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35 CHAPTER 4 Conclusions and Suggested Research In order to develop a potential path to success, it is helpful to These figures associate the potential actions with the obsta- determine which of the hurdles standing in the way would have cles they address. the greatest positive impact if removed. The primary issue at hand is that the NAMH industry has not been cost-competitive Address Labor/Manning Issues to date. Therefore, it would make sense to address the basic eco- nomic issues (such as capital and total shipment cost) first-- Labor cost and restrictive labor policies were seen as burden- directly or indirectly. Only once this has been accomplished can some to the development of NAMH at several levels. A viable the other identified or perceived hurdles be solved. labor model needs to be developed that will avoid burden- Accelerating the development of NAMH will require a new ing marine highway operations with costs that disadvantage business model and new policies. The following conclusions the industry vis--vis other modes. Buy-in from organized provide the building blocks for the new paradigm. Success will labor is critical to creating a cost-competitive NAMH service require the best technology available; innovative business in terms of both vessel and marine terminal operations. In models; and favorable government policies. order to accomplish this goal, labor interests on the dockside The conclusions flowing from the research can be divided would need to be of the opinion that the opportunities from into two broad categories: new cargo are sufficient to merit special consideration, even if the per unit profitability from serving NAMH services is 1. Economic framework and lower than that of existing services. 2. Planning and operations. Reducing required manning levels for self-propelled blue- water vessels is important for NAMH to have a competitive These categories can be further divided into three broad cost structure. Talks would need to be undertaken with author- subcategories: ities in both Canada and the United States to develop manning requirements that reflect the differences in coastal shipping 1. Potential actions for industry and planning organizations, and cross-ocean shipping. One of the goals could be to elim- 2. Potential actions for the public sector (non legislative), and inate the discrepancy in manning levels between barge config- 3. Potential legislative actions. urations and small vessels. Furthermore, NAMH SHORT SEA operators in the past who have attempted to retrofit or recon- Some of these subcategories can be further classified into figure vessels have been burdened by the ad hoc process of regional issues. Where an action is specific to a region, such modifying crewing requirements. One benefit of establishing distinction is noted. Although the success or failure of actions standards for NAMH vessel fleets would be that the manning in one category could affect the implementation of actions in requirements could be set at the onset of the new service. another category, they are treated as independent actions for Vessel capital and crew costs as well as marine terminal the purpose of this analysis. expenses would need to be set at "best in class" levels for U.S. operations for NAMH to be price-competitive with ground transport alternatives on a door-to-door basis. Economic Framework The best way to control costs and scheduling is to use ter- minals that are under the control of the operator. In a similar Industry and Planning vein, an operator could employ its own draymen exclusively The potential industry and planning activities related to to pick up/deliver as a means to control drayage costs and the economic framework are shown in Figure 11 and Table 5. make them more predictable.

