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Public and Private Sector Interdependence in Freight Transportation Markets (2009)

Chapter: Section 2 - Freight Transportation Decisions and Considerations

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Suggested Citation:"Section 2 - Freight Transportation Decisions and Considerations." National Academies of Sciences, Engineering, and Medicine. 2009. Public and Private Sector Interdependence in Freight Transportation Markets. Washington, DC: The National Academies Press. doi: 10.17226/14285.
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Suggested Citation:"Section 2 - Freight Transportation Decisions and Considerations." National Academies of Sciences, Engineering, and Medicine. 2009. Public and Private Sector Interdependence in Freight Transportation Markets. Washington, DC: The National Academies Press. doi: 10.17226/14285.
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Suggested Citation:"Section 2 - Freight Transportation Decisions and Considerations." National Academies of Sciences, Engineering, and Medicine. 2009. Public and Private Sector Interdependence in Freight Transportation Markets. Washington, DC: The National Academies Press. doi: 10.17226/14285.
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Suggested Citation:"Section 2 - Freight Transportation Decisions and Considerations." National Academies of Sciences, Engineering, and Medicine. 2009. Public and Private Sector Interdependence in Freight Transportation Markets. Washington, DC: The National Academies Press. doi: 10.17226/14285.
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Suggested Citation:"Section 2 - Freight Transportation Decisions and Considerations." National Academies of Sciences, Engineering, and Medicine. 2009. Public and Private Sector Interdependence in Freight Transportation Markets. Washington, DC: The National Academies Press. doi: 10.17226/14285.
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Suggested Citation:"Section 2 - Freight Transportation Decisions and Considerations." National Academies of Sciences, Engineering, and Medicine. 2009. Public and Private Sector Interdependence in Freight Transportation Markets. Washington, DC: The National Academies Press. doi: 10.17226/14285.
×
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Suggested Citation:"Section 2 - Freight Transportation Decisions and Considerations." National Academies of Sciences, Engineering, and Medicine. 2009. Public and Private Sector Interdependence in Freight Transportation Markets. Washington, DC: The National Academies Press. doi: 10.17226/14285.
×
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Suggested Citation:"Section 2 - Freight Transportation Decisions and Considerations." National Academies of Sciences, Engineering, and Medicine. 2009. Public and Private Sector Interdependence in Freight Transportation Markets. Washington, DC: The National Academies Press. doi: 10.17226/14285.
×
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Suggested Citation:"Section 2 - Freight Transportation Decisions and Considerations." National Academies of Sciences, Engineering, and Medicine. 2009. Public and Private Sector Interdependence in Freight Transportation Markets. Washington, DC: The National Academies Press. doi: 10.17226/14285.
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Decisions That Affect Freight Transport and Which Sector Makes the Decisions There are many areas of decision making that affect the freight transportation industry. Deci- sions must be made regarding infrastructure planning and maintenance; economic, safety, secu- rity and environmental regulations; operations of equipment and personnel; mode of shipment; choice of carrier; and other operations and investments. Different Types of Decisions The public sector is responsible for planning, owning, and maintaining infrastructure. The one exception is railways, which are privately owned and operated. The public sector also creates the economic environment in which private entities operate by issuing various regulations. The pri- vate sector, in turn, largely makes operating decisions as well as company-specific investment deci- sions. Which sector leads is a function of ownership, incentives, and organizational objectives. Decision Type Typical Lead Sector (1) Policy and Regulation Public sector led (2) Technology Private sector led (3) Infrastructure Public sector led (4) Operations/Maintenance Public sector/private sector shared (5) Non-transportation (behavioral) Public sector led Public policy making is by definition a public function, though the private sector has incentive to influence some policies to its advantage. The division of policy making across national, state, regional, and local agencies is ultimately determined by the political process. The multiple levels of policy making can add to the challenges faced by both public and private sector decision makers. Technology in transportation is typically led by the private sector, which invests to develop it, adopt it, and expand markets for it worldwide. Government regulation or funding sometimes influences the development and adoption of technology by the private sector. Infrastructure decisions, with the exception of most of the freight rail system, are made by the public sector, as the owner and principal funding source. Innovation in infrastructure finance and operations by the public sector has drawn more private participation but the overall frame- work is still led by the public sector as the ultimate owner. Operations and maintenance of infrastructure is chiefly performed by the public sector (again with the exception of freight railroads) but the private sector leads decisions affecting the oper- ations and maintenance of equipment, subject to government regulation. 13 S E C T I O N 2 Freight Transportation Decisions and Considerations

