PART 2
Commissioned Papers



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Policy Options for Intermodal Freight Transportation: Special Report 252 PART 2 Commissioned Papers

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Policy Options for Intermodal Freight Transportation: Special Report 252 Principles for Government Involvement in Freight Infrastructure Randall W. Eberts, W. E. Upjohn Institute for Employment Research The Committee for a Study of Policy Options To Address Intermodal Freight Transportation of the Transportation Research Board has been charged with providing guidelines for determining government’s role in freight-related activities. The committee has been asked to consider several questions: What circumstances (e.g., market inefficiencies, equity concerns, or historical institutional patterns) justify or necessitate government involvement? Will optimizing the freight system require centralized decision making (e.g., arbitration of interstate rivalries), or conversely, will existing, decentralized decision making suffice? How can federal responsibilities be distinguished from those of state and local government? What practical analysis tools do governments need to evaluate individual proposals for government involvement in projects for developing freight facilities?

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Policy Options for Intermodal Freight Transportation: Special Report 252 A conceptual framework to aid the committee in addressing these questions is provided in this paper. Intermodal freight operations are defined and illustrations of existing facilities are offered. Potential benefits of intermodal freight facilities are set forth. Barriers to the effective implementation and operation of intermodal freight facilities are discussed. Reasons for government involvement, including market failures and externalities, are introduced. The relationship between regional economic development, intermodal freight activity, and government involvement is described. Finally, the appropriate roles of the various levels of government are examined. INTERMODAL FREIGHT ACTIVITY Intermodal freight activity is any shipment of goods that involves two or more modes of transportation during a single journey. Various combinations of modes are used to ship goods: trucks, railroads, ships and barges, and aircraft. Consequently, intermodal freight activity requires terminals for intermodal transfers and appropriate highway, rail, waterway, and runway access to link these facilities to the national transportation network. The most common intermodal activity, with respect to tons shipped, is the combination of rail and water transport. According to the 1993 Commodity Flow Survey, 42 percent of all U. S. domestic tonnage shipped intermodally was shipped by a combination of rail and water, whereas 36 percent was shipped by truck and water. When measured in ton miles, the ranking stays the same but the percentage increases for the rail-water combination from 42 to 46 and decreases for the truck-water combination from 36 to 27. The truck-rail combination stands at 21 percent for tons and 25 percent for ton miles. Intermodal freight shipments are used predominantly for long-distance hauls. Intermodal shipments are at least twice as long as single-mode shipments. Multimodal shipments involving trucks averaged 2250 km (1,400 mi) in 1993; single-mode shipments by for-hire truck averaged 760 km (470 mi) and by rail averaged 1230 km (770 mi) (Bureau of Transportation Statistics and Bureau of the Census 1996, Table 1). Intermodal freight activity is still a small portion of total freight activity, according to statistics from the Commodity Flow Survey. In

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Policy Options for Intermodal Freight Transportation: Special Report 252 1993, 2 percent of the 8.7 billion t (9.6 billion tons) transported that year was shipped intermodally. When measured in ton miles, the percentage is higher (6 percent). Nonetheless, intermodal freight shipments are considered beneficial to the national economy, and increased attention has been focused on how to expand the nation’s intermodal capacity. To illustrate the steps involved in intermodal shipments, consider the movement of a container from a domestic producer to a foreign destination. In this case, the shipment involves trucks, railroad flatcars, and containerized ships. A typical intermodal arrangement begins with the assembly of products to be loaded into the container. The products may come from a single location or may be collected from several locations by small trucks or vans and taken to a trucking terminal, where they are loaded into a container. The container is hoisted onto chassis and transported by truck to a truck-rail intermodal terminal, where it is transferred to either a double-stack or single-stack train, depending on the distance shipped and the terminal facilities. Once assembled, the train, which will probably include other types of cars, embarks for the port. At the port facilities, the shipload is assembled from this and other trains and trucks while awaiting the arrival of the containership. En route, information concerning the containers and their contents is sent to the shipping company’s agents at the arrival port, and steps are initiated for customs clearance. Carriers are notified of the number and type of railroad cars needed to ship the incoming containers and the expected arrival time of the containership. Receivers are also notified. On the ship’s arrival, containers are off-loaded directly onto an awaiting train or onto chassis and trucked to their destinations (DOT 1995). The example highlights several facts about intermodal freight activity that are important in understanding the appropriate roles of government and the private sector. First, intermodal freight activity improves the efficiency of shipments by combining existing modes of transportation. The efficiency occurs through the optimal use of existing modal capacity. Second, because intermodal freight activity connects publicly provided transportation systems, such as highways and water navigation improvements, with privately provided systems such as rail, it involves from the start a public-private partnership. Third, the construction of intermodal facilities, such as seaport facilities, entails large fixed costs, which may give the facility the status of a natural monopoly and thus has

