4
Conclusions and Recommendations

TRB’s Committee for the Study of Freight Capacity for the Next Century was convened to examine indications that the freight transportation sector, which has in recent decades facilitated productivity growth, instead threatens to become a hindrance to the economy. Participants in the industry have noted that in some segments investment in capacity is not growing at the same rate as traffic, shifts in freight patterns related to structural changes in the economy are creating bottlenecks that degrade performance, and adding capacity is becoming more expensive and difficult.

The committee undertook two tasks: first, to examine the trends in the freight transportation sector that have been the sources of concern in order to determine whether they indicate a risk that the efficiency gains of recent decades might not continue; and second, to propose changes in government policy that will increase capacity by enhancing the efficiency of freight transportation and promoting more rational investment, especially over the long term. Government in the United States builds and operates major components of freight system infrastructure and regulates private-sector transportation firms.

In the two sections below, the committee’s conclusions are summarized and its policy recommendations are presented. The conclusions and recommendations are addressed to federal and state government legislators and administrators, private-sector executives and industry associations, and the public. Significant change in the public sector’s approach to provision and management of freight capacity would require



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Freight Capacity for the 21st Century: Special Report 271 4 Conclusions and Recommendations TRB’s Committee for the Study of Freight Capacity for the Next Century was convened to examine indications that the freight transportation sector, which has in recent decades facilitated productivity growth, instead threatens to become a hindrance to the economy. Participants in the industry have noted that in some segments investment in capacity is not growing at the same rate as traffic, shifts in freight patterns related to structural changes in the economy are creating bottlenecks that degrade performance, and adding capacity is becoming more expensive and difficult. The committee undertook two tasks: first, to examine the trends in the freight transportation sector that have been the sources of concern in order to determine whether they indicate a risk that the efficiency gains of recent decades might not continue; and second, to propose changes in government policy that will increase capacity by enhancing the efficiency of freight transportation and promoting more rational investment, especially over the long term. Government in the United States builds and operates major components of freight system infrastructure and regulates private-sector transportation firms. In the two sections below, the committee’s conclusions are summarized and its policy recommendations are presented. The conclusions and recommendations are addressed to federal and state government legislators and administrators, private-sector executives and industry associations, and the public. Significant change in the public sector’s approach to provision and management of freight capacity would require

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Freight Capacity for the 21st Century: Special Report 271 legislation, which could only come about through the demand and support of industry, the public, and transportation professionals. CONCLUSIONS The committee relied on four kinds of information: Data on national trends in freight traffic volumes, extent of freight infrastructure, capital spending, and freight system performance; Case studies examining specific freight projects and planning efforts; Interviews with participants in the freight transportation industries; and Assessments of recent studies of related transportation questions by the federal government, NRC, industry groups, and others. As described in the following subsections, these sources offer complementary perspectives. The aggregate trends provide an overview of the prospects for development of freight capacity in the coming decades, if fundamental policies and economic conditions continue as in the past. The case studies and the interviews indicate how institutional and management factors affect the response of freight capacity to changes in demand. Finally, the review of policy studies suggests alternatives for changes in government practices to improve freight system performance. Prospects for Freight Capacity The committee organized its examination of freight capacity trends in seven topical areas: highway trends; railroad industry trends; problems related to congestion at freight terminals and border crossings; the long lead times and rising costs of infrastructure projects; trends in congestion in urban areas, especially on facilities shared by passengers and freight; trends in other freight modes; and underlying trends in productivity, finance, and technology. Taken together, the trends have indicated to many observers a pattern of unprecedented tight capacity in certain parts of the freight transportation system, expected continued growth of traffic, and slowing of the rate of addition of capacity in response to various external constraints. Concern has been magnified by extrapolating the trends: by 2020, the nation’s total output of goods and services probably will increase by 70 percent, highway travel and all domestic freight traffic will increase by about 40 percent, and international container traffic may more than double. The strong economic growth of the 1990s and the resulting traffic growth placed exceptional demands on the transportation system and accentuated its weaknesses. In making decisions about transportation

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Freight Capacity for the 21st Century: Special Report 271 capacity it is important to distinguish long-run trends from cyclical peaks in traffic. The economic performance of the 1990s may not represent the trend of the next several decades; nonetheless, even sustained, modest growth will bring about deteriorating performance if freight capacity is allowed to stagnate. The committee’s task was to consider the implications of historical developments for freight system capacity and performance in the long run and the need for public-sector responses. The evidence appears to be consistent with the following assessment and qualitative predictions about developments over the next few decades. First, without diminishing the legitimacy of concerns about capacity, to obtain a balanced view it must be recognized that certain trends have positive implications. On the highway system, demographic trends, in particular the slowing of the rate of labor force growth compared with the 1970s and 1980s, will moderate the traffic growth rate compared with the recent past (Pisarski 1999). The evidence is mixed on how much average highway trip times are actually increasing; apparently highway users’ behavior changes are partially offsetting the effect of increased traffic density. Part of the trend toward greater traffic density in all modes reflects productivity improvement, a positive rather than a harmful development. Furthermore, capacity is being added. For highways, recent additions more often take the forms of widening, alignment improvements, improvements in signal systems and other traffic management methods, and intersection improvements than construction of new routes. Although inflation-adjusted highway capital spending is today only moderately above the peak levels of the 1960s, spending has grown steadily over the past decade as a result of increased federal funding in the Transportation Equity Act for the 21st Century (TEA-21) and state efforts. Overall, highway capital stock is being added faster than it is wearing out (although this circumstance does not demonstrate that the rate of growth is optimal). Railroads and ports report ambitious infrastructure spending plans as well, although it is uncertain how much of planned spending will occur. Market developments, including future international trade patterns and global patterns of commodities production and consumption, will determine the future scale of the U.S. rail industry and which transport markets it will serve. It appears possible that the rail industry trend of consolidation and network rationalization will continue. An important uncertainty about future port development in the United States is where capacity will be added, that is, which ports and regions in the United States and neighboring countries will attract the expansions that will be needed to handle trade growth. Congestion in the freight transportation system remains localized; it is not severe in all urban areas and as yet affects only small parts of the

