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Introduction: The Intermodal Freight System, Policy Issues, and Study Scope

In the past two decades freight transportation has been transformed from an industry dominated by regulation and resistant to innovation to a dynamic sector contributing to productivity growth and driven by rapid technological, market, and organizational change. The transformation has been important for the U.S. economy as a whole. Freight expenditures were $440 billion in 1995. Thus, even incremental productivity gains yield major benefits.

Freight transportation is a joint enterprise of the private sector and government. Private firms provide nearly all direct services to shippers and own transportation equipment and components of the infrastructure, including the rail system. Government provides major infrastructure components—highways, ports and harbors, airports and airways,



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Policy Options for Intermodal Freight Transportation: Special Report 252 1 Introduction: The Intermodal Freight System, Policy Issues, and Study Scope In the past two decades freight transportation has been transformed from an industry dominated by regulation and resistant to innovation to a dynamic sector contributing to productivity growth and driven by rapid technological, market, and organizational change. The transformation has been important for the U.S. economy as a whole. Freight expenditures were $440 billion in 1995. Thus, even incremental productivity gains yield major benefits. Freight transportation is a joint enterprise of the private sector and government. Private firms provide nearly all direct services to shippers and own transportation equipment and components of the infrastructure, including the rail system. Government provides major infrastructure components—highways, ports and harbors, airports and airways,

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Policy Options for Intermodal Freight Transportation: Special Report 252 and inland waterways. Because the industry has undergone rapid change, it is important to review government programs that serve freight to determine whether they are keeping up. Government infrastructure and other programs affecting freight must be flexible to match the dynamism of the industry. The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), which governed the disbursement of nearly $30 billion in annual revenues from fuel and vehicle excise taxes for highways and other transportation purposes, was one important step toward a new government approach to serving the freight sector. The act’s Declaration of Policy states: It is the Policy of the United States to develop a National Intermodal Transportation System that is economically efficient and 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. The National Intermodal Transportation System shall consist of all forms of transportation in a unified, interconnected manner, including the transportation systems of the future, to reduce energy consumption and air pollution while promoting economic development and supporting the Nation’s preeminent position in international commerce. (P.L. 102-240, Sec. 2) ISTEA, together with complementary legislation enacted in 1995, had provisions to raise the priority of projects serving freight in highway spending programs, allow more flexibility in using federal funds for freight projects, and make way for new forms of public-private ventures. Although the act refers specifically to intermodal transportation, its provisions affect the entire domestic freight transportation system. The nation now has 6 years of experience with ISTEA. Also in this period, state and local governments have initiated a variety of freight development initiatives, often in partnership with the private sector (and often independent of the provisions of ISTEA). The congressionally chartered National Commission on Intermodal Transportation (NCIT), the Federal Highway Administration, the Transportation

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Policy Options for Intermodal Freight Transportation: Special Report 252 Research Board (TRB), and other organizations have published reviews of government policies toward freight and the performance of ISTEA. Some parties have expressed disappointment with the performance of ISTEA programs as means for promoting freight development. NCIT concluded in 1994 that “planning and policies, particularly at the Federal level, do not encourage and accommodate intermodalism” (NCIT 1994, 3). The American Association of Port Authorities’ policy on ISTEA reauthorization stated, “The Nation needs policy and program changes that will result in funding for projects to facilitate freight …, a goal which has not been achieved under the current program” (American Association of Port Authorities 1996). A 1996 General Accounting Office (GAO) review found, “The total amount of funds obligated for intermodal freight projects through roughly the first 4 of ISTEA’s 6 fiscal years … equals … less than 1 percent of ISTEA funds apportioned to the states during that period …” (GAO 1996, 2). GAO did not explicitly conclude that this share was inappropriate, but the GAO study conclusion illustrates why some parties advocating a more active government role may be dissatisfied with ISTEA. To continue this review, TRB’s Committee for a Study of Policy Options To Address Intermodal Freight Transportation has examined prospects for changes in government programs to improve the efficiency of freight transportation in the light of recent experience. In the remainder of this introductory chapter, the sources of dynamism in freight transportation today and the government’s role in freight are described, and the specific public policy issues that the committee has examined are identified. THE INTERMODAL FREIGHT SYSTEM TODAY To understand the economic importance of intermodal transportation, it is essential to view intermodalism in the context of broader technological developments in freight and logistics. Transportation, Logistics, and Productivity Advances in transportation technology and logistics management practices are yielding important benefits throughout the manufacturing and