14 Public and Private Sector Interdependence in Freight Transportation Markets Non-transportation decisions affecting the behavior of freight system users, such as environ- mental or land use regulations, are public sector led. Public Sector Decision Making Public sector freight decision making requires the consideration of many factors that can influence or constrain the course of action. The factors that affect public decision making reflect the fact that there are many competing demands on public agencies for attention and funding. Policy, planning, and regulatory decisions made in the public sector today have important consequences for the freight system tomorrow. The public sector also influences freight system operating decisions related to highways, waterways, and airways directly, and other modes through the regulatory impacts on operating decisions made by private firms. Drivers Affecting Public Sector Decision Making Critical freight decisions that have great impact on the private sector include those involving safety, the environment, land use, economic concentration within the industry, and the opera- tion of the system. Investment and Financing: Taxes, Fees. Financing public sector programs and projects is always a primary concern of public officials, and almost all decisions have a financial aspect to them. Obtaining funding required for public sector investment is a recurring problem for public officials. Sources of public revenue include local, state, and federal taxes and fees assessed on com- panies and system users. The ability to collect revenue and the behavior influenced by assessing fees are fundamental in influencing public sector decisions. Taxes and fees also influence private sector decision making, which is therefore a consideration in public sector financing decisions. Economic Regulation. Economic regulation of freight transportation can strongly influence the use of the freight transportation system. Federal and state law gives the public sector great power over the character of the private portions of the freight transportation system. Providing and Maintaining Infrastructure: Highways, Tracks, Ports, Air. The provision, operation, and maintenance of infrastructure are the most basic of public sector functions with respect to freight transportation. With the exception of most railroad infrastructure, the freight network is largely a result of decisions made by the public sector. The connectivity of the infrastruc- ture system is also almost entirely a result of public sector decisions. The adequacy of capacity and the condition and performance of infrastructure are key to public freight transportation decisions. Land Use: Facility Location and Access. The availability, location, and access to land for freight facilities are critical to the freight system’s long-term ability to adapt to changes in demand. Local public agency control of land use and policy objectives can have significant conse- quences for transportation decision making. Local land use issues are complicated at times by fed- eral issues such as military base closures or national initiatives like the “rails-to-trails” right-of-way preservation program.3 Environmental Issues. The public sector employs a combination of regulations, mitigation programs, fees, and taxes to protect the environment. All these rules and programs affect freight 3 A federal program to encourage the banking of abandoned rail right-of-way through conversion to trail use.

Freight Transportation Decisions and Considerations 15 transportation decision making and planning. The National Environmental Policy Act and other federal and state laws have significant impacts on decisions about the operation and expansion of the freight transportation system. Safety. Public sector protection of worker and traveler safety extends from construction and operation of transportation infrastructure to the regulation of the manufacture and sale of equip- ment used for freight transportation. There are financial and operational consequences from government safety regulations. The regulations can even affect the structure of the freight trans- portation system by influencing the relative cost of operations between modes of transportation. Operations. Public sector operation and maintenance of infrastructure such as highways serves demands from passengers as well as from freight transportation. Since so much of the infrastructure for freight transportation is shared with passenger transportation, operational and cost assessment considerations unrelated to freight can affect freight transportation decisions. Public sector decisions concerning operations extend beyond the roadway network to airports and waterways. Jobs and Employment. In the public sector, most political leaders understand the impor- tance of jobs related to trade and transportation but they do not always recognize the importance of freight in protecting jobs in other sectors of the economy. This partial appreciation of the role of freight transportation in the economy has led to decisions that give less attention and support for policy and program development of freight transportation than are warranted by the actual importance of this sector to the economy. Regulatory Decision Making Public regulation of freight transportation impacts the system comprehensively. Agencies at different levels affect transportation modes differently. Trucking, the most pervasive mode of transportation, is impacted in more areas by the greatest number of agencies (see Table 3). Cutting across the various factors affecting decision making are the existence of several differ- ent levels of government, each with its own priorities, constituencies, revenues, and budgets. Apart from differences with the private sector, public agencies also frequently must make decisions in the context of conflicts with other jurisdictions. Pipeline Federal Federal Federal Federal/ State Federal/ Local Federal/ State Federal/ State/ Local Federal/ State/ Local Federal Federal Federal Federal Federal Federal Federal Federal Federal Federal Federal Federal Federal Federal Federal Local Local Local Local Local Local Federal Safety Economic Environmental Land use Operations Rail Truck InlandWater Deep Sea Air Table 3. Primary government level of responsibility by function and mode. Conflicts between different levels of government affect decision making and outcomes. The U.S. freight industry is subject to regulation across many aspects of the business at federal, state, and local levels.

