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Summary During the 1990s, capacity constraints became evident in parts of the U.S. freight transportation system, the consequence of economic and population growth and changing patterns of domestic and global com- merce. The constraints impaired economic productivity, but resolving them taxed the institutional andfinancial capacities of public- andprivate- sector transportation providers. The most visible problems were conges- tion at certain important nodes of the system, for example, at the largest seaports and at terminal operations at inland hubs like Chicago, and their surrounding areas. Improving freight flow at congested locations usually is a complex undertaking, requiring cooperative action by state and local government jurisdictions, federal agencies, and private-sector firms. Typically, the required projects are intended to produce a mix of benefits to private firms (lower costs to freight carriers who use the infrastructure and to shippers who own the freight) and to local residents and noncommercial travelers (e.g., reduced congestion from elimination of conflicts between passenger and freight traffic). They usually involve coordinated packages of capital and operational improvements at publicly owned (e.g., port and highway) and private (e.g., railroad and terminal) facilities. The charge to the Transportation Research Boardâs Committee for the Study of Funding Options for Freight Transportation Projects of National Significance asked the committee, first, to analyze the rationale for public investment in freight infrastructure and, as a related question, to assess the relevance of the concept of national significance as a possi- ble criterion for determining federal government responsibility. Second, the committeewas to evaluate alternative finance arrangements for freight infrastructure. 1
2 Funding Options for Freight Transportation Projects The recession that began in December 2007 sharply reduced traffic and congestion and altered the outlook for traffic growth. These events have not reduced the relevance of transportation finance reform. Con- gested conditions will returnwith recovery, as after past recessions.More significantly, finance reform will be an opportunity to improve the per- formance of the transportation system. Changes in finance arrangements can yield economic benefits by improving investment decision making and the operating efficiency of freight infrastructure, regardless of the level of traffic over the next decade. The first two sections below are summaries of the committeeâs find- ings concerning government responsibilities for freight infrastructure and the adequacy of existing finance arrangements. The final section is a summary of the committeeâs recommendations for changes in finance arrangements. GOVERNMENTRESPONSIBILITIES FOR FREIGHT INFRASTRUCTURE To analyze the rationale for public investment in freight transportation projects, the committee considered three questions: First, in what cir- cumstances is public-sector involvement in the freight transportation system needed? Second, when is federal government involvement war- ranted? Third, when does the public-sector responsibility require building or paying for infrastructure, as opposed to any other formof intervention, for example, regulation? Need for Government Involvement ⢠In practice, government roles are dictated primarily by established responsibilities that are not likely to change fundamentally in the near term. Governments provide and operate most freight infrastructure, impose fees and taxes to support these facilities, provide research and information, and impose environmental and economic regulations. ⢠Expansion of government involvement should be limited to certain defined circumstances in which market-dictated outcomes would be far from economically efficient. These include restraining exercise of monopoly power and dealing with nonmarket costs of pollution,
Summary 3 congestion, and accidents. Proposed alterations in established gov- ernment responsibilities should be evaluated carefully and the risks weighed against the possible benefits. ⢠Government involvement and leadership are practical necessities in complex projects: large projects that extend through multiple juris- dictions, involve sensitive environmental issues, and involve coordi- nated improvements to publicly and privately owned facilities serving passengers and freight. Need for Federal Involvement ⢠The federal government has important opportunities for contribut- ing to freight system performance and infrastructure development by improving execution of its established functions: the federal-aid pro- grams for highways and airports, the systems directly provided by the federal government (air traffic control, inland waterways, andmarine harbor channels), essential federal functions such as customs and bor- der security, and environmental and economic regulations. ⢠There is a federal responsibility to intervene in exceptional circum- stances where state and local governments and the private sector lack the capability to carry out an economically beneficial project without assistance. Such circumstances may include projects imposing high external costs on local communities that state and local governments lack authority to control, and unusual projects with high potential return but also high risk and for which conventional methods of rais- ing capital are not feasible. ⢠The federal government needs more effective instruments, including reforms in financial aid programs, to carry out these responsibilities. ⢠National significance, as the term has been used in federal laws and in transportation policy debates, is not a definitive criterion for deciding which transportation projects merit extraordinary federal support or involvement. Any substantial freight transportation infrastructure project that is expected to yield benefits is significant to the national economy. Instead, the federal role should be defined more restric- tively: a projectmerits federal assistance if it is of high economic value and would not be accomplished by the state and local governments and the private sector acting alone.
