Funding Options for Freight Transportation Projects (2009)

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1Introduction During the 1990s, capacity constraints became evident in parts of theU.S. freight transportation system, the consequence of economic and popula- tion growth and changing patterns of domestic and global commerce. The constraints threaten to impair economic productivity, but resolving them has taxed the institutional and financial capacities of public- and private-sector transportation providers. The most visible problems have been congestion at certain important nodes of the system, for exam- ple, at the largest seaports and at terminal operations at inland hubs like Chicago, and their surrounding areas. These problems have raised aware- ness of the importance of efficient freight transportation, and freight problems are now prominent in discussions of transportation policy. The recession that began in December 2007 sharply reduced traffic and congestion and has necessitated revisions in projected future traffic levels. These economic circumstances do not reduce the relevance of transportation finance reform. Congested conditions will return with recovery, as they have after past recessions. More significantly, finance reform will be an opportunity to improve the performance of the trans- portation 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. Improving freight flow at congested locations usually is a complex undertaking, requiring cooperative action by multiple state and local government jurisdictions, federal agencies, and private-sector firms that normally are competitors. Typically, the required projects are intended to produce a mix of benefits to private firms (lower costs to freight car- riers who use the infrastructure and to shippers who own the freight) and 15

16 Funding Options for Freight Transportation Projects 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 fundamental obstacles these projects confront are as much insti- tutional as financial in nature. They arise from fragmentation of jurisdic- tions and responsibilities, legal and regulatory constraints, and historical management practices that failed to promote efficient facility use and investment decisions. Nonetheless, negotiations among the parties seek- ing solutions to freight bottleneck problems tend to hinge on finance questions: how costs should be shared among the parties, how required funds should be raised, and who should bear the risk that expected ben- efits or revenues do not materialize. Decisions on these finance questions shape the institutional structure of the project: the roles of the public- and private-sector parties in planning, governance, and management of the facility. Freight infrastructure in the United States is provided by both the government and the private sector. Government accounts for the larger share of infrastructure spending and provides highways, the inlandwater- ways, and most aviation and seaport facilities. Freight railroads and pipelines are privately provided. Most government-provided trans- portation infrastructure (including most spending for highways and aviation and a share of water transport spending) is paid for through long-established arrangements under which revenue from fees and taxes imposed on users of the facilities is pooled in special funds, sequestered from general funds, and dedicated to transportation uses. These arrange- ments have been regarded as successful historically in reinforcing the effectiveness of the transportation programs they supported (TRB 2006, 185); however, the stresses on freight transportation system capacity have caused some industry participants to conclude that the existing arrangements alone are no longer adequate. The most common criti- cism is that finance arrangements (see Box 1-1) are failing to generate revenue sufficient to support construction of high-payoff projects, but these arrangements may also be contributing to freight system problems if they fail to direct funds to the most valuable projects, fail to provide

Introduction 17 BOX 1-1 Definitions: Assistance, Finance, Finance Arrangements, Financing, Funding,Government, Project Assistance: In this report, assistance refers to a grant, tax incen- tive, loan, or loan guarantee offered by a governmental entity to private firms or individuals or to other governments (e.g., by the federal government to the states). Finance: As a noun, finance is meant in the sense that it is used in the term public finance, a field of economics defined as follows in one text: “Public Finance is concernedwith the income and expen- diture of public authorities and with the adjustment of the one to the other” (Dalton 1922, quoted by Prest and Barr 1979, 3). Pub- lic finance as a field of economics seeks to understandhowchanges in the forms of government revenues and expenditures affect the welfare of individuals (Prest and Barr 1979, 2). Finance arrangements: In this report, in the case of transportation projects involving the public sector, finance arrangements refers comprehensively to the sources of the funds expended on build- ing andoperating the facilities (whichmay includeuser fees in var- ious forms and contributions from general tax revenue or from other forms of taxes and may entail raising funds through bor- rowing) and the processes by which spending decisions are made concerning project selection and operating budgets, including the relationship between revenue and spending decisions. Financing: In this report, financing (or, as a verb, to finance) refers to the activity of raising a pool of funds to make a capital expen- diture, which in practice often involves borrowing (e.g., through issuance of any of various forms of bonds sold to investors) and may involve public equity contributions (i.e., grants) and equity contributions by private partners in a public–private enterprise. (continued on next page)

incentives for efficient operation of facilities, or discourage private- sector provision of infrastructure. The Transportation Research Board (TRB) formed the Committee for the Study of Funding Options for Freight Transportation Projects of National Significance to evaluate finance strategies and to identify the appropriate roles for government in selecting investments and in paying for freight infrastructure projects. The following section presents the study charge to the committee. The next introduces current freight infra- structure finance arrangements. The third summarizes conclusions of four previous TRB committees that considered some of the transporta- tion finance policy questions that are the topic of this study. The final section outlines the remainder of the report. 18 Funding Options for Freight Transportation Projects BOX 1-1 (continued) Definitions: Assistance, Finance, Finance Arrangements, Financing, Funding, Government, Project Funding: Providing or identifying a source of resources to sup- port a project or program. For example, Congress funded the federal-aid highway program by dedicating the revenue of the federal highway user taxes to transportation purposes. Government: References to government, unless otherwise quali- fied, refer to all levels of government in the United States: fed- eral, state, and local, including special-purpose public authorities (e.g., airport, seaport, and turnpike authorities). “Public sector” is used synonymously. Project: The committee has assumed that projects in the charge refers to capital projects; that is, expenditures to acquire assets that are to provide services over a period of years. In most proj- ects, the asset will be physical infrastructure (including commu- nication and information technology facilities). In some projects, the initial expenditure, rather than for infrastructure, is primar- ily to develop and implement an organizational or operational change intended to yield benefits over time.