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Policy Options for Intermodal Freight Transportation: Special Report 252 implications for the pricing of services.1 Fourth, the efficient operation of intermodal freight facilities requires a high degree of coordination among modes and the efficient flow of information across modes.2 Two intermodal facilities illustrate these characteristics and provide a basis for motivating the discussion on government involvement. The Alliance International Tradeport, located in the Dallas–Fort Worth area, is a hub for rail, truck, and air freight transport. Although it is a successful enterprise, local governments have provided substantial financial support. To attract a maintenance facility of a large airline to the tradeport, the Alliance Airport Authority, a government entity, issued up to $800 million in tax-exempt special facility revenue bonds. The city of Fort Worth financed $10.7 million in street, utility, and runway improvements, and the state approved a 15-year abatement of personal and real property taxes. Jet fuel charges were waived, and airline inventories were exempted from taxation (W. E. Upjohn Institute for Employment Research 1995). Another example is Rickenbacker International Airport in Columbus, Ohio. The tradeport is considered one of the most successful truck–air cargo facilities in the nation. Nine air cargo carriers average at least 65 arrivals per week. In 1994, the airport handled more than 215 million kg (475 million lb) of air cargo, employing nearly 5,000 individuals. Even with this success, the airport has not broken even, nor is it expected to do so in the near term. The county currently subsidizes airport operations by $3.5 million to $4.0 million per year (W. E. Upjohn Institute for Employment Research 1995). 1 Scherer defines natural monopolies as occurring when the minimum optimal scale of production is so large that there is room in a given market for only one or at most a very few firms to realize production and distribution economies of scale (Scherer 1970, 520). He gives the example of railroading, which he says has the tendency toward natural monopoly because of the indivisibility of the right-of-way and the coordination difficulty of having more than one carrier use a given set of tracks. Intermodal facilities appear to have some of the same characteristics, if one considers the entire system connecting the facility to the highway or rail network, among other factors. The question is ultimately an empirical one. Given the limited number of locations suitable for ports, the land requirements to accommodate the large equipment and mooring requirements, and the linkages to the rest of the transportation system, it appears questionable whether these facilities could be divided into small, replicable units and still achieve the lowest unit costs. 2 The National Commission on Public Works Improvement (Revis and Tarnoff 1987, i) states that an efficient and seamless transfer of goods between modes requires the simultaneous and successful implementation of several key components: integrated and coordinated infrastructure, integrated and standardized facilities and equipment, coordinated communicatation, coordinated management and administration, coordinated paperwork (documentation), and clarity of liability responsibility.

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Policy Options for Intermodal Freight Transportation: Special Report 252 These two examples illustrate the current role of government in intermodal activities and the private-public partnerships that have been established. In both cases, government has provided infrastructure improvements, directly financed construction costs, and subsidized operating expenses. The purpose of this paper is to arrive at a set of principles and guidelines to assess the role of government in intermodal activities. BENEFITS OF INTERMODAL FREIGHT ACTIVITY Understanding the type and magnitude of benefits generated from intermodal freight activity is critical for determining whether intermodal freight facilities and activities should be the responsibility of the private sector or government. The National Commission on Intermodal Transportation, in its final report to Congress, listed several types of benefits that may accrue from an efficient national intermodal transportation system (National Commission on Intermodal Transportation 1994, 3). The commission considered all intermodal transportation, including passenger, but the list presented here includes only the benefits that are most likely to result from intermodal freight activity: Lowering overall transportation costs by allowing each mode to be used for the portion of the trip to which it is best suited; Increasing economic productivity and efficiency, thereby enhancing the nation’s global competitiveness; Reducing congestion and the burden on overstressed infrastructure components; Generating higher returns from public and private infrastructure investments; and Reducing energy consumption and contributing to improved air quality and environmental conditions. The commission’s list combines direct benefits, such as the reduction in transportation costs, congestion, and pollution, with secondary or resulting benefits, such as enhanced competition and higher returns, which may be confusing when considering the distinct consequences of intermodalism. Nonetheless, the list is helpful in thinking about the

