Freight Capacity for the 21st Century: Special Report 271 (2003)

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

legislation, which could only come about through the demand and support of industry, the public, and transportation professionals.

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.

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

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

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.

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.

Aggregate trend data are insufficient as indicators of the adequacy of capacity because constraints in transportation systems generally are

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.

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-

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.

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.

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

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.

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-

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.

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.

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.

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

through changes in government transportation programs. The philosophies underlying the recommendations in the various statements might be grouped in three categories:

• Incrementalist: more resources for existing programs, refinements in program structure or new initiatives within the precedents of established policy, more coordination and cooperation among the interested parties.

• Activist government: new government programs departing from established structures, expanded responsibilities for government, partnerships with the private sector, private-sector grants, increased regulatory oversight, government promotion or advocacy of particular business practices or institutional structures.

• Limited government: deregulation, privatization, pricing, devolution of government responsibilities to the local level.

The divergence of prescriptions is in part a symptom of lack of information, the consequence of the failure of government transportation agencies to conduct adequate evaluations of many projects. There is a lack of policy experimentation—for example, states have shown reluctance to participate in federally sponsored efforts to stimulate innovations such as the pilot programs for toll finance and congestion pricing. The recommendations indicate some opportunities for evaluation and experimentation to provide a better factual basis for policy.

In the first two sections below, principles to guide decisions on government programs affecting freight capacity are proposed, and the scope of the government policy agenda relevant to freight capacity is described. Specific recommendations related to investment, management of facilities, decision-making methods, and regulation are presented in the final section. The main recommendations are italicized.

The differences among the policy prescriptions described in the preceding section arise from differing conceptions of the proper role of government in freight transportation. Therefore, it is appropriate to state the principles, or assumptions regarding government responsibilities, that underlie the committee’s recommendations. Experience in the United States and other countries demonstrates that respecting the principles listed below will put the freight infrastructure system on course to provide the level of capacity and performance that makes the greatest contribution to the nation’s economic well-being.

• Economic efficiency ought to be the primary goal of government transportation policy; that is, capital improvements and operating practices for public facilities should be selected that yield the greatest net economic benefit, considering all costs.

• Government involvement should be limited to certain defined circumstances in which market-dictated outcomes would be far from economically efficient. These include, in particular, preventing exercise of monopoly power and dealing with nonmarket costs of pollution, congestion, and accidents. In addition, government is responsible for management of parts of the transportation system for which it has a historically established responsibility that it would not be feasible to alter in the near term, and in settings where institutional complexity— arising from the involvement of multiple government jurisdictions, dense development, and sensitive environmental issues—necessitates government leadership. It sometimes makes sense for government to accept the up-front risk in genuinely innovative projects. The federal government is responsible in instances where a potential conflict exists between nationwide and local interests. The federal government also is responsible for ensuring transportation facilities for national defense.

• A government responsibility to provide facilities or leadership in developing a project does not necessarily justify government subsidy of the costs. The important benefits of most public-sector freight transportation–related investments are the direct benefits that users of the facilities receive in the form of reduced transportation and logistics costs. Although exceptions exist, as a general rule, if such a project could not be financed by any scheme of user fees, then the responsible agency should question whether the project’s benefits are adequate to justify the investment.

• Finance provisions in public-sector transportation programs are a major determinant of performance, affecting both the quality of investment decisions and the efficiency of operations. Reliance on revenue from users, and from local matching funds in federal grant programs, will increase the likelihood that the most worthwhile improvements will be carried out and that facilities will be operated and maintained efficiently.

There is a degree of acknowledgment of these principles in federal policy. They are partially paralleled in DOT’s 1997 National Freight Transportation Policy Statement, which set forth “principles of federal freight transportation policy.” These include allocation of federal resources to cost-effective projects supporting national goals, removal of unnecessary regulation, efficient pricing of publicly financed transportation infrastructure, assurance of safety and environmental protection, application of technology advances to promote efficiency and safety, and fulfillment of defense needs. The 1994 Presidential Executive Order

“Principles for Federal Infrastructure Investments” requires that “infrastructure investments shall be based on systematic analysis of expected benefits and costs” and directs that “since efficient levels of service can often best be achieved by properly pricing infrastructure, the Federal Government—through its direct investment, grants, and regulation— should promote consideration of market-based mechanisms for managing infrastructure.” Congress has sometimes supported the principles in legislation.

