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

The Transportation Research Board’s (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 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 sector that have been the sources of concern in order to assess the risk that efficiency gains 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.

The committee examined aggregate trends in traffic, performance, capital expenditures, and capital stock for the freight modes; developments related to congestion at freight terminals, at border crossings, and in urban areas, especially on facilities shared by passengers and freight; and underlying trends in productivity, finance, and technology. Taken together, developments in these areas have indicated to many observers

a pattern of unprecedented tight capacity in certain parts of the system. 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.

The prominent developments in recent decades that formed the basis of concern for the future performance of the freight system included growing congestion on important highway segments and slowing of the rate of addition of highway capacity, rail infrastructure downsizing and service disturbances, congestion at terminals and border crossings, lengthening lead times and rising costs of infrastructure projects, and freight–passenger conflicts in cities. These trends represent serious challenges to public- and private-sector providers of freight transportation services and facilities. However, to obtain a balanced view, it must be recognized that certain developments, although they do not diminish the legitimacy of concerns about capacity, have positive implications. Demographic trends, in particular the slowing of the rate of labor force growth compared with the 1970s and 1980s, will moderate highway traffic growth. Moreover, 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 harmful development.

Furthermore, capacity is being added. For highways, recent additions more often take the forms of widening, alignment improvements, improved traffic management systems, and intersection improvements than construction of new routes. 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, although it is uncertain how much of planned spending will occur. Market developments, including future global patterns of trade and com-

modities production, will determine the 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 additional capacity will be located, that is, which ports and regions in the United States and neighboring countries will attract the facility 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. The growth of international trade may exacerbate the bottleneck problem by concentrating freight traffic at a small number of nodes, including certain ports and border crossings.

Productivity growth in freight transportation has historically been impelled by a series of breakthroughs, both technological and institutional. Major boosts to productivity of this sort probably will occur again. Improvement in vehicle and infrastructure technology will continue to be important. Possibly most important will be information technology applications that improve coordination of transport operations. In public administration, ample opportunities exist for reforms in management, operations, and finance that could yield dramatic gains in transportation efficiency.

There will be serious challenges. 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 increase the cost of expanding capacity and add to the risk of investment.

The United States has ample resources for expanding the transportation system; however, 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 adjust to accommodate or avoid congestion. 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, by accepting more congestion, and by

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. Changes in government policy that would allow the nation to make better use of existing capacity and better investment decisions, compared with this scenario, would have important economic benefits.

The committee examined transportation projects as case studies to illuminate the institutional setting of project-level decision making and sought views of freight industry executives on study issues. The cases suggest that certain basic questions about the management of public transportation programs are not being adequately examined. Government evaluations of projects sometimes are not broadly conceived, do not employ proper analytical techniques, or are not subjected to expert review. Governments often fail to recognize and take advantage of the link between project finance and performance. Consequently, public agencies usually do not evaluate how alternative funding mechanisms or user fee arrangements would affect the performance of transportation programs or follow project funding practices that maximize the chance of producing successful projects.

The case studies did not document systematic misallocation in government investment decisions in favor of projects primarily serving passengers 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 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. The case studies as well as the aggregate trends indicate how capacity problems often originate in operating practices that are not optimal. A common theme in the cases is that obstacles to problem resolution, as well as poor management decisions, can arise from inadequate communication

among the private sector, government transportation agencies, and other government bodies at the federal, state, and local levels.

The views of freight executives communicated to the committee highlighted that physical plant is not the only potential capacity constraint on the freight transportation system. Short-run constraints often are equipment or labor shortages rather than shortages of road space or trackage. Although labor supply is a problem that carriers and workers can resolve, public policy regarding education, workplace regulation, immigration, and rights of foreign carriers to enter the United States will affect the labor outlook.

A general recommendation is presented first, concerning principles to guide decisions on government programs affecting freight capacity and the need for consistent policy direction across the broad range of public programs relevant to freight capacity. This is followed by specific recommendations related to investment, management of facilities, decision-making methods, and regulation. The main recommendations are italicized.

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 in all these programs that are consistent with the principles outlined below.