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Freight Capacity for the 21st Century: Special Report 271 rural Interstate highway system and of the intercity links of the other modes. However, congestion at a bottleneck can have severe systemwide repercussions, as recent episodes in the aviation and rail systems have demonstrated. The growth of international trade may be exacerbating the bottleneck problem by concentrating freight traffic at a small number of nodes, including certain ports and border crossings, which are experiencing traffic growth rates much higher than those of the freight system as a whole. The development of freight transportation throughout the past century has been characterized by increasing efficiency coupled with increasing diversity and sophistication of service offerings to provide greater utility to customers. The most important sources of productivity growth have differed in different time periods; they have included a combination of continuous incremental processes of capital accumulation and technological refinement, together with occasional major breakthroughs. Breakthroughs have been both technological—the revolutionary changes embodied in vehicles, infrastructure, and information systems—and institutional, in particular, turning points in government involvement with transportation. Two such turning points in the past half century were the federal commitment to the Interstate highway system and reform of the regulations governing trucking, railroads, aviation, and shipping. Major boosts to productivity of this sort probably will occur again. Speculative projections the committee reviewed suggest that improvement in vehicle and infrastructure technology will continue to be important. Fully automated transportation systems may eventually appear. New technology will reduce pollutant emissions and increase energy efficiency. Possibly most important will be information technology applications that improve coordination and scheduling of transport operations (Meyer 1997; Pisarski 1999). In the administration of public-sector transportation systems, ample opportunities exist for reforms in management, operations, finance, and pricing that could yield dramatic gains in efficiency. The trends show evidence of the emergence of social and political forces that will influence freight transportation development in new ways in the next decades. Increasing population density, urbanization, and wealth ensure that conflicts between freight and passenger traffic; conflicts between freight transportation and residential, recreational, and other competing land uses; and requirements to control pollution will increase. These forces will tend to increase the cost of expanding capacity and add to the risk of investment. As congestion worsens, demand for increased public spending will appear. The United States has ample resources for expanding the transportation system; in most regions, the densities of population, employment, transportation networks, and traffic are low in comparison with the Northeast or with western Europe.

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Freight Capacity for the 21st Century: Special Report 271 If capacity addition does lag traffic growth and congestion worsens, as seems likely, the long-run consequence will not be massive breakdown. Freight markets have self-correcting capabilities. Users will make numerous adjustments over time to accommodate or avoid congestion. Shippers will change logistics practices, for example, by shipping more in bulk and holding larger inventories than they would if freight transport were cheaper. From a close-up perspective, these long-term repercussions of congestion may not be evident. One of the most important coping mechanisms will be changes in land use and in the location of activities: workplaces and residences will move away from congestion within metropolitan areas and from more-congested to less-congested regions within the United States. Such adjustment has been the most important means of accommodating growth throughout U.S. history. Congestion will be a constraint on the growth of some urban areas. Some production will move from the United States to other countries if congestion costs cause the United States to lose comparative advantage in some industries. Therefore, one plausible course of development is that the nation will continue to accommodate growing freight traffic volumes by increasing capital spending on infrastructure, accepting more congestion, altering production and logistics practices, and moving away from the most congested locations. This resolution might be tolerable, but will certainly be far from the economic optimum, for two reasons. First, the available capacity will continue to be used poorly on those parts of the system where users do not pay prices that reflect costs and where operators lack incentives to be responsive to user costs and preferences. Second, obstacles exist to effective targeting of capital expenditures, particularly in the public sector. Public capital spending will dissipate much of its impact because some high-payoff projects are passed by and some low-payoff ones are carried out. Private-sector capital expenditure may not be efficient if a suboptimally small number of firms dominate a market, hindering competition. The potential future costs of delay and other direct consequences of congestion can be estimated, but other costs of this “business-as-usual” scenario—for example, the costs of distortion of land use and regional development patterns—are difficult to observe or predict. Changes in government policy that would allow the nation to make better use of existing capacity and investment decisions, compared with this scenario, would have important economic benefits. Institutional and Management Factors Aggregate trend data are insufficient as indicators of the adequacy of capacity because constraints in transportation systems generally are

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Freight Capacity for the 21st Century: Special Report 271 localized in time and space. The average link at an average time period may be operating well below capacity even if the performance of the system as a whole is hampered at bottlenecks during peak periods. In addition, understanding the determinants of performance requires examining institutional arrangements and management practices as well as physical conditions. Therefore the committee examined individual system components as case studies to provide a more concrete understanding of freight supply problems and the institutional setting of project-level decision making. In addition, the committee solicited the views of freight industry executives in a series of informal interviews and inquiries. The five cases were the FAST (Freight Action Strategy) Corridor port access project in the state of Washington; the Florida Freight Stakeholders Task Force, a public–private body charged with advising the Florida Department of Transportation on its intermodal facilities improvements program; Virginia’s 20-year plan for expanding capacity on I-81, a major truck corridor; the U.S. Army Corps of Engineers’ (USACE’s) plan for expanding lock capacity on the Upper Mississippi River; and PrePass, a public–private system to automate certain trucking regulatory enforcement functions. The Virginia and Mississippi River cases each involve efforts of a government agency to expand capacity on a mainline route that it operates. The Florida and Washington cases are efforts to foster public-private cooperation in identifying and resolving terminal access problems in local areas. Although the case studies alone cannot provide sufficient evidence to support definite conclusions about the obstacles to efficient supply of freight capacity, they do suggest hypotheses that are worthy of consideration. FAST Corridor; Florida Freight Task Force The FAST Corridor is a $470 million project of the Washington State Department of Transportation, the state’s ports, the Puget Sound Regional Council, cities of the region, and the railroads to improve access to the ports and reduce freight–passenger conflicts, primarily through construction of rail grade separations. The Florida Freight Stakeholders Task Force was a public–private body charged with advising the state department of transportation on its intermodal facilities improvements program. The task force developed a method of setting project priorities that incorporates freight-related benefits into project evaluations; recommended a program of improvements, including terminal access roads and a rail access line; and recommended new mechanisms for freight project funding and private-sector input to local government decisions on transportation capital expenditures. Past policy studies, including the report of the National Commission on Intermodal Transportation, have asserted that local and state govern-