4 Funding Options for Freight Transportation Projects Forms of Government Intervention ⢠Once the determination ismade that government involvement (at the federal, state, or local level) is required, it is necessary to search for the most cost-effective action, considering public investment as well as other forms of intervention. Building or paying for infrastructure sel- dom is the only option for fulfilling the government responsibility. Regulation, taxation, pricing, and closer publicâprivate cooperation canmitigate problems of pollution and congestionwithout shifting cost burdens for commercial facilities to the public. For example, govern- ment could reduce freight market distortions that affect competition among the rail, truck, and water modes by charging users of public freight facilities (highways andwaterways) fees thatmore closely corre- spond to the cost of providing service to each user. ⢠The objectives of freight projects often include reducing adverse com- munity impacts of traffic. In practice, publicâprivate cost sharing in such projects as railâhighway grade crossing separations (a typical mitigation project) is determined by negotiation among the parties. Wherever shippers and carriers can be induced or required to pay for impact mitigation, this outcome will not be detrimental to effi- cient freight system development provided the cost is justified by the benefit to the community. In cases where legal, equitable, or practical considerations prevent government from imposing the cost burden on shippers or carriers, it may be in the public interest for the govern- ment to pay for mitigation. This will be consistent with economic efficiency provided the government seeks cost-effective mitigation options. If the federal government pays a share of costs, it becomes responsible for assessment of the costs and benefits of the alternatives. EVALUATING FINANCEALTERNATIVES The committee reviewed the finance arrangements (i.e., the sources of funds for building and operating facilities, policies with regard to pric- ing and fees, mechanisms for raising capital, and investment decision- making processes) in prominent projects and the forms of government involvement in project development and finance to determine whether existing arrangements are adequately serving the needs of industry and
Summary 5 the public. The criterion for judging the arrangements was the impact on the performance of the freight transportation system. Satisfactory finance arrangements should promote efficient investment and operation. That is, they should encourage investments that yield economic benefits and discourage poor investments, and they should encourage operating prac- tices on existing facilities such that service is provided to those who value it more highly than the cost of producing it and is not provided to others. The cost of transportation services includes congestion, environmental costs, and accident costs. The three findings were as follows. 1. Present finance arrangements are inadequate for maintaining and improving freight transportation system performance. The future reliability of present major sources of public funding is uncertain. Of equal importance, public-sector finance arrangements often are not designed to provide incentives for efficient development and operation of transportation facilities. The problems that today appear to hinder efficient operation and optimum investment are listed below. All but the last are related to finance arrangements and could be ameliorated by reforms to finance arrangements. ⢠Operating practices of public infrastructure providers fail to optimize performance. Usersmust tolerate congestion that could be avoided by demand management through pricing or other methods. ⢠Investment decisionmaking lowers the average return on investment. Capital spending often is directed according to distributional consid- erations rather than targeted to investments that would yield the greatest public benefits. ⢠Public policies add to costs and discourage investment. The added costs include avoidable regulatory delays and subsidies that distort competition. ⢠The institutional capacity and authority to undertake unique and complex projects at major ports and transportation hubs are lacking, particularly when participation of multiple government jurisdictions is required. ⢠Problems arise from external social and economic trends: rapid change in patterns of freight demand complicates planning; increasing populationdensity andwealthdriveup the costs of infrastructure expan-
6 Funding Options for Freight Transportation Projects sion; and security requirements, especially at ports and land border crossings, impose new costs and administrative bottlenecks. 2. Finance reforms shouldbedesigned topromote productivity gains. Finance arrangements are among the most powerful instruments available for improving the performance of the freight transportation system. Choices concerning funding sources and fees charged to users strongly influence investment decisions and the utilization of facilities. 3. Finance reform options differ in their probable impacts on freight system performance. The committee reviewed proposals for new finance arrangements that have been prominent in discussions of transportation infrastructure policy. The various proposals differ primarily in four characteristics: the division between public and private responsibility for providing funds and for investment decisions, the division of responsibility between the federal and state governments, the kinds of fees charged to users of facilities and the dependence of project funding on fee revenue, and the extent of subsidies that allow shippers to pay less than the cost of service. Each of these characteristics influences public and private investment decisions and the decisions of systemusers about their trans- portation and logistics practices. Reforms must be selected with these performance consequences in mind. Revenue adequacy is a primary concern in designing finance arrange- ments. Themost prominent revenueproposals include increasing the rates of the taxes that now pay for infrastructure, creating a new national or regional freight user fee, and funding more of transportation capital spending out of general government revenue. A fourth option, develop- ing new facility-specific user fees that reflect the cost of providing service to the users of a facility (for example, highway tolls and charges to port users to pay for access infrastructure) would be the revenue source most consistent with the goal of improving system performance in most cir- cumstances, although creating new facility-specific fees will be challeng- ing. Fee structures must be tailored to the special characteristics of each project and institutions (for example, special-purpose authorities) cre- ated with powers to impose and collect fees and dispense the revenues.
