development projects have been identified as potential sources of incremental demand on the capacity of the port in the coming years. The most significant example is the construction of a gas pipeline to bring North Slope natural gas to market in the upper Midwest. The steel pipe for the line would weight 3.6 million tons and the project would require 1 million tons of materials. The population growth associated with that project would further add to port demand.

In contrast, in 2008 the port handled a total of 4.4 million tons over the dock of which most was containers and petroleum. Dry bulk and steel was 117,000 tons. If the Anchorage port did not have the capacity to handle the demand created by pipeline construction, it would have to be diverted at additional cost, to other south central ports increasing the cost of moving supplies into the state along with the total project cost.

Another potential source of new demand will come from expansion of oil and gas exploration and development from the North Slope of Alaska into the interior of the state. Materials and supplies destined for the coastal and offshore North Slope oil fields currently move in one of two ways. The first is by barge sealift directly from Seattle to the North Slope during a short window during the summer when ice in the Beaufort Sea moves offshore. The second is by a combination of rail and road from south central Alaska ports.

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The industry is interested in developing known deposits south of those on the Northern coast which are not directly accessible by barge sealift. The Umiat oil field,

about 200 miles south of Prudhoe Bay has 1 billion barrels of oil in place and the state is considering constructing a spur road to access that field. 4 If that oil field were to be developed, it is likely that it would be served entirely by road through south central ports rather than by barge to the North Slope and then south by road.

Although it is unlikely that the cost of shipping would be the determining factor in whether any of these special large projects moved forward, it would impact their profitability, and consequently national income.

(3) Livability

3a. Not Quantified

Reduced Highway Congestion—Truck traffic from outlying ports into Anchorage mustcompete with tourists in the summer and in the winter truck movement can be restricted due to snow and avalanches. Any project that removes truck traffic from these highwaysenhances livability.

Several road locations within the port have been identified as among the most criticallycongested locations for freight traffic within Anchorage by the Anchorage Metropolitan Area Transportation Solutions (AMATS) Freight Advisory Committee. The rail extension would eliminate considerable truck traffic thru those intersections.

Increase in Quality of Land—This project would increase the quality of over 70 acres of real estate at the port by improving its accessibility to both ocean and rail traffic.Although the benefit cost analysis has quantified the direct benefits of this improved access, the option of having this access is likely to produce economic benefits that have not been anticipated in this study.

Increase in Modal Options for Freight Movement—There is value to south central Alaskafrom having an additional option for moving goods into and out of Anchorage. For example the highly seasonal nature of economic activity in Alaska, particularlyconstruction activity, can lead to congestion during peak periods even when there is sufficient capacity on a year round basis.

(4) Sustainability

4a. Emission Cost Savings—($1.31 million)

4 Watt et al. (2010) Umiat: a North Slope giant primed for oil development. Oil and Gas Journal Jan 2010 Volume 108.1, available at: http://www.muni.org/Departments/port/TIGERIIBCA/4%20Oil%20and%20Gas%20Journal%20Article.pdf

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The rail extension reduces fuel consumption thru a shift from truck to rail transport. The redirection of barge traffic and container growth increases barge fuel use, but this is morethan offset by savings from the reduction in rail and truck traffic. This saves 6.6 million gallons of fuel and 66 thousand tons of Co2 emissions. At a cost of $33 per ton (2009 $)increasing at a rate of 2.4% annually, the Co2 emission cost savings would be valued at $1.31 million. (This savings includes reduced nitrogen and particulate emissions.)

(5) Safety

5a. Not Quantified

Reduced Highway Accidents, Personal Injuries, and Deaths—Fewer trucks on thehighway would mean fewer accidents leading to personal injuries and deaths. Furthermore, more efficient handling of freight is likely to reduce the incidence of accidents at the port.

Enhanced Earthquake Response Capability—South central Alaska is in a location prone to earthquakes and since almost all supplies and equipment come into the region by ship, the availability of the port in the event of an earthquake is critically important. Consequently, a benefit from the development of the barge dock is increased capacity of the port to continue operating after an earthquake. The probability that an earthquake would do significant damage to the port in the next 20 years is small, and the benefit of improved response capability is also small, but the barge dock would provide some extra insurance that does have a value.

Summary of Benefits:

Detail of the quantifiable benefits are shown in Table 1. and the non-quantifiable benefits are listed in Table 2.

The net present value of quantifiable benefits is $103 million and the project cost is $29 million all of which is assumed spent in the first year of the analysis (2011). The Benefit Cost Ratio-- benefits divided by costs—is 3.45.

Table 1. Benefit Cost Analysis Summary Quantitative Information

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Table 2. Benefit Cost Analysis Qualitative Benefits

(ii) Economic Competitiveness Reduced costs for current Alaska residents and businessesReduced transport cost for new resource developmentEnhanced military preparedness

(iii) Livability Reduced highway congestionIncrease in quality of landIncrease in modal options for freight movement

(v) Safety Reduced highway accidents, personal injuries, and deathsEnhanced earthquake response capability

Sensitivity Analysis:

The sensitivity of the Benefit Cost Ratio was tested by considering three key assumptions of the analysis subject to uncertainty.