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Policy Options for Intermodal Freight Transportation: Special Report 252 benefits accruing from intermodalism. The importance of freight transportation to national defense should also be mentioned, since an efficient transportation system is necessary for troop and ordnance deployment and the efficient production of materials used for national defense. This list, with the addition of national defense, will be used in this paper to establish principles for determining the extent of government involvement in intermodal freight activity. BARRIERS TO DEVELOPMENT OF AN INTERMODAL FREIGHT SYSTEM Whereas intermodal freight activities account for only 2 percent of the volume of shipments, intermodal activity is predicted to grow substantially in the next few years if barriers to the development of intermodal facilities are overcome. Many intermodal facilities report increased congestion not only within their facilities but also on access routes to the facility. A study contracted by the Federal Highway Administration (DOT 1995, 1–12) cited the following impediments to the expansion of intermodal facilities: Lack of adequate infrastructure, Congestion, Operational inefficiencies, Financial limitations, and Institutional relationships. Behind these impediments are complex issues of planning, coordination of the various modes, financing, and environmental and land use regulations, to name a few. It is not simply the issue of whether the private sector or the government should take sole responsibility for intermodal freight activity. The private sector has taken the lead in intermodal development, and partnerships between the two sectors have already been formed. Rather, the question is whether the government needs to modify its established transportation programs to further accommodate and enhance the private sector’s move toward intermodalism as the demand for less costly, more efficient freight shipments increases.

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Policy Options for Intermodal Freight Transportation: Special Report 252 PRINCIPLES OF GOVERNMENT INVOLVEMENT IN ECONOMIC ACTIVITY The principles and suggested guidelines posited in this paper are based on the concept of market failure. This principle assumes that markets are the most efficient means of allocating resources to economic activities. Consequently, economic transactions, including investment in capital projects, are best performed by individuals acting in their own self-interest within a market that is unconstrained by government regulation or other impediments that may distort prices or otherwise alter behavior. Therefore, market failure is the failure of private markets to achieve an efficient allocation of resources. One well-accepted role of government is to correct market failures. However, in establishing this framework for considering the role of government in intermodal freight facilities, it must be recognized that what we will propose is only a second-best solution. Given the deeply rooted institutional arrangements for the public provision of highways, ports, and air facilities, it is impossible to start from scratch and redo the entire system to comply with market principles. Nonetheless, market failure provides guidelines with which to gauge the appropriateness of future transportation infrastructure investment decisions. At least three types of market failure can be associated with intermodal freight activity. The first type relates to market failures associated with the large fixed cost incurred in constructing the facility and to the inability of marginal cost pricing to cover the costs of building and operating the facility. The second type has to do with externalities directly generated by the facility, such as the likelihood that intermodalism will reduce traffic congestion and air pollution and create network externalities. In addition, the contribution of intermodal freight activity to national defense is considered an external benefit. The third type calls for government intervention, in the form of an infrastructure project, to correct perceived market failures of high unemployment and low economic activity within specific regional economies. This type is similar to the second in that it generates externalities, but the two types of externalities are differentiated, because the third type frames intermodal freight activity as a means to an end that is not directly related to transportation, that is, to boost the overall local economy. Other

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Policy Options for Intermodal Freight Transportation: Special Report 252 government-sponsored projects could achieve the same purpose and may be more effective in doing so. Therefore, the appropriate role of government depends not only on the characteristics of the intermodal transportation facilities themselves, but also on freight-related activities as a potential tool for local economic development. That is, guidelines should include ways to counter factors that impede the private sector from investing efficiently in intermodal facilities (if indeed market failures do exist) as well as reasons why government subsidies to private partners in intermodal activities or government management of intermodal transportation systems may be an effective tool for pursuing economic development strategies. The extent of government involvement in freight-related activities is determined by a host of factors, including the nature of the activities, the type and magnitude of market and nonmarket benefits resulting from intermodal freight activities, cost characteristics, and the economic condition of the local economy in which the activity is located. INTERMODAL FREIGHT ACTIVITY AS PRIVATELY PROVIDED Intermodal freight activity combines existing modes of freight transportation to use these modes efficiently. The ability to cross between modes allows shippers to utilize the comparative advantages of the different modes. For example, trucks are generally less expensive than rail for shorter distances, typically those less than 1600 km (1,000 mi). Over longer distances, rail service, especially double-stack container flatcars, is less expensive than trucking. Trucking also offers special services for some types of shipments, such as more flexible departure and arrival times, better reliability, and better tracking, which may render trucking more cost-effective for some type of commodities regardless of the distance (DOT 1995, 1–18). Morlok et al. (1996) provide several examples of intermodal freight shipments being less costly than single modes. Because intermodal freight activities enhance modal efficiency, they lower transportation costs for all users of the transportation net-

