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

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

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

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

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29 Lo/Lo vessels. In fact, the experience of inland waterway oper- The amount of HMT charged per unit of freight varies by ators has shown that stick cranes are sufficient and, after some the commodity and trade corridor, but several estimates are experience, operators of such equipment have shown that available that provide an idea of the magnitude of the effect. they can match the throughput of "sophisticated" container In 2004, the vice-president of operations for Apex Marine terminals (28 lifts/h). (who was the chairman of the Short Sea Shipping Coopera- Right-sizing capacity, whether it is for rail or water, is sig- tive at the time) was quoted as stating "HMT is an identified nificantly more difficult than it is for trucking. Marine and rail cost of anywhere from USD 75 to USD 120 on a 20-ft box operators have to pay for infrastructure capacity expansion, moving by water." (37) In 2005, the average value of goods but truckers have to pay only for trucks. This makes long-term in a 40-ft container (2 TEU) was estimated to be $47,788. With planning particularly important for crafting effective water double collection for international containers, the amount of transport policies. 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, Regional Concerns in many cases these amounts substantially reduce or simply Canada. There may be some need for Ro/Ro adaptations eliminate the financial savings generated by marine high- in smaller Canadian ports. (16) 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 Government/Regulatory Issues on the West Coast. (39) Universal Concerns The effect goes beyond the actual amount of the tax. One example is that of a LTL carrier who wishes to use a marine The HMT is widely viewed as an impediment. It was insti- highway service for part of the move. To do so, the highway car- tuted by the Water Resources Development Act of 1986 rier must contact every shipper with freight in the trailer to seek (P.L. 99-662). The tax is 0.125% of cargo value and is assessed permission to subject each shipment to the HMT at the expense to the shippers receiving inbound cargo at most ports. The of the shipper or importer. The domestic shipper/importer will tax on exports was declared unconstitutional by the Supreme then need to make a business decision whether the time and Court in 1998 and was discontinued at that time. The HMT money saved on the congestion avoidance route (NAMH) is was intended to recover 100% of maintenance dredging worth the added tax and document filing obligation. If it agrees expenses incurred by the federal government. Some believe to incur the added costs associated with HMT, the domestic HMT is an impediment because of the cost, others because shipper/importer will need to declare accurately the shipment of the paperwork involved, and yet others for both reasons. contents and value of the merchandise shipped. (40) Some interviewees called it a "deal killer" (especially in the It is important to note that HMT is also a source of friction Great Lakes region) while others said it was just an irritant. internationally. The EU views it as a discriminatory import (The sensitivity to the issue in the Great Lakes region could be tariff that violates the General Agreement on Tariffs and Trade due to the fact that when traffic is international, there is much (GATT). EU's reasoning is that the current HMT regime stricter enforcement of HMT collections than with strictly allows tax-free port use to products originating in the United domestic moves.) The degree to which it impacts a service States but imposes a tax on imported products, a direct vio- seems to depend primarily on the type of cargo handled. The lation of GATT. The possibility exists that exempting cer- greatest impact is on LTL and less than container load (LCL) tain types of shipments (especially if they are domestic versus shipments. Some interviewees claimed that many shippers foreign) could create some conflicts with other trade agree- simply do not pay it, and almost no one pays it twice. Still, ments as well. if enforcement is stepped up, this will become more of an According to congressional staff sources, a recent con- issue. In the Detroit area, many shippers elect to take a 165-mi gressional analysis showed that if HMT were eliminated for detour rather than have to pay the HMT when using the truck NAMH shipments, it would cost the federal government ferry. Thousands of trucks each day opt to wait at the border approximately $12 million over the next 10 years. In total, rather than deal with HMT. This happens even though they the domestic movement of containers contributed only about incur the cost of waiting and a much higher degree of uncer- $1.71.9 million of the $880 million of HMT collected in 2004, tainty of crossing times. (The trucks that take the ferry south- or 0.2% of total. Yet this tax creates an uneven playing field for bound tend to be empty.) The ports of Nanticoke and Erie new NAMH service providers as truck and rail freight carriers also claim that a NAMH operation they are attempting to do not have to pay HMT. (41) (Some would make the argu- start up is being stymied by HMT. There are efforts under- ment that trucks contribute to the cost of their infrastructure way to resolve this issue. by paying fuel and other taxes into the Highway Trust Fund

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

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

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