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36 Potential Actions Obstacles Addressed Negotiate new labor/manning policies with Handling costs significantly affect throughput Unions, Coast Guard and terminal operators costs Intensify vessel design research and set NAMH Cost of vessel construction & need to construction design guidelines standardize Redundant cargo "touches" decrease service viability Ocean terminals currently give preference to ID best operational framework large carriers Need to determine best practices for Ro/Ro and Lo/Lo models Figure 11. Economic framework potential actions--universal: industry and planning. Miscellaneous Operational Strategies try to emerge as a true competitor to truck and rail. There was marked disagreement, however, over how extensive the Most interviewees who had examined the concept of NAMH standardization could become and what its primary drivers from a national focus suggested an initial focus on Ro/Ro for would be. Standardization has been viewed as an advantage most corridors. Lo/Lo can be considered if crane infrastruc- for shipbuilders; however, it could also benefit ports that ture is already in place and lift costs can be discounted for are considering different options for terminal construction NAMH operators. Less landside infrastructure and equip- or modification. More research is required into what features ment are required for Ro/Ro, and operations are simpler. could be standardized across a range of NAMH vessels. Stake- Furthermore, the predominance of 53-ft containers and trail- holder workshops on this subject would also be of value in ers in the United States clearly favors the deployment of ves- sels with these capabilities. attempting to form areas of consensus. New Lo/Lo vessels should not be geared (have shipboard cranes). All indications are that there is no real market for Intensify Research into Vessel Design such vessels in the NAMH future. Although the per unit cost and Construction Strategies of using landside container cranes is high, the fully amortized Several interviewees indicated that some degree of standard- cost of shipboard cranes is even higher since they generally are ization on the vessel side would be necessary for the indus- idle for most of the time. Not only do shipboard cranes add to Table 5. Economic framework potential actions--regional: industry and planning. Potential Actions Obstacles Addressed Address labor cost issue Canada & US West Coast: high cost of labor Vessel design research Canada: need vessels for NAMH Identify best operational framework US: container on barge not high probability of success

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37 initial capital costs, they also increase ongoing maintenance Tables 6 and 7. These figures associate the potential actions expense considerably. with the obstacles they address. Public Sector (Non Legislative) Include Externalities in Taxing and Funding System The potential public sector (non-legislative) actions related As truck and rail engines become cleaner, CO2 emissions to the economic framework are shown in Figure 12 and will emerge as one of the most compelling policy drivers for Potential Actions Obstacles Addressed Provide access to capital to stimulate Lack of qualified vessels & barges shipbuilding Operators need long-term commitments to cover upfront transition costs Incentives to shippers Too much variability in demand Incomplete cost recovery from other modes Include externalities in taxing and funding Need to make externalities part of cost of doing business Need to preserve & develop waterfront Develop waterfront industrial parks Need competitive door-to-door service Figure 12. Economic framework potential actions--universal: government (non legislative).

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38 Table 6. Economic framework potential actions--regional: government (non legislative). Potential Actions Obstacles Addressed Incentives to shippers Canada: difficult to compete against rail Table 7. Economic framework potential actions specific to stakeholders: government (non legislative). Potential Actions Obstacles Addressed Revisit manning requirements Operators: manning requirements burdensome for certain vessel types Improve Title XI to stimulate shipbuilding Shipyards: Title XI cumbersome and restrictive making greater use of marine highways. The Quebec provin- Encourage the U.S. Shipbuilding Industry cial government has established a GHG reduction incentive The U.S. shipbuilding industry could reinvent itself by program that might serve as a model. (See Appendix F for building a new fleet of environmentally friendly coastal ships. a description of this program.) It might be possible to use This type of redirection, however, would require a major new this approach as a foundation for compensating shippers concerted effort at the federal level. It has been suggested that for using marine highways and thereby reducing negative the full-scale replacement of the Military Sealift Command externalities. would be an initiative of the scale required to create a fleet. Taxing and revenue policies need to positively impact water If the fleet were designed principally for civilian freight needs vis--vis other modes. Increases in fuel surcharges appear to but with requirements necessary for military needs in mind, have the greatest likelihood of causing shippers to consider it could create a viable fleet. NAMH services as an alternative