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Policy Options for Intermodal Freight Transportation: Special Report 252 trade sectors of the U.S. economy. Productivity gains in business logistics compared with the previous year reduced costs by $23 billion in 1995, a savings of nearly $100 per capita. Savings in 1995 compared with 1989 productivity levels were estimated at $150 billion, according to Cass Information Systems projections (Schulz 1997). Logistics is the management of movements and inventories of materials, goods in process, and products from suppliers through production and distribution to customers. Logistics costs include the costs of transportation and warehouse operations and inventory carrying costs. Achieving these savings has required restructuring of manufacturing, distribution, and even product design. A recent news item illustrates a typical case: [A computer manufacturer] chose nine dealers to be the first that will complete assembly of its personal computers for businesses, a key step in the transformation of its delivery process…. [The company] will deliver unfinished PCs to the firms, which will then add memory chips, modems and other parts based on customer specifications. The move is designed to reduce distributors’ inventories of completed products, a cost-saving step that [the company] hopes will allow it to price its PCs closer to those of direct shippers…. With less inventory, [the company] will be able to incorporate new technology without first having to sell a large amount of existing models. (Wall Street Journal 1997, B6) This example illustrates how redesigning logistics lowers costs in industry by reducing inventory and allowing suppliers to respond more quickly and precisely to changes in demand and technology. The drive to attain these kinds of economies dictates the service qualities that shippers seek from freight transportation, for example, reliability and real-time information about the location and expected arrival time of shipments in transit. One principal source of gains in logistics productivity has been coordination of the elements of the process through application of information and communication technologies. Information system improvements provide shippers and carriers with more complete and timely information about goods in transit and in inventory

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Policy Options for Intermodal Freight Transportation: Special Report 252 and about changes in circumstances that determine requirements for shipments and inventories. Intermodal Freight Intermodal transportation, in the narrowest usage of the term, refers to transport of goods in containers that can be moved on land by rail or truck and on water by ship or barge. Containers save handling costs when freight must be transferred from one mode to another (e.g., from ships to trucks); also, a truck-rail container movement can yield a savings compared with truck alone if the cost of the transfer (the cost of the added handling of the container plus the cost of the difference in speed and reliability between truck and intermodal) is offset by rail’s lower cost per ton mile. Container traffic has grown rapidly: the numbers of containers and piggyback semitrailers (highway trailers loaded on flatcars) carried by railroads doubled between 1983 and 1994 (Association of American Railroads 1997, 26). Growth has slowed since then but has remained strong (American Shipper 1998). In addition to containers, intermodal freight usually is understood to include bulk commodity shipments that involve a transfer (for example, combined rail and barge movement of grain from farms to ports) and air freight, which always travels to and from airports by truck. The total of all such movements accounts for a minority of U.S. freight activity, whether measured in physical volume of freight or in the cost of services. However, intermodal freight is critical in international trade, in transport of many high value-added products, and in military supply; it has been a source of trucking industry cost savings and rail industry revenue growth; and intermodal transfers, which often require coordination of government entities and multiple private-sector firms, can be physical and organizational bottlenecks affecting the performance of the entire freight system. The term “intermodal” often is used as a shorthand or exemplar for the important overall advances in freight transportation and logistics of recent years. For example, one of the consequences of changes in the industry is that carriers, which traditionally have defined their businesses by a mode (e.g., they are trucking companies or railroads), have begun to redefine themselves in terms of services offered rather than