Nonetheless, application of these principles frequently is controversial, and many government investment and operating decisions are not consistent with them. Controversy is especially likely when proposals are made for changing existing practices concerning user fees or funding sources (e.g., instituting user charges on previously uncharged public facilities) and when particular industries or local interests argue that a project’s national significance justifies federal or state subsidy instead of funding through project-generated revenues. Consideration of the distribution of benefits commonly is a factor in public-sector transportation spending decisions, as when federal funding is allocated to ensure that the states receive comparable shares, or when public investment is targeted to increase income in particular urban areas. Policy makers should keep in mind that these practices have efficiency costs. It is important to long-run economic welfare that resources be concentrated on high-payoff capital investments rather than diverted to constructing facilities that will be high-cost or underutilized. The cumulative effect of such diversions will be to reduce system capacity compared with the capacity that equal investment, more effectively targeted, could provide.

Action to continually extend the application of these principles affords the only realistic prospect that the nation can continue to enjoy the benefits of freight transportation productivity growth in the long run. By themselves, technology, better planning, and increased spending levels will be unable to achieve comparable results. Keeping up with growth within the constraints that will be imposed on the transportation system in the future will be possible only if operators extract more service from existing facilities and higher returns on investment by selecting better projects. Finance reform in government programs and greater reliance on markets can help attain both of these goals. The present inefficient use of much existing transportation capacity should be regarded as a large hidden capacity reserve waiting to be tapped through improved management practices. Revenues from appropriate user fees in many circumstances would be the best indication of where capital expenditure to expand capacity would be most valuable.

Reliance on user fees and pricing in finance and management of public facilities is already extensive, even though existing schemes are imperfectly designed. Numerous opportunities exist for incremental

extension and refinement of rational fee systems. These include changes in motor vehicle user fees to more closely tie fees to costs, increased use of concessions and commercialization in airport and port operations and for waterway maintenance, development of public and private toll roads, and use of congestion pricing or other market mechanisms to manage congestion of inland waterways. Congress and the responsible federal agencies must promote state and local government experiments with these practices, and federal agencies should monitor experience in countries where applications of these methods have advanced farther than in the United States.

The committee urges that the Congress, as well as the federal agencies responsible for transportation infrastructure and regulation, recognize the full range of federal programs that affect freight and endeavor to make decisions on these programs that are consistent with the principles outlined above.

The periodic reauthorization of the federal surface transportation program (most recently, TEA-21 in 1998) has been the focus of debate and policy initiatives concerning federal freight policy in recent years. Congress’s objective in ISTEA (the 1991 act) was “to develop a National Intermodal Transportation System that is economically efficient, environmentally sound, provides the foundation for the Nation to compete in the global economy and will move people and goods in an energy-efficient manner.” Congress apparently meant “intermodal” broadly, as a reference to the national transportation system as a whole. The goal is appropriate but is too broad to be attainable through the limited means available within the historical scope of the federal surface transportation act or any other single federal program.

Freight transportation is a joint venture of government and the private sector. Therefore, the performance of the system and the adequacy of freight capacity in the next decades will reflect the outcomes of government decisions on numerous spending, regulatory, and operational questions that arise in the course of administering established programs. The range of relevant activities goes well beyond the programs in TEA-21 and any successor legislation. It includes federal programs that are likely to undergo legislative revisions in the next few years that will have far-reaching influence on the adequacy of freight capacity. Decisions on these matters often appear to address narrow concerns and to be guided by short-run considerations. What is needed instead is a coherent government effort at the national level to improve freight efficiency and provide adequate capacity that takes into account the cumulative long-run consequences of these government decisions and applies consistent principles to guide decision making.

Present government activities that directly affect freight transportation can be classified into four categories:

• Provision of infrastructure,

• Operation of transportation facilities,

• Finance of the construction and operation of facilities and collection of fees from their users, and

• Regulation.

The four activities are interconnected: financing sources limit the scale of construction and influence where funds are spent; user fee collection can be a mechanism for managing use of facilities and for guiding investment; and regulations are integral to the management of public facilities. In each of these four areas, government decisions that will affect long-run freight capacity are pending.