to trucks. Alternatively, car- More research is needed into vessel design characteristics bon taxes could have a similar effect in raising the average per that will be desirable for maintaining the viability of marine mile cost of trucking. highway operations into the future under a variety of fuel costs, Another possible approach is to tax trucks that use highways congestion, and economic scenarios. (as in Germany), especially during peak congestion hours. The Eurovignette directive, for example, has been in place Provide Incentives to Shippers and/or Receivers since 1999 and has been repeatedly modified to capture more externalities. The origins of this European policy go back to The federal government could provide some form of stimu- the early 1990s. A process of trial and error would likely be lus to make it attractive for shippers and/or receivers to explore required in order to properly design a taxing scheme that the use of a new and (at least in terms of perception) more would account for externalities in the U.S. modal split. complex transportation option. It is important to keep in mind In some cases, tolling might be used when fuel taxes are that the carriers are not the decision makers--the shippers deemed insufficient to fully capture externalities. Externali- and receivers are. A wide range of incentives is available. Incentives used ties would include not only emissions but also the traffic bur- for industrial development purposes include items such as den placed by trucks on the general public. One approach property tax rebates, income tax credits for qualified invest- would be to set up a tolling system that would vary the charge ments, financial assistance in developing site infrastructure, by the route taken. and income tax credits based on actual shipping volume. The government of Quebec adopted a program to pay an amount Revisit Manning Requirements per ton of GHG reduced as a result of a modal shift. Further information on Quebec's program is found in Appendix F. It is important to ensure that government regulations con- cerning U.S. vessel safety and manning levels, as well as U.S. In Canada, Change Policy of Full-Cost Recovery shipyard work processes, are consistent with similar mea- for Customs Services sures maintained by leading maritime nations such as Japan, Germany, and Denmark. (See the discussion under "Address Under the current policy, the entity requesting new or Labor/Manning Issues" earlier in this chapter.) expanded customs services must cover the full cost of that

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39 expansion or new service. The government could consider a Mode switching can be induced by price incentives, such policy of fully funding customs services as an economic devel- as an "ecotax" on truck fuel (a tax proportional to the amount opment tool. of pollution associated with transport), or by changes to the total cost structure for a mode. Interviewees repeatedly stated that it would be a better solution to lessen the existing subsi- Have Ports Consider Volume Guarantees dies for trucking as opposed to creating new subsidies for Ports could consider strategies for guaranteeing volumes water transport. for a fixed period of time to get operations up and running. Provide Tax Incentives. More consideration could be given to tax incentives for intermodal supply chains that Legislative include water. For example, federal tax credits might be Potential legislative actions relating to the economic frame- restricted to designated marine highways projects (most work are shown in Figure 13, Figure 14, and Table 8. These likely to be designated by MARAD). Qualified expenditures figures associate the potential actions with the obstacles they could include design, construction, or modification of vessels; address. development or improvement of shoreside infrastructure; cargo handling equipment; intermodal connectors; or any expenditure that reduces emissions. (The solar energy invest- Federal Government--United States and Canada ment tax credit might be a good model to emulate.) Accel- Institute Effective Subsidies and Grants. Some inter- erated depreciation for participants in designated marine viewees expressed support for government to help smaller highways projects could focus on the first three years of oper- terminals and port entities acquire new capital equipment ation. This might better align tax obligations with expected related to marine highway services and suggested that MARAD cash flows. was the entity best suited to administer such a program. Establish "TIFIA for Ports." A program could be estab- Although smaller ports are often capable of handling short lished for marine activities similar to the program established sea intermodal cargo at low volume levels, the efficiency of the under the Transportation Infrastructure Finance and Innova- crane infrastructure is often not up to a standard where the tion Act of 1998 (TIFIA), but with a lower minimum amount level of service could be maintained under higher volumes. to make it more accessible to small ports and terminals. The Interviewees pointed out that government, either at the TIFIA program is a federal credit program for eligible trans- national or state level, could look at strategies for making portation projects of national or regional significance under terminal land costs more affordable for marine highway oper- which U.S.DOT may provide three forms of credit assistance-- ations on the West