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North American Marine Highways (2010)

Chapter: Chapter 3 - Findings and Applications

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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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Suggested Citation:"Chapter 3 - Findings and Applications." National Academies of Sciences, Engineering, and Medicine. 2010. North American Marine Highways. Washington, DC: The National Academies Press. doi: 10.17226/14406.
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12 Although there are examples of successful marine high- way services that are currently in operation or have operated in the recent past, the researchers found no extant service that could serve as a true model for marine highway devel- opment. Given the scale of services that would be necessary to divert a significant percentage of current and future vol- ume onto the water, all existing models would have limited utility. Therefore, the researchers’ approach was to isolate the factors within each of these services that would be poten- tially transferable to a future system of marine highways. An important issue, thus, in this type of study is the lack of successful NAMH models upon which to build substantive recommendations. One of the more interesting findings from this research effort is that the conventional wisdom regarding the neces- sary distance for NAMH options (i.e., that marine highway operations are only viable at distances equal to or greater than those that are viable for intermodal rail) is not correct. On the contrary, successful operations have functioned on routes as short as “across the bay” and as long as more than 1,000 mi. More importantly, the researchers concluded that there is no critical distance for determining whether a particular venture will be successful. The specific geographic features of each service must be considered, including the alternative landside distances and connections. Ventures As with any other type of enterprise, there has been a wide variety of methods, equipment, geographic locations, and cargo mixes involved in marine highway ventures. These ven- tures have not had a high success rate. In an effort to determine what has already been attempted, what has failed, and what has succeeded, the researchers compiled a table of ventures that can be found in Appendix B. There seem to be several themes that run through the suc- cessful attempts and those that characterize the unsuccessful ventures. Ventures that have been successful exhibit the fol- lowing characteristics: • They operate in a limited market in terms of geography and cargo mix. They deliberately do not try to be “all things to all people,” but also do not depend exclusively on a single shipper. • The vessels (ship or barge) are adequately sized for the cargo that is being targeted. Most of the successful operators work with relatively small lot sizes, enabling them to use equip- ment that requires a low up-front capital budget. Small vessels such as barges are also easier to replace or substitute. • The frequency meets the needs of the customers, and there are often set, reliable schedules. • Successful ventures promote an integrated door-to-door service. Working with truckers (or controlling their own truck fleets) and becoming intermodal providers were key elements of success. • They are able to provide cost-effective terminal services. • There is limited competition from potential marine service providers. Unsuccessful ventures also had several of the following com- mon characteristics: • The door-to-door cost was not competitive with trucking and/or rail services. • An attempt was made to develop a market based on the characteristics of a preexisting vessel or vessels, as opposed to the market characteristics dictating the type of vessel to be utilized. • In order to reduce capital requirements, certain ventures time-chartered their vessels. When the charters expired, they were unable to negotiate new charters for their vessels or find suitable replacements. • There was heavy reliance on a single vessel. When mechan- ical or weather problems arose, there was no ability to work C H A P T E R 3 Findings and Applications

around these problems, causing shippers to lose confi- dence in the service. • Although the success rate of all ventures was low, services that were designed to cater to international services exhibit a higher failure rate than do domestic services. Of course, with the current economic recession being experi- enced across the globe, the ability to offer new services at a rate that will provide a proper return is severely impaired. As the crisis fades, rates and demand will improve, and those services that are properly positioned and structured will be in an advan- tageous position for capturing new marine highway markets. Shipper Requirements The literature review and interviews revealed several ship- per requirements that are important for a marine highway operator to address. To succeed, a NAMH service must pos- sess the following two major characteristics (1) it must pro- vide a time/cost tradeoff that is competitive with that of other modes, and (2) it must be reliable and as seamless as possible. The most important attributes in a shipper’s choice of mode are (not necessarily in order) general preference for retaining the existing service structure, travel time, reliability, and cost. The first category is probably least discussed yet quite salient due to the transaction costs involved in switching transporta- tion providers. Although shippers are sometimes in a position of seeking to switch service providers, they certainly do not want to go through this process often. Therefore, the shipper must be convinced not only that the NAMH service is viable in the short term, but also in the long term. These shipper considerations were emphasized in a consultant study com- missioned by a Canadian carrier to examine the economics of a feeder service on the East Coast that would use a fully amor- tized vessel. According to a representative of the carrier, the study determined that even with the limited capital expendi- tures on the front end, the service was not justified due to unacceptably high time of transport and high port charges. The economics would be even less favorable with fuel costs lower than those used in the study. The shipper requirements documented in the literature are listed in Appendix C with references. The most important consideration to note is that shipper priorities will vary by type of business and the commodity transported. Given that caveat, there are certain requirements that seem to surface with great regularity, as follow: • The service must be cost-competitive with alternatives. • The service must provide door-to-door arrangements. The service that is offered must be an integrated service. It must be as “simple” from the shipper’s perspective as arranging a truck-only shipment. • Frequency is important. To attract a significant number of previously unaffiliated shippers, services must be once per week at a minimum. For certain commodities, multiple sail- ings per week are a requirement. NAMH cannot compete with same-day services. • The service must be scheduled so a shipper can plan ship- ments. Timeliness and reliability are extremely important. Being “fast” is not as critical as being reliable. The more reliable the service, the more likely it will be chosen. • Total delivery times are important. This is not the same as transit time. Although a barge’s transit time may be longer, its total delivery time may be quicker if the transit can occur on the weekend and during late-hour operations, and avoid congestion as well. • Marine highway operators need to be able to handle 48-ft and 53-ft containers as well as standard 20-ft and 40-ft ocean containers. • Motor carriers interested in using marine highway services typically want to use their own equipment, which implies that Ro/Ro services will have an easier time partnering with motor carriers. • Time-sensitive shippers, as well as shippers of high-value or hazardous goods, need a good system to track and manage their shipments. Real-time tracking services may partially compensate for slower delivery times. Although these requirements are frequently cited, it must be noted that generalizations can be dangerous. Many opera- tors are quick to point out that there is no substitute for under- standing the shipper needs for a certain commodity or service in a certain geographic area. Vessel Issues According to MARAD, as of December 31, 2008, the U.S.- flag, privately owned ocean and Great Lakes merchant marine fleet consisted of 675 active and inactive vessels. Of those, 238 vessels were available for operation in U.S. foreign and domestic trades and within those, 145 were Jones Act vessels with unrestricted coastwise trading privileges. Of the 238 ves- sels, 116 (49%) were built before 1984. Of the 145 Jones Act Vessels, 103 (71%) were built before 1984. There are only 15 Ro/Ro and 27 container vessels available for the Jones Act trades, and most of them are approaching the end of their useful life. Table 2 shows the composition and age of the fleet. Vessel Types Types of vessels that are, or could be, employed on NAMH can be classified as the following: • Tug and pull-barges (ocean-going), • Tug and barges (river type), 13

• Integrated tug/barge and articulated tug/barge (ITB/ATB), • Small self-propelled container vessels: lift-on/lift-off (Lo/Lo), • Small ships: Ro/Ro, • Rail ferry, and • High-speed ferry. The literature and the interviewees expressed a wide range of opinion on the importance of the speed of the vessel. The actual speed of current operators ranges anywhere from 5 to 6 knots for inland operators up to 20 knots for coastal opera- tors. One shipbuilder pointed out that high-speed vessels are “light-weight” vessels—their speed and fuel consumption are greatly affected by the load they carry. Some of the litera- ture focused on time-sensitive cargoes where speed might be a factor, but most analysts seem to agree that highly time- sensitive cargoes are not a good market for marine highway operators. Furthermore, increased vessel speed is a key contrib- utor to increased fuel consumption and vessel operating costs. The draft requirements of an NAMH vessel are not likely to be the limiting factor in most cases. Of the regularly consid- ered ship types, the deepest draft has been approximately 20 ft. Given average container weights, it is very likely that the cargo for ships will be volume-limited rather than draft-limited. Tug and Pull-Barges (Ocean-Going) The pull-barge is the most commonly used vessel for NAMH coastal operations in the United States. Barges are preferred in NAMH shipping operations due, in part, to federal regulations specifying small crew sizes. Both U.S. and Canadian crew size regulations stipulate minimum crew size based largely on the vessel’s registered tonnage, which in the case of a pull-barge is the tug vessel, not the barge itself. The crew of the tug, typi- cally about eight, is much smaller than that of a self-propelled vessel similar in size to the pulled barge. A self-propelled vessel of 700-TEU capacity would require a crew of 20. (TEU stands for 20-ft equivalent unit. A 20-ft ocean container is 1 TEU; a 40-ft container is 2 TEU. This is the standard unit of measure for container capacity.) Figure 1 is a photograph of an ocean- going pull-barge arrangement. Tug and Barges (River Type) The inland tug and barge services attempted to date or cur- rently in use utilize conventional deck or box barges to move containers. Container-carrying tug and barge services can be combined with barges carrying “traditional” cargoes such as agricultural commodities. Alternatively, river barge services in which there is a cargo imbalance for a traditional cargo in one direction can sometimes handle container barges on what would be the empty repositioning leg. Figure 2 is an example of a large container shipment on river barges. Integrated Tug/Barge (ITB)/ Articulated Tug/Barge (ATB) Tug and barge systems offer numerous advantages over self-propelled vessels. They require one-third the crew of self- 14 Fleet Before1984 1984– 1988 1989– 1993 1994– 1998 1999– 2003 After 2003 U.S. Flag 116 38 6 34 19 25 Tanker 19 4 0 13 16 7 7 13 Double Hull 9 0 11 13 Dry Bulk 53 4 0 Lakers 47 0 0 Container 19 21 3 Ro/Ro 17 8 2 General 5 Jones Act 103 9 1 15 Tanker 22 4 1 11 DH 9 11 Dry Bulk 51 0 0 Lakers 47 0 0 Container 19 3 1 Ro/Ro 10 2 0 General 1 1 1 1 0 1 0 0 0 7 9 7 3 4 0 0 0 0 0 0 0 0 0 0 9 5 9 5 9 8 0 0 0 0 0 2 1 0 2 1 0 1 3 Source: U.S. Water Transportation Statistical Snapshot, MARAD, July 2009. (6) Table 2. Age profile of U.S.-flag, privately owned ocean and Great Lakes fleets, 2008. Figure 1. Ocean-going tug and barge. Figure 2. Containers on river barge. Source: Marine Log.