Three major federal infrastructure programs build freight facilities: the surface transportation program (as most recently defined in TEA-21), the water resources development acts (most recently, WRDA 1999 and WRDA 2000), and federal airport improvement and airways traffic control programs (most recently the Aviation Investment and Reform Act for the 21st Century of 2000). Each of these is a periodically reauthorized program providing grants to nonfederal public agencies and direct federal spending; includes funding for operating as well as capital expenditures; specifies rules on project eligibility and selection; and specifies finance provisions including maintenance of trust fund accounts, collection of user fees, and rules on federal and nonfederal cost sharing.

Policies on operation and management of government-provided freight facilities—highways, ports, airports, air traffic control, and waterways—encompass traffic management, fees, maintenance management, and safety and pollution control activities. Decisions of Congress and the operating agencies on how to use technology and market incentives to manage traffic and control operating costs will determine the effective capacity and quality of service of existing facilities. One example, described in Chapter 3, is proposed traffic management improvement as an alternative to physical expansion on the inland waterways.

Examples of immediate finance issues whose outcomes can affect freight capacity include deciding on federal shares and revenue sources for port channel development, finding a new source of funding for harbor dredging, current efforts promoting toll funding and private-sector participation in development of highways, and proposals for commercialization of air traffic control.

Examples of immediate regulatory issues relevant to freight capacity include proposals for changes in federal economic regulation of railroads and airlines, proposals for reform of international aviation regulation as

it applies to air freight, truck size and weight regulation, implementation of North American Free Trade Agreement (NAFTA) international carrier access provisions, and proposals for streamlining environmental review of transportation infrastructure projects to avoid unjustified delays. Environmental streamlining is a good illustration of a problem that cannot be addressed within the boundaries of a single executive agency or public works program because of the breadth of government activities affecting freight capacity. Improving the cost-effectiveness of environmental reviews of infrastructure projects will require examination of environmental laws and regulations as well as transportation agency practices.

These examples of pending critical decisions refer to federal actions, but parallel decisions are made continually in every state. States are the direct providers and operators of highways, and state and local governments and special authorities build and operate ports and airports; the private sector provides infrastructure components and is the direct provider of all freight services. Freight transportation system development in the United States is a decentralized, rather than centrally planned, enterprise, and the scope of federal control is limited. Nonetheless, the list suggests that federal government influence is pervasive and is the outcome of a large number of recurring legislative and administrative decisions. The success of government efforts to ensure adequate future capacity will depend on the quality of decisions in these areas of established responsibility.

The recommendations that follow are illustrations of how the principles stated above can be applied to clarify choices concerning pending government decisions on investment, operations, finance, and regulation. The examination of freight capacity problems in this study points to numerous immediate, practical opportunities for incremental improvements in government performance that will substantially contribute to ensuring adequate future capacity. Adjustments will allow the established public works programs to start producing better results: better project selection and better facility operation. Then over time the resources available will build a system that provides greater benefits for its users and the public.

The recommendations address selected policy issues affecting all the freight modes and are grouped under three headings: federal infrastructure programs, decision-making processes and planning, and regulatory issues. They do not constitute a comprehensive freight program; instead, they were selected to illustrate the application of the principles listed above to immediate decisions facing Congress and government agencies

that will have long-run consequences for freight capacity, in order to indicate the direction in which policy ought to evolve.

Because trucking accounts for the majority of U.S. freight transportation expenditures and the federal government has a leading roll in national highway programs, no federal activity has greater significance for freight capacity than the federal-aid highway program. Highway services are essential to the functioning of the rail, air freight, port, and waterway systems. Congress is now drafting successor legislation to the present surface transportation program, TEA-21. Since cars and trucks use the same facilities, measures to better serve freight traffic are for the most part the same as those required to improve the overall performance of the highway system. The committee recommends that the new program further these three goals:

1. Maintain and reinforce the principle of user financing, reforming the structure of fees so that they more closely relate to costs each highway user imposes.

Measures that Congress can take toward improving the system of federal highway finance include the following:

• Making adjustments to more closely align average user fee payments of vehicles with estimates of cost responsibility in DOT’s most recent federal highway cost allocation study. The existing federal excise tax scheme is an imperfect form of user fee because it does not allow fees to be charged that are very close to actual costs generated (which depend, for trucks, on axle weights, mileage, route, and other factors) and because the states charge fees in addition to the federal fees. Nonetheless, better matching of fees to costs, even within the existing fee structure, could provide some incentive for shippers to make logistics decisions and for carriers to make equipment and operating decisions that reduce the costs of truck transportation and permit better utilization of existing capacity. In considering fee changes, Congress should evaluate how proposed changes would affect incentives for efficient highway use.

