North American Marine Highways (2010)

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S U M M A R Y Introduction As the economic and geographic character of the United States changes, so too must the transportation system. The important factors driving increased interest in waterborne ship- ments in Europe and other parts of the world—congested roads, high fuel prices, tolls, road taxes, hours of service limitations on truck drivers, driver shortages, safety concerns, and environmental concerns—can all be found in the United States. It is with this basic understanding that the U.S. Maritime Administration (MARAD) launched its Short Sea Shipping (SSS) Initiative, which has now evolved into the North American Marine Highways (NAMH) Initiative. The enthusiasm for NAMH, however, has been tempered in recent years by the failure of some start-up initiatives and the fact that, despite record energy prices, the promise of NAMH does not appear to have been fully embraced by the freight community. One of the first tasks in assessing NAMH or SSS is to establish a reasonable definition for “North American marine highways.” This research uses the definition for “short sea shipping” adopted by the Society of Naval Architects and Marine Engineers Panel O-36 also to define North American marine highways as follows: Freight service operations carrying either containerized or trailerized cargoes (or empties) via the coastal waters and river systems . . . and in particular those services where there is a true “intermodal choice” to be made by the shipper between moving units by water and using one or more land-based alternatives (i.e., highway and/or rail).1 In order to understand NAMH and what can be done to support their development, the authors have divided the subject matter into the following seven topics: • Ventures (both successful and unsuccessful) since 1990, • Shipper requirements, • Vessel considerations, • Legislation aimed at encouraging NAMH, • The European experience, • Obstacles to further development of NAMH, and • Miscellaneous important considerations. Findings One of the more interesting findings from this research effort is that marine highway ventures of varying distances have the potential for viability. Thus, the conventional wisdom North American Marine Highways 1

2that marine highway operations are viable only at distances equal to, or greater than, those that are viable for intermodal rail is not correct. On the contrary, successful operations have been carried out 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 fea- tures of each service must be considered, including the alternative landside distances and connections. There seem to be several themes that run through the successful 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 lower upfront capital budget. Smaller vessels such as barges also are 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 ele- ments 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 common 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 mechanical or weather problems arose, there was no ability to work around them, causing shippers to lose confidence in the service. • Although the success rate of all ventures was low, services that were designed to cater to international cargoes have a higher failure rate than do domestic services. The literature review and interviews revealed several shipper requirements that are impor- tant for a marine highway operator to address. To succeed, a NAMH service must possess two major characteristics: (1) it must provide 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, reliabil- ity, and cost. Various vessel types are, or could be, employed in NAMH operations. They can be classi- fied as the following:

3• Tug and pull-barges (ocean going), • Tug and barges (river type), • Integrated tug/barge and articulated tug/barge (ITB/ATB), • Small ships, • Rail ferry, and • High-speed ferry. The literature suggests that in the case of vessel selection, smaller may be better. Optimal ship size is obtained by trading off economies of size in the hauling operations with dis- economies of size in the handling operations. The larger the vessels are, the lower the opti- mal 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 often increase with ship size, but hauling costs per ton at sea decline with size. Typically, shipping lines will enter a new market with the smallest vessels that meet their economic requirements and then grow the service by substituting larger vessels for the smaller ones. Intraregional container ships seem to fall within the range of 1,000 to 3,500 TEU. (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.) The most appropriate roll-on/ roll-off (Ro/Ro) vessels appear to be in the small- to mid-size range of 600–650 ft length over- all, 21-ft draft, and the capacity to transport 140–150 48-ft or 53-ft trailers). Focusing on a relatively high number of small vessels spreads the risk and mitigates the impact of taking a single vessel out of service, 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 committing to smaller vessels in a high-volume market is that the service may never achieve the operating economy that could be realized by using larger ships and, thereby, might be more vulnerable to competitors. Legislative activity to date can be separated into two main categories (1) attempts to mod- ify or eliminate the Harbor Maintenance Tax (HMT), and (2) designation or promotion of routes for the development of marine highways or SSS through infrastructure 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, either on a regional or national basis. Despite bipartisan support for the idea, none of those bills has made it out of committee. Such efforts are still underway in the current session of Congress. Bills that encourage the development of marine transportation alternatives have met with more success, but they have not been accompanied by levels of funding that would be nec- essary to jump-start the industry. The literature is replete with obstacles encountered by prospective marine highway ship- pers and operators. For the most part, they all can be reduced to one issue: these services are not cost-competitive with the alternatives that exist. The economic model is compli- cated by the fact that NAMH services must not only meet the prices offered by alternative modes but, in many cases, must actually offer a significant discount over trucking alterna- tives to compel shippers to switch. (Studies indicate that discounts of 20% to 30% off truck- ing costs may be required to compensate for a transit time increase of one day for longer short sea transits, assuming that the NAMH service is reliable.) The question then becomes one of determining what factors prevent such services from competing effectively.