propelled vessels and are able to consume significantly less fuel when slow speeds are acceptable. Tugs typically have crews of 6 to 8 versus a crew of 20 to 23 on self-propelled vessels. Addi- tionally, tug crewmembers generally have a more favorable wage scale relative to crewmembers on self-propelled vessels, in large part because certified mariners for self-propelled ves- sels are a very small population. They also feature lower con- struction costs, maintenance costs, and drydocking fees, and are more conducive to moving larger freight. Ocean-going tugs/barges move at 9 knots, half the speed of self-propelled vessels, but this slower speed results in much less fuel con- sumed per mile. In addition, both new construction and maintenance costs on barges are well below similar size self- propelled vessels. Integrated tug/barge units are used widely in the U.S. Gulf of Mexico and East Coast offshore trade. The stern is notched to accept a special tug that can be rigidly connected to the barge, forming a single vessel. The barge is built in the molded form of a normal ship’s hull. Directional stability and control underway is far superior to that of a towed barge, although this configuration does not do well in high seas. No particular changes in the size or shape of the tug are required except for a higher pilothouse, needed for improved visibility. The ITB is usually semi-permanently connected. The tug is not disconnected from the barge when loading or unloading. With an ATB, the tug is generally allowed to “float free” in the notch while loading or unloading. This is an important fea- ture in that it allows the tugs to be utilized for a higher per- centage of time as opposed to being tied to the barge while loading. Given that terminals handling NAMH traffic will often load containers at a slower rate than terminals serving ocean-going vessels, it is often attractive to separate the tug engine since it is the most costly element of the system. Over time, the cost to build ITB units has risen to values in excess of an equivalent ship. Furthermore, with the issue of Navigation and Inspection Circular 2-81 (NVIC-2-81), the U.S. Coast Guard closed many loopholes in the regulations that the ITB was designed to take advantage. Thus, no ITB has been built since the early 1980s. (7) An articulated tug/barge unit is a newer type of integrated barge. The cost of an ATB is about 20% less than the cost of an analogous self-propelled ship. Unlike the older inte- grated tug/barge style, the ATB has a hinged connection system between the tug and barge. In an ATB configuration, the tug and barge roll as one, but they pitch independently. The ATB system “couples” the tug and barge together. The ATB unit’s barge has a notch in the stern where its tug bow fits. An ATB tug can be separated from the barge and used alone. There are a few inherent drawbacks to the ATB system in terms of accomplishing broader utilization. The notches on most ATBs are designed such that a tug from one company can not be used with a barge from another. This has the effect of limiting the aftermarket and raising the cost of production and purchase. This lack of standardization is another obstacle to vessel procurement for marine highway service. Further- more, ATBs have been used almost exclusively for liquid car- goes to date. Figure 3 is a photo of an ITB. Figure 4 is a photo of an ATB. 15 Figure 3. Integrated tug/barge. Figure 4. Articulated tug/barge.

Small Self-Propelled Container Vessels: Lift-on/Lift-off (Lo/Lo) The literature indicates that a time-chartered roll-on/roll-off vessel is probably more suitable to the domestic market and a geared container (Lo/Lo) vessel is more appropriate to the feeder market, depending upon the port choice. (4, 8–11) Ro/Ro cargoes typically compete on near-sea and short-sea dis- tances with local truck transport, while Lo/Lo typically com- petes over longer distances with rail and long-haul trucking transport. A feeder ship will typically carry less than 1500 TEU. The capacity of Ro/Ro vessels can be less than one-half that of a Lo/Lo vessel of similar size. Furthermore, since cargo can not be stacked (due to wheels) and significant space is needed for load and offload ramps, the use of the Ro/Ro model also has implications for terminal efficiency. For this reason, space- constrained terminals may be less willing to accept a Ro/Ro operation if it interferes with more productive Lo/Lo services. However, even in the case of Lo/Lo operations, the operator is not guaranteed priority access for berthing slots. Because ports and terminals tend to give priority to ocean-going container- ships, coastal Lo/Lo ships typically have to allocate 24 h per port call, althoughonly8–12h are required to load and offload cargo. New developments in the design of container feeder vessels, which operate in support of mainline vessels and in short sea trades, focus on speed and size. Whereas a service speed of 12–14 knots was acceptable 15 years ago, in order to maintain schedules, speeds of 15–17 knots are not uncommon. Feeder ships now range from 250 TEU to over 2,000 TEU in the Far East and Southeast Asia. SPM’s new feeder, Shamrock, is con- sidered a state-of-the art design. It is 376 TEU, with some Ro/Ro capacity on the upper deck. Its top speed is 16 knots, allowing it to call at four ports weekly. The vessel was new in January 2001. Figure 5 is an illustration of a small container vessel. Small Ships: Ro/Ro Lower storage density and, in the case of larger vessels, the need for decking to accommodate multiple levels, makes Ro/Ro ships about three times more expensive than a con- ventional container feeder vessel of equivalent container or trailer capacity, which explains why Ro/Ro vessels require an intensive commercial operation to be economically viable. Examples of markets that have seen the successful adoption of Ro/Ro designs are the Baltic and the English Channel. Vessels from 150-trailer to 700-trailer capacity have been proposed for a variety of markets. Smaller vessels of approx- imately 200-trailer capacity may have the broadest market potential while easing phase-in of a marine highways service. (4, 8, 12–13) A container vessel can carry much more cargo per dead- weight ton at a cheaper cost than a comparable Ro/Ro vessel, but container vessels take longer to load and offload—Lo/Lo operations are logistically more complicated. Generally speaking, Ro/Ro vessels provide the most effec- tive NAMH service platform, because they enable truckers to use containers or trailers on chassis for the entire movement. Several studies indicate that the cost savings from reduced port cargo-handling costs as well as service advantages in faster vessel and trailer turn-times more than offset the more effective vessel utilization provided by containerships versus Ro/Ro vessels. The literature does not definitively state the con- ditions under which this advantage holds and at what point the balance might shift. The majority of previous studies suggest that a Ro/Ro operation with 53-ft domestic tractor-trailers is the most viable coastal shipping option. The best vessel option from a cost perspective would appear to be a relatively new time-chartered Ro/Ro vessel capable of carrying highway trailers. Alternatively, an existing offshore service ship design could be modified to a single-deck ferry for 53-ft trailers. The size of the vessels likely to be involved in such services (4, 12–13) would have the following general characteristics: • Length overall: 190–200 meters (623–656 ft), • Beam: 24 meters (79 ft), • Draft: 6.4 meters (21 ft), • Deadweight: 12,000 deadweight tons (DWT, a measure of how much weight a ship can safely carry), • Road trailers: 140–150 (primarily 48-ft and 53-ft), and • Stern ramp or quarter ramp. Local street access to the highway system is required that is able to accommodate a flow of up to 140 trailers into the terminal and out of the terminal (each direction) within a 3- to 4-h period MARAD shows 15 Jones Act Ro/Ro vessels as of the end of 2008. This number did not change for the period 2003–2008. (14) 16 Figure 5. Small container (Lo/Lo) vessel.

According to Infomare, “the niches where the general Ro/Ro concept is likely to remain and be developed are defi- nitely short sea trade routes with an increasing need for fast tonnage and deep sea trade with rolling cargoes only.” (15) New Ro/Ro vessels built by Stena and DFDS point the way in terms of future development. Stena’s 4Runner class vessels are 12,300 DWT, 195m length overall, with 3,000 lane-meters (lm) or 858 TEU capacity, and a service speed of 22.5 knots. An additional freight deck can be added above the upper deck, giving another 1,000 lm capacity to a total of 4,000 lm, similar to DFDS’ Tor Line and Finnlines, which have ordered similar vessels with 4,000 lm capacity. Many of Stena’s previous gen- eration of Ro/Ro vessels, the Searunner class, were converted to roll-on/roll-off/passenger (Ro/Pax) vessels. Another new innovation was introduced by Cobelfret for the StoraEnso project, which combines full-width double-level ramps and straight driving lanes on-board vessels. It has since been intro- duced by TT-Line and DFDS as well. Analysis of the economics of NAMH suggests that a Ro/Ro vessel of around 150-trailer capacity can be effectively employed on voyages of 800 to 1,000 nautical miles such as along the Atlantic Seaboard. Larger vessels (up to 300 trailers) may be deployed on the gulf routes where potential volumes are greater. (4) Figure 6 is an example of a small Ro/Ro vessel. Ro/Pax. Ro/Pax is a ferry concept that is a mixture of trailers, trucks, cars, and passengers. These vessels are usually of 5,000–10,000 DWT, and operate at speeds of 22–28 knots. Typical vessels of this design are Stena’s Seapacer class (400 pas- sengers, 170 trailers, and 22 knots); TT-Line, which operates between Germany and Sweden, with a vessel of 1,000 passen- gers and 200 trailers at 22 knots; Superfast (the newest vessels have a passenger capacity of 626, vehicle capacity of 900, and sail at 30.4 knots.); and Irish Ferries (2,000 passengers and 270 trailers). In Europe, these vessels are designed for cargo plus utilitarian passenger travel. Unfortunately, the addi- tional cost associated with Ro/Pax service as compared to straight Ro/Ro appears to be high enough to make such a service impractical in North America. (16) Incat. Incat has developed a new variation of its successful Incat 98 vessel, the Evolution 112, which offers 25% more capac- ity than the previous generation. It is designed for passenger and freight applications, with a total freight capacity of 1,500 tons at reduced speed or 1,000 passengers at full speed. Total lane meter capacity for trucks is 345, while the ship can carry 198 cars (or 321 cars if no trucks are loaded) using the mezzanine decks. The ideal freight run would be 500 nautical miles. Rail Ferry There are two marine highway ventures in existence today that operate as rail ferries. The first is CG Railway, a sub- sidiary of International Shipholding Corporation. The ser- vice operates between Mobile, Alabama, and Coatzacoalcos in southern Mexico. CG Railway is actually a railway (as opposed to a marine operator) although its service is essen- tially a NAMH service. Figure 7 is a photo of a CG Railway vessel in operation. The second operation is New York New Jersey Rail (NYNJR). The ferry is the only freight crossing of the Hud- son River south of the Alfred H. Smith Memorial Bridge, 140 mi to the north of New York City. NYNJR leases approximately 27 acres of land at Conrail’s Greenville Yard in Greenville, Jersey City, where it connects with two Class I railroads—CSX Transportation and Norfolk Southern Railway. On the Bay Ridge, Brooklyn, end, the 6-acre Bush Terminal Yard connects to the New York and Atlantic Rail- way’s Bay Ridge Branch and the South Brooklyn Railway. The 2.5-mi barge trip across the harbor takes approximately 45 minutes. The equivalent truck trip would be 35 to 50 mi. Figure 8 is a photo of the NYNJR ferry in operation. 17 Figure 6. Ro/Ro vessel. Photographer: Kurt Brandt. Figure 7. CG Railway rail ferry.