  Congress should ensure that federal truck size and weight regulations (which historically have been addressed in the highway program legislation) are consonant with user fees. Motor carriers should be allowed to operate equipment that minimizes their costs, provided the equipment is consistent with safety and fees on the equipment cover the cost

of providing infrastructure for it. Size and weight limits directly affect the freight-carrying capacity of the highways. Size and weight reform facilitates trade, and NAFTA commits the parties to harmonization of motor vehicle regulations. At the request of Congress, another TRB study committee has recently published recommendations on specific changes in federal size and weight regulations (TRB 2002).

• Continuing the Value Pricing Pilot Program of TEA-21 and strengthening incentives for state and local governments to participate. The value pricing program, a continuation of the earlier Congestion Pricing Pilot Program, provided funding to support the costs of implementing pilot projects to demonstrate road pricing or related market-based traffic management strategies.

• Continuing the provisions of TEA-21 and ISTEA that encourage highway development using toll finance. These include, in addition to the value pricing program, provisions allowing states to use federal-aid funds to construct or reconstruct toll roads or to lend funds for these purposes to private toll operators, as well as the pilot program that allows states to institute tolls on Interstate highways to finance reconstruction. These programs have been lightly utilized, and Congress should provide incentives for states to participate in pilots. The pilots themselves will have little impact on highway finance; however, it is imperative that highway agencies begin to develop experience with new forms of user fees. Improved pricing offers the only serious long-run opportunity to improve utilization of existing highway capacity, reduce the costs of highway congestion, and more accurately target highway investment to the projects with the greatest benefits.

As an incentive for states to experiment with alternative finance and management methods, Congress could set aside a fund dedicated to projects on roads where the highway agency has implemented efficient maintenance, traffic control, and other management measures, according to specified definitions. Appropriate user fees would be evidence of efficient management in the competition for funding under the program.

Private-sector equity participation in construction and operation of highways is another mechanism for using market forces to direct investment and manage highway operation. As part of the highway program reauthorization, Congress should consider measures to reduce obstacles and provide incentives to private participation in highway development, as pilot programs with continuation dependent on evaluation of the results.

The most recent DOT highway cost allocation study concluded that user fee revenues from all vehicles nearly equal highway expenditures and that large trucks’ user fees almost equal the highway expenditures for which they were allocated responsibility according to the study’s assumptions (DOT 1997, ES-9). The methods of cost allocation studies are contro-

versial; nonetheless, there does not appear to be a basis for arguing that large trucks as a class should be required to pay a much larger share of the cost of highway construction and maintenance. The need is for fees that are structured in a way that encourages efficient use of the highways, for example, fees that provide incentives for operators to select equipment that reduces bridge and pavement wear.

1. Support improved operation and maintenance of existing highway facilities.

The user fee reforms recommended above would be a step in the direction of improved highway operation. In addition, Congress should act to strengthen oversight of state administration of federal motor vehicle size and weight regulations and to evaluate the effectiveness of enforcement of federal motor carrier safety regulations. The recent report of another TRB policy study committee concludes that although size and weight regulation for interstate traffic is a legitimate federal responsibility, the effectiveness of the regulations as a highway management tool is hampered by weak federal oversight of the states’ administration of them (TRB 2002). A recent GAO study concluded that information needed for DOT to evaluate the effectiveness of its truck safety regulatory programs is lacking and that such evaluations will be necessary for the department to meet its accident reduction objectives (GAO 2000). Congress should continue support for research on highway maintenance practices and methods and on intelligent transportation system applications for traffic management. A recent TRB study has assessed promising lines of research in these areas (TRB 2001).

Congress should instruct DOT to review, in cooperation with the states, experience with the state infrastructure management systems, in order to develop ways that the federal aid program can help improve the effectiveness of these management tools in all states.

1. Provide funding adequate to ensure that the states have resources to maintain the overall performance of the highway system.