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Freight Capacity for the 21st Century: Special Report 271 ments do not assign sufficiently high priority to projects important for freight mobility. Four causes for this failure are cited: first, government officials do not understand the needs of freight transportation; second, needed projects are ineligible for funding under the rules of established federal grant programs; third, projects are institutionally complex, involving multiple transport modes and multiple jurisdictions as well as private industries; and finally, certain important freight-related projects that benefit the nation as a whole fail to receive necessary local support because of negative local impacts. These studies have proposed that if local governments did the right kind of freight planning, incorporating formal arrangements for receiving opinions from local freight carriers and shippers, they would find the high-payoff freight projects they are now missing. FAST and the Florida task force both were experiments aimed at developing procedures and institutional arrangements to overcome these perceived problems in carrying out local freight projects. Both efforts targeted freight-related improvements, recruited participation of industry and all affected jurisdictions in project selection, and gained commitments from the public agencies controlling funds to support their chosen improvements. One of the justifications for initiating both the Washington and Florida programs was that prior project selection practices in these locations had overlooked high-payoff freight-related projects; the new planning and coordination procedures could bring recognition and resources to such projects. The case studies could not confirm that the two programs improved the states’ returns on their transportation investments in this way. This is not to say that worthwhile freight projects are never overlooked. However, governments do not evaluate transportation investment projects in a manner that allows comparison of benefits from improved freight mobility with benefits from improved passenger mobility. Therefore, while input from freight interests may have changed government investment priorities in these two cases, the governments involved do not know whether the projects displaced would have yielded a higher or lower payoff than the freight-related capital projects that were moved ahead of them. Both programs began with the presumption that additional resources were to be devoted to freight-related projects, so evaluation of freight projects versus competing transportation projects was not regarded as a relevant issue in either case. It is conceivable that the priorities assigned by transportation planners following traditional project programming methods (i.e., considering primarily passenger mobility benefits) have been correct. That is, in urban areas where budgets are tight and many worthwhile projects go unfunded, freight projects that do not also yield high passenger benefits may rarely merit high priority.

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Freight Capacity for the 21st Century: Special Report 271 A second reason these cases did not document that governments are overlooking high-payoff projects is that most government transportation expenditure is for roads, and most road projects that yield large benefits for passenger traffic also yield substantial freight traffic benefits. In the case studies, the bodies responsible for deciding capital program priorities appeared to be struggling to identify high-priority freight projects within the state and local governments’ spheres of responsibility that were distinct from projects that would have been programmed under established prioritizing procedures. These cases suggest that governments often fail to recognize and take advantage of the link between project finance and performance. For example, the Seattle FAST project is financed primarily by state and local funds and by federal aid that could be used for other purposes within the state if it were not devoted to this project. The largest benefit of the project is mitigation of congestion, nuisance, and accident costs imposed by port rail traffic on local residents. This financing arrangement is the result of the long-established legal assignment of responsibility for rail grade crossings to the road agency rather than to the railroad; nonetheless, its implications for fairness and economic efficiency should be examined. Reliance on public funding to mitigate spillovers means that railroads and ports do not fully take into account the public costs of their decisions to expand facilities. It is noteworthy that the Alameda Corridor rail port access project in Los Angeles plans, in contrast to FAST, to derive the majority of its funding from fees charged to the railroads and from port user fee revenues. Public expenditures to mitigate harmful side effects of freight traffic growth may well stimulate local residents to ask whether it is really in their best interests to host the freight facilities, considering the negative spillovers, demands for public subsidies, and the facilities’ occupancy of valuable urban property. I-81; Upper Mississippi River Locks Interstate 81 in Virginia is a major truck route but carries relatively moderate automobile traffic. The state has a plan for several billion dollars in improvements to the highway in the next 20 years to accommodate expected traffic growth. The state is considering construction of exclusive truck lanes as part of the project. The Norfolk Southern Railroad has a parallel route on which it believes there is potential for growth of container traffic. There may be a connection between the level of state investment in upgrading I-81 and the railroad’s willingness to invest in building up rail service. USACE conducted a controversial study evaluating proposals for construction of lock extensions on the Upper Mississippi River to allow faster

