By Dr. Neal Johnson, Indiana University
Summary

This report addresses the benefits and costs of the proposed new I-69 highway in Southwest Indiana, which as currently proposed would run between Evansville and Bloomington. It takes as its starting point the benefit-cost analysis contained in the Draft Environmental Impact Statement (DEIS) released in April 1996. After correcting several deficiencies in that benefit-cost analysis, it concludes that:

The costs of the new highway exceed the benefits by $115 million.

The benefit-cost ratio for the highway is 0.81, which means that every $1 spent would result in only 81 cents in benefits.

Thus, building the highway as proposed would result in a significant economic loss to the nation.

The author of this report is a professor at Indiana University’s School of Public and Environmental Affairs who has a Ph.D in economics and has taught both undergraduate and graduate-level courses in benefit-cost analysis. It is an impartial analysis, motivated by a concern that the benefits and costs of this major project be correctly and honestly calculated and presented to the public. The author has not been paid by either proponents or opponents of the highway, or by anyone else, for the preparation of this report.

This report, like the DEIS, addresses the benefits and costs only of the proposed "new terrain" Southwest Indiana Highway. It does not address the benefits and costs of alternatives to the new terrain route, such as upgrading existing highways. It is possible that one or more alternatives may produce positive net benefits.

The revised benefit and cost estimates are reported in Table 1. These figures can be compared to those in the DEIS’s benefit-cost analysis, which are reproduced in Table 2. This study’s calculation of negative net benefits of $115 million (benefits are negative because they are exceeded by costs), compares with the DEIS’s calculation of $305 million in positive net benefits. Both estimates are calculated as of the projected start of construction in 2005. Both estimates are in 1995 dollars and use the same 7% "discount rate."

Flaws in the Calculation of Benefits in the DEIS

This reevaluation does not change the DEIS’s calculation of the costs of developing and maintaining the highway. However, it does significantly amend the DEIS’s calculation of the highway’s benefits, which it finds to be significantly overstated due primarily to two flaws: First, the DEIS ignores benefits and costs to non-Indiana residents. Second, the DEIS uses an improper measure of benefits from new and expanded businesses and tourism.

In order to correct these two flaws, this report makes two major methodological changes to the benefit-cost analysis in the DEIS:

The DEIS takes into account only benefits and costs to Indiana. By contrast, this report includes benefits and costs to the entire nation. The benefits of the proposed highway would accrue to both residents and non-residents of Indiana. Because 80 percent of the project would be federally funded, the costs would be incurred largely by non-residents of Indiana. For these reasons, the benefit-cost analysis for the highway should not exclude benefits and costs to residents of other states.
Changing the analysis from a state to a national focus required the following adjustments to the benefit-cost analysis in the DEIS:

The calculation of benefits (such as faster travel times) to people who would drive on the proposed highway is expanded to include travel by non-Indiana residents.
"Benefits" that represent simply a shift in activity from one state to another are eliminated, because they are not net benefits to the nation. In these instances, gains to Indiana are offset dollar for dollar by losses to other states. Thus, the "business attraction benefits" of businesses leaving other states and moving into Indiana, to the extent they represent only such shifts, are not included. To the extent the movement of businesses creates real benefits, they are included.
The DEIS measures benefits from new and expanded businesses and increased tourism by calculating the resulting increases in disposable personal income. By using disposable income as a measure, the DEIS vastly overstates these benefits. (That is because it does not account for the costs, in labor and materials, of the increased production that causes disposable income to rise.) By contrast, this report uses more accurate and correct measures of these benefits. These measures focus only on the direct benefits of the highway, primarily in the form of decreased travel times and other transportation benefits, to businesses and tourists.
This correction required the following adjustments:

Benefits from new and expanded businesses are measured as these businesses’ decreased transportation and production costs resulting from highway-related improvements in travel times and safety.
Benefits from increased tourism are measured as the benefits to tourists, from highway-related improvements in travel times and safety, associated with the increased number of tourism trips.
Impacts of the Corrections in the Calculation of Benefits

These two corrections account for $421 million reduction in the amount of benefits in this reevaluation compared to the DEIS. Differences in three categories of benefits account for nearly all of this difference:

Benefits from businesses attracted to Indiana from other states are reduced from $473 million in the DEIS to $14 million in this report.
Benefits from tourism are reduced from $94 million in the DEIS to $7 million in this report.
Partially offsetting these reductions, this report adds $137 million in benefits to drivers who are not Indiana residents. These benefits were not included in the DEIS.
The two benefit-cost analyses do not differ significantly with respect to the other major benefit categories. Benefits to drivers for non-business travel originating in Indiana ($195 million) are identical in both analyses. Benefits to existing and expanded businesses are $108 million in the DEIS, compared with $95 million in this report.

As previously mentioned, the cost of the highway (that is, the costs of developing and maintaining it) is the same in both analyses. This reevaluation does not make any changes on the cost side of the benefit-cost calculation.

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