These applications of marine highway operations have very limited applicability across North America. It seems to work in the case of CG Railway because of border congestion and the inefficiencies of rail operations that run from the south- eastern United States to the Yucatan Peninsula and in the case of NYNJR because of extreme congestion. These conditions do not exist elsewhere. High-Speed Ferry High-speed ferries, advocated by some analysts, have much higher costs of construction and operation (fuel) than stan- dard ferries. In fact, the time savings achieved with faster ves- sels often does not justify the additional fuel cost. Moreover, the commercial use for shorter routes, which constitutes most of the traffic, is limited. The high-speed vessels are simply not cost competitive with trucks. Figure 9 is a photo of a high- speed ferry operating overseas. Vessels Used in Marine Highway Operations The following sections summarize the key features of vessels used in current and defunct NAMH operations. Tables 3 and 4 list relevant NAMH ventures and their key characteristics. The literature suggests that in the case of vessel selection, smaller may be better. (4, 9, 17–19) Optimal ship size is obtained by trading off economies of size in the hauling oper- ations with diseconomies of size in the handling operations. The larger the vessels are, the lower the optimal frequency is to handle the same volume. This creates a barrier to entry into shipping routes, as the volume of cargo must be sufficient to enter the market with an economically sized vessel. In port, handling costs per ton increase with ship size, while hauling costs per ton at sea, on the other hand, decline with size. Typ- ically, shipping lines will enter a new market with the smallest vessels that meet their economic requirements and then grow the service by increasing ship size. Intra-regional container ships seem to fall within the range of 1,000–3,500 TEU. The most appropriate Ro/Ro vessels appear to be in the small- to mid-size range: 600–650 ft length overall, 21-ft draft, and the capacity to transport 140–150 48-ft or 53-ft trailers. Deploying a relatively higher number of small vessels mitigates the impact of taking a single vessel out of service for overhaul, while allowing trucking and rail to serve as a safety net in the event of high demand or reduced vessel capacity (as in the case of a drydocking). Alternatively, the disadvantage of using smaller vessels is that it may not be possible to capital- ize on the economy of scale offered by a larger ship—a factor that may be important in high-volume markets. Relatively high-speed vessels (e.g., 25 knots) can not oper- ate on most of the length of the inland waterway system. Vessel transit times are slowed by delays in negotiating the system’s series of locks and dams. As a result, creating a truck- competitive NAMH service on the inland waterways (with the exception of across the Great Lakes) is not likely. The general view of ocean carriers is that self-propelled vessels rather than traditional tug-barge combinations would be required to make domestic shipping services operationally feasible, primarily due to the considerably faster speed of a vessel (21 to 25 knots for conventional propulsion and much faster for advanced high-speed designs that may provide speeds in excess of 40 knots). The equipment that ocean carriers use and the labor force they employ are built around the man- agement of self-propelled vessels. Furthermore, there is a greater probability of delays with international shipping due to weather, customs, and equipment availability; therefore, ocean carriers value speed and the ability to “make up time.” This would apply mainly to feeder services as opposed to purely domestic shipments, where volumes would not be as great and more flexibility would be possible. Vessel Financing New marine highway services—both Ro/Ro and container vessel-based long-haul services—would be expected to use publicly owned existing terminal facilities or new facilities financed by state and federal authorities. The vessels have 18 Figure 8. NYNJR rail ferry. Figure 9. High-speed ferry.

19 Venture Service Area Period Vessel Albany Express NY/NJ–Albany 2003–2006 River barges America’s Marine Express Memphis–Santo Tomas, Guatemala–Puerto Cortez Honduras 1994 Container vessel; DWT: 3,700; TEU: 256; speed: 16 kn Crowley Liner Services Lake Charles–Progreso 1999 Three Ro/Ro vessels Gulf Bridge Ro/Ro Mobile–Tuxpan 1998–1999 Dolores, Ro/Ro ship; DWT: 13,480; Cars: 1,158; TEU: 872; speed: 17.75 kn Gulf Caribbean Transport Tampa–Tampico 2001–2002 Rita del Mar, vehicle carrier; DWT: 10,890; Cars: 2,780; speed: 18 kn Gulf of Mexico Express Mobile–Veracruz 1999–2000 Ro/Ro vessel Hale Container Line NY–Philadelphia– Baltimore–Norfolk NY–Boston St. John–Boston–NY 1985–1987 Ocean barge with 420 TEU capacity and Lanette, container ship; DWT: 14,033; TEU: 827; speed: 16.5 kn Matson (Company still active in other trades) Los Angeles–Seattle– Vancouver 1994–2000 Ewa, container ship; DWT: 39.276; TEU: 2,128; speed: 21.25 kn McAllister Brothers, Inc. Boston–NY/NJ 1976–1988 Ocean barges (no description available) Mexus Ro/Ro Ltd. Houston–Tuxpan 1994–1995 Chartered Ro/Ro vessel Protexa Burlington International Galveston–Coatzacoalcos- Altamira–Veracruz 1993-1994 4 rail barges, each with capacity of 54 rail cars Sause Brothers Long Beach–Ensenada 1998–N/A Ocean barges Sea Lion Ocean Freight Tampa–Veracruz 1997 Mint Dart, general cargo ship; DWT: 3,194; TEU: 256; speed: 12.5 kn SPM Container Line St. Pierre et Miquelon– Halifax–Portland–Boston 1994–July 2004 Carried autos and containers; DWT: 4,850; TEU: 396; speed: 16 kn Yucatan Express Tampa–Puerto Morelos Tampa–Cancun 2002 Scotia Prince, Ro/Pax vessel; DWT: 1,321; trucks: 21; cars: 75; speed: 21.5 kn Table 3. Defunct NAMH operations. been, and are likely to be, owned by private interests. Although there is some divergence of opinion, stakeholders consider- ing self-propelled vessel services indicate that vessel costs are such that new vessels for established operators will generally require federal financing assistance, and new operators will almost certainly require federal financing assistance. For barge-based short- or intermediate-range services (mostly for 20-ft and 40-ft international container boxes and some for 53-ft domestic trailers), in the absence of Title XI, engine manufacture financing may be the practical financing solution. For container and Ro/Ro-vessel-based long-haul services (where vessels could cost $100 million or more, or where several $100 million vessels may be needed to establish a viable service), federal assistance such as that provided by MARAD’s Title XI program may be required. There are several points of view on the issue of Title XI funding. Some are opposed to it and feel that it only props up otherwise unprofitable businesses. They make the case that such programs encourage enterprises that do not have a sound business reason for existence. Their basic premise is that cargo/demand is the issue, not ship availability. Others (especially shipyards) see it as a valuable tool to achieve a critical mass of shipbuilding activity. According to a recent study conducted by General Dynamics NASSCO (19), the present value benefit to a prospective shipowner of a Title XI loan over a traditional loan would be $23 million per $100 million of shipyard cost. If it is indeed preserved, the application and compliance processes could be simplified and the debt/equity ratio requirements may need to be relaxed. The Title XI program currently has $45 million available. Due to recent failures, it may be difficult to get more funding in the short term. However, because of the way the leveraging works, this could assist in building vessels worth $900 million. (In the event of default, Title XI is only “on the hook” for about 5%.) The age of the vessel affects the financing arrangements. New vessels can usually be mortgaged for 12–15 years, whereas older tonnage can be financed over 7–10 years. Economic analyses have shown that the capital cost of a ship does not factor significantly into the price of transportation. That cost is spread over thousands of units per year for a 25-year projected life of the ship. A NAMH carrier could buy a comparable ship for half the price overseas, and it still would not make a strong difference in the economics for a given service. (17, 20–21) Vessel Construction The Jones Act (Section 27 of the Merchant Marine Act of 1920 [46 USC 883]) requires that all waterborne shipping

20 Venture Service Area Period Vessel 64 Express Norfolk to Richmond 2008–present Conventional river box barges CG Railway Mobile–Coatzacoalcos 2000–present Columbia Coastal Transport East Coast Ports 1990–present 5 deep draft barges with capacity of 450– 912 TEU; approx. 8 kn speed Detroit–Windsor Truck Ferry Detroit–Windsor 1990–present Flat deck barge; trucks: up to 30 speed: approx. 9 kn Eco Transport Oakland–Stockton 2009 (proposed) Tug-barge, up to 350 containers (700 TEU) per barge; plans include 3 barges Great Lakes Feeder Lines Halifax–St. Pierre et Miquelon1 2008–present Dutch Runner, general cargo ship with Ro/Ro capability; DWT: 3,056 trailers: 16; TEU: 219; speed: 13.5 kn Horizon Lines Tacoma–Oakland (extension of Hawaii String) 1999–present 5 container ships, DWT: 20,668–39,420; TEU: 1,172–2,824; speed: 20–23 kn. Ingram Barge Paducah–New Orleans 2006–present Conventional river box barges Linea Peninsular Panama City–Progreso 1984–present 5 general cargo ships, DWT: 3,036–3,145; TEU: 154 each; speed: 11.0–11.6 kn Maybank Industries Port of Charleston to Nucor steel plant 2003–present Shallow draft barges of 2,000–3,000 tons capacity McKeil Marine Sept-Îles–Trois-Rivières Hamilton–Montreal2 3 2005–present 2009–present Alouette Spirit, capacity: 11,500 MT; operates as ATB with tug Wilf Seymour; retractable roof and bow ramp Niagara Spirit, capacity: 250 TEU, 8,500 short tons; operates as ITB New York New Jersey Rail New York Harbor 1983–present 2-290’ x 40’ carfloats and 1-360’ x 41’ carfloat, capacity: 10–15 cars each Oceanex Montreal–St. John’s 1997–present (current operational model started in 2005) Oceanex Avalon, container ship with moveable cell guides; DWT: 14,747; TEU: 1,229; speed: 20 kn Osprey Line Houston–New Orleans New Orleans–Memphis 2000–present 2004–2009 Conventional river box barges (currently operating on inducement basis—no scheduled service) Red Hook Container Barge New York Harbor 1991–present Container platform barges, capacity: 320– 400 TEU each Sause Brothers PNW–Southern California 1950s–present Ocean barges, capacity from 4,300–11,900 tons Seabridge Freight Port Manatee–Brownsville 2008–present Ocean barge with 620 TEU capacity Seaspan British Columbia 1970–present 4 rail/vehicle carriers, DWT: 2,000–3,429; rail cars: 0–5 trailers: 2–8; speed: 12–18 kn Various Columbia/Snake River 1932–present River barge, typically 120-ft deck barge; TEU: typically 80–100, largest is 160 1 Because this is a mainland-island service, it does not meet the definition used for this study. However, the Dutch Runner was specifically retrofitted for service as a Canadian-flag vessel and therefore provides a relevant case study regarding vessel requirements. 2 This service is actually offered by Sea3, Inc., a wholly-owned subsidiary of Hamilton Port Authority. McKeil provides the tug and barge service. 3 Because this is a mainland-island service, it does not meet the definition used for this study. However, the Oceanex Avalon is a new build designed to carry containers (including 53-ft containers) relatively short distances and therefore is included as an example of a useful vessel design. Table 4. Current NAMH operations. between points within the United States be carried by vessels built in the United States. Existing U.S. shipyards are service- able but will require technological upgrades. Additional dry- docks may also be needed, especially for larger vessels. The Title XI program could potentially provide seed money to finance new ships, and shipyard and terminal upgrades. Any program targeting shipyards should probably focus on the mid-tier operations. The “big six” shipyards do primarily naval construction. A mid-tier shipyard with new construc- tion and repair capability could build any vessel type other than large container ships. It is important to keep in mind that if things go smoothly, it takes 18–20 months to build the first ship following the placement of an order. Follow-ups take 14–18 months. There may be an opportunity to realize economies of scale if multiple vessels of one type can be produced in series by a shipyard; however the gains from this form of standardiza- tion suffer diminishing returns to scale at a certain volume production. In the short-to-medium term, volume produc- tion is only viable for barges (e.g., ATBs and the like). Self-