16 Public and Private Sector Interdependence in Freight Transportation Markets Private Sector Decision Making Private sector decision making for freight is driven by several factors, some of which are more related to the public sector than others. The factors that affect private sector decision making reflect the fact that companies ultimately need to survive in a competitive marketplace, generate a return for their owners, and satisfy their customers, all while operating under the law. Drivers of Private Sector Decision Making Market and Shipper Demand. Transportation carriers want to operate where and when their customers want them to be—employing the workers, equipment, and technology to best meet these demands. Investment follows market demand. For example, the implementation of tracking technology is now a requirement for some freight markets. Financial Performance Metrics. Return on investment (ROI) and other measures of prof- itability are primary considerations, particularly for publicly traded businesses. Market share and revenue growth are also key performance factors. Efficient Management of Volumes, Schedules, and Costs. Ground-level operating decisions respond to these tactical management factors. Regulatory Issues. Compliance with regulations in a way that minimizes costs and disrup- tions to operations influences other management decisions. An example is the influence of toll rates on the routing of trucks. Decision-Making Categories To better understand private sector decision making, it helps to categorize private sector deci- sions and to group them by type of activity. Among the most important decision categories are investment decisions and operational decisions. Other categories of decisions include those for marketing and technology. Investment decisions ultimately determine how companies deploy their limited financial resources. They are the key to the long-term survival and success of these businesses. Freight transportation company investments can be made in infrastructure and in operations. The mix of infrastructure and operations investments varies widely by mode of transportation depend- ing on how much of the infrastructure used is provided by the public sector. The best example is to contrast the very high investment in private track network infrastructure by the railroads with the very small truck terminal infrastructure investments by truckload trucking companies who rely heavily on the public highway system infrastructure. Investment decisions are made in the context of public tax policy where higher taxes will usually reduce the level of private invest- ment while tax credits can encourage higher levels of private investment. Operations (and maintenance) decisions for equipment and facilities are also driven by finan- cial considerations. The time horizon used to make operating decisions is typically shorter than that for investment decisions. Factors such as maintaining system performance and regulatory compliance also influence operating decisions. Costs are generally the most important factor in private sector operating decisions, and private companies are usually very good at assigning costs to every part of their operations. Private sector decisions can also be classified broadly as tactical or strategic in nature. Tactical decisions are commonly those with short-term impacts, often of an operational nature. Strategic decisions are those made to achieve the longer-term objectives of companies. Financial decisions,

Freight Transportation Decisions and Considerations 17 such as investments, are in this category. The difference between these two types of private sector decisions is important to understand because it affects the decision-making timeframe. Levels of Decision Makers Within the private sector, there are many levels of freight transportation decisions made every day. Decision making in freight transportation businesses commonly extends down from the Board of Directors and the CEO all the way to the individual equipment operator (e.g., the truck driver or boat captain). Responsibilities and authority for decisions are ideally optimized for the most efficient operation and cost minimization. Immediate operational decisions are those delegated as close as possible to the transportation activity of individual equipment operators. As the timeframe, scale, and consequences of decisions increase, the decisions are made at a higher level in the management structure. Different types of public and private decisions are made at different points in time and at different points in the management hierarchy (see Table 4). The private sector’s interaction with the public sector for each type of decision follows the pat- tern of bigger-consequence decisions. They are made at a higher level in the management structure of the organization. Intersection of the Public and Private Sectors Public and private decisions relating to freight transportation overlap in many areas. At times, the interest and responsibilities converge and facilitate cooperation. However, at other times, the responsibilities and interests can diverge, creating conflicts and inefficiencies. This section will further explore the differences and the commonalities between private and public decision Timing Responsibility Mode Decision Example Public Interaction Short-Term: Hourly, Daily Drivers, Local Terminal Staff Primarily Truck Congestion, Avoidance of Traffic, Construction, Events, Physical Access to Customer Traffic Centers, Local Planning and Scheduling, Construction Permits and Scheduling Mid-Term: Weekly, Monthly, Annual Local, Regional, Some Corporate All Modes Repeat Routing and Scheduling, Fuel Routing, Technology Use, Customer Access Hours Local, State, Federal, Planning, Operations, Regulatory Longer Term: Annual 3–5 Years Corporate All Modes Facility Location, Fleet Size, Schedules Local, State, Federal, Planning, Policy, Regulatory Very Long Term: Annual Beyond 3–5 Years Corporate All Modes Equipment Purchases, Market Entry, Facility Ownership Local, State, Federal, Planning, Policy, Regulatory Table 4. Timeframe and hierarchy of decision making in each sector.