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Policy Options for Intermodal Freight Transportation: Special Report 252 work.3 These direct benefits are reflected in the prices paid for transportation services, and when businesses operate in a competitive market these lower costs are passed along to customers as lower prices. Shippers have incentives to use the freight facility and thus pay for the services offered, because they can cut costs and, in the case of some commodities, can offer special services because they can combine modes with different attributes, such as more frequent deliveries, on-time departures, and greater reliability. Consequently, intermodal terminal owners can reap the benefits of their investment through the market system. Indeed, most rail and truck intermodal terminals and facilities are privately owned and operated, so the private sector has taken primary responsibility for the terminal component of the intermodal freight system (DOT 1995). FAILURE OF MARKETS TO INVEST OPTIMALLY IN INTERMODAL FACILITIES A private entity decides to invest in a facility if the internal rate of return on the project is greater than the market rate of interest. Why should government intervene in facility investment when private businesses provide it more efficiently? First, consider private market impediments to building and operating an intermodal freight facility. Government intervention may be justified because of the nature of the facility, particularly its large size, and in the case of intermodal systems because of the need to coordinate various activities and parties and to obtain strategic rights-of-way. Thus, governments, at various levels, become involved in the construction and operation of intermodal facilities Through direct financing of all or part of the intermodal project or providing the transportation system to the facility, As a fiscal agent that can use its creditworthiness and tax-exempt status to secure loans for the facility, 3 Morlok et al. (1996) demonstrate that the amount of savings due to intermodal freight activities depends on the proximity of the business to the intermodal freight facility.

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Policy Options for Intermodal Freight Transportation: Special Report 252 Whereas the Stark County intermodal financing was both creative and successful in building the facility, the project itself has evidently had an uncertain start. The major problem appears to be the facility’s access to the EDI, the electronic network that is vital for transshipping and tracking freight. Although the Stark County Development Board thought it had acquired rights to access the network, that proved not to be the case, and, as a result, usage of the facility is running below expectations. RELIABILITY OF ECONOMIC AND FINANCIAL PROJECTIONS One of the hopes for major infrastructure projects that are to be undertaken by the public or the private sector or by a public-private combination is that they will be self-supporting to a significant degree. This depends both on the effective demand for the facility and the ability of the project sponsor or operator to tap that demand in the form of the necessary revenues to support operations and pay the cost of capital, be it debt or returns to ownership. As was noted, the ability of governments or franchised utilities to capture payments in the provision of basic services over which they effectively have monopoly powers has been demonstrated. However, where there are geographic or technological substitutes or where economic growth does not live up to expectations, there can be problems. The high level of risk and the inability of private-sector sources to run long-term deficits and to “control” markets cause a major impediment to greater use of user charges and toll facilities. The results of recent toll road financings that involved essentially start-up operations have been disappointing in the short run because projected volumes of usership have not been forthcoming. In a recent review of toll road projection results, analysts at J.P. Morgan found that of 14 toll road projects studied, only 3 met or exceeded revenue projections used when the bonds were sold (J.P. Morgan Securities 1996). Whereas 1 of the remaining 11 projects was only 12 percent below forecasts, the remaining 10 were from 20 to 75 percent below projections by the fourth year, and most of these 10 missed their revenue projections by 40 percent during the second year of operation. Because the prepon-