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. Decisions on these matters often seem 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 fall into four categories: provision of infrastructure; operation of facilities; finance of the construction and operation of facilities and collection of fees from their users; and regulation to reduce environmental and safety costs, protect consumers from monopoly power, and control international commerce. Although freight transportation system development in the

United States is a decentralized rather than centrally planned enterprise, the government influence is pervasive. The success of government efforts to ensure adequate future capacity will depend on the quality of decisions in these four areas of established responsibility.

Experience in the United States and other countries demonstrates that respecting the following four principles will enable the freight infrastructure system 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, those 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 circumstances in which market-dictated outcomes would be far from economically efficient. These include preventing exercise of monopoly power and dealing with nonmarket costs. Government also is responsible for management of facilities for which it has a historically established responsibility that could not feasibly be altered in the near term, and in settings where institutional complexity necessitates government leadership. The federal government is responsible in instances where a conflict exists between nationwide and local interests and 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. Wherever the important benefits of a public-sector freight-related project are the direct benefits that users of the facilities receive in the form of reduced transportation and logistics costs, users should pay the costs.

• 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.

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 regarding 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 signif-

icance 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; however, this practice has efficiency costs. It is important to economic welfare that resources be concentrated on the high-payoff capital investments that are available, rather than diverted to constructing facilities that will be high-cost or underutilized.

Government has in the past attempted to direct transportation and infrastructure programs as the committee recommends, that is, by defining general principles to be applied across programs. The U.S. Department of Transportation’s (DOT’s) 1997 National Freight Transportation Policy Statement is one example. Implementation of this approach has had only limited success. The obstacles have been not only conflicting interests but also lack of planning and administrative follow-up. After the principles are established, the necessary next steps are to identify all the government activities to which they apply, considering operations and regulation as well as construction, and then to analyze how each program must be changed to align with the principles. A start at this planning and analysis task has been made in this report, but a comprehensive policy review would require a greater effort.

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. The program recommendations below identify opportunities for application.

The recommendations that follow are illustrations of how the principles stated above can be applied to 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. The recommendations are grouped under three headings: federal infrastructure programs, decision-making processes and planning, and regulatory issues.

Because trucking accounts for the majority of U.S. freight transportation expenditures and the federal government has a leading role 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. The next federal surface transportation program should 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 to improve the system of federal highway finance include the following:

• Making adjustments to more closely align average user fee payments for vehicles with estimates of cost responsibility in DOT’s most recent federal highway cost allocation study. Better matching of fees to costs could provide incentives 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. The adjustments would not necessarily entail raising average user fee rates. 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 that the equipment is consistent with safety and fees on the equipment cover the cost of providing infrastructure for it.

• Continuing the Value Pricing Pilot Program and the provisions of the Transportation Equity Act for the 21st Century (TEA-21) and the Intermodal Surface Transportation Efficiency Act that encourage highway development using toll finance, and strengthening incentives for state and local governments to take advantage of these provisions.

• Considering measures to reduce obstacles and provide incentives to private participation in highway development, as pilot programs with continuation dependent on evaluation of the results.

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

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. Congress should strengthen oversight and evaluation of state administration of federal motor carrier safety and size and weight regulations. Congress should continue support for research on highway maintenance practices and

methods and on intelligent transportation system applications for traffic management.

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 studies. The DOT C&P reports have significant imperfections but are the best available projections of returns on federal transportation investments.

Freight Priorities in the Federal-Aid Program Any programs that Congress enacts for the purpose of redirecting state and local government project selection toward freight-related projects should satisfy the following 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.

• 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.

• 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 on 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.

New Systems Congress should direct DOT, in cooperation with the states and the private sector, to study the costs and market potential of exclusive truck facilities and to examine needs for additional ancillary highway facilities for trucks to reduce truck–car conflicts, such as rest areas and parking and staging areas. Such facilities should be paid for by user fees.

The Administration and Congress should reexamine the planning process for new projects as well as the present rules on funding formulas and sources for harbor and channel improvements, 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, that is, systematic review of the justification for all authorized harbor and waterway projects;

• Regional planning for port capacity or regionalization of port investment decisions;

• Greater reliance on local cost-sharing and user fees; and

• Strengthened requirements for independent review of evaluations of federal harbor and waterways projects.

Congress should sustain the cost-sharing reforms of the 1986 Water Resources Development Act by refraining from waiving or bypassing local match requirements.