Coast, either by providing subsidies that secured (direct) loans, loan guarantees, and standby lines of would offset the cost of procuring the required land or by off- credit. The program's fundamental goal is to leverage federal setting the opportunity cost of displacing other cargoes already funds by attracting substantial private and other non-federal utilizing the area. This might involve simply buying and trans- co-investment in critical improvements to the nation's surface ferring land or it could involve some type of subsidy or favor- transportation system. It would be useful to be able to access able tax structure for the port or terminal operator that would these funds for port infrastructure (docks, warehouses, and make them more amenable to working with NAMH interests. equipment) as well as for connecting infrastructure such as One interviewee mentioned that--while certainly extreme-- rail lines and highways. state governments could even use their power of eminent domain to set up marine highway terminals. Consider CO2 Reduction Program. Future environmen- Interviewees also pointed out that government could take tal taxes based on CO2 emissions could provide the ration- steps to attract private capital and reduce the excessive risk, ale to subsidize NAMH or to reduce shippers' incentives to similar to the approach the federal government took for the utilize trucks by levying higher taxes. In addition, any sort of railroads in the mid-19th century. This could be done by pro- emissions trading system would put the coastwise mode in an viding loans with competitive terms--the Alameda Corridor advantageous position and stimulate its popularity among received a $400 million loan that was leveraged to finance the shippers. In Europe, carbon taxes and cap and trade programs $2.4 billion project. It could also be accomplished via 100% have been established as a means of incorporating greater loan guarantees. Federal government entities could do what modal equity into the market. businesses, states, and local governments do today to raise Discussions with congressional staffers indicate that this capital for infrastructure projects--sell bonds and leverage would probably need to be an entirely new program. Some the proceeds. have proposed modifying the CMAQ scheme, but this would

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40 Potential Actions Obstacles Addressed Effective subsidies & grants High start-up costs High start-up costs Tax incentives (including property tax relief) Lack of capital for vessel acquisitions TIFIA for ports Need to "right size" capacity Make fees equitable across modes Unfair truck & rail advantage Consider changing HMT HMT is hindrance to business development Copy FTA's new starts program High startup costs Allow use of highway money Need flexibility to pursue best alternative Figure 13. Economic framework potential actions--universal: legislative.

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41 Need to make externalities part of cost of CO2 reduction grants doing business Put marine funding on equal footing with land Unfair truck & rail advantage Improve Title XI Lack of qualified vessels & barges High start-up costs Consider using CMAQ for marine highways Need to preserve & develop waterfront Consider assistance to shipyards Lack of qualified vessels & barges Handling costs significantly affect throughput Establish short overweight corridors costs Figure 13. (Continued). be very difficult to change. CMAQ specifically focuses on Federal Government--Canada addressing nonattainment issues, not overall air pollution. Assist Smaller Canadian Ports in Constructing Ro/Ro Part of the thinking behind the current CMAQ allocation scheme is that many metropolitan areas are contending with Facilities. Most of the literature indicates that a high per- pollution created elsewhere, and therefore require additional centage of ports could handle Ro/Ro traffic with very few mod- funding to address nonattainment issues. ifications or upgrades. (4, 8, 45, 46) However, it appears that several of the smaller Canadian ports lack such facilities or the Fund Marine Infrastructure on an Equal Footing with financial means to construct them. (16) Canadian authorities Land Infrastructure. Most government planning and fund- could look at assisting with the construction of Ro/Ro ramps ing processes are geared to highway transportation. Congress where new or expanded services are proposed. could provide incentives and requirements for metropolitan planning organizations and state departments of transporta- Consider Removing Various Marine-Only Fees or Make tion with marine services within their jurisdictions to more Fees More Equitable across Modes. This is a complex issue actively consider such services in their planning. that goes beyond the scope of this study. However, it seems

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42 Potential Actions Obstacles Addressed Canada: lack of qualified vessels Remove vessel import duty Canada: lack of shipyard capacity Canada: smaller ports don't have necessary Build Ro/Ro ramps in small Canadian ports ramps Canada: too many marine fees versus trucking Change full recovery of customs costs fees US: high start-up costs Consider using ferry boat discretionary funds US: need to preserve & develop waterfront Improve Title XI US: high cost of vessels due to Jones Act US: need funding to overcome high start-up & Consider using CMAQ for marine highways transition costs Figure 14. Economic framework potential actions--regional: legislative. Table 8. Economic framework potential actions specific to stakeholders: legislative. Potential Actions Obstacles Addressed Make fees equitable across modes Operators: port & marine fees are a barrier Improve Title XI to stimulate shipbuilding Shipyards: Title XI too cumbersome & complex