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Policy Options for Intermodal Freight Transportation: Special Report 252 derance of these projects were in the public sector and were essentially additions to established systems, there were no bond defaults. What’s wrong with the forecasts? They were too optimistic about national and local economic conditions and rates of development in the corridor being served, the ability to achieve higher levels of tolls than were customary, and the effect of the availability of alternative routes. In particular, greenfield projects without established commuting patterns by commuters who place a high value on their time are high risk. Where there is an assumption of rapid revenue growth, there is a greater possibility of trouble. The greater the degree of congestion in the corridor to be served and the higher the income level and economic activity already in place, and the more modest the assumptions about revenue growth, the better the prospect that toll roads will meet their expectations. The experience indicates that user charge studies need to be heavily discounted when it comes to revenue expectations. Furthermore, projects that already have heavy use, where congestion costs are considerable and recognized, and where there are no reasonable close substitutes (and the governmental units involved are committed to retaining “monopoly-like” controls to head off any competition) are by far the best candidates for private market solutions. Virgin projects that will need to grow by displacing existing traffic and intermodal centers are much riskier propositions. CAMINO REAL INTERMODAL CENTER The Camino Real Intermodal Center (CRIC) project will be a state-of-the-art border-crossing facility located on the border between New Mexico and Mexico at the international port of entry of Santa Teresa/San Jeronimo. The site is approximately 11 km (7 mi) west of El Paso, Texas, near the crossroads of two U.S. Interstate highways and three19 major railroad operations and facilities. The proposed intermodal facility will alleviate the overflow of commercial traffic currently passing through El Paso, allowing truck, rail, and air shippers to store and move cargo between the United States and Mexico more efficiently and cost-effectively. By creating greater reliability for goods movement 19 Railroad mergers have reduced from five to three the number of companies serving the area: Burlington Northern/Santa Fe, Union Pacific/Southern Pacific, and Ferrocarriles Nacionales de Mexico.

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Policy Options for Intermodal Freight Transportation: Special Report 252 and timely deliveries, the CRIC project is expected to induce additional economic development and enhance trade. It will also provide safer passage of hazardous materials, which currently move through the very congested Ciudad Juarez and El Paso areas. By helping to reduce congestion, the CRIC project should also improve air quality in the El Paso area, a severe nonattainment zone by EPA standards. The intermodal facility portion of the CRIC project is expected to cost approximately $60 million, including land, trackage, yards, buildings, and associated equipment. Preconstruction development costs of $6 million, together with financing and other “soft” costs, are expected to result in a total cost for the intermodal facility itself of approximately $80 million. In addition to the intermodal facility, costs will be incurred for new roads that will provide better access to the center and that are expected to relieve much congestion in the urbanized area. The plan for financing CRIC assumes that the project will be self-supporting, privately operated, and capable of obtaining conventional private financing after an initial development period. Operating and capital costs will be paid from revenues derived from a variety of fees and charges collected from users of the facility. However, to obtain permanent financing, approximately $6 million is expected to be spent on preconstruction costs, including an environmental impact statement, engineering studies, and a financial feasibility study. CRIC, Inc., a special-purpose corporation that has been set up to oversee the project, is arranging a bridge loan from a commercial bank to cover these on the front end. It is anticipated that the loan will be repaid with the proceeds of conventional private project financing. To improve the prospects of obtaining private financing for the preconstruction loan, CRIC, Inc., proposed to secure the loan with a guarantee from the New Mexico State Highway and Transportation Department (NMHTD), backed by up to $6 million of New Mexico’s future regular federal-aid apportionments. To bolster the prospects for obtaining a private preconstruction loan, CRIC, Inc., plans to further secure its bank loan with a guarantee from NMHTD. The state has agreed to pledge up to $6 million of New Mexico’s future regular federal-aid highway apportionments as a repayment source in the event permanent financing is not obtained. For such a pledge to be made, however, the project’s eligibility for federal financial assistance had to be established. In December 1996 it was determined that the highway connections and assorted other costs of the project were eligible for $6 million and that a federal loan guarantee for that amount could be used.