A new revenue source for maintenance dredging of navigation channels is needed. Options that have been proposed for harbor maintenance finance include general revenue funding, a new harbor services user fee, and dedicating a portion of customs revenues to a fund to finance federal harbor expenditures. A fourth option would be a fee scheme more closely matching fees to costs; for example, fees related to vessel operating draft and to the costs of specific channels. Although the committee makes no specific recommendation about the appropriate new revenue sources, it urges Congress to recognize that tying channel capacity expansion and maintenance to project-specific user fees would have certain economic benefits. With current technology, all users can be identified and their use can be charged for as is the use of a toll road.

Congress and the Administration should direct the Corps of Engineers to improve the efficiency of congested locks on inland waterways through demand management. In its authorizations and appropriations for Corps Civil Works activities, Congress should begin to rely on revenues from user fees to fund inland waterways operation and maintenance as well as capital expenditures. Increased reliance on segment-specific user fees would tend to discourage expenditures on little-used waterway segments. For the longer run, new institutional arrangements should be sought for inland waterways management—for example, operation by regional authorities—that would entail less federal subsidization of waterway operation and expansion.

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.

States 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 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 their involvement in freight transportation infrastructure. Nontraditional projects typically have involved public–private joint undertakings and complex financing packages with support from multiple sources, often center on intermodal facilities, and often entail public support for facilities that are commonly provided by the private sector. The first step in considering public funding for such a project 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 the project and compare it 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.

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, its Highway Economic Requirements System, and its highway cost allocation studies. However, better guidance for federal decisions would be possible with improvements to these tools. For this purpose, Congress should provide for the ongoing collection of freight transportation statistics by DOT, through the Bureau of Transportation Statistics. The Commodity Flow Survey and the Corps of Engineers’ waterborne freight transportation data programs should be continued.

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 clearing-house would not supplant any agency’s evaluation responsibilities, but would work to define best practices. 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 activity 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.

Public infrastructure investment choices are made more difficult by weak analysis capabilities. The sources of this problem lie in the lack of an explicitly defined evaluation framework, political incentives that discourage evaluation, and failure to devote resources to research and data collection.

The following guidelines are applicable to government freight-related infrastructure projects: (a) Evaluation 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. (b) Evaluations of capital improvements must include comparison with noncapital alternatives including traffic management and pricing. (c) External costs must be included and specification of alternatives must give consideration to opportunities for modifications to project design that mitigate these costs. (d) The evaluation must include analysis of risks and sources of uncertainty, including uncertainty in traffic projections, and consider strategies for reducing risk.

Infrastructure providers see curtailing the growth of project delivery times as essential to controlling the costs of capacity expansion. Legally required environmental reviews of infrastructure projects serve an essential function but also have costs and can add to completion time and uncertainty. Changes in practices and policies that shorten delivery time would greatly reduce the difficulty of efficiently matching capacity to demand. The goal of reforms should be to speed project delivery without compromising valuable environmental safeguards. The following actions would be steps toward reducing excessive delay:

• The Secretary of Transportation should implement a streamlined environmental review process at the earliest possible date that furthers the congressional intent of improving the efficiency of project delivery expressed in

TEA-21. DOT should not overlook opportunities to streamline reviews of more common, smaller-scale rehabilitation projects.

• Congress should consider allowing federal agencies reviewing highway projects to accept funds from nonfederal public agency applicants to pay administrative costs in order to speed project review.

• Congress should direct DOT to conduct, in cooperation with the states and the federal environmental agencies, the following studies:

  • An assessment of the effects of required environmental reviews of transportation projects, including impacts of reviews on project delivery times and on final project design.

  • A program of research to identify and document best practices in state transportation programs and in other federal and state infrastructure programs regarding innovative project development, design, and management aimed at reducing project delivery times. The review should consider methods of initial project planning that enable states to foresee and ameliorate potential environmental conflicts.

  • Evaluations of successful and unsuccessful projects to examine the distributions of the direct costs and benefits, among all the affected individuals and groups, of publicly supported freight infrastructure developments.

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. Increased competition and increased carrier flexibility would be expected to yield improvements in efficiency in the international air cargo system as they have in other transportation sectors. An alternative to the present regulatory system would be to govern international air cargo, as is trade in other international services, by a multilateral free trade agreement reducing barriers to ownership, market entry, and cabotage.

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