propelled domestic container vessels are likely to continue to be “one off” designs (i.e., each one will be unique). Some have recommended the idea of building in militarily useful features in new ship construction such as roll-on/roll-off ramps and heavy weight-bearing decks that could be paid for by the U.S. Department of Defense as part of a military sealift con- tingency program such as the current Maritime Security Pro- gram. However, there is little incentive for a potential NAMH operator to incorporate militarily useful features into vessels. In addition, the potential disruption associated with diverting NAMH vessels to support large-scale military deployments would not be easily absorbed. If such a program is established, a contingency plan for continuing to serve shippers in the event of a mass deployment would need to be taken into account. The American Recovery and Reinvestment Act of 2009 (ARRA) made $98 million available for grants on a 75%/25% basis. The Omnibus Appropriations Act of 2009 provided an additional $17,150,000 for grants. The application periods for both of these programs have expired. No more than 25% of the funds available will be awarded to shipyard facilities that have more than 600 production employees. No recipient may have more than 1,200 production employees. Freight ferries have been a major source of marine highway traffic in overseas markets. The Ferry Boat Discretionary Pro- gram (FBD) provides a special funding category for the con- struction of ferry boats and ferry terminal facilities. It was created by Section 1064 of ISTEA (1991, Public Law 102-240). It has been reauthorized and continued through the Surface Transportation Extension Acts. Section 1801 of SAFETEA-LU (Public Law 109-59) further continued the program and added the program to 23 U.S.C. as Section 147, Construction of Ferry Boats and Ferry Terminal Facilities. Additional funding was provided by the ARRA (Recovery Act, Public Law 111-5). There is a set of circumstances/requirements that eligible projects must meet. The federal share of the costs for any proj- ect eligible under the FBD program is 80%. Europe has created a program called CREATE3S that brings together some of the lead companies in SSS and ship design with the aim of developing a new generation of short sea ves- sels utilizing advanced design and manufacturing techniques. The program is intended to be equally applicable to container, dry bulk, and liquid cargoes. This approach will combine the ability for a “standard ship design” to be tuned to very differ- ent trades and commodities while using advanced construc- tion techniques such as the “industrial” fabrication of large series of standardized basic modules. This is expected to reduce both operational and manufacturing costs. Production lead- times should also be trimmed by about 10%. According to press reports, the total funding for this project is 64.2 million with the European Union (EU) funding about 62.5 million of the total. The duration of the project, which started on Nov- ember 1, 2006, is 36 months. Legislation The policy challenge for government is to bridge the gap between present circumstances and future aspirations. Busi- nesses are not going to sacrifice potential profits purely for “greening” their operations. Political entities must ultimately either tax what they wish to discourage or incentivize what they wish to encourage. Legislative activity to date at the federal level can be sep- arated into two main categories: (1) attempts to modify or eliminate HMT, and (2) designation or promotion of routes for the development of marine highways or SSS through infra- structure grants or other mechanisms, along with attempts to actually fund these programs. Efforts to eliminate HMT for domestic shipping have been unsuccessful to date. In the last four congressional sessions, a number of lawmakers have sponsored bills providing HMT relief. Despite bipartisan support for the idea, none of those bills have made it out of committee. Such efforts are still underway. Bills that encour- age the development of marine transportation alternatives have met with more success, but there has been little fund- ing attached to them. Appendix E provides a summary of legislative activity directly related to these two categories mentioned. It includes both successful and unsuccessful legislative proposals. The HMT proposals may have been unsuccessful simply because they did not receive priority consideration, but it may also be because of trade-related issues. Congressional sources point out that a taxation scheme that differentiates between international trade and domestic trade through- ports could violate existing trade agreements and could result in an unfavorable ruling from the World Trade Organization if challenged. Most interviewees believe that if incentives are deemed to be necessary, the best approach is to incentivize shippers, not operators. In this manner, the decision makers will be directly affected. With increased demand, capacity will follow. If incen- tives go to operators, there is no guarantee that the shipper will directly benefit and the effect of the incentive will be diminished. Furthermore, some analysts hold the view that for an incentive program to be effective, the recipient needs to have a significant financial stake (e.g., a one-to-one match- ing grant); otherwise, there is not a strong incentive to “do things right” from the outset. There is strong disagreement over demonstration projects. Some believe that these projects often fail, and every failure makes it that much harder to convince a shipper that the marine option will work. Others say that it is necessary to at least try these projects in highly congested areas in order to acquaint shippers with the concept and verify their technical effectiveness. The reality is that when public money is used to subsidize a service and it fails (as in the case of the Albany Express service), it tends to create a negative reaction from 21

the public. Great care must be taken to ensure that any subsi- dized program has the necessary business foundation to have a reasonable chance of being successful. The Congestion Mitigation and Air Quality Improvement Program (CMAQ) is often mentioned as a potential mecha- nism for funding NAMH projects. CMAQ is a federal program that provides funds to state departments of transportation, metropolitan planning organizations, and transit agencies to invest in projects that reduce criteria air pollutants regu- lated from transportation-related sources. Funding is avail- able for areas that do not meet the National Ambient Air Quality Standards (nonattainment areas) as well as former nonattainment areas that are now in compliance (maintenance areas). Several ports have used this source for surface trans- portation improvements in their areas. The Albany Express service (now defunct), the Red Hook container barge service in New York/New Jersey, and the 64 Express container-on-barge service on the James River have received CMAQ funding. Although its overall utility in creating viable corridors may be limited, CMAQ has the potential to become a good source of assistance, primarily for intra-state moves (such as the Albany Express and the 64 Express). The problem is that for movements between nonattainment areas or between one area that is in attainment and one that is not, the total benefit is reduced since only the benefits that occur within the boundaries of a nonattainment zone may be considered. Furthermore, it becomes extremely difficult to decide what the benefits are, who receives the benefits, and who should pay the costs. Finally, there is a growing debate over the feasibility of using surface transportation funds for marine highway projects— specifically, those that mitigate or solve a surface transporta- tion issue. This debate is in its early stages, but it seems to be gaining attention. The European Experience It is well known that European development of marine highway options has a longer history than those in the United States. The use of inland barging for container operations has long constituted a significant share of the total modal split for the extended hinterland of Rotterdam and Antwerp. The hub-and-spoke network for intra-European deliveries is more advanced, with small container vessels delivering containerized cargo from major port hubs to secondary ports. Finally, there is a system of hybrid passenger and freight ferry networks that moves trailer freight between different coastal locations throughout the continent. In general, the geography of Western Europe is ideally suited for maritime activity given that the vast majority of the popu- lation lives near navigable waterways. Europe’s unique coast- line creates many port pairs in which the shortest distance between two points is by sea. Nevertheless, the area where Europeans have been least successful is in shifting domestic freight (defined as between two EU member countries) between two points over the open ocean. The dominance of trucking for intra-European domestic cargoes is still relatively fixed, despite an environment in which there are high road costs, high levels of congestion, and a freight rail system that is, in many instances, not competitive. The average speed of freight transport moving within Europe over rail was recently esti- mated at 17 km/h. (22) These conditions should make the European marketplace generally more favorable to marine highway development than is the United States. As of 2006, the share of EU inland freight transport handled by road stood at 73%, an increase of 3% from 2000 to 2006. (23) By 2006, the share of inland waterway transport had fallen to 5% of total EU ton-miles. Germany and the Netherlands accounted for 77% of inland waterway ton-miles. Rail stood at 17% of ton-miles. Lost in these aggregate statistics is the seg- regation of containerized versus non-containerized cargoes; nevertheless, it is clear that when the total freight picture is examined, trucks play a dominant role. Within the EU, several large countries are even less diver- sified. For example, in Spain alternative modes make up less than 10% of total inland freight shipments. In Italy, the per- centage is also approximately 10%. At the same time, some EU countries have a higher percentage of rail transport than does the United States. In Poland, for example, one-third of total ton-km is by rail. Other former Eastern Bloc countries within the EU show a high percentage of rail shipment, par- tially a legacy of the rail-centric Soviet planning model that steered these nations for decades. The European definition of “short sea shipping” or “marine highways” includes feedering of international cargo. Within Europe, there has been a debate as to whether the definition should be narrowed to include only “domestic” intra-European services, yet for many of the feeder services that currently uti- lize water a land-based alternative would be possible (though not desirable). Therefore, it is logical for purposes of compar- ison to classify the European feedering strings as legitimate “short sea” operations. While the total modal share for inland transport has been relatively fixed in recent years, impressive growth rates for SSS of containers have been realized in many EU member states. Between 2002 and 2007, Belgium recorded the highest growth rate in SSS of containers with a 23.8% average annual rate of growth, almost all of which is tied to the Port of Antwerp. Denmark also saw impressive double- digit annual growth in containerized traffic during this period. France, which has historically made less use of the marine high- way network than the nations of Northern Europe, has never- theless seen robust annual growth of 7.6%, and in 2007 moved 1.4 million TEU by short sea—a volume roughly equivalent to that of the Port of Houston. France’s self-reported short 22

sea volume in 2007 was higher than Belgium’s in 2002. (24) Growth in barge traffic from the Port of Rotterdam has slowed in recent years. For this reason, the port is taking steps to ensure that users of its future terminal expansion, Maasvlatke 2, meet a higher target for non-road alternatives. Thus, the European situation can be described as successful in achieving a somewhat diverse modal balance, yet far from the goal of dislodging the dominance of trucking for internal movements. In the last decade, the EU made the strategic deci- sion to invest in Motorways of the Sea (MoS), a series of start- up grants for new water corridors that would be a part of the Trans-European Transport Network (TEN-T) and interline with established rail and inland waterway networks. The goal is to achieve the same level of success for cargo that currently moves overland by truck in coastal corridors that has been realized from inland barging and international short sea feed- ering. The concept is in its early stages and has not yet been sufficient to create a paradigm shift in modal choice. The dif- ficulties in switching cargo to rail are exacerbated by the fact that the freight rail network, dedicated mostly to passenger transport, has in general not served as a realistic option for a large enough pool of shippers. Most origin-destination dis- tances for rail shipments are too short to be attractive minus outside subsidies. The Marco Polo program is another EU effort to stimulate modal shifts for freight transportation. By subsidizing the cost of initiating certain actions that will lead to a modal shift, the EU is hoping to encourage more rail and waterborne freight transportation. Another program with potential applicability to the North American marketplace is Italy’s Ecobonus pro- gram. This program subsidizes truckers who shift freight from a heavily congested highway corridor to a marine corridor. Figure 10 summarizes the three major EU efforts to achieve a modal shift for freight transportation. The MoS program has been slow in developing. Despite the fact that the initiative was announced several years ago, the 23 Profile of European Transport Programs Marco Polo and Marco Polo II Marco Polo is the European Union’s funding program for projects that shift freight transport from the road to sea, rail, and inland waterways. This means fewer trucks on the road and thus less congestion, less pollution, and more reliable and efficient transport of goods. The current, second Marco Polo Program runs from 2007–2013 and is a continuation of the first Marco Polo Program, which ran from 2003–2006. Source: Marco Polo: New Ways to a Green Program http://ec.europa.eu/transport/marcopolo/calls/docs/faq/faq_programme.pdf Ecobonus Program The Ecobonus Program is an Italian initiative that provides a direct subsidy to truck companies that elect to use marine alternatives for heavily congested corridors. The program has recently been suggested as a European best practice that could be implemented in other markets. The formal ecobonus program was launched by Italy in 2007. There are 28 eligible routes within Italy and an additional 11 international routes that have been proposed. Sources: “Italian Ecobonus Is Working” http://www.shortseashipping.no/?nid=14358&lcid=1033, Lloyd’s List, Accessed: October 30, 2009. “Ecobonus Extension Critical to Motorways of the Sea Success,” Lloyd's List, October 27, 2009. Motorways of the Sea The trans-European network of motorways of the sea is intended to concentrate flows of freight on sea-based logistical routes in such a way as to improve existing maritime links or to establish new viable, regular, and frequent maritime links for the transport of goods between member states so as to reduce road congestion and/or improve access to peripheral and island regions and states. Motorways of the sea should not exclude the combined transport of persons and goods, provided that freight is predominant. Source: “Notification of an Open Call for Tender for Motorways of the Sea Projects in the North Sea Region. 2009–2013 ANNEX 1: Article 12a of the TEN-T guidelines” Publication date: November 9, 2009. http://ec.europa.eu/transport/maritime/motorways_sea/doc/2009_11_09_open_call_for _tender_ns_mos_2009_2013.pdf Figure 10. European modal shift incentive programs.