Summary 7 RECOMMENDATIONS 1. Guidelines for Federal Assistance to Freight Infrastructure Development Federal programs to assist in the development of freight infrastructure should adhere to the guidelines listed below. They are intended to apply to federal involvement in projects that fall outside the bounds of the established finance arrangements for federal-aid highways and facilities directly provided by the federal government (inland waterways, harbor channels, and air traffic control). However, the underlying principles are sound for any public transportation infrastructure investment. The federal role in financial assistance should be facilitative and incremental. Federal assistance should be employed as a pragmatic means to stimu- late action by state and local governments or by the private sector on dif- ficult problems where the potential economic benefit from improved freight mobility or the potential reduction in external costs is great. In keeping with this objective, the dollar value of any special federal assis- tance to nonhighway projects andmultimodal projects normally should not exceed a small share of total project costs. Federal assistance programs should promote development and use of well- designed facility charges and other local and facility-specific revenue sources. Federal policy should encourage and provide incentives for development of local and facility-specific revenue sources to pay for construction and operation of freight facilities. Federal law should not impede imposition of user charges, and federal programs should not offer inducements to local authorities to substitute grants for funds that could be raised through user charges or other local sources. Federal assistance programs should be flexible and adaptable to diverse infrastructure projects. Any federal freight infrastructure assistance program should be struc- tured to address projects on a case-by-case basis, and it should be flexi- ble enough to address diverse assistance needs. Federal assistance should use a variety of forms of aid, including grants, loans, and other kinds of credit assistance.
8 Funding Options for Freight Transportation Projects Legislation establishing federal assistance programs should direct the admin- istration of the programs by defining project evaluation criteria rather than by identifying projects to receive aid. Project earmarking in federal transportation assistance programs that circumvents executive agency evaluation weakens the effectiveness of those programs. Federal policy to promote efficient freight infrastructure development should encompass reforms in regulatory, management, and tax policies that affect freight infrastructure performance. The scope of federal laws and programs that affect freight system per- formance and infrastructure development is broad. It includes grant programs; direct federal provision and operation of facilities; environ- mental, safety, and economic regulation; border security; and imposi- tions of special user taxes and general taxes that influence investment. A comprehensive federal policy to promote efficient development of freight infrastructuremust coordinate actions in all of these areas of fed- eral involvement to achieve the common objective of improved system performance. 2. Federal Discretionary Assistance Program Reserved for Freight Projects Congress should create a new discretionary assistance program to sup- port freight infrastructure projects. The objective should be to bring fed- eral resources to bear to ensure completion of freight projects that would yield large national economic benefits or large reductions in external costs and that other government and private-sector parties could not complete without federal involvement, or could not complete in a timely and cost-effective manner. The program should be established initially as a test of the need for and value of a responsive and flexible federal pro- gram of assistance to freight projects. The main features of the program should be as follows: ⢠Limited initial scale: The program should be funded by a multiyear congressional authorization, on the order of the magnitude of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) Section 1301 Projects of National
Summary 9 and Regional Significance program ($1.8 billion over 5 years). Fund- ing preferably would not be taken from revenue now dedicated to other transportation purposes, but to avoid complications during the trial, initial funding from existing user taxes or general revenue fund- ing would be acceptable. ⢠Assistance awarded competitively: Project selection should be based on explicit policy objectives and evaluation criteria. At least during the trial period, assistance should be awarded at the discretion of the Sec- retary of Transportation. ⢠Limited initial duration and sunset: The program should be enacted explicitly as a trial for a fixed term of 4 to 6 years with a requirement for independent evaluation at the end of the period to determine whether a larger, longer-termprogram iswarranted. If evaluation shows that the program is worthwhile and it is renewed, the continuing program should be fundedby a revenue source derived from freight systemusers, and the most appropriate form for its permanent organization should be considered. An alternative form would be to create a government- owned corporation authorized to award assistance. ⢠Assistance in the form of grants and credit assistance:Aidnormally should be in the form of credit assistance. Grants (always for a minority of expenditures) should be considered only in instances where a loan would not suffice to allow a project to proceed and only for certain pur- poses. Among the appropriate purposes are preconstruction develop- ment assistance, incentives for projects that demonstrate innovative finance arrangements and administrative structures, and incentives formultistate projects. Loans could also be used as ameans for the fed- eral government to exert leverage in promoting projects that are of par- ticularly high economic value yet face especially difficult local obstacles. ⢠Limited federal participation: The value of federal loans and grants should be a small share of total project cost. ⢠Focus on capacity enhancement or environmental mitigation: The pro- gram should be devoted to projects to construct freight capacity or mitigate harmful external impacts of freight traffic, or for equipment and start-up costs associated with operational improvements. ⢠Preference for projects with user charges: A projectâs ability to generate revenue from its users is evidence of economic benefit to users and helps ensure that it will be sustainable in operation.