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Policy Options for Intermodal Freight Transportation: Special Report 252 the mode of carriage. The chief executive of a British trucking firm, among the first in Europe to offer warehousing services in addition to truck transport and an early user of computers and intermodal, describes his business as follows: Today we are a logistics contractor…. We manage flows into and out of the warehouse or distribution center, which could involve using our own fleet, a dedicated solution or a subcontractor’s network. That’s why we say we are logistics managers, not truckers. (Parker 1997, 24) Intermodal is one of the elements of the wave of technological change affecting logistics. It is one more option increasing flexibility for shippers and offering opportunities for cost savings, and it is a foremost case of the value of coordination in the logistics process. The success of intermodal depends on information technology applications. Information technology has allowed carriers to mitigate intermodal’s reliability problems, which arise from added handlings and the involvement of more parties in each freight movement. These private-sector advances in logistics and freight transportation, while still maturing, are established features in the economy, not a development that is predicted or that is dependent on government leadership for fulfillment. The policy concern that this study has addressed is whether government transportation programs are adequately meeting the needs of this rapidly changing freight transportation market. Intermodal Freight as a Public Policy Issue ISTEA was evidence of increased awareness of intermodal freight transportation on the part of government. State and local government transportation departments and economic development agencies also have shown great interest in promoting freight intermodalism. A confluence of factors has stimulated this attention: Some state departments of transportation have been attracted by the potential of truck-rail intermodal for relieving pressure on state

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Policy Options for Intermodal Freight Transportation: Special Report 252 highway systems and have considered state investments in intermodal facilities as possibly cheaper alternatives to highway expansion. Although productivity growth has reduced freight costs relative to the size of the economy, freight volumes are growing. Traffic of freight-carrying trucks is projected to increase 21 percent by 2006 compared with 1996 (Schulz 1998). State departments of transportation are also interested in the potential of public-private transportation developments as a means of augmenting their transportation budgets. Regulatory officials and environmental interests see truck-rail intermodal as a means of reducing pollution and helping to meet air quality regulatory requirements, because rail transport generates lower emissions per ton mile than truck. The enactment of ISTEA stimulated awareness of intermodal and made the term a focal point of public discourse on transportation policy. ISTEA’s framers apparently had intermodal passenger transport more in mind than freight. In concrete terms the act’s provisions affecting use of Highway Trust Fund distributions for public transit probably have been more important, but ISTEA did provide some limited funding to intermodal freight projects. State and local officials concerned with economic development have pursued public involvement in intermodal freight projects, especially port access projects, and have supported increased availability of federal funding for this purpose. State and local governments have traditionally viewed ports as engines of employment and growth. Also, certain ports have experienced rapid increases in trade volume, putting pressure on existing facilities. Recently other kinds of intermodal freight projects (for example, truck-rail intermodal terminals) have been pursued as public-private ventures viewed, from the public-sector side, primarily as economic development opportunities. In summary, freight intermodal is seen by many of the public-sector participants as a means to ends considerably more diverse than simply improving freight transportation efficiency. Primary motivations more often are controlling highway agency costs, reducing pollution, and stimulating local employment. These are legitimate responsibilities of government; however, in this study, the committee has taken the perspective that an essential criterion for judging public-sector freight transportation programs should be the effect on

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Policy Options for Intermodal Freight Transportation: Special Report 252 the efficiency of the freight transportation industry. Projects that enhance freight productivity generally will have the greatest chance of success in attaining other public goals. Such projects will be well-used by carriers, will be viable for the long term, will generate the strongest stimulus for local economies, and will have the greatest effect on pollution, congestion, and accidents. Of course, intermodal movements use the same infrastructure, equipment, and organizational systems as single-mode freight, with the exception of certain terminal and transfer facilities. Thus, for example, a well-functioning highway system is an asset to truck-rail intermodal freight as well as to all truck transport. Analogously, the questions concerning government programs and investment decisions that are most important for intermodal freight efficiency are, for the most part, the same questions that are most important for the efficiency of all freight services. STUDY SCOPE This study was undertaken on the initiative of the TRB Executive Committee to review recent experience with government programs affecting intermodal freight transportation, identify options for changes in public policy that could help foster more efficient intermodal freight transportation, and indicate areas where research could resolve problems. The study committee has limited its conclusions concerning particular policy issues to identification of the leading alternatives for addressing recognized problems or capitalizing on opportunities. Decisions on these alternatives involve compromises among competing objectives, and assessments depend on whether the perspective is federal, state, or local. Selecting the best option will be a matter of political debate, analysis, and experimentation. The committee has made recommendations in the more general areas of principles for government involvement and the framework for evaluating projects and programs, and on research needs. The committee examined questions of government policy that affect the overall efficiency of freight transportation, including the important market niches of intermodal freight. The committee addressed issues at the federal government level, including the scope of federal responsibility, federal-aid programs, and