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Policy Options for Intermodal Freight Transportation: Special Report 252 To provide the loan guarantee, the federal aid would take the form of a contingent Section 129 loan from the department to CRIC, Inc., funded pursuant to advance construction.20 NMHTD will use its existing authority to provide the loan guarantee. Although FHWA has assisted in structuring the federal assistance, FHWA will not be a party to any direct agreements with CRIC, Inc., or NMHTD. The accompanying box with its diagrams indicates key aspects of the loan guarantee structure. In March 1997, FHWA and NMHTD had approved an advance construction Section 129 loan for the CRIC project. However, final execution of the loan agreement is contingent upon CRIC, Inc., securing a bank loan for the actual funds to pay preconstruction costs. It is expected that the bank loan and the Section 129 loan agreement will be entered into simultaneously in the near future. To approve the contingent Section 129 loan, eligibility for structuring the federal aid as a Section 129 loan had to be established. Establishing eligibility for a Section 129 loan requires identifying a “dedicated revenue stream” for repayment of the loan. FHWA concluded that anticipated permanent financing of approximately $80 million constituted a “dedicated revenue stream.” In addition, the value of dedicated right-of-way and ongoing future revenues could also be considered as dedicated revenue sources. Like a true standby, the Section 129 loan will be made by New Mexico only if other sources for repaying the bank loan are not available. The state’s loan is intended to be repaid from proceeds of permanent financing arranged at some future date or from other revenues yet to be identified. The financing risk the state department faces is that if the project does not go forward, there will be no permanent financing and no other readily available means to repay the federal Section 129 loan.21 20 Federal law does not explicitly provide for using federal-aid highway funds to make loan guarantees. Technically, federal financing assistance for the CRIC project is being structured as a loan (under Section 129) that may be used to pay off another loan (the bank loan). Reflecting the effective nature of this arrangement, this case study refers to the federal assistance as a loan guarantee. 21 To reduce the department’s financial exposure and to have CRIC, Inc., share in the risk that the project will not be completed, a condition for the Section 129 loan is that CRIC, Inc., concurrently provide a $3 million irrevocable letter of credit from a commercial bank that NMHTD could draw upon in the event the department’s guarantee is called upon. The letter of credit effectively creates between NMHTD and CRIC, Inc., a 50/50 sharing of the risk of project noncompletion. As of March 1997, CRIC, Inc., had obtained commitments from two banks to provide the letter of credit. CRIC, Inc., has also pledged its corporate assets to repayment of any Section 129 loan.

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Policy Options for Intermodal Freight Transportation: Special Report 252 Key Aspects of the Camino Real Loan Guarantee Structure Upon obtaining the bank loan, CRIC, Inc., will use the loan proceeds received from the bank to pay preconstruction costs. At the time the bank loan is made, CRIC, Inc., will also enter into a Section 129 loan agreement with NMHTD, but no funds will change hands pursuant to that loan. At maturity of the bank loan, if CRIC, Inc., is unable to obtain permanent financing to pay off the preconstruction loan (as well as to fund construction), CRIC, Inc., will draw on the Section 129 loan from NMHTD and use those funds to pay off the bank loan. CRIC, Inc., would then be obligated to repay the Section 129 loan to NMHTD. To reduce the department’s exposure in the event of a draw on the Section 129 loan, CRIC, Inc.’s, bank letter of credit would be drawn on and those funds used to partially pay off the Section 129 loan. The Camino Real project illustrates how public funding can be used to leverage extensive private investment in transportation infrastructure. Private-sector funding can be used in situations offering enough economic potential, but the public money is often needed to handle development costs and glue the deal together. And nothing is certain until the shovel hits the ground. The state of New Mexico’s financial involvement in the project will be limited in both amount and time and is targeted to the risky development period of the project. The state hopes to achieve considerable

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Policy Options for Intermodal Freight Transportation: Special Report 252 return in terms of economic development and increased trade. The loan guarantee provided represents less than 10 percent of the project’s total costs and is expected to last 2 years or less. By targeting the loan guarantee to the early, preconstruction phase of the project’s development, public-sector risk will decrease after the initial period. Once over the developmental hump, private-sector funding is expected to pay substantially all of the project’s operating and capital costs. CRIC is still in development and presents another of the difficulties in implementing and financing intermodal facilities—interstate competition. Although an objective is to relieve congestion in the neighboring El Paso area, it will also compete with those facilities for traffic. As older cities elsewhere have learned, congestion, while painful, goes along with jobs and commerce that can be sucked away by competitors. Thus, stakeholders in the existing corridor may well object and react by enhancements of their own. How much the federal government chooses to become involved in such competition among state and local jurisdictions for the location of facilities is a difficult and ultimately a political question. ASSESSMENT OF PUBLIC-SECTOR FINANCIAL INVOLVEMENT The area of public financial involvement in intermodal facilities is not standardized, nor are the means of financial assistance institutionalized. Hence, prescriptions for financing schemes are necessarily administered on a case-by-case basis. That in itself is an argument for the very types of “cut to fit” arrangements that have characterized public financial involvement to date. There is the question of the scale of the project to be financed. Clearly some projects are primarily of local or regional interest. With the growing institutional awareness of the need for flexibility and the progress to date on loosening federal funding constraints, it appears that federal aid will be more available for the more locally oriented intermodal projects under the standard highway programs. What the states do with regard to aiding local and regional intermodal facilities tends to be a matter of state and local priorities. In any event, the projects, while significant to some and perhaps marginally helpful to many, are not of national significance.