10 Funding Options for Freight Transportation Projects ⢠Economic justification: Standardized requirements should be defined for demonstrating economic justification of the project in applica- tions for aid through the program. Applicants would present their own evaluation, to be reviewed by the U.S. Department of Trans- portation (USDOT). ⢠Justification for federal involvement: Applicants should be required to show that federal involvement would speed project completion, lower costs, or otherwise increase the likelihood of success. ⢠Outcome evaluation: Applicants should be required to present an analysis plan and commit to conducting an outcome evaluation of the completed project that compares actual cost and usage with projec- tions. USDOT would report to Congress periodically on the results. ⢠Integration with other assistance programs: Administration of the program should be integrated with administration of freight project assistance that is delivered through the Transportation Infrastruc- ture Finance and Innovation Act (TIFIA), Railroad Rehabilitation and Improvement Financing, and SAFETEA-LUprivate activity bond programs. That is, freight projects should gain consideration for all available forms of federal assistance through a single application and review process. 3. Federal Credit Assistance and Tax Incentives for Freight Infrastructure Projects The federal government should make credit assistance more accessible and attractive to freight projects that merit federal support. Also, Con- gress should reduce the bias in tax law that now favors public over private development of highways and other infrastructure historically provided by public agencies. Direct Federal Loans and Loan Guarantees Changes should be enacted in the TIFIA program to create a federal loan program that is more accessible to sponsors of freight projects and that givesUSDOT increased flexibility in adapting the assistance offered to the characteristics of individual projects. Chapter 6 identifies specific changes for this purpose.
Summary 11 Tax-Exempt Bond Finance To encourage private-sector participation in provision of freight infra- structure, the tax laws should be neutral with respect to private versus public management and finance of the kinds of facilities that commonly are built by the public sector. Neutralizing this bias fully would require adjusting or eliminating the caps in federal law on the volume of private activity bonds thatmaybe issued for highways andother specific categories of projects. Infrastructure Banks Another possible source of government assistance would be an infra- structure bank: a revolving fund, capitalized, at least in part, by the gov- ernment. If new federally sponsored infrastructure banks are created, their operation should be consistent with the principles for federal assis- tance listed in Recommendation 1 above. Preference should be given to projects that generate revenue for loan repayment, and requirements should be imposed for efficient operation and pricing. 4. Federal Actions to Promote New Local and Project-Specific Revenue Sources The federal government should reduce barriers to the development of local and facility-specific revenue sources to pay for construction of freight transportation facilities and should provide incentives to encourage use of these revenue sources. Remove barriers to user charges and establish federal policy in support of such charges. Congress should reduce impediments to imposition by port authorities of charges on cargoes passing through their ports by establishing in law a federal policy in support of such charges for the purpose of provid- ing revenue for construction and operation of port facilities and access routes. In addition, provisions in the federal-aid highway program that restrict imposition of tolls onhighways built with federal-aid funds should be removed, although federal responsibilities (for example, to ensure that interstate commerce is not interfered with) may necessitate some form of oversight.
12 Funding Options for Freight Transportation Projects Promote user charges with incentives. Federal assistance to freight infrastructure projects should include incen- tives to encourage transportation facility operators to undertake user- charge funding and to establish organizational arrangements for setting charges and providing facilities. Remove barriers to international investment. Congress should act to reduce legal barriers to foreign ownership, opera- tion, and investment in theU.S. transportation industry, particularly in the maritime and aviation industries, to the extent consistent with national security. Provide information, planning, and training assistance. The federal government can promote use of local and project-specific rev- enue sources through information dissemination, planning assistance, and training. USDOT should serve as an information clearinghouse and technical assistance resource, as proposed in Recommendation 5 below. 5. Freight SystemMonitoring, Planning, and Project Evaluation The federal government should expand its capabilities for freight system planning and project evaluation and for data collection in support of freight system performance monitoring. Organizational Structure USDOT should designate or create a discrete, identifiable institutional home for the functions of project evaluation, performance monitoring, and technical assistance to state and local governments. The organiza- tion should have cooperative relationships with state and local govern- ments and with the freight industry. It should provide products that are useful to state and local governments, including evaluation and planning techniques that define best practices. Freight System Monitoring The federal government should expand its existing freight system mon- itoring program by developing a continuing, comprehensive, and sys- tematic program to monitor the performance of the national freight
Summary 13 transportation system and to identify sources of inefficiency. Monitor- ing should measure performance in physical and in economic terms. Freight System Planning The federal government should develop improved capabilities for short- term forecasting and for short- and long-term scenario analysis of freight transportation markets and freight transportation system performance. Planning should usemethods that incorporate consideration of risk and uncertainty. Project Evaluation The federal government should undertake a programof research, demon- strations, and outreach activities to develop and promote the use of sound project evaluation in public freight infrastructure programs. The federal government should work with state and local government agencies through this program to develop the agenciesâ technical capacity in project evaluation.