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Freight Capacity for the 21st Century: Special Report 271 lock traversals of barges and relieve congestion. Critics asserted that USACE overestimated shipper benefits from the expansion, improperly evaluated environmental costs, and dismissed traffic control measures and congestion pricing as alternatives to capacity expansion. Both these cases suggest that some government transportation agencies do not routinely consider facility management alternatives to physical expansion as means to increase effective capacity. The cases show that transportation agencies sometimes lack data and proper models for comparing the benefits and costs of all alternatives, including management alternatives. Moreover, the agencies sometimes do not recognize the potential value of such alternatives. The cases and other evidence also indicate that some public agencies have recognized these deficiencies and have made progress toward correcting them. The Virginia case highlights the question of the extent to which intermodal rail is an alternative to highway expansion to handle freight traffic growth. The only valid argument for a state policy directly promoting rail intermodal development as an alternative to highway expansion would be that truck user fees are less than the full cost of their use of I-81. The state policy in this circumstance that would promote the greatest efficiency in freight transportation would be to charge trucks appropriate fees. It probably would be possible under the innovative finance provisions of TEA-21 to institute tolls on the expanded highway for this purpose. Conclusions from the Cases The cases all illustrate how institutional complexities pose great challenges to public officials charged with construction and management of freight facilities. There are some reasons for optimism that progress is being made in overcoming these challenges: improved planning methods are being applied and transportation agency awareness of freight needs appears to be increasing. However, government evaluations of projects sometimes are not broadly conceived, do not employ proper analytical techniques, or are not subjected to expert review. Consequently there is inadequate assurance that low-payoff projects are not being selected or that high-payoff ones are not being overlooked. Public agencies in general do not evaluate how alternative funding mechanisms or user fee arrangements would affect the performance of transportation programs, and they do not follow project funding practices that maximize the chance of producing successful projects. They sometimes appear to favor capital-intensive solutions over operational improvements. The case studies did not document systematic misallocation in government investment decisions in favor of projects primarily serving pas-

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Freight Capacity for the 21st Century: Special Report 271 sengers over projects of particular importance to freight because the project evaluation methods governments used in the cases did not compare returns from the freight-related projects that were selected for funding with returns from alternative transportation uses of the funds. The cases do illustrate that freight capacity problems in those parts of the transportation system for which government is responsible often are simultaneously passenger transport capacity problems. Solutions to freight and passenger capacity problems may often be complementary. Repeatedly, the case studies as well as the aggregate trends indicate how capacity problems often originate in operating practices that are not optimal. The cases suggest that solutions to capacity problems typically involve a mix of operational improvements and physical expansion and are facilitated by cooperative institutional arrangements between the public and private sectors and among jurisdictions. However, as physical expansion becomes more expensive, the necessity of optimizing operations will become more important than ever. A common theme in the cases is that obstacles to problem resolution, as well as poor management decisions, often arise from inadequate communication among the private sector (shippers and carriers), government transportation agencies, and other government bodies at the federal, state, and local levels. Intergovernmental communication, as well as public–private communication, evidently is necessary for efficient project execution. Public–private communication cannot be limited to soliciting the advice of interested private-sector parties. Market transactions also are communications, in which buyers inform producers of their willingness to pay for transportation services. Communication can also be through scientific market surveys for use in project evaluations. Industry Interviews The committee solicited views of shippers, carriers, and port operators, through informal interviews or requests for written comments, as an additional method of identifying freight capacity problems. The interviews were not a systematically conducted survey, so inferences must be limited. The responses revealed three sets of issues important to the respondents: sources of present capacity constraints, emerging trends that affect those constraints, and potential solutions to existing and emerging problems. Labor shortage was the immediate constraint most commonly identified, especially by motor carriers. Port operators also reported shortages of certain kinds of skilled workers. The interviews were conducted before the 2001 recession. Port operators also identified needs to review and revise work practices that have outlived their original purposes, and to extend marine terminal operating hours to accommodate carriers.

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Freight Capacity for the 21st Century: Special Report 271 With regard to physical facilities, motor carriers believe that road capacity is not keeping pace with growth in volume and cited the need for more efficient road operating practices. Port operators noted that lack of available land for expansion is a concern. Respondents frequently cited regulatory constraints on efficient operation and expansion. Motor carriers identified interstate variability in regulations as a source of inefficiency. Shippers cited customs delays. Port operators identified environmental regulations governing disposal of dredged material as a constraint on expansion. The emerging trends affecting the adequacy of freight capacity that were most often mentioned mainly relate to continued change in the characteristics of freight demand, for example, the emergence of e-business, changes in supply chain management practices (including preferences with regard to freight mode, shipment size and frequency, and procurement and inventory strategies), and shippers’ increasingly exacting requirements for reliability and speed. Taken as a whole, the responses illustrate forcefully that physical plant is not the only potential capacity constraint on the freight transportation system. Short-run constraints are more likely to be equipment or labor shortages than shortages of road space or trackage. Labor and equipment supply are problems that carriers, suppliers, and workers can resolve in the private market. However, public policy with regard to education, regulation of workplace conditions, immigration, and rights of foreign carriers to enter the United States will be important for the long-term labor outlook. Policy Alternatives The committee took advantage of several recent studies by nationally prominent groups that analyzed public policy problems related to provision of freight capacity and recommended changes in government policy. These include NRC studies on public policy for intermodal freight transportation, port landside access, and Mississippi River navigation; the 1994 congressionally mandated report of the National Commission on Intermodal Freight Transportation; and studies and statements of the U.S. Department of Transportation, the General Accounting Office (GAO), industry groups, and other organizations. The committee noted specific policy proposals of these groups as well as the principles concerning evaluation criteria and the responsibilities of government in freight transportation that guided their conclusions. Taken together, the recommendations from these sources indicate the range of options that are open. All these sources agree that freight transportation efficiency or the social benefits derived from freight transportation could be increased