first grants were issued in 2009. Development of the program has been complicated by the fact that in order to be eligible for funding, projects have to involve more than one member state (e.g., the connection between the northern coast of Spain and France). Because the planning behind these projects has taken so long, enthusiasm for launching them in the midst of the recession is tepid. Due to the reduction in economic activity within Europe, and an associated drop in congestion, it is unlikely that the new MoS Program will achieve the modal shift goals, at least initially, that were envisioned when these cor- ridors were first proposed earlier in the decade. (25) Adding to the difficulty in predicting modal shift within Europe has been the willingness of the trucking industry to accept less favorable working conditions in order to secure employment. Therefore, assumptions that truckers would effectively cede marginally profitable routes to short sea operators will need to be reexamined. In certain established markets, SSS functions quite well. Shipments between Baltic countries, such as Lithuania, Esto- nia, Latvia, and the northwestern corner of Russia, are gener- ally seen as a success story. It is interesting to note that the situation for shipping between the Port of Riga, for example, and the Scandinavian countries is not fundamentally different from shipping between the northern coast of Spain and France. Yet, while the former has been a great success, there has been very little modal shift to water for proposed routes connect- ing secondary ports in northern Spain with their equivalents in France. (26) Lowering trans-Pyrenean traffic has been a major priority for Spain and France. Each has agreed to invest 630 million for the establishment of two new MoS lines, the first between the French port of Nantes-Saint Nazaire and the Spanish port of Gijon, and the second linking Nantes-Saint Nazaire in France with Le Havre and the Spanish port of Vigo. (27) Two models are used for this service, one in which the driver parks the trailer and a second in which the trac- tor and the driver ride along. Ship capacity will vary from 300–520 TEU. Payback provisions to the participating govern- ments, should either of the lines become profitable, have been incorporated. Also, at the time of this report, Spain and Italy were in the final negotiation stages for a designation of MoS routes. The target mode shift from the Italian/Spanish initia- tive is to remove 400,000 trucks over the next two years. (28) Each region within the European Union is currently devel- oping its own MoS Program consistent with the overall TEN-T plan. As an example, the East Mediterranean MoS coalition was formed in 2007 in order to establish guide- lines for investment. One of the first goals was to establish the patterns of freight movements and future trends to iden- tify divertible flows. MoS is seen as a component, not only of integrated trans- port policy, but also of an integrated EU maritime policy that would balance the demands and impacts of freight, passenger marine transport, fisheries, and tourism. Like MoS, the inte- grated policy is regionalized within each sea basin (i.e., the North Sea or the Mediterranean). The European Committee of the Regions (CoR) recently made a series of recommenda- tions regarding European community (EC) maritime policy, including freight investment policy. With regard to the MoS program, the committee stated it would “like to see a more ambitious, comprehensive assessment of the type of opera- tions and investment eligible for European subsidies, given that the measures taken in recent years have not achieved the expected results, especially with regard to the short-term via- bility of services.” (29, p. 65) More specifically, France has recently recommended to the European Commission a modification of the rules governing investment in MoS in order to allow national governments to take a more direct role in purchasing and controlling vessels for use in the motorways. The government of France argues that the current EU-directed pattern of incentives is not robust enough, and direct state support would be more effective in creating and directing a fleet of short sea vessels. The French approach would allow national governments to finance and fully or partially own vessels. (30) This would clearly change the level of state involvement in MoS policy, as compared with the current framework. Given the different characteris- tics of marine highway utilization around the EU, there is def- initely an argument to be made for differentiating the strategy of investment based upon national need, particularly for the larger states. Conversely, direct state aid and ownership by one member has the possibility of upsetting the balance if other member states abstain from direct funding. In addition to vessels, the French proposal also recommends a modification of the Marco Polo Program to allow states to provide “eco- bonuses” directly to shippers or transportation providers who elect to use marine alternatives. The eco-bonus proposal is similar to an Italian initiative that has been viewed as a model. None of the initiatives that subsidize freight modal shift has been completely without controversy. One of the key challenges within Europe is that there are so many preexist- ing services that already resemble MoS yet do not receive sub- sidies. With the collapse of shipping volumes that occurred during the 2008–2009 economic crisis, several of these pre- existing services expressed the opinion that EC aid to the Marco Polo grant program and the MoS further weakened their business model and threatened to push existing services out of business. If this were to occur, it could ironically divert cargo to trucking. As an example, the Grandi Navi Veloci freight ferry service has launched a complaint against the Euro- pean Commission for funding a Barcelona–Livorno service that serves essentially the same market as its preexisting Barcelona–Genoa service. (31) If the economic crisis in Europe persists, it is possible that future funding schemes will endeavor not only to shift truck 24

cargo onto new marine alternatives but also to ensure that pre- existing truck alternative routes stay in operation. For 2009, the Marco Polo Program has been allocated an additional 662 mil- lion in order to fund new mode-shift projects. Under current guidelines, Marco Polo can fund up to 50% of project costs. (31) In past rounds of Marco Polo, a flood of applications has meant that the vast majority of applicants were not able to take advantage of the subsidy. For future rounds, therefore, it has been recommended that funding levels be increased to a level that ensures all worthy applicants can take part. One of the more innovative aspects of the new Marco Polo Program is the decision to expand eligibility to “Wider Europe” (i.e., trad- ing partners outside the EU 25). The rationale behind this expansion in eligibility is that truck traffic flows to and from major freight generators such as Russia could have a substan- tial impact on traffic within the European Union. Therefore, freight shipments that originate from Russia could be eligible for Marco Polo funding if they terminate within the EU 25. In order to fully participate in Marco Polo funding, Russia would need to sign a specific agreement with the EU specify- ing Russia’s contribution to the general fund. (32) Application The willingness of the EU to expand funding for its Marco Polo and MoS programs to eligible parties outside of the EU 25 shows a general awareness that the freight flow issues that impact Europe go beyond Europe and that merely ensuring that all member nations are on the same page is not sufficient to solve the problem. The example set by the new orientation of Marco Polo could be seen as instructive for NAMH in that future programs may need to include other trading partners in the region even if they are not full participants. There is no direct equivalent of the Marco Polo program in North America in which multimodalism is universally incentivized. In comparing the MoS program with the NAMH initiative, both are closer to the inception, than to the full implementa- tion, phase. Despite the fact that the MoS has already funded several implementation projects, its full potential has yet to be realized. It is likely that MoS will have an earlier impact than an analogous program started under the banner of NAMH because, in comparison to the United States, Europe has had several years of additional planning, as well as a greater pre- existing pool of short sea operators and associated capital. The challenges in making MoS and NAMH succeed diverge most sharply in the operating environments. Within Europe, policy makers are attempting to carve out new routes and ser- vices in the context of a very well developed container feeder and freight ferry network that would be recognized in the United States as a form of NAMH shipping. The biggest chal- lenge for Europe is to continue to push forward new water services that take congestion off the roadway without disrupt- ing the balance of a preexisting advanced water freight trans- port system. In the United States, with the exception of a few small-scale services, there is less of an established base on which to build. Freight or Ro/Pax ferries in the United States, which in Europe have served as a type of cottage industry for building up demand for water alternatives, are not a signifi- cant element of the transportation network. In addition, in the United States cabotage restrictions have, at times, con- strained the establishment of domestic feeder services of inter- national cargo. By contrast, in Europe, a robust international feeder market has contributed to the development of intra- European MoS services. The Marco Polo Program, which covers rail as well as water mode shift, has certain common features with U.S. programs, but also some key differences. At its broadest level, the Marco Polo Program seeks to improve the energy efficiency and sustainability of freight transportation. In this sense, it can be seen as comparable to the EPA’s SmartWay Program. Since being established in 2004, the SmartWay Program has generally sought to improve the efficiency of U.S. freight trans- portation through identification of best practices and limited grants. With the passage of the American Recovery and Re- investment Act of 2009 (ARRA), the role of SmartWay has become more robust with grants such as the SmartWay Clean Diesel Finance Program. At present, the role of SmartWay 2.0 can be distinguished from Marco Polo in that Marco Polo has the specific function of improving efficiency through modal shift while SmartWay seeks to improve efficiency within each mode. Although in its early stages the program concentrated overwhelmingly on trucking, SmartWay 2.0 expands the pro- gram’s scope to include all modes of land, sea, and air freight transport. Thus, as it evolves, SmartWay is looking more like Marco Polo. The two programs could never fully converge; however, the evolution of both programs shows a trend to greater breadth in systemwide transport planning. In tracking the European experience, it is important to examine not only initiatives taken by the EU as a whole, but also actions taken at the national or sub-national level. The Port of Rotterdam’ s master plan for the Maasvlatke 2 project to boost the non-truck modal split of the Port’s additional traffic is a portcentric solution. Italy’s Ecobonus program, which pays direct incentives to shippers, is being seen as a model that could be adopted in other areas of Europe. Obstacles The literature is replete with obstacles encountered by prospective marine highway shippers and operators. For the most part, they can all be reduced to one issue: these services are not cost-competitive with the alternatives that exist. Studies indicate that discounts of 20% to 30% off trucking costs may be required to compensate for a transit time increase of one 25