4In the analysis of potential obstacles to NAMH, it is important to distinguish between obstacles common to all start-up business enterprises and those that uniquely disadvan- tage marine transportation in comparison to rail and truck transportation. For example, the lack of statistical data regarding trade flows is a real obstacle for the development of NAMH to marine operators. Although all transportation providers rely on data to a cer- tain extent, providers in other modes also make business decisions based upon what their competitors are doing. For marine highway operators who may be the first service to serve a particular corridor, there are no direct competitors to examine; thus, they are far more reliant on third-party data. Another often-cited obstacle is lack of familiarity 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 a service must explain how the 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. Obstacles fall within the following categories: • Service/marketing, • Operating cost, • Infrastructure and shoreside equipment, • Government/regulatory, • Operational constraints, • Vessel-related, and • Other. One remarkable finding is that port infrastructure issues—defined as docks, warehouses, storage areas, and cargo handling equipment—were rarely mentioned by interviewees as a serious impediment to the development of marine highway services. Conclusions To develop a potential path to success, it is helpful to determine which of the hurdles standing in the way would have the greatest positive impact if removed. The primary issue at hand is that the NAMH industry has not been cost-competitive to date. Therefore, it would make sense to address the basic economic issues (such as capital and total shipment cost) first—directly or indirectly. Only once this has been accomplished can the other iden- tified or perceived hurdles be cleared. The conclusions flowing from the research can be divided into the following two broad categories: 1. Improving the underlying economic framework, and 2. Enhancing planning and operational activities. These categories can be further divided into the following three broad subcategories: 1. Potential actions for industry and planning organizations, 2. Potential actions for the public sector (non legislative), and 3. Potential legislative actions. Economic framework conclusions tend to fall into the category of potential legislative actions because they often revolve around issues of taxation and regulation, while planning

and operations issues tend to fall within the realm of non-legislative agency actions. The major conclusions included in this research are discussed in the following sections. Economic Framework Industry and Planning Crewing requirements for NAMH vessels are a major issue that can jeopardize the viabil- ity of marine highway operations in the future if not properly addressed. In addition to the oft-cited distinctions in crew size for small self-propelled cargo ships versus equivalently sized barges, the researchers identified other labor/manning issues that may become more important as NAMH is developed. For instance, a greater role for domestic marine activity will require an expanded workforce of more qualified mariners than is currently available. Several interviewees indicated that some degree of standardization on the vessel side would be necessary for the industry to emerge as a true competitor to truck and rail. There was marked disagreement over how extensive the standardization in design and construction could become; additional research into vessel design and construction strategies is needed. Public Sector (Non Legislative) There are multiple opportunities to incorporate externalities in taxing and funding by more fully assessing and considering the comparative impacts of marine highway trans- portation on air quality, carbon dioxide (CO2) reduction, roadway maintenance costs, and safety. Providing incentives directly to shippers who choose marine alternatives is a method that could prove effective. Due to high upfront capital costs, targeted assistance for the U.S. shipbuilding industry could be made under certain circumstances. With the tightened capital markets that have emerged since the global financial crisis, the provision of alternative channels for access to capital may be a consideration. Legislative On a broader scale, consideration could be given to establishing a program similar to the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) that would focus on marine or multimodal initiatives. At the federal level, issues that could usefully be considered early in the process of NAMH implementation include the potential elimination of the HMT for all North American non- bulk shipments and a full review and assessment of the Title XI Program to make it more conducive to NAMH. Planning and Operations For planning entities, the most consistent observation is that that preexisting market analysis should drive vessel selection and not the other way around. This strategy has some- times been difficult due to the limited supply of available vessels at a given time. It is critical that all parties involved—from shipowners to governmental authorities—work under the assumption that new services will become permanent. Most shippers have little interest in participating in experiments and will consider shifting modes only if they perceive it to be a long-term arrangement that will not require shifting again in the foreseeable future. Although it is tempting to use large vessels in order to accentuate the natural advantages of marine transportation, planners would be wise to consider starting small and ramping up 5

6capacity as demand increases. Small ships mean low operating costs and fast turn time— both of which are essential in the early implementation of services. It is also important to understand the specific policies of all affiliated terminals and preexisting trucking compa- nies and freight forwarders. There are several other public sector (non-legislative) actions that generally could encour- age the development of marine highway activities. These include efforts to preserve working waterfronts and prevent marine encroachment that would undermine future NAMH origins, destinations, or corridors. Corridors that can safely transport hazardous cargo should be given a particular focus. At some point in the future, it would be logical to incorporate NAMH into homeland security and infrastructure protection plans and coordinate this plan with a NAMH plan- ning guide developed by MARAD. Future planning guides should be sufficiently flexible to accommodate new transportation statistics, even when the methodology for statistical col- lection changes. Although it is unlikely that there will be significant change to the Jones Act in the near future, it may be possible to harmonize regulations and cabotage legislation among North American Free Trade Agreement (NAFTA) partners to better accommodate cabotage restric- tions for shipments between partners. An adjustment to the requirement that U.S. Customs be notified of an inbound international shipment 24 h in advance would improve the prospects for U.S.-Canada marine trade. Additional standardization of customs processes at ports in the United States, Mexico, and Canada for marine highway traffic would also significantly reduce uncertainty for NAMH services.