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Policy Options for Intermodal Freight Transportation: Special Report 252 “Megaprojects,” such as those at international portals and the intersections of the major freight corridors, require large expenditures and affect large numbers of parties both at the site and downstream. The appropriate federal role appears to be exactly the one that it has played, providing a “wrapper of credit comfort” in addition to allowing states to redirect their conventional aid toward supporting projects they believe are useful. However, such federal aid should be provided with an exit strategy in mind. The claims of private benefit and local economic effect are significant, and it is appropriate that projects should be largely self-financing and depend largely on the joint efforts of the affected and immediately benefiting parties, the facility user groups, and the local and state jurisdictions to do the heavy lifting. But it is an unfortunate fact of economic life that many of the users of the intermodal facilities are members of a highly competitive industry. The competition benefits society, but it also limits the degree to which individual firms can be expected to commit to long-term investments. In that case, society benefits by keeping near-term prices low but pays in the long term by not having a longer-range investment horizon. The individual firms may come and go, but the site and the intermodal need will persist. The users and immediate beneficiaries should pay, but the host governments involved have a longer-term and geographic-specific interest; they can and should shoulder a portion of the start-up and longer-term risk if they wish to remain a transport hub. If they aspire to become one, the risk they must bear (as the toll road discussions demonstrate) is proportionately greater. Benefit-cost estimates are important to make despite the uncertainties and estimates they necessarily contain. When done in conjunction with the straightforward financial feasibility study (such as contained in a revenue bond–backed enterprise project), they provide a logical, quantified backdrop as to why the public sector has an interest and is involved in the project. Nonetheless, benefit-cost analyses have their limitations. They attempt to bring everything forward to a present-period value, and when high discount rates are used (as is the case in the private sector), great weight is given to near-term values. Second, they are best on discrete projects on a given mode. Mixed projects that span several facilities, jurisdictions, and modes can be

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Policy Options for Intermodal Freight Transportation: Special Report 252 awkward when several trade-offs must be matched up.22 Finally, as analytical tools, they work best where ways of doing business are well established and are unlikely to shift rapidly. They are increasingly unreliable where there are imponderables and feedbacks that cannot be perfectly foreseen. Massive projects like the Interstate system totally reoriented living and trade patterns and the economies of regions. The Interstate highways also made possible the use of large trucks and an enormous change in distribution patterns. The greatest barrier to providing federal aid is both practical and philosophical and has to do with practicing triage: providing help where it really makes a difference as opposed to where it will not or is not needed anyway. There are major projects that the private sector and the state and local governments can hash out among themselves. The auctioning off of site locations among competing governments may be distasteful, but it is part and parcel of the competitive system that obtains among governments as well as in most private markets. However, providing federal assistance, unless it is made equally or, at least, proportionately available using some politically acceptable criterion, will necessarily be helpful to a select few. The criterion for selection must be that for special aid to be given, the project’s circumstances are uniquely challenging and heavily charged with a national interest. The very dynamic of the transportation industry today indicates that only a few major ports of entry and a few key inland terminals fit that description. In other words, in the absence of a broad geographic incidence of “intermodal freight facility problems,” it is really not desirable to crank the local terminal factor into federal distribution formulas. If the political will is there and the basic economics justify it, then sufficiently flexible funding should accommodate states’ using their own money (and federal transportation grants) that way if they so choose. The conclusion is that federal aid should be minimized and most likely be in the form of credit assistance where there is a substantial 22  An example is the case of the competition between two ports, where improvements at one will result in reduced traffic for the other. This will involve regionally a net gain for the former, a net loss for the latter, and maybe a gain overall (nationally). Clearly the federal government wants the overall improvements to occur. To avoid playing political favorites it is best advised to make the aid available on the same terms to each and let the “highest bidder” that can mobilize other needed sources win the prize.