day for longer short sea transits, assuming that the NAMH service is reliable. Two examples can be found in references (12) and (33). The question then becomes one of determining what factors prevent such services from competing effectively. In the analysis of potential obstacles to NAMH, it is impor- tant to distinguish between obstacles common to all start-up business enterprises and those that uniquely disadvantage marine transportation in comparison to rail and truck trans- portation. For example, the lack of statistical data regarding trade flows is a real obstacle for the development of NAMH to marine operators. Another often-cited obstacle is lack of famil- iarity on the part of the shippers. Many of the interviewees felt that this is a problem that all new businesses must overcome. Any operator that is attempting to sell his service must explain how his service is different from other alternatives and what the benefits will be to the shipper. Another such obstacle is the flow-imbalance issue (significant differences in the volume of cargo moving in one direction as opposed to the opposite direction); all modes must deal with this problem. This analysis specifically focuses on factors that create a disadvantage for marine operations compared to truck or rail operations. The researchers established certain categories into which these obstacles fall, as follows: • Service/marketing, • Operating cost, • Infrastructure and shoreside equipment, • Government/regulatory, • Operational constraints, • Vessel-related, and • Other. These obstacles are listed by category in Appendix D, with references to the literature where these items are discussed. A brief summary is provided in the following sections. Within each category, there are certain issues that are essentially uni- versal in nature, while others are specific to a region or certain class of stakeholder. These distinctions are important when crafting potential actions and responses to market conditions. One remarkable finding is that port infrastructure issues— defined as docks, warehouses, storage areas, and cargo handling equipment—are rarely mentioned as a serious impediment to the development of marine highway services. Service/Marketing Issues Universal Concerns All of the alternatives must be considered on a door-to-door basis. This is true for both delivery times and cost. It can be very difficult for a marine transportation provider to compete on a door-to-door basis. Inexperienced operators do not always identify the subtle cost elements in the supply chain that can weaken the competitiveness of NAMH initiatives vis-à-vis traditional modes. The operator must understand the total cost of the shipment (including demurrage, detention, container management, the need to send export cargo to terminals early, terminal costs, associated trucking costs, etc.). NAMH interests are quite often seen as competitors to truck- ing interests. However, there is almost always a truck com- ponent to a shipment that moves by water. Experience with cargo shifts to intermodal rail indicates that many truckers are attracted to the prospect of reliable short-haul deliveries that allow them to stay close to their place of residence. There- fore, it is possible that the establishment of a new NAMH service could be seen as a positive development for the truck- ing community. One of the recurring themes in the literature and inter- views is that much of the success of NAMH services will be determined by the willingness of trucking interests to retail the service and partner with the potential operator. NAMH operators need to build a system that “a trucker can use,” especially long-haul truckload operators. This has been done successfully in the case of truck-rail intermodal services. Fac- ing a shortage of drivers, trucking companies have already expressed their interest in cooperating with ship owners. However, less than truckload (LTL) operators generally are not likely users due to NAMH’s longer transit times and multiple steps in the intermodal process. Marine highway service is more viable for large trucking companies with broad geographic scope who have tractors in both origin and discharge ports. NAMH operators should include an owner-operator network to coordinate owner- operator hand-offs at load and discharge ports. Freight forwarders, by controlling the cargo flows, can eas- ily provide alternative transport routes through which cargoes travel at the lowest transit time and cost. However, they are under strong cost pressures themselves. The reliance of many NAMH start-up ventures on a single vessel (or a very limited number) has proven to be problematic. Although this approach is understandable due to the high capital cost associated with marine vessels, it has led to many instances where the failure of a vessel is the death-knell of an otherwise promising venture. (The Matson service on the West Coast connecting Seattle to Oakland in the 1990s was one example.) This approach has made long-term schedule reliability a very difficult task. Having only one vessel reduces the operator’s flexibility and magnifies the impact of any obstacles encountered. Gulf/Atlantic corridor vessel strings may require up to six vessels, with three required for pure Atlantic strings. (12) The reputation of the NAMH industry has not benefitted from the fact that many services employ older retrofitted ves- sels that are approaching the end of their service lives and are employed in a type of service different from that for which 26

they were originally designed. Furthermore, each start-up that fails due to equipment failure damages the overall reputation of the industry. Conversations with shipbuilding experts con- firmed that the retrofitting of ships for alternative uses does not tend to yield a good result except in cases where there is no alternative. The acceptance of frequency of service can be evaluated only in terms of a certain commodity type. Generally speaking, the frequency of departures has a significant positive effect on the allocation of cargo shipments toward the option pro- viding the greatest frequency. However, for low-value com- modities it is not a strong factor. The higher the cargo ranks on the value scale, the more of a factor it becomes. Distance also influences the need for frequency. Shippers are willing to accept less frequent service at greater distances. Additionally, although the economies of scale continue to work in NAMH’s favor, the general agreement from interviewees was that the optimal size of NAMH shipments should be closer to that of an intermodal train as opposed to a container ship. The closer an operator can get to a low-volume/high-frequency para- digm that roughly duplicates the service characteristics of intermodal rail, the higher the chances of success will be over the long term. Some start-up ventures have taken the approach of first acquiring a vessel and then attempting to develop a market. However, a number of interviewees indicated that this is the reverse of what should be done. Ideally, a start-up venture will identify the needs and the customers, and then configure the service accordingly. Securing vessels after the fact is easier when the NAMH service can use traditional barge technology with slow operating speeds and loading processes, as opposed to services that require higher speeds and rapid turnaround. It is possible that there has been too much of an emphasis on the differences in air emissions or CO2 production across the transportation modes. Although it remains a legitimate point of comparison, trucks and locomotives are required to employ ever-cleaner technologies and the fleet age for these modes is, in general, much lower than that of barges and inland vessels. Therefore, these differences are diminishing. However, the potential energy savings from maritime transportation in markets where intermodal rail is unavailable or uneconomic is still quite substantial. Prospective services should keep in mind that domestic shipments have fewer customs requirements and often do not have to be concentrated at major load center ports, which may allow for the use of underutilized ports in the region. Most importantly, though, is the sheer volume of domestic freight flows, which outnumber international volumes by almost a 2:1 ratio. The challenge of handling the growing volume of international cargo is important, but it pales in comparison to the challenge presented by the movement of domestic freight by highway. Domestic shipments not only offer more volume, they also consist of a more diverse commodity mix and move between a larger number of origins and destinations. Regional Concerns United States. Focusing on a container-on-barge (COB) paradigm competing for international shipments is probably not advisable. Northbound international shipments need faster transit times than southbound shipments, but northbound (upbound) river traffic is slower. COB forces an international focus when domestic shipments might be more productive. Stakeholder Class Concerns Operators who have tried to acquire business from ocean carriers have differing opinions based on their business models. Generally, businesses attempting to serve as coastwise feeder services are finding that a feeder service provides a very low profit margin. Ocean carriers want the lowest price possible and use their market power to get it. Additionally, some ocean carriers need the business to supplement current volumes, and one existing operator fears that if he gets such a service started, the ocean carrier will simply “steal” it from him. The interviewees that move cargo inland or move overweight/ oversize cargo find that it is a good business. They may find the business even more attractive if ocean carriers continue the current trend of withdrawing from the inland logistics business. Operating Cost Issues Universal Concerns Start-up (initial capital) costs make it difficult for marine operators to compete with a truck service. Trucking services can lease their equipment and “right-size” their operations rapidly. A comparative assessment of short sea operations in Europe versus North America (34) determined that one of the key advantages of the European model is the prevalence of short-term chartering, which allows marine highway oper- ators to right-size their fleets and respond to changing eco- nomic conditions. In terms of creating an even playing field for the modes, marine alternatives must become less capital intensive. Railroads can compete with trucking on cost, despite the capital-intensive nature of rail service, due to the accumu- lation of capital assets over decades—there are few, if any, start-up railroads in the United States. In the current economic environment, truckers are des- perate for business and can easily undercut a start-up marine service provider. Most likely, this will change as the economy improves, yet even after a recovery has taken place, the trucker shortage that occurred in the earlier part of this decade is unlikely to reemerge for quite some time. 27

In many instances, the origin or ultimate destination of the shipment is too far from the docking facility to be cost- effective for marine operations. Drayage becomes too expen- sive for the marine alternative to work. In a recent study of potential West Coast operations, the financial analysis determined that the largest contributors to the total cost are the fuel, drayage, and stevedoring components, accounting for approximately 80% of the total per trailer cost for a Ro/Ro operation. (21) The vessel used in the study was a Ro/Ro vessel with a capacity of between 450 and 550 trailers and a cruising speed of 27 knots. In this analysis, the capital cost of the vessel is a minor contributor to the overall operat- ing cost of moving cargoes. Regional Concerns Canada. It is difficult to compete against rail service in certain corridors, especially against the railroads in Eastern Canada. In Canada, many fees are charged to marine transportation service providers that are not charged to land-based transporta- tion service providers (customs services, pilots, icebreaking, etc.). For the smaller shipments, these fees tend to make it uneconomical to ship by water. Also, with lower population density than the United States, Canada experiences less intense general clamor to remove trucks from congested corridors. Canada and U.S. West Coast. The cost of labor is an important issue to many existing and potential operators, especially in Canada and on the U.S. West Coast. To over- come costly labor, an operator would have to have a much larger volume than would be expected for a marine highway operation. The International Longshoremen’s Association (ILA) appears to be more willing to establish special pricing and working conditions for new SSS operators than other unions. Certain special agreements have already been reached at some terminals serviced by the ILA, such as reducing gang size requirements, reducing the minimum hours requirement, allowing a gang working on a deep sea vessel that finishes early to “fill in” time with NAMH work, and even offering a reduced wage rate. The severity of labor issues varies around the coun- try based upon the preferred vessel type, with barge or Ro/Ro services being comparatively less severely impacted. West Coast. On the West Coast, the cost of waterfront property is a big issue. Ocean carriers typically receive priority scheduling and service because of the volume they transport. Port authorities do not want to set aside high-cost property for NAMH because of the low volume of cargo moved. The over- whelming flood of Asian imports has until recently strained existing capacity and made port and labor officials cautious in signing on to new untested services, particularly when the vol- umes they promise pale in comparison with the promise of new international growth. Stakeholder Class Concerns Operators. Port fees can become an issue in some cases. For example, NAMH operators have to pay dockage and wharfage fees twice—once when the cargo is discharged from a deep sea vessel and once for the cargo to go on the barge (or vice versa). Truckers and railroads do not have this double cost. Some operators took exception to having to pay security fees when they do not handle international cargoes. One cost element that is also a regulatory matter is the manning requirements established by the U.S. Coast Guard. Operators make the case that different vessel types with equal capacity should have similar manning requirements and that manning requirements should be different for vessels cross- ing the ocean than they are for vessels employed in the coastal trades. Crew expenses are a significant cost component, and operators do not want to have any more crew than is absolutely necessary. However, a recent study of the feasibility of a marine high- way service on the West Coast indicated that (at least on larger vessels) manpower represents only 4% to 5% of annual vessel costs, and vessel costs represent 31% to 59% of the total costs per load. In this analysis, the authors selected a nominal Ro/Ro vessel with a capacity of 700 trailers and a cruising speed rang- ing between 20 and 27 knots. The lower percentage of vessel cost applied to shipments from northern California to south- ern California at a speed of 27 knots. The higher percentage applied to shipments from northern California to the Pacific Northwest at a speed of 24 knots. In this economic analysis, vessel manpower represents 1% to 3% of the total costs per load of a NAMH Ro/Ro operation. Crew reductions as high as 60% would represent only a reduction in the cost per load of less than 1% to 2%. (35) In the past, Coast Guard procedures have allowed for oper- ators to submit an application to reduce manning levels based upon a number of criteria. Manning requirements are set in accordance with vessel technology. (36) If the application is approved, the service is allowed to operate for a trial period. However, this can be a burdensome process. Infrastructure and Shoreside Equipment Issues Universal Concerns Port infrastructure does not appear to be the chief limiting factor for most routes under consideration. Equipment seems to be an issue only with regard to larger vessels, especially 28