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Freight Capacity for the 21st Century: Special Report 271 alternatives were debated. Proponents also have argued that general revenue funding would afford protection for U.S. ports from foreign competition, would avoid constitutional problems and conflicts with U.S. obligations under trade agreements, is appropriate because the benefits of ports are shared broadly by the entire population, and would preserve some U.S. ports (those with relatively high dredging costs or small traffic volumes) that might be put out of business without subsidies or if maintenance expenditures were related to fee revenues. However, tying channel capacity expansion and maintenance to project-specific user fees would benefit overall economic welfare. Channels are not public goods; with current technology all users can be identified and their use can be charged for as is the use of a toll road or a telephone line. Subsidizing ports to protect them from loss of traffic to lower-cost foreign ports harms the U.S. economy by raising the cost of trade. Competition among North American ports is a trade issue analogous to issues that are dealt with today through arrangements under NAFTA. The freight transportation system would become more efficient if ports that cannot sustain their own operations are allowed to lose traffic to lower-cost competitors. Controversy over finance of channel improvements and maintenance arises from distributional issues: some ports and shippers would be harmed by the change. OPERATION AND MANAGEMENT OF THE INLAND WATERWAYS Congress and the Administration should direct USACE to improve the efficiency of congested locks on inland waterways through implementation of demand management practices. Promising methods include traffic scheduling, congestion charges, and lock time reservations. This recommendation is consistent with that of an NRC committee that examined waterway planning (NRC 2001) and recommended that Congress direct USACE to explore traffic management options. In its authorizations and appropriations for USACE Civil Works activities, Congress should begin to rely on revenues from user fees to fund inland waterway operation and maintenance as well as capital expenditures. (Today, operating and maintenance expenditures and part of capital expenditures are funded from general tax revenues.) Waterway charges that are not levied for the purpose of congestion management should be structured to minimize traffic diversions to other modes. Efficiency does not require that fee revenues cover the full costs of the waterways. Fees should cover traffic-dependent waterway operating costs; in addition, congestion fees should be imposed. That is, fees should be determined solely to promote efficient use of existing facilities, rather than according to consideration of cost recovery or future project financing. Effective demand management, including improved pricing, would reduce the cost of lock congestion by giving better access to the most

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Freight Capacity for the 21st Century: Special Report 271 time-sensitive cargoes (i.e., the shipments for which delays are most costly) and by giving barge operators incentives to change their practices in ways that reduced delays at locks. It is likely that in many cases, demand management would be a more cost-effective means of reducing the costs of congestion than capital improvements. Increased reliance on segment-specific user fees would tend to discourage expenditures on little-used waterway segments. Regional patterns of production and consumption adjust through time, as does the demand for transportation service; consequently waterways that were once vital may become obsolete. Therefore, the benefits and costs of low-volume waterways should be evaluated. A scheme might be developed to evaluate the demand for low-traffic waterways through increased reliance on user fees that reflect the operation and maintenance costs of these river segments. If user fees collected on a segment fail to cover its operations and maintenance costs, then the segment should become a candidate for rationalization. Improved targeting of scarce resources to the most beneficial uses is critical for maintaining adequate freight capacity. Improved targeting implies fewer resources for system elements with relatively low returns and increased resources for the most promising elements. For the longer run, the Administration and Congress should evaluate new institutional arrangements for inland waterway management that would entail less federal subsidization of waterway operations and expansion. Regional authorities could better address conflicts in resource use and have greater flexibility in management and funding. For example, regional authorities would provide a mechanism for resolving conflicts between upstream and downstream interests over management of river flows for multiple purposes. To promote efficient use of waterways and harbors and to be perceived as fair by the payers, fee structures should take into account the costs attributable to all users, including commercial navigation, other private navigation, and public and nonnavigation uses of facilities. There is a need for government and industry to examine how to achieve a reasonable user fee structure that assesses all users appropriately according to the costs each imposes. PUBLIC–PRIVATE JOINT FUNDING OF FREIGHT-RELATED PUBLIC WORKS PROJECTS State and local governments should routinely conduct evaluations to quantitatively test the economic rationale for government involvement in their freight transportation infrastructure projects, prospectively for each new proposal for government participation and retrospectively for each completed government project. The rules of federal programs should require such evaluations of projects receiving federal assistance. Congress should base its future decisions on whether to adjust federal-aid program rules to

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Freight Capacity for the 21st Century: Special Report 271 encourage such projects on review of the outcomes of prospective and retrospective evaluations of past projects. In recent years, governments have experimented with expanding the scope of their involvement in freight transportation infrastructure. Port access projects and intermodal terminal developments have been prominent among these public undertakings. The proposal for state rail aid as an alternative or complement to adding Interstate highway capacity, described in the Virginia I-81 case study in Chapter 3, would be an example of this expanded conception of public responsibility. These projects often involve some form of public–private joint undertaking and complex financing packages with support from multiple public and private sources, often center on intermodal facilities, and often entail public support for rail or other facilities that are commonly provided by the private sector. These projects usually are controversial. Proponents of these kinds of expanded public-sector involvement argue as follows: Artificial boundaries in traditional programs are obstacles to the flexibility governments require to solve transportation problems by the most effective means. For example, handling freight traffic growth by aiding railroads might be cheaper for government budgets than expanding road capacity. User fees on trucks do not cover the full cost of their use of roads, so shippers often choose truck when rail would be the cheaper option overall. If underpricing of trucking cannot be corrected, investment in rail by the highway agency is justified to attain efficient use of the two modes. Public demands placed on the railroads to accommodate intercity and commuter passenger rail traffic justify greater public contributions for capital and operating costs of jointly used facilities. Public leadership is indispensable because of the scale and institutional complexity of some projects. Subsidies are justified because the facilities involved, especially ports, generate important nonmarket benefits and therefore are essential to local economic development plans. Opponents have made the following arguments: Subsidizing railroads to compensate for subsidizing trucking leads to excess capacity in both modes. Governments have other options to mitigate market distortions arising from any underpricing of trucks, including not expanding roads to accommodate uneconomical truck traffic and reforming fees. Proposals for public investment in infrastructure that will not earn a commercial return should be examined skeptically, since the opportunity cost of the funds in alternative public uses may be high.