In deciding on justifiable highway spending levels, Congress should consider the estimates of benefits of alternative highway funding levels in DOT’s Conditions and Performance (C&P) studies. The DOT C&P reports have significant imperfections, but they are the best available projections of returns on federal transportation investments. The methods DOT uses in these evaluations were reviewed recently by the Congressional Budget Office and GAO. Both reviews identified needed improvements in the methods but concluded that the reports are useful for general guidance. The DOT studies indicate that highway projects that are marginal at present funding levels have high rates of return on

average and that federal-aid funding sufficient to maintain or improve system performance would be economically justified as long as the bulk of funds went to the best projects. In spite of the uncertainty of these estimates of investment returns, there is little reason to doubt the general conclusions. Highway freight and passenger traffic is growing; much of the reserve capacity created by the construction of the Interstate system has been used up; highway productivity is not growing fast enough to offset the effects of growth in traffic volume. There are no grounds for arguing that consumers of highway services would not be willing to pay fees sufficient to maintain present levels of service. Government efforts to promote alternative freight transportation modes are unlikely to significantly reduce the justified level of highway funding.

At any level of funding, greater benefit could be obtained from the federal-aid highway program if highway pricing were reformed, best operating practices were generally applied, and economic evaluations were used more consistently to guide capital expenditure and maintenance decisions.

Freight Priorities in the Federal-Aid Program TEA-21 contained programs intended to redirect state and local government project selection toward freight-related projects. These include the Transportation Infrastructure Finance and Innovation Act, the Rail Revitalization and Improvement Financing program, and other provisions. Any programs Congress enacts for this purpose in successor legislation to TEA-21 should satisfy these criteria:

• They should sustain the user-pays principle that underlies the federal-aid program; that is, capital and operating costs should be paid from the revenues of fees charged to the direct users of the facilities. By itself, user fee finance does not ensure that efficient investment decisions are made or that facilities will be efficiently operated. Nonetheless, when fees are used for demand management and fee revenues are used as one index of the merits of capacity expansion investments, efficiency will be promoted.

• They should sustain the broad support of the affected parties that the federal user fee financing system enjoys by funding projects that fee payers recognize as having value to them. The Inland Waterways Users Board is a precedent for a mechanism to give rate payers a voice in the use of revenues. Supporting underused facilities with revenues from heavily used facilities usually will not promote efficiency.

• To ensure that the market outcomes of competition between trucking and other modes are in the public interest, primary reliance should be placed on adjusting user fees rather than supplying offsetting subsidies to the competing modes.

• Rules for federal multimodal credit assistance programs should include requirements for ongoing and retrospective evaluation of the performance of the programs.

Increasing federal controls on state project selection in the federal-aid program for the purpose of directing funds toward freight-related projects would entail a risk of reducing the overall effectiveness of the program. Any bias in state and local project selection caused by failure to recognize freight benefits can only be corrected by systematic improvement in evaluations of project benefits.

New Systems Congress should direct DOT to study the costs and market potential of exclusive truck facilities. The research should include examination of how user fee policies on exclusive truck roads and competing unrestricted routes would affect feasibility. DOT, in cooperation with the states and the private sector, also should examine needs for additional ancillary highway facilities for trucks to reduce truck–car conflicts, including rest areas and parking and staging areas. Such facilities should be paid for by fees collected from users.

Construction of exclusive truck roads is one novel kind of infrastructure program that may be justifiable at some point. The mixing of cars and trucks in the traffic stream generates costs that would be avoided if the two kinds of vehicles did not share the same roads. In addition to the potential traffic and safety benefits of separation, savings would be possible because car-only facilities would have more lightly constructed pavement and bridges. Truck-only roads are in operation or planned in a few locations today, but experience has been insufficient to establish the scope of their practical application. Although it appears that they could be justified only on routes with traffic volumes that are very high by today’s standards, traffic growth on certain routes, mainly within urban areas, may render separation feasible in the coming decades.

The Administration and Congress should reexamine the planning process for new coastal harbor and channel improvement projects as well as the present rules on funding formulas and sources for these projects, with the goal of ensuring that available funding is concentrated on the projects with greatest net benefits. The following reform measures should be considered:

• Deauthorization review, a congressionally mandated review by USACE of the justification for all authorized harbor and waterway projects, considering commercial, defense, and environmental criteria. The review would be an opportunity to improve past evaluations by more thorough consideration of noncapital alternatives, updated demand forecasting, and

submission to independent review. A legislative instruction to rank projects so as to allow selection of the package that would yield the greatest return for a specified budget would encourage closer scrutiny of estimates of costs and benefits by the beneficiaries of the Civil Works Program.