Lo/Lo vessels. In fact, the experience of inland waterway oper- ators has shown that stick cranes are sufficient and, after some experience, operators of such equipment have shown that they can match the throughput of “sophisticated” container terminals (28 lifts/h). Right-sizing capacity, whether it is for rail or water, is sig- nificantly more difficult than it is for trucking. Marine and rail operators have to pay for infrastructure capacity expansion, but truckers have to pay only for trucks. This makes long-term planning particularly important for crafting effective water transport policies. Regional Concerns Canada. There may be some need for Ro/Ro adaptations in smaller Canadian ports. (16) Government/Regulatory Issues Universal Concerns The HMT is widely viewed as an impediment. It was insti- tuted by the Water Resources Development Act of 1986 (P.L. 99-662). The tax is 0.125% of cargo value and is assessed to the shippers receiving inbound cargo at most ports. The tax on exports was declared unconstitutional by the Supreme Court in 1998 and was discontinued at that time. The HMT was intended to recover 100% of maintenance dredging expenses incurred by the federal government. Some believe HMT is an impediment because of the cost, others because of the paperwork involved, and yet others for both reasons. Some interviewees called it a “deal killer” (especially in the Great Lakes region) while others said it was just an irritant. (The sensitivity to the issue in the Great Lakes region could be due to the fact that when traffic is international, there is much stricter enforcement of HMT collections than with strictly domestic moves.) The degree to which it impacts a service seems to depend primarily on the type of cargo handled. The greatest impact is on LTL and less than container load (LCL) shipments. Some interviewees claimed that many shippers simply do not pay it, and almost no one pays it twice. Still, if enforcement is stepped up, this will become more of an issue. In the Detroit area, many shippers elect to take a 165-mi detour rather than have to pay the HMT when using the truck ferry. Thousands of trucks each day opt to wait at the border rather than deal with HMT. This happens even though they incur the cost of waiting and a much higher degree of uncer- tainty of crossing times. (The trucks that take the ferry south- bound tend to be empty.) The ports of Nanticoke and Erie also claim that a NAMH operation they are attempting to start up is being stymied by HMT. There are efforts under- way to resolve this issue. The amount of HMT charged per unit of freight varies by the commodity and trade corridor, but several estimates are available that provide an idea of the magnitude of the effect. In 2004, the vice-president of operations for Apex Marine (who was the chairman of the Short Sea Shipping Coopera- tive at the time) was quoted as stating “HMT is an identified cost of anywhere from USD 75 to USD 120 on a 20-ft box moving by water.” (37) In 2005, the average value of goods in a 40-ft container (2 TEU) was estimated to be $47,788. With double collection for international containers, the amount of HMT comes to $120 per box, half of which is for the domes- tic move. For local trailers (2.5 TEU) the average HMT would be $75 per load. Without taking social benefits into account, in many cases these amounts substantially reduce or simply eliminate the financial savings generated by marine high- way services. (38) Other studies estimated the amount to be around 2.5% of the total cost of an SSS movement along the Atlantic Coast (4) and 6-10% of the total cost per trailer load on the West Coast. (39) The effect goes beyond the actual amount of the tax. One example is that of a LTL carrier who wishes to use a marine highway service for part of the move. To do so, the highway car- rier must contact every shipper with freight in the trailer to seek permission to subject each shipment to the HMT at the expense of the shipper or importer. The domestic shipper/importer will then need to make a business decision whether the time and money saved on the congestion avoidance route (NAMH) is worth the added tax and document filing obligation. If it agrees to incur the added costs associated with HMT, the domestic shipper/importer will need to declare accurately the shipment contents and value of the merchandise shipped. (40) It is important to note that HMT is also a source of friction internationally. The EU views it as a discriminatory import tariff that violates the General Agreement on Tariffs and Trade (GATT). EU’s reasoning is that the current HMT regime allows tax-free port use to products originating in the United States but imposes a tax on imported products, a direct vio- lation of GATT. The possibility exists that exempting cer- tain types of shipments (especially if they are domestic versus foreign) could create some conflicts with other trade agree- ments as well. According to congressional staff sources, a recent con- gressional analysis showed that if HMT were eliminated for NAMH shipments, it would cost the federal government approximately $12 million over the next 10 years. In total, the domestic movement of containers contributed only about $1.7–1.9 million of the $880 million of HMT collected in 2004, or 0.2% of total. Yet this tax creates an uneven playing field for new NAMH service providers as truck and rail freight carriers do not have to pay HMT. (41) (Some would make the argu- ment that trucks contribute to the cost of their infrastructure by paying fuel and other taxes into the Highway Trust Fund 29

Local communities are beginning to push back against port expansions. They are enacting regulations and policies that limit the ability of marine operations to expand and continue to be efficient. There seems to be general sentiment among the interviewees that there is insufficient leadership in both Canada and the United States in terms of an overarching freight movement program or strategy. This results in investments being made that may hinder efficiencies or ignore large systemic issues. Regional Concerns Canada. The Canadian policy of total cost recovery for new or expanded customs services is viewed as a serious imped- iment. Proponents of change point out that this policy restricts the ability of start-up businesses to be viable. It was blamed by one operator for the failure of the Rochester ferry. Some con- tend that the federal government should promote trade and encourage business development by providing the level of service needed in each location. The Canadian government can issue exceptions, but then that puts the government in the position of picking winners and losers. Additionally, Canadian interviewees also believe that customs capability is not always adequate at the smaller ports. Canada/Great Lakes. The 24-h advance notice rule imposed by U.S. Customs is an issue in the Great Lakes Region. The actual trip time is less than 24 h. Trucks are required to report only 1 h in advance; therefore, this places a serious handicap on marine services. The 24-h rule has been blamed for causing the failure of a potential Oswego– Hamilton service. One operator has installed a computerized advance notification system and worked out a special arrange- ment with customs. United States. U.S. interviewees mentioned that there is unequal customs service at different ports, limiting the options for international cargo. Many state departments of transportation do not have any in-house marine expertise. This almost guarantees that they will not consider marine alternatives when dealing with sur- face transportation problems. Stakeholder Class Concerns Operators. As noted in the section on cost issues, the manning requirements required by the Coast Guard can seri- ously affect the economic model for a marine operator. Agency/Government. One planner noted that the inabil- ity of government to plan and fund multi-jurisdictional proj- ects is a serious impediment. The planner questioned whether the 64 Express project would have been viable had it crossed and railroads build their own infrastructure; however, marine services also pay fuel taxes and a host of other fees related to their use of ports and waterways.) Several interviewees felt that trucks have an unfair advantage because of the funding that highway infrastructure receives and the lack of any requirement to pay for externalities. The lack of a systematic accounting for comparative greenhouse gas (GHG) emissions for freight that could reward reductions in carbon emissions regardless of where fuel is combusted is a constraint on the development of marine highways. Addi- tionally, the use of roads is considered free for truckers, but maritime operators must pay a host of fees to use the water (e.g., piloting, wharfage, dockage, longshoremen, icebreak- ing, etc.). Part of the success of marine highway development in Europe has been tied to surcharges on trucking that have accompanied investments in water. Taxing and revenue poli- cies need to positively impact water vis-à-vis other modes. Peak-period tolling for trucks is not judged to be as effective in incentivizing water transportation as an across-the-board increase in fuel tax. The literature indicates that increases in fuel surcharges would result in a greater likelihood of consid- ering NAMH services as an alternative to trucks. (42) Alter- natively, carbon taxes could have a similar effect in raising the average per mile cost of trucking. If peak-period pricing is used, truckers of non-time-sensitive products (the type of which would be eligible for water shipment) will simply avoid the peak period, and there will be no net gain for using an alternative mode. Some of the interviewees suggested that there should be more flexibility in the use of highway funds. Some went so far as to suggest that the Highway Trust Fund should be opened up to marine infrastructure investments. The argument is that when a marine project is identified that will solve or miti- gate a congestion or safety issue on roadways, transporta- tion authorities should be allowed to use highway money to help implement such projects. However, the reality is that this may not be a politically effective policy. Highways are seen and used by almost the entire population, whereas waterways are typically “out of sight, out of mind.” It is to be expected that politicians will choose options that are most visible to the greatest number of people. With the current condition of the Highway Trust Fund, gaining political buy-in for any program that is seen as diverting highway funds away from traditional surface transportation projects will be difficult even if the projected benefit-cost ratios are positive. One interviewee pointed out that there may be some gov- ernmental resistance, at least in some states, to taking cargo off highways. In California, marine fuel is not taxed by the state but highway diesel is taxed. Taking cargo off the highways will reduce the immediate cash flow to the state, but it should be offset by reduced maintenance and congestion costs. 30

state lines (“New York doesn’t care about traffic jams on I-95 in Connecticut”). Rail projects often face this issue. Marine transportation planners need to borrow best practices from rail and regional highway planners. Furthermore, local efforts are not as likely to result in an efficient freight transportation system as are regional or national approaches. Shipyards. Although it relates to a vessel issue, interview- ees believe that the current Title XI program administered by MARAD is too cumbersome and complex and that if the pro- gram is to continue, it should be simplified. One of the biggest drawbacks to the current Title XI program is that it requires a 1:1 debt-equity ratio. Operational Constraints Universal Concerns Marine operations need a higher volume per shipment than truckers do to be profitable. This reduces the flexibility of a marine service in handling sporadic and/or small shipments. (Railroads also face this difficulty.) Because of high equipment costs and uncertainty in demand, marine operators must maintain a fairly high level of work- ing capital. Unlike railroads, they do not have an existing cap- ital base from which to work. To be able to obtain competitive financing, operators need to have long-term commitments and fairly stable volumes. This has been very difficult for marine operators to achieve to date. Ocean terminals tend to favor ocean carriers, given the high volume they represent. Terminal layout, equipment, and sched- uling practices tend to be geared toward large ocean-going vessels moving between continents. Marine operations tend to require too many “touches.” Given the number of handoffs involved, especially in relation to a truck move, many shippers believe there is too much potential for delays. For example, a trucker simply loads a truck at the origin and unloads it at the destination. When a marine service is involved, the truck must be loaded at the origin, the cargo must be taken off the truck and placed on a barge or vessel, then at the destination the cargo must be taken off the barge or vessel and placed on a truck, and then the truck must be unloaded at the final destination. In addition to the poten- tial for delays, this extra handling results in more costs and opportunities for damages. Traditionally, there has been too much variability in demand in the markets that marine highway operators have pursued. High variability in demand can make it difficult for an opera- tor to be successful. It does not work to try to consolidate car- goes by bouncing around a harbor area and then transporting the load—there must be adequate dock-to-dock volume. This is one of the reasons that the Ensenada, Mexico to Los Angeles/ Long Beach, California attempts have not been successful. Regional Concerns Canada/Great Lakes. In areas that require a winter shut- down, it will be very difficult to develop a true NAMH service, especially in dealing with high-value cargoes where buyers and sellers do not want to maintain high inventories. Vessel-Related Issues Universal Concerns There is quite a divergence of opinion on the availability of capital for vessel acquisitions. Some claim the lack of capital is a serious impediment, while others state that with a good business plan capital is readily available, at least in compari- son to availability in other industries. All agree that long-term shipper commitments will enable an operator to acquire capi- tal on more favorable terms. In today’s economic environment, long-term fixed-rate financing is difficult to obtain. Vessels are assets that are difficult to redeploy in the event of a business failure, and this has an effect on the cost of capital. Many parties have called for standardization of vessel designs as a means to reduce the cost of production. The general rule is that the first vessel is most expensive, the second vessel is less expensive, and the third and fourth vessels are where produc- tion becomes optimized. So for total construction costs, an order of four or more ships is best. However, operators point out, and others agree, that this level of standardization may not be possible. Operators want vessels that are unique to their services and offer a competitive advantage. Additionally, there is a very wide range of cargoes and operating environments that are involved in NAMH operations. Not even in the ship- building industry, where vessel standardization could have significant benefits, is this approach universally supported. Furthermore, there simply are not enough procurements on the horizon to justify standardization. Interviewees in both the United States and Canada empha- sized that the lack of qualified vessels and barges is a serious impediment to the development of NAMH. Although there may be plenty of water and shoreside infrastructure to accom- modate the development of this industry, a lack of vessels becomes a capacity issue. Canadian interests seem to be the most concerned. There are only two container ships in the Canadian fleet that are appropriate for feeder services and the fleet for domestic service is limited and aging. It is inter- esting to note that in Europe, most short sea feeder operators charter their vessels rather than owning them because it pro- vides maximum flexibility in responding to changes in market conditions and demand. With a very limited number of vessels available that meet cabotage restrictions, such arrangements are not feasible in North America. Several studies indicate that the cost of vessels is not as important to the overall economic structure as might be 31