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Freight Capacity for the 21st Century: Special Report 271 Hopes of diverting significant traffic off highways and thus reducing the need for highway expansion are unrealistic, as are hopes of stimulating regional development by freight subsidies. Government aid will tend to reinforce pressures for greater regulation of railroad operating and service decisions and rates, eroding the benefits of deregulation in the industry. State and local governments are not equipped to evaluate proposals for intermodal or rail assistance or to resist demands for economically unjustified aid. State and local governments confront this issue in developing their public works programs, and it has become a federal concern as well. In debates preceding the last two surface transportation authorization acts, changes in federal-aid rules were considered that would encourage state and local governments to undertake these kinds of projects, although measures enacted for this purpose have been modest. Some project sponsors have also sought special federal assistance. Most of the competing claims concerning this issue that are listed above can be empirically assessed for individual projects, although such assessments are rarely conducted. The first step in considering public funding for such a proposal should be a quantitative analysis to demonstrate that the rationale for government support is sound. The analysis would estimate the benefits, costs, and government budgetary impacts of proposed infrastructure improvements and compare them with alternative means of serving freight and with alternative institutional arrangements. If the proposal is for government support of a project that cannot obtain private-sector financing, the evaluation should demonstrate that public benefits exist that raise the public rate of return above the private rate. One such evaluation was begun in 2001. The Mid-Atlantic Rail Operations Project is a joint effort of five states and the major Eastern railroads to examine the complementarity of rail freight infrastructure development and Interstate highway capacity expansion in the Northeast United States. Decision-Making Processes and Planning DOT DATA AND ANALYSIS PROGRAMS Congress should give continued support to the development of DOT capabilities for economic analysis of the federal-aid highway program and federal highway user fees and to the application of this analysis in support of decisions. Congress should provide for joint state–federal efforts to transfer and adapt these federally developed policy guidance tools to state and local needs.

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Freight Capacity for the 21st Century: Special Report 271 DOT has made progress in recent years in the development of methods and data for its C&P reports (biennial reports to Congress describing the condition of the highway system and projecting the effects of alternative federal-aid funding levels on condition), its Highway Economic Requirements System (a model supporting the economic analysis of alternative funding levels in the C&P reports), and its highway cost allocation studies (estimates of fees and taxes paid by and costs attributable to various classes of highway vehicles, to guide the setting of highway user excise tax rates). However, better guidance for federal decisions would be possible with improvements to these tools. The DOT model has two major shortcomings. First, it does not support comparisons of highway expansions with congestion pricing or other demand management alternatives. Therefore, the model overlooks attractive policy alternatives in many instances. Second, it does not incorporate a network model. Consequently, the estimate of benefits from expansion of a highway link does not change if a decision is made to simultaneously expand a substitute or complementary link. The value of the model for policy planning would be greatly enhanced if it were refined to include these capabilities. In planning future highway cost allocation studies, DOT should review the 1996 recommendations of the TRB Committee for Review of the Federal Highway Cost Allocation Study concerning methods for analyzing whether changes in highway user fees could increase the net economic benefit the nation derives from its highway system. Fees affect efficiency (that is, the economic payoff from the highway system) through their influence on the volume of highway travel, freight shippers’ selections of truck freight versus other modes, truck operators’ choices of equipment, and other highway user decisions. In particular, future cost allocation studies should examine whether urban road users are subsidizing intercity highway travel and the implications of any such subsidy for freight transportation efficiency. Measures of freight transportation activity are necessary for evaluation of transportation improvements. Projections of freight traffic are needed to estimate the benefits of new facilities, which depend primarily on use. Evaluating regulations and user fee policies also requires data on freight markets. Since much of the nation’s freight transportation infrastructure is owned and almost all freight is carried by private firms, collection of freight data requires the participation of industry. Congress should provide for the ongoing collection of freight transportation statistics by DOT, through the Bureau of Transportation Statistics. The survey capabilities of the Census Bureau should be utilized unless it can be demonstrated that the data necessary for government decisions can be obtained without exercising the Census Bureau’s reporting compliance powers. The shipper-based Commodity Flow

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Freight Capacity for the 21st Century: Special Report 271 Survey program should be continued. To be useful for most federal, state, and local government planning applications, this freight transportation data program must receive sufficient funding to allow publication of shipper statistics by commodity, by transport mode, and by origin–destination pair. Waterborne freight transportation data programs of USACE should also be continued, and further integration across other modal freight data collection efforts within DOT should be encouraged. The freight data programs within the federal government should be coordinated through the Bureau of Transportation Statistics, whose tasks should include data collection, auditing of all DOT freight transportation data programs, and publication of data and analytical summaries. The bureau should define the objectives of its activities in terms of three classes of information: strategic (i.e., to reveal large departures from historical patterns in performance or demand), benchmarking (comparative evaluations of the performance of components of the transportation system according to specified criteria), and special studies relevant to critical or emerging issues. EVALUATION METHODS As one means of promoting more useful evaluation at the federal and state levels, Congress should create a clearinghouse devoted to evaluation methods within DOT, where DOT program agencies and local and state governments could share and compare methods and examples of evaluations. The clearinghouse would not supplant any agency’s evaluation responsibilities but would work to define best practices and produce manuals and case studies. The scope would include project evaluation, regulatory evaluation, follow-up evaluations of programs and projects, and evaluation of excise tax and user fee schemes. This function must not add to delay by creating additional layers of project approval requirements. Rather, the clearinghouse ought to contribute to streamlining through development of clearly defined and accepted methods and by providing supporting staff expertise. The clearinghouse could contribute, for example, to developing effective methods for the evaluations recommended above in the section on public–private joint funding of freight-related public works projects. In creating the Bureau of Transportation Statistics in DOT, Congress acknowledged the importance of data to effective management. Appropriate evaluation methods are as important as reliable data in supporting management decisions. The case studies have highlighted how public choices are made more difficult by weak analysis capabilities. The sources of this problem lie in the lack of an explicitly defined evaluation framework (that is, decision makers and planners often do not define the standards of evaluation in a measurable way); political or bureaucratic