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43 that in order to treat the various modes equitably, it will be Consider a Program Similar to the FTA's New Starts important to be able to identify all of the various fees and Program. Grants could be targeted to improve ports and taxes imposed by transportation services using a given mode, terminals, including the purchase or lease of equipment, con- provide the rationale for the fee, and explain how the revenue struction of intermodal connectors, and vessel construction will be used. It is desirable to have consistency in how fees and or modification, with a mandate to meet high environmen- taxes are levied for the modes to be able to compete on the tal standards. merits of their services rather than on costs affected by gov- ernment actions. Consider Using a Portion of CMAQ Funds to Fund Marine Highways Projects Approved by MARAD. The federal gov- Consider Removing the Vessel Import Duty in Canada. ernment could promote the use of CMAQ funds for projects Eliminating the 25% vessel import duty would be a means of contained within one state or that involve two or more non- lowering the initial capital cost of vessels and increasing the attainment areas in different states. Research is needed to deter- supply. If the duty is left in place, then consideration could be mine the potential rule changes that would be required. given to using the receipts to seed a revolving fund that would Allow States to Use Highway Money on Marine Projects aid operators in acquiring vessels for NAMH services. with a Beneficial Effect on the Highway System. Research is needed on the specific characteristics that would need to be Federal Government--United States included in NAMH projects to make them eligible for high- way funds. Consider Changes to HMT for all North American Non- Bulk Shipments. Eliminating HMT for all North American Consider Assistance to Shipyards. As discussed earlier non-bulk shipments would improve the cost structure of in this report, government could provide some means of services and enable NAMH services to compete for high- lowering the capital risk for investors in U.S. ships through value cargoes. programs such as the currently unfunded federal Title XI If the HMT scope is not changed, a non-refundable tax credit Program, although further research would first be needed. could be offered for NAMH operators. Such a scheme could Additionally, as it has in other cases, government could pro- include the following characteristics (this is not a definitive list): vide tax incentives such as accelerated depreciation for invest- ment in new shipbuilding infrastructure. The credit could be offered to companies engaged in trans- Research is needed into the feasibility of compensating porting either products or people between any two U.S. NAMH operators for including militarily useful features in ports, or originating in a port in either Canada or Mexico new ship construction. Any such program would need to and ending in a U.S. port. contain a contingency plan for continuing to serve shippers The credit could be incremental, meaning that companies in the event of a mass deployment. would claim the credit on their corporate tax returns based It might be possible to use the small shipyard grant pro- on the increase in products or people shipped in the current gram more effectively by targeting it toward the construction tax year over a base period of the preceding three tax years. of marine highway vessels. Further funding along the lines of The credit could be the greater of 10% of the increase ARRA and the Omnibus Appropriations Act of 2009 could use in value of items shipped for the tax year, or an amount essentially the same guidelines with the proviso that the con- based on the increase in tonnage of items shipped. This struction of marine highway vessels would receive priority. tonnage portion of the credit could provide different credit amounts per ton for grain, coal, sand, salt, iron ore, or Consider Targeting Some FBD Funds for NAMH (Freight) other bulk cargo. Transportation Options. Currently, the FBD program The credit could be nonrefundable, meaning that it would focuses on passengers and their vehicles. Government could offset only positive current tax liability of the carrier. If consider amending it to specifically include freight transport. the carrier has a tax loss for the year, the credit could be carried back two years and forward for five years. (47) Local Initiatives Offer Property Tax Relief Research Possible Amendments to Title XI. Because of the difficulties with Title XI funding, further research is needed Local authorities could consider offering property tax relief to quantify the actual benefits and to understand the successes for those companies developing or renovating ports and termi- and failures of the program. At a minimum, the application nals for the NAMH market. Such effort would create employ- and compliance processes could be simplified and the debt/ ment and generate tax revenue that contributes to the social equity ratio requirements relaxed. good of the area.