A reduction in the growth rate of freight demand in south central Alaska from 2.5% to 1% annually reduced the Benefit Cost Ratio to 3.3. The Redirected Container Growth (2c.) is sensitive to the growth rate in demand, but the port has limited capacity to handle additional containers. So the Redirected Container Growth benefit is limited by that capacity constraint and

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Calendar Year

Project Year

Initial Cost

(2011 Mill ion$)

State of Good Repair: Sustainabil ity:

Undiscounted Sum of Net

Benefits

Net Present Value @ 7% Discount

Rate (1)

CO2 Emissions saved (metric

tons)

Additional Tonnage thru

POA (000 tons)

Cathodic Protection

Rail Extension

Redirected Barge Traffic

Redirected Container

Growth

Western Alaska Access

Emission Cost Savings

Sum ($29.88) $26.54 $21.46 $63.20 $110.33 $9.50 $3.20 $204.35 $73.34 66,274

2011 1 (29.88)$ -$ -$ -$ -$ -$ -$ (29.88)$ (29.88)$ - -

2012 2 - (0.06)$ 1.13$ 2.64$ -$ 0.50$ (0.01)$ 4.20$ 3.90$ (299) 121

2013 3 - (0.01)$ 1.13$ 2.71$ 0.79$ 0.50$ 0.01$ 5.12$ 4.42$ 218 163

2014 4 - (0.06)$ 1.13$ 2.77$ 1.68$ 0.50$ 0.03$ 6.05$ 4.85$ 806 210

2015 5 - (0.07)$ 1.13$ 2.84$ 2.60$ 0.50$ 0.06$ 7.06$ 5.25$ 1,408 258

2016 6 - (0.07)$ 1.13$ 2.91$ 3.54$ 0.50$ 0.08$ 8.09$ 5.58$ 2,026 308

2017 7 - (0.02)$ 1.13$ 2.99$ 4.50$ 0.50$ 0.11$ 9.20$ 5.90$ 2,659 358

2018 8 - (0.08)$ 1.13$ 3.06$ 5.49$ 0.50$ 0.14$ 10.24$ 6.09$ 3,308 410

2019 9 - (0.03)$ 1.13$ 3.14$ 6.50$ 0.50$ 0.17$ 11.41$ 6.30$ 3,973 463

2020 10 - (0.14)$ 1.13$ 3.22$ 7.54$ 0.50$ 0.21$ 12.45$ 6.39$ 4,655 518

2021 11 - (0.04)$ 1.13$ 3.30$ 7.77$ 0.50$ 0.22$ 12.87$ 6.13$ 4,801 533

2022 12 - (0.09)$ 1.13$ 3.38$ 7.77$ 0.50$ 0.22$ 12.91$ 5.71$ 4,791 537

2023 13 - (0.04)$ 1.13$ 3.46$ 7.77$ 0.50$ 0.23$ 13.05$ 5.36$ 4,780 541

2024 14 - (0.10)$ 1.13$ 3.55$ 7.77$ 0.50$ 0.23$ 13.08$ 4.99$ 4,770 545

2025 15 - (0.10)$ 1.13$ 3.64$ 7.77$ 0.50$ 0.24$ 13.18$ 4.66$ 4,759 549

2026 16 - (0.10)$ 1.13$ 3.73$ 7.77$ 0.50$ 0.24$ 13.27$ 4.36$ 4,747 553

2027 17 - 27.87$ 1.13$ 3.82$ 7.77$ 0.50$ 0.25$ 41.34$ 12.62$ 4,736 557

2028 18 - (0.11)$ 1.13$ 3.92$ 7.77$ 0.50$ 0.25$ 13.46$ 3.81$ 4,724 562

2029 19 - (0.06)$ 1.13$ 4.02$ 7.77$ 0.50$ 0.26$ 13.62$ 3.58$ 4,712 566

2030 20 - (0.16)$ 1.13$ 4.12$ 7.77$ 0.50$ 0.26$ 13.62$ 3.33$ 4,700 571

NPV $8.21 $10.91 $30.58 $47.24 $4.83 $1.31 = $103.08

1 Project net present value of $73 mill ion is calculated as net present value of total benefits of $103 mill ion minus costs of $30 million.

Benefit cost ratio is $103.08/$29.88 = 3.45.

Economic Competitiveness:

Benefits (mill ion 2011 $)

reducing the growth rate in freight demand has little effect on this benefit or the Benefit Cost ratio.

A reduction by half in the assumed cost savings for each ton of freight redirected to Anchorage from outlying ports (or reduction by half in the tonnage) reduced the Benefit Cost Ratio to 2.2. However the Benefit Cost Ratio of 3.45 is based on the assumption that only half the current cost difference between shipping by barge thru Anchorage and outlying ports could be realized. Consequently this sensitivity analysis demonstrates that the model result of 3.45 is quite robust.

The largest category of quantified benefits is the redirected container cost savings. If the current container dock were able to handle additional capacity, or if it were not efficient to move additional containers through an upgraded barge dock, the assumption of those benefits might be incorrect. However if the benefits in that category were eliminated entirely, the remaining quantifiable benefits would still produce a Benefit Cost Ratio of 1.9.

Benefit Cost Ratio at Reduced Discount Rate or Longer Time Horizon:

Using a discount rate of 3% increases the Benefit Cost Ratio to 5.4.

With a 40 year time horizon the Benefit Cost Ratio would be 6.2.

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TIGER II Benefit Cost Analysis

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Northern Economics Inc. 2008. Port of Anchorage Transportation Cost Comparison Study. Prepared for Anchorage Economic Development Corporation. available at: http://www.muni.org/Departments/port/TIGERIIBCA/2%20Cost%20Comparison%20Study.pdf

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