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Freight Capacity for the 21st Century: Special Report 271 incentives that discourage evaluation; and failure to devote resources to research, data collection, and model development. The following guidelines for evaluations are not controversial but often are not followed in practice: Evaluation, especially of projects that may involve trade-offs among freight mobility benefits, passenger benefits, and environmental protection, requires use of benefit–cost analysis. Traditional engineering standards for judging projects are insufficient. Transportation benefits should be evaluated in terms of users’ willingness to pay for the change in service produced by the project. Estimating the demand response to changes in transportation cost is necessary. Evaluations of capital improvements must include comparison with noncapital alternatives including traffic control improvements and congestion pricing. External costs, including environmental costs, must be included in the benefit–cost analysis, and specification of alternatives must give consideration to opportunities for modifications to project design that mitigate environmental costs. The evaluation must include analysis of risks and sources of uncertainty, including uncertainty in traffic projections, and consider strategies for reducing risk. These guidelines are consistent with the requirements of Executive Order 12893 on principles for federal infrastructure investments (Executive Office of the President 1994). Other recent examinations of federal transportation infrastructure programs, by other NRC committees and by GAO, have concluded that necessary evaluations of federal infrastructure spending proposals sometimes either are not carried out or are incorrectly executed. They have recommended actions to ensure conscientious evaluation in direct federal infrastructure spending programs, DOT planning studies for advising Congress on federal-aid programs, and DOT review of proposals for discretionary grants for transportation infrastructure. In addition, DOT should actively promote state application of appropriate economic evaluation methods in state programs that receive federal aid, in particular, the highway programs. Modeling requirements and methods for evaluating alternative management practices and capital improvement proposals according to the criterion of economic efficiency, applicable to the inland waterways, were described in the report Inland Navigation System Planning (NRC 2001). Requirements for cost and demand models to support analysis of tax alternatives, to be employed in future DOT highway cost allocation studies, are identified in the reports of the 1996 TRB committee that reviewed the federal cost allocation studies (TRB 1996a).

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Freight Capacity for the 21st Century: Special Report 271 Regulatory Issues REDUCING PROJECT DELIVERY TIME The Secretary of Transportation should implement a coordinated, streamlined environmental review process at the earliest possible date that furthers the basic congressional intent of improving the efficiency of project delivery. The focus of the federal streamlining efforts has been major projects that require preparation of an Environmental Impact Statement, the most comprehensive class of environmental review defined in federal law. In addition to this effort, DOT should not overlook opportunities to streamline reviews of more common rehabilitation projects (which follow the Environmental Assessment or Categorical Exclusion processes defined in federal law rather than the Environmental Impact Statement process). Section 214 of WRDA 2000 authorizes a federal agency evaluating permit applications (in this legislation, permits under the jurisdiction of the Department of the Army) to accept funds from a nonfederal public agency applicant to pay administrative costs in order to speed review. Congress should consider options for funding federal agency reviews of highway projects analogous to this provision. Too little objective information is available about the impacts of environmental reviews and alternative approaches to carrying out reviews. Congress should direct DOT to conduct, in cooperation with the states and the federal environmental agencies, an assessment of the effects of required environmental reviews of transportation projects. The assessment should have two components. First, DOT and the states should collect data on durations and costs of reviews and the impact of reviews on project delivery times. The 2000 American Association of State Highway and Transportation Officials (AASHTO) survey of state experiences with project delays was a constructive step but was not designed to provide objective, quantitative information on review durations and costs. Second, DOT and the states should assess the impact of the review process on final project design, which is the ultimate test of the benefits of the process. In addition, Congress should direct DOT, in cooperation with the states, to conduct a program of research to identify and document best practices in state transportation programs and other federal and state infrastructure programs regarding innovative project development, design, and management aimed at reducing project delivery times. Studies should examine practices relating not just to environmental reviews but to all aspects of design and management. Congress should direct DOT to conduct cooperative research and evaluations of successful and unsuccessful projects with the states to examine the distributions of the direct costs and benefits of publicly supported freight infrastructure developments among all the affected individuals and groups. The research should examine how these distributions are affected by project financial, legal, and institutional arrangements. The object would