18 Public and Private Sector Interdependence in Freight Transportation Markets making. Steps that can be taken by public officials to further facilitate cooperation will be dis- cussed in Section 3. Overlapping Roles and Responsibilities Public and private sector decision processes intersect at many critical points in the nation’s freight system. The intersection of decision making reflects the joint ownership and provision of freight transportation services in the country as well as in areas such as safety regulations. The roles played by the public and private sectors vary by mode of transportation though the public sector always sets the regulatory environment and the private sector always operates the freight equipment (see Table 5). Comparison of Decision-Making Drivers and Processes A comparison of freight decision-making issues between the public and private sectors reveals differences in the drivers of decisions between the two sectors. A list of areas for improvement between the two sectors can be derived directly from the checklist in Table 6. Given the differing emphasis on decision making between the two sectors, the current gaps between the decision-making processes can be better understood. There are significant differences between the private and public sectors with respect to freight transportation that can make the relationships between the two sectors difficult. There is a diver- gence in attitudes, processes, scale, geography, timing, and objectives that affect how decisions are made. This is due to fundamentally different roles and responsibilities and differing objec- tives between the two sectors. This situation leads to conflicts in working toward the common purpose of improved freight transportation for the nation (see Table 7). The scale of investments by the private sector is limited to the resources companies can assem- ble, either individually or collectively, but can span political boundaries and geographies in search of markets. Government agencies can look more broadly at investments at a state or national level that benefit all participants within the economy, but are generally limited geo- graphically to political boundaries. PublicPublicPublicPublicPublicPublic PrivatePrivatePrivatePrivatePrivatePrivate Public/ Private4 Public/ Private4 Public/ Private4PrivatePrivatePrivate None/ Public3 None/ Public2PublicPublicPrivatePrivate Infrastructure – Road/Rail “Line Haul” Network AiInlandWaterTruckRailPipeline Regulatory Environment Equipment/ Operations Infrastructure – Terminals rDeep Sea1 1 Also applies to U.S. Coastal and Great Lakes shipping. 2 Public component includes aids to navigation, channel maintenance, and safety. 3 Public component includes the air traffic control network. 4 Frequently represents privately developed terminals on publicly owned property. Source: Association of American Railroads 2008. Table 5. Sector responsibility or ownership by function and mode.

Freight Transportation Decisions and Considerations 19 Private sector decision making is often hierarchical with one decision maker or a small board making final decisions with large impacts. Decisions with smaller financial and operational impacts are made further down the hierarchy. Public decision making is primarily collaborative. It takes into account many stakeholders and interests that have influence over those making pub- lic funding and policy decisions between executive and legislative branches of government. The public sector process is thus more time consuming. Private sector decision making is often more focused than public sector decision making on the near term with short-run operating and financial decisions complementing longer-term strategic decisions. The near-term focus is driven by the fundamental objective of earning returns for the company owners through a combination of business revenue growth and higher profits. At the same time, strategic investments in infrastructure can focus on the future. The public sector, with its multiple objectives and functions for society, works in an environment that takes into account many stakeholder concerns including social and political issues in addition to the business aspects of decisions. Political power ultimately controls public decisions regardless of whether the conse- quences for business or the economy are fully understood or considered. Freight Decision Issue Driver of Public Decisions Driver of Private Decisions Land use planning/zoning that accommodates ports, rail yards, and distribution centers Investing in capacity to ensure profitability and efficiency Investing in or addressing voter concerns Investing public funds in social, equity, and environmental justice issues Implementing cost saving technology as soon as practical Managing budgets and priorities that dramatically and rapidly shift Managing budgets with strict performance criteria accompanied by steady capital plans Managing investments to ROI and hurdle rate standards Pricing transportation to fully cover all costs and benefits Managing executive turnover that coincides with national, state, local elections ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Table 6. Comparison of freight decision-making issues. Differences Public Sector Private Sector Scale of investment Entire system within its jurisdiction One company at a time but international tekramlabolGyradnuoblacitilop.S.UyhpargoeG Process of reaching decisions Collaborative Hierarchical Planning horizon and timing Longer-run, slower Shorter-run, quicker Objectives of decisions Social and political as well as economic development Increase shareholder value through higher profits/revenues llasserddaotstpmettAsedutittA stakeholder concerns Satisfy owners, customers and employees Table 7. Key public and private sector differences in freight decision making.