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Policy Options for Intermodal Freight Transportation: Special Report 252 nonfederal benefit to be gained by market participants and the host governments. The reasoning is both purist and practical; credit enhancement is the federal government’s strong point, and where it can leverage private capital flows by absorbing certain levels of risk and galvanize deals by providing front-end capital, it is getting the most for the dollars committed. The distinction between credit enhancements and direct loans is not always straightforward. The Alameda Corridor provides an example of a situation where the existence of a take-out direct loan is in fact a credit enhancement (a standby loan facility). Whereas there is a negative pledge that the loan in no way involves a federal guarantee, by virtue of the loan “standing by,” it provides that so long as the project’s borrowing stays within a boundary amount (loan limit) the federal government will lend the amount needed on demand. Credit assistance, direct or standby, sets up public assets and private (or subnational government) liabilities where they should be, on the balance sheet. Such an accounting treatment forces, over time, a dollar-for-dollar recognition that an investment has been made rather than a gratuity extended. Whereas a capital grant can be spent today and forgotten tomorrow, a credit support stays to be extinguished and accommodates the review of the payoff over time. An analogy to the student loan program may be made. There is substantial public interest in making higher education available, but there is a clear economic benefit over time to most individuals who make the investment, and it should be recognized with patient but insistent requirements for repayment over the years. The depth of the subsidy and the most efficient way to deliver it are other important matters of policy, but the principle of repayment when and to the extent there is individually enjoyed benefit—personal, corporate, or jurisdictional—is a compelling one. The author’s limited information indicates that the number of significant international intermodal seaports is two or three on each coast and that the number of key border crossings is similar. An economical solution appears to be designation of the ports of entry and limited assistance along the lines of the credit provided for the Alameda Corridor. In areas where the trade accommodated is primarily domestic, aside from the ancillary assistance provided by the highway money, there appears to be little justification for “special” federal aid. But where

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Policy Options for Intermodal Freight Transportation: Special Report 252 it is extended, the credit assistance model, requiring that the private and state and local players come up with most of the capital and absorb a share of the risk themselves, is the best alternative. REFERENCES Abbreviations DOT U.S. Department of Transportation FHWA Federal Highway Administration GAO General Accounting Office Burke, J. 1996. Field of Dreams or Prudent Investment: Just How Much Port Capacity Is Enough? Traffic World, March 25. DOT. 1995. Intermodal Freight Transportation: Volumes 1 and 2. Final report. Dec. Eurich, H. 1997. Clinton’s Transportation Plan Beats Muni Players’ Expectations. The Bond Buyer, March 24. Federal Register. 1997. Definition of Private Activity Bonds, 26 CFR Parts 1 and 602. Jan. FHWA. 1994. Rebuilding America: Partnership for Investment. U.S. Department of Transportation, Dec. FRA. 1996. Intercity Freight and Rail: State and Local Project Reference Guide. Sept. GAO 1996a. Intermodal Freight Transportation: Project and Planning Issues. GAO/NAISID-96-159. July. GAO. 1996b. Surface Transportation Research Funding, Federal Roles and Emerging Issues. Report 96-233. Hickling Lewis Brod, Inc. 1995. Benefit Cost and Financial Analyses of the Rail Intermodal Facility at Auburn, Maine. Federal Railroad Administration, April. J.P. Morgan Securities, Inc. 1996. Examining Toll Road Feasibility Studies. Municipal Market Monitor, March 22 and April 5. Kaplan, M. 1996. Hunting Blind: The Creation of Public/Private Sector Partnerships for Infrastructure Development. Municipal Finance Journal, April. Kreutzen, W. 1996. Statement. Hearings Before the Surface Transportation Subcommittee, House Committee on Transportation and Infrastructure. July 18. Longman, P. Blood on the Tracks. U.S. News and World Report, Oct. 27. Machalaba, D. Deal Is Near for Major Rail Link in Northwest. The Wall Street Journal, April 3. Mathews, A. 1997. Eastern Ports Slash Rates To Lure Cargo. The Wall Street Journal, Jan. 3. McCormick, G. 1996. Statement. Hearings Before the Surface Transportation Subcommittee, House Committee on Transportation and Infrastructure. July 18. Muller, G. 1996. Intermodal Freight Transportation (3rd edition). The Eno Institute.

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Policy Options for Intermodal Freight Transportation: Special Report 252 National Commission on Intermodal Transportation. 1994. Toward a National Intermodal System. Phillips, D. 1996. State Officials Laying Groundwork for a Railroad Pact. The Washington Post, July 16. Plume, J. 1995. Louisiana To Study Alameda Corridor–Like Port-Rail Link for Lower Mississippi Shippers. Traffic World, June 19. Rich, R. 1996. Statement. Hearings Before the Surface Transportation Subcommittee, House Committee on Transportation and Infrastructure. July 18.