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Freight Capacity for the 21st Century: Special Report 271 be to determine how distributional outcomes affect the likelihood of public acceptance and successful completion of projects. Infrastructure providers see curtailing the growth of project delivery times as essential to their ability to control the costs of future capacity expansion. The adjustment of infrastructure to changing markets is slowed as a consequence of lengthening project delivery times. Investment becomes more risky because decisions are more dependent on highly uncertain long-term forecasts and because final decisions to proceed with projects cannot be made until after many years of development and review. Changes in practices and policies that reduced delivery time would greatly reduce the difficulty of efficiently matching capacity to demand. The attention of the state transportation agencies and the federal government has recently been focused on the issue of environmental streamlining, that is, efforts to reduce the time and cost of environmental regulatory reviews of transportation projects. Legally required environmental reviews of infrastructure projects serve an essential function but add to cost, completion time, and uncertainty. The agencies controlling the reviews may be insensitive to these impacts because they do not directly affect the agencies’ own budgets and missions. In particular, the states have petitioned the federal government for more expeditious review of highway projects. A policy statement of AASHTO concludes that “only if federal agencies commit to developing a simplified coordinated review process that maintains substantive environmental protection and takes less time, will States be able to deliver, in a timely manner, the investments in transportation envisioned by Congress and expected by the public” (AASHTO 1995). TEA-21 in 1998 required DOT to work with the federal environmental regulatory agencies to develop procedures to facilitate reviews of projects to reduce delay and costs. The act requires the Secretary of Transportation to “develop and implement a coordinated environmental review process for highway construction projects…. The … review process for each project shall ensure that, whenever practicable…, all environmental reviews, analyses, opinions, and any permits, licenses, or approvals that must be issued or made by any Federal agency for the project concerned shall be conducted concurrently and completed within a cooperatively determined time period” (P.L. 105-178, Section 1309). A 2002 presidential executive order creates new procedures for federal agencies to follow to “promote environmental stewardship in the Nation’s transportation system and expedite environmental reviews of high-priority transportation infrastructure projects” (Executive Office of the President 2002). Streamlining will allow federal and state agencies to “move paper faster,” that is, to comply more expeditiously with the requirements and the spirit of the National Environmental Policy Act. However, attaining

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Freight Capacity for the 21st Century: Special Report 271 the goal of improved efficiency of project delivery demands multiple strategies, including the following: Administrative streamlining of environmental assessments (i.e., procedural reforms that DOT, acting together with other state and federal agencies, can implement on its own authority). Fundamental review and evaluation of the environmental assessment requirements in U.S. law. Requirements that have produced demonstrable benefits should be strengthened, and those that have not should be modified or deleted. Such a review would consider changes whose implementation would be beyond DOT’s authority. Better initial project planning to foresee and ameliorate potential environmental conflicts. Application of innovative methods of project design, development, and management to speed project delivery. Integration of design and construction, use of performance incentives, and other innovative contracting practices can greatly expedite project delivery in certain circumstances (TRB 1996b, 27–32). Another TRB committee has recommended federal actions to develop methods to dramatically reduce highway delivery times (TRB 1998). LIBERALIZATION OF INTERNATIONALAIR FREIGHT The committee endorses past U.S. government efforts to liberalize the international air freight market through bilateral agreements with other nations but recommends that the multilateral approach be pursued as well, since it is the method with the greatest potential benefit. International air cargo is probably the most regulated major freight market. International competition is governed by the system of bilateral treaties that also regulates passenger traffic. The treaties restrict landing rights, nationality of ownership, cabotage, and other aspects of operations. Increased competition and carrier flexibility would be expected to yield the same improvements in efficiency in the international air cargo system as they have in other transportation sectors. Increased efficiency means that better use is made of existing capacity. Lower costs would lead to more air cargo, but the system would be better able to respond to growing demand. An alternative to the present system of regulation would be to govern international air cargo, as is trade in other international services, by a multilateral free trade agreement within the World Trade Organization structure. The agreement would reduce barriers to ownership, market entry, and cabotage. International air cargo could be liberalized through this approach without changing the present rules governing passenger transport. Such a proposal has been made recently by international business groups.

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Freight Capacity for the 21st Century: Special Report 271 REFERENCES Abbreviations AASHTO American Association of State Highway and Transportation Officials DOT U.S. Department of Transportation GAO U.S. General Accounting Office NRC National Research Council TRB Transportation Research Board AASHTO. 1995. AASHTO’s Reauthorization Policy Statements: Interim Report. Dec. DOT. 1997. 1997 Federal Highway Cost Allocation Study .Washington, D.C., Aug. Executive Office of the President. 1994. Principles for Federal Infrastructure Investments. Executive Order 12893, Jan. 26. Executive Office of the President. 2002. Executive Order: Environmental Stewardship and Transportation Infrastructure Project Reviews. Sept. 18. GAO. 2000. Commercial Motor Vehicles: Effectiveness of Actions Being Taken to Improve Motor Carrier Safety Is Unknown. Washington, D.C., July. Meyer, J.R . 1997. Transportation Today: The U.S. Experience in a World Context. Annals of the American Academy of Political and Social Science [Special Issue: Transport at the Millennium (S.G. Long, ed.)], Vol. 553, Sept., pp. 17–29. NRC. 2001. Inland Navigation System Planning: The Upper Mississippi River–Illinois Waterway. National Academy Press, Washington, D.C. Pisarski, A.E . 1999. Testimony Before the Subcommittee on Ground Transportation of the Committee on Transportation and Infrastructure, U.S. House of Representatives. Feb. 3. Taxpayers for Common Sense and National Wildlife Federation. 2000. Troubled Waters: Congress, the Corps of Engineers and Wasteful Water Projects. March. TRB. 1996a. [Untitled letter report.] Committee for Review of the Highway Cost Allocation Study. National Research Council, Washington, D.C., May 30. TRB. 1996b. Special Report 249: Building Momentum for Change: Creating a Strategic Forum for Innovation in Highway Infrastructure. National Research Council, Washington, D.C. TRB. 1998. Dramatically Reducing Highway Construction Project Times: Suggestions for Research. Research and Technology Coordinating Committee. National Research Council, Washington, D.C., Nov. 11. TRB. 2001. Special Report 260: Strategic Highway Research: Saving Lives, Reducing Congestion, Improving Quality of Life. National Research Council, Washington, D.C. TRB. 2002. Special Report 267: Regulation of Weights, Lengths, and Widths of Commercial Motor Vehicles. National Research Council, Washington, D.C. Voinovich, G. 2000. Statement of Senator George V. Voinovich: Committee on Environment and Public Works, Transportation and Infrastructure Subcommittee: Corps Backlog and Mission Hearing. May 16.