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Policy Options for Intermodal Freight Transportation: Special Report 252 regulatory issues. It also addressed issues that confront state and local governments, including project selection and finance. Although the illustrative examples in this report describe for the most part highway and rail operations and projects, the committee’s conclusions and recommendations are relevant generally to the performance of all the domestic freight modes, including air freight and waterways. The committee selected topics to complement and update several past reviews of intermodal policy. ISTEA mandated a study of freight and passenger intermodal policy issues by NCIT, a specially created commission. In its 1994 report, Toward a National Intermodal Transportation System, the commission found “significant barriers to the development of a fully integrated National Transportation System,” including road and rail access to intermodal terminals (NCIT 1994, 3). Its 12 policy recommendations were grouped into three areas: federal intermodal transportation policy, public investment levels in intermodal transportation, and government organization. Several other recent and thorough reports have addressed intermodal issues. The Federal Highway Administration review Intermodal Freight Transportation (1995) analyzed impediments to intermodal freight growth and described the development of intermodal freight in the United States, the provisions of ISTEA and other government programs intended to promote intermodalism, and recent specific innovative public-sector projects aimed at promoting intermodal freight. TRB policy studies on Intermodal Marine Container Transportation (1992) and Landside Access to U.S. Ports (1993) examined port and maritime intermodal problems. These past analyses provided the starting point for the work of the present study. Issues and policy options in the following four areas are defined in Chapters 2 through 5 of this report: Principles for government involvement: The committee examined what the guidelines should be for deciding the forms of government involvement in freight-related activities that are in the public interest and what practical analysis tools governments need to evaluate individual proposals for developing freight facilities. Federal surface transportation programs and freight: The committee examined how federal surface transportation programs have served the needs of freight and considered options for provisions of federal programs aimed at improving intermodal freight efficiency, including the overall structure of the federal program, rules governing use of

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Policy Options for Intermodal Freight Transportation: Special Report 252 funds for nonhighway freight projects, consideration of freight benefits in setting project priorities, and the identification and accomplishment of freight infrastructure projects of national significance. Regulatory and operations issues: The committee examined opportunities for government agencies to improve the performance of the ports, airports, roads, and waterways that they operate and opportunities to improve the cost-effectiveness of regulations. Public finance of intermodal freight projects: The committee identified the factors that federal, state, and local public officials should take into account in making finance decisions for individual projects and for public works programs. REFERENCES Abbreviations FHWA Federal Highway Administration GAO General Accounting Office NCIT National Commission on Intermodal Transportation TRB Transportation Research Board American Association of Port Authorities. 1996. AAPA Platform on ISTEA. Alexandria, Va. American Shipper. 1998. Transportation Trends. Feb., p. 79. Association of American Railroads. 1997. Railroad Facts 1996. Washington, D.C., Sept. FHWA. 1995. Intermodal Freight Transportation: Volume 1: Overview of Impediments, Data Sources for Intermodal Transportation Planning, Annotated Bibliography; and Volume 2: Fact Sheet, Federal Aid Eligibility. U.S. Department of Transportation, Dec. GAO. 1996. Intermodal Freight Transportation: Projects and Planning Issues. July. NCIT. 1994. Toward a National Intermodal Transportation System: Final Report. Washington, D.C., Sept. Parker, J.G. 1997. Britain’s TDG Takes Next Step in Logistics Process. Transport Topics, May 12, p. 24. Schulz, J.D. 1997. Drilling It Down. Traffic World, June 9, pp. 36–37. Schulz, J.D. 1998. Freight’s Boom Times. Traffic World, Jan. 5, p. 8. TRB. 1992. Special Report 236: Intermodal Marine Container Transportation: Impediments and Opportunities. National Research Council, Washington, D.C. TRB. 1993. Special Report 238: Landside Access to U.S. Ports. National Research Council, Washington, D.C. Wall Street Journal. 1997. Compaq Computer Picks Dealers To Finish Assembling Its PCs. July 30.