supposed. Specifically, when examining Ro/Ro opportuni- ties, studies show that the most significant costs for NAMH on a per trailer basis remain the landside costs including truck drayage to and from the terminals, port costs, and fuel costs. The cost of the vessel falls within the range of 10% to 14% of the total cost per trailer. Reducing the cost of the vessel will help the economics, but will not determine definitively whether the operation can be profitable. Regional Concerns Canada. Although there is no direct equivalent of the Jones Act (described in the following subsection) in Canada, there is currently a 25% duty on the value of imported vessels. Canadian interests state that it is not possible to get vessels built in Canada that would be suitable for a marine highway operation. This situation, in conjunction with the 25% import duty, is resulting in a lack of suitable vessels. Furthermore, the import duty and the vessel modifications required to meet Canadian cabotage restrictions are sunk costs that cannot be recovered if the service is unsuccessful. Ro/Ro and barge seem to be the vessels of choice. However, in Canada, there are very few Ro/Ro vessels available and sev- eral smaller ports do not have Ro/Ro ramps that would even allow such vessels to call. (16) United States. Some interviewees say that the cost of ves- sels is holding the industry back. Almost all agree that U.S.- made vessels are more expensive than foreign-made vessels, but there is disagreement as to whether this really affects the viability of the industry. Since vessels are financed over long periods, the effect on annual operating expenses should not be dramatic. There is much talk about the negative effect of the Jones Act on NAMH. The Jones Act is Section 27 of the Merchant Marine Act of 1920 (46 USC 883). It requires that all water- borne shipping between points within the United States be carried by vessels built in the United States, owned by U.S. citizens (at least 75%), and manned with U.S. citizens. In dis- cussing the Jones Act, one prominent shipper even went so far as to state that the cost of drayage is not a big problem— it is the long-haul costs that are inflated because of Jones Act protections. The shipper’s experience has shown that the cost to ship to Antwerp is one-fourth of the cost to ship to Puerto Rico, and they blame this on the Jones Act. Contrary to expectations, the cost of labor in the United States is not a prohibitive factor in the overall cost of a U.S.- built vessel. Compared to other key shipbuilding nations, the United States ranks third or fourth in the hourly cost of labor. When compared to world-class shipyards, the key differential in shipbuilding cost is volume. The best way to reduce the cost of a Jones Act ship is to establish the requirements of the marketplace, identify or design a vessel to meet those require- ments, and then—once the design is complete—produce those vessels in quantities that drive down the “learning curve” toward more affordable unit prices. The Jones Act was originally—and should still be viewed as—a military strategy to protect U.S. shipyards that can build vessels that will be under the control of the U.S. government during times of military conflict. Congress will not consider weakening national security by abolishing the Jones Act. It is highly unlikely that the Jones Act will see any significant amendments any time soon. One interviewee pointed out that even abolishing it might not make the difference everyone thinks it will. When similar laws were repealed in some other countries, the impact was far less than projected. Besides, cap- ital costs are not the tipping point. (Several interviewees made this last point.) If the Jones Act were to be amended, it would be necessary to consider the effect it would have on current operators who have built their business model around Jones Act requirements. One shipyard pointed out that there are more shipyard employees than there are U.S. Merchant Marine employees. Stakeholder Class Concerns Shipyard. There is a wide range of opinions on Title XI financing. Because of recent failures, several interviewees felt that the program was ineffective. Others believe that it is diffi- cult to qualify and stay in compliance with Title XI require- ments, but if a shipyard can qualify, the program helps financially. Another related issue is that existing operators often oppose such applications vigorously, seeing it as govern- ment favoring one operator over another. Other Issues Universal Concerns Externalities are not included in freight rates or the cost of doing business. Because of this, marine operators are not able to capitalize on their reduced impacts on the environment. There are competing uses for the waterfront. As more cities consider building hotels, condos, parks, and the like along the waterfront, it will be more difficult to acquire space at ports. In much of the discussion on NAMH, little has been made of the fact that such operations are going to be profitable only in limited circumstances. Some analysts make the claim that it is a better strategy to invest in a few priority corridors rather than offering nominal assistance to all parties. The possibility exists that if NAMH becomes a serious trans- portation competitor, the railroads would “fight back.” There would definitely be an attempt on the part of rail companies to hold on to market share. Can marine operators weather that kind of challenge? 32

Regional Concerns United States. There are differences in the liability a carrier has to the shipper. For example, marine carriers are statuto- rily limited to $500 liability per “package” (unit), while truck- ers are fully responsible for the cargo they carry but typically carry insurance for $100,000 per shipment. Especially for coastal shipping, this difference in the liability assumed by the carrier can be an issue in modal choice. Stakeholder Class Concerns Operators. Many operators suggest that dealing with intermodal marketing companies or third-party logistics (3PL) providers is a good marketing strategy. However, both types of providers will often try to force the carrier’s price down to maintain their own margins. Many operators try to operate on what amounts to a “shoe- string.” Because of variability in demand and high fixed costs, any unforeseen difficulties cause them to fail. They are unpre- pared for situations—such as a rail line lowering rates to keep its business. Miscellaneous Considerations Land Requirements One of the concerns often expressed by port planners and smaller ports is whether there is sufficient acreage available at a given port to accommodate new marine highway activities. Some of the literature indicates that at least 10 acres is the minimum required size for container operations. (43, 44) It is likely that smaller sites will start to constrict the required traffic circulation for an efficient marine terminal. Land requirements for a conceptual NAMH terminal with rail intermodal facilities and supporting business operations tend to fall within the following ranges: • Terminal operations and storage: 10 to 20 acres, • Rail intermodal yard: 8 to 10 acres, • Supporting container industry business operations: 10 to 40 acres plus, and • Total approximate land area requirements: 28 to 70 acres plus. These totals are for an integrated container operations cen- ter containing a variety of facilities and operations. For prospec- tive node sites with adjacent or nearby distribution center facilities and/or intermodal facilities, an effective NAMH ter- minal could be established on as little as 10 to 15 acres of land. Given the model of a Ro/Ro vessel system, the primary requirement is for a paved trailer parking area of at least 5.5 acres to support a 150-trailer vessel operation and ramps either on the vessel or fixed to the shore that enable the fast loading and discharge of trailers by stevedores using yard tractors. A rule of thumb that is often used is that there must be parking for two times the maximum number of trailers expected on a given voyage. A parking area of 5.5 to 6.5 acres would provide parking for 240 to 280 trailers. It is difficult to comment on the available port and termi- nal capacity to handle NAMH operations without consider- ing the specific commodities and markets to be served. The bigger problem is the need for waterfront land for facilities that would bring shippers closer to the services. This type of industrial expansion could be prohibitive in most existing port locations and would face considerable community oppo- sition in many cases. Columbia/Snake River Lessons Three major factors contributed to the start-up and con- tinued success of container barging on the Columbia/Snake River System: cooperation, commodity mix, and geography. The ports, barge lines, shippers, and steamship lines all saw container-on-barge shipping as the best alternative. Steamship lines agreed to quote through rates to and from the inland ports, and they were willing to position containers at those inland ports. In the past, the trans-Pacific trade was large enough to offer a suf- ficient mix of ocean carriers that some steamship lines chose to cater to markets such as the agricultural and forest products that make up the majority of the container barge movements. How- ever, the Asian trade out of Portland has dropped as a result of the global economic crisis, causing some shippers to look more to Tacoma and Seattle. Perhaps the most important factor was that the container barges could be easily added to existing tows of grain or petroleum barges without adding significantly to the cost of the move. Shippers of low-value, non-time-sensitive cargo can afford the extra couple days of transit time in exchange for the lower transportation cost. Further, the cargo is concentrated in very close proximity to the river system. Forest products in Lewis- ton, Idaho; potato products in Boardman, Oregon; and hay cubes in Pasco, Washington are all produced less than a mile from the barge docks. The cargo is concentrated, moving from a few inland loca- tions to one major hub for steamship service in Portland and on to the Far East and Europe. Having one common-user ocean terminal in Portland is a great advantage. If the container-on- barge cargo needed to be split among two or more terminals, it would be much more difficult to aggregate the volumes needed to make economical use of ocean container terminal labor and equipment. The inland move is of intermediate distance (200–400 mi), which balances the cost and time factors to the shippers’ advantage. 33

Infrastructure Requirements Infrastructure and other requirements potentially include Ro/Ro ramps and facilities, additional drivers, cross docks, chassis pools, rubber tired gantry cranes for Lo/Lo, and yard hustlers. One study indicated that a typical Atlantic port can be prepared to handle Ro/Ro traffic with a $5 million investment. (8) Redundancy The I-95, I-5, and I-10 coastal interstates have 6,600 bridges collectively among them. Of these, 1,370 bridges have spans greater than 300 ft that cross significant features. If destroyed, at a minimum, these bridges would take months to replace and, for the longest bridges over major rivers, years to restore service. (8) This presents a significant vulnerability for the U.S. economy. A bridge that is out of commission is more than a frustration to commuters; it can cause serious disruptions that ripple through regional trade corridors with consequences across a wide sector of the economy. NAMH provide significant and invaluable additional redun- dancy to the transport network when considered as a system. Instead of a single line of communication vulnerable to being severed by a determined attack, the network could be devel- oped as a web that cannot be disrupted even if individual lines are severed. 34

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TRB’s National Cooperative Freight Research Program (NCFRP) Report 5: North American Marine Highways explores the potential for moving intermodal containers on chassis, non-containerized trailers, or rail cars on marine highways in North America. The report includes an assessment of the conditions for feasibility; an analysis of the economic, technical, regulatory, and logistical barriers inhibiting greater use of the marine highway system; and potential ways to eliminate these barriers.

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