• Regional planning for port capacity or regionalization of port investment decisions. Regional decision making could help avoid inefficient duplication of facilities and encourage each port to concentrate on those market segments where it possessed advantages. It would be possible for Congress to provide incentives in federal assistance programs for multiport regions to make coordinated proposals for harbor projects.

• Greater reliance on local cost-sharing and user fees. Growth of the backlog will be inhibited and the best projects will rise to the top of the priority list if local cost-sharing requirements are maintained or increased. Creation of mechanisms whereby the costs of a federally executed harbor improvement could be repaid by fees paid by the users of that improvement also would tend to bring the projects with greatest net benefit to the forefront.

• Strengthened requirements for independent, outside review of the economic and environmental evaluations of large or controversial federal harbor and waterway projects.

• Sustaining the cost-sharing reforms of the Water Resources Development Act of 1986 (Public Law 99-662, Title I) by refraining from waiving or bypassing local match requirements. The 1986 legislation required that nonfederal participants in navigation construction projects pay specified shares of construction costs and a share of operating and maintenance costs of deep draft harbors and channels.

Individual coastal harbor and channel improvements are jointly planned and implemented by the federal government and public port authorities. USACE plans new projects, and the federal share of improvements is funded though its Civil Works appropriations. Because Congress has authorized projects at a much greater rate than it has been willing to fund their implementation for the past several years, the backlog of unfunded new federal water project construction has continued to grow. The unfunded backlog of active Civil Works projects amounted to some $38 billion in 2000. The backlog is symptomatic of a project selection process that is failing to establish priorities (Voinovich 2000; Taxpayers for Common Sense and National Wildlife Federation 2000). To make the best use of available financial resources, legislation will be required to bring the planning process and project selection criteria into consonance with the financial capabilities of the federal government and the nonfederal project sponsors to implement new projects. Without new planning and financing models, development of new port channel capac-

ity will not meet the requirements of growth in commerce and increases in vessel capacities in an efficient and timely manner.

The appropriations for maintenance of navigation channels are made annually from the Harbor Maintenance Trust Fund, which is the depository for the receipts from the Harbor Maintenance Tax (HMT). Expenditures from the trust fund averaged about $500 million annually during the 1990s. The portion of the ad valorem HMT that applied to exports was ruled by the courts to violate the constitutional prohibition on export taxes in 1998. The remaining fee on imports is vulnerable to charges of being in violation of international trade agreements. Therefore, a new revenue source for maintenance dredging is needed.

The committee makes no specific recommendation but notes that options that have been proposed for harbor maintenance finance include the following:

• General revenue funding.

• Harbor Services User Fee. The administration proposed a fee system to replace the HMT in 1998. The fee would be collected from the owner or operator of each vessel using a U.S. port on a per-voyage basis. The amount would depend on the vessel capacity and vessel category (general, bulker, tanker, or cruise). The variation in fees among categories was described as reflecting differences in the average level of services required. Revenue from the fee would be credited to a trust fund, appropriations from which would pay all federal costs of operations, maintenance, construction, and improvements. Capital expenditures are now funded from general revenues. This proposal has been opposed by shippers, carriers, and port interests because of the perceived impacts on U.S. trade volume and on the competitive position of U.S. ports relative to Canadian ports.

• A fee scheme more closely matching fees to costs. Fees could be more closely matched to costs than in the Harbor Services User Fee proposal. For example, fees could be related to a vessel’s operating draft for each movement and to the costs of specific channels. Linking spending in each harbor to revenues generated could also be considered.

• Other dedicated revenue streams. Dedicating a portion of customs revenues to a fund to finance federal harbor expenditures has been suggested.

The principal argument in favor of general revenue funding is expediency. Parties that would be harmed have successfully opposed enactment of any cost-based fee scheme since before passage of the HMT in 1986. General revenue funding would be a way to provide for maintenance while

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.

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

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.

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

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.

• 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.

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.

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

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.

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

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:

1. 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.

2. Evaluations of capital improvements must include comparison with noncapital alternatives including traffic control improvements and congestion pricing.

3. 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.

4. 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).

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

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

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).

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.

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.

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