20 Public and Private Sector Interdependence in Freight Transportation Markets Comparison of Decision-Making Areas The nature of the intersection between the public and private freight interests influences how successful the two sectors are in working together. When objectives are closely aligned and there are managers on both sides frequently interacting, the two sides can work well together and take actions that improve the overall system. When the interests and objectives of the two sides diverge, or when the private freight system is not a high priority for public agency decision mak- ers, the relationship between the two sectors has suffered. Areas Where Public and Private Interests Align Two areas of alignment of public and private sector interests that are illustrative are (1) safety and security issues and (2) economic regulation. These are not the only areas of common interest. Though there are differences between the two, safety and security issues regarding the private portions of the freight system are generally of common interest to the public and private sectors. Increasing security is desirable for both government and business, even if process details can lead to disagreements about the approach and who pays for security. Safety regulation and enforce- ment by the public are backed up by safety requirements for private companies so that they can obtain insurance. Industry improvements in these areas achieved to date are partly a result of public agencies interacting regularly with the private sector freight system users to achieve objec- tives. Both sectors want to protect people, property, and infrastructure. Economic regulation of freight transportation has largely worked well in the last quarter century because the industry was mostly deregulated by the early 1980s. While some shipper groups object to aspects of the remaining regulations, or the lack thereof, the overall real costs of freight trans- portation and logistics in the economy have fallen over this time period as shown in Figure 13. The remaining economic regulatory functions are carried out within the bounds of the regulatory sta- tus quo by public agency staff dedicated and focused on the private freight transportation sector. 8% 10% 12% 14% 1984 1987 1990 1993 1996 1999 2002 2005 2008 Source: Council of Supply Chain Management Professionals, 18th Annual State of Logistics Report Value of U.S. Logistics (Transportation plus Warehousing) Costs as Percent of U.S. Gross Domestic Product; IHS Global Insight’s forecast after 2006. Figure 13. Cost of logistics as a share of U.S. GDP.

Areas Where Public and Private Interest Diverge In areas where public officials are responding to broader social and equity issues, the narrower profit motive of the private sector can drive the two sides apart. Environmental and land use planning issues regarding the private freight system have been the source of many disagreements between the two sectors because objectives and incentives dif- fer. Public sector agency resources dedicated to freight transportation in these areas have been limited, because freight transportation has not generally been a high priority. The mismatch between public sector jurisdictional geography and the need to operate across global supply chains in the private sector leads to conflicting objectives. Operations of the freight system by the public sector have not always adequately taken into account the needs of the private sector. For example, truck use on the roadway network has been constrained, which increases costs and, in some cases, exposure because of circuitous routing. This has especially been the case in congested urban areas with severe passenger transportation and environmental challenges. In these difficult situations, the accommodation for private freight operational needs has often been limited, at times without the full consequences of these operational limitations being understood. Consequences for Public Sector Officials The interdependencies and overlapping responsibilities highlight the importance of decision making in both sectors. Decisions cannot be made truly independently and there are limits on each sector’s ability to pursue its own objectives. Compromises must be achieved between the public sector’s goal to provide infrastructure to help reach the potential of the entire economy and the private sector’s goal to use publicly provided infrastructure to optimize time and cost functions for its own gain. In the private sector, profitability and efficiency drive internal decisions, but costs are not solely in the private sector’s control because some costs are driven by public policies and regu- lations. Conversely, public sector costs for infrastructure operations and maintenance depend in part on how much the private sector uses that infrastructure. When there are conflicts between the two sectors, a common public sector misperception is that “freight doesn’t vote” and that consequences from acting against private freight desires will be limited. Frequently, the public sector does not fully understand that there are instances when freight does vote. This voting does not take place at the ballot box but rather through the shrink- ing, removal, and relocation of facilities and the jobs associated with them. The end result in such jurisdictions is a curtailment in services and loss in revenue. Freight Transportation Decisions and Considerations 21 Freight Does Vote: Loss of access to cost- effective freight transportation can chase business away—costing jobs, reducing tax rev- enues, and resulting in adverse selections of alternative freight facility locations and route choices.

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TRB’s National Cooperative Freight Research Program (NCFRP) Report 1: Public and Private Sector Interdependence in Freight Transportation Markets is designed as a primer on relationships between public sector and private sector stakeholders in the freight transportation industry. The report explores the freight industry through the use of examples, case studies, and a broad-based examination of the mutually dependent issues facing public and private investment decision makers.

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