Introduction 19 CHARGE TOTHECOMMITTEE The committee’s charge (defined in the study task statement approved by the National Research Council) is as follows: This study will analyze the rationale for public investment and evaluate financing strategies for freight transportation projects of national signifi- cance. Criteria will be developed for defining “national significance,” and the committee will assess the ability to use such criteria to select projects. Generic financing options will be evaluated and compared based upon the greatest net benefit and least cost per public dollar invested. The study charge reflects a recurring debate over national freight transportation policy as it has been implemented in the federal surface transportation aid program [reauthorized most recently in the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) of 2005, which expires in 2009]. The 1991 reautho- rization, the Intermodal Surface Transportation Efficiency Act (ISTEA), introduced new provisions to promote freight planning and to allow states and local governments some flexibility in using federal surface transportation aid for nonhighway or mixed-mode freight projects. The explicitly freight-related provisions of the federal-aid program have been modified and extended over the past 16 years but have had only modest impact on public capital spending priorities. Freight industry advocates have urged Congress to take stronger action to define a national policy to promote efficient investment and freight systemoperation (e.g., Kavinoky 2007, 6; AASHTO 2007, 37–39). Understanding the origin of the charge requires knowledge of past use of the term “projects of national significance.” The TRB report Policy Options for Intermodal Freight Transportation traced the history of the term in discussions of federal freight infrastructure policy (TRB 1998, 47–61). An early use was in the 1994 report of the National Commission on Inter- modal Transportation (created by Congress in ISTEA), which concluded that “the national intermodal transportation system should ensure fund- ing of projects of national or regional significance. . . . Congress should provide special funding annually to support some number of intermodal projects that are truly of national or regional importance.”

20 Funding Options for Freight Transportation Projects At the time of the commission’s report, freight interests, and particu- larly the ports, which were experiencing unprecedented growth, were frustrated that ISTEA had not increased funds for their high-priority projects. A 1996 report concluded that less than 1 percent of ISTEA funds had gone to projects that could be identified as intermodal freight (GAO 1996). In the view of freight advocates, the principal obstacles were that, with few exceptions, aid provided in the federal surface transportation program can be used only for highway projects, not for infrastructure for rail or other modes, and that the state transportation departments and metropolitan planning organizations that control federal-aid project pro- gramming do not give freight-related projects like port access the priority the freight interests believe they deserve. The failure of ISTEA to yield much additional federal help for specifi- cally freight-related projects renewed proposals for direct federal inter- vention of three kinds: federal rules that would induce the states to give priority to freight-related projects, for example, reserving a portion of federal-aid funds for such purposes; authorization for federal aid to be spent on freight rail infrastructure; and creation of new revenue sources in the form of taxes imposed on freight system users and dedicated to freight-related purposes. Such proposals were debated before each of the two subsequent reauthorizations of the federal surface transportation program [the Transportation Equity Act for the 21st Century (TEA-21) of 1998 and SAFETEA-LU] but have not been enacted. Legislation in the 1990s did provide for federal credit assistance to freight projects. “Project of national significance” and similar terms were used in policy statements of the U.S. Department of Transportation (USDOT) and of freight interest groups and in federal legislation during the 1990s to designate the category of projectsmeriting federal support.Most recently, SAFETEA-LU (Section 1301) created a new federal-aid program category, Projects of National and Regional Significance, which was to award funds competitively to freight and passenger projects proposed by the states. (Congress earmarked the entire authorized amount to be spent on specified projects, so no competitive awards were made.) The legisla- tion did not contain a restrictive definition of “project of national and regional significance.” In all these past uses, the concept of project of national significance was meant to encapsulate the argument that because facilities like ports

Introduction 21 serve freight bound for every part of the nation and affect the economy of every state, they are properly a federal responsibility, and the federal government should directly ensure that they receive adequate invest- ment. For example, the “Findings” paragraph of SAFETEA-LU, Section 1301, states the following: “A program dedicated to constructing projects of national and regional significance is necessary to improve the safe, secure, and efficient movement of people and goods throughout the United States and improve the health and welfare of the national economy.” The term has been used solely as a criterion for determining eligibility for fed- eral assistance. Because of this history of use of the term, the committee understands the questions in the study charge concerning projects of national sig- nificance to direct it to determine the responsibility of the federal gov- ernment in promoting the development of freight infrastructure and in participating in finance arrangements for freight infrastructure projects. Port advocates, including the port authorities and state and local gov- ernments who see their ports as economic development engines, have been prominent in the debates over federal involvement in freight infra- structure finance, but at the same time interest in multimodal freight projects has grown among other states and cities. Some states, in plan- ning to accommodate future traffic on their busiest Interstate routes, have examined the option of investing in rail as well as highway capac- ity, seeking to reduce their costs and improve highway performance by shifting some of the expected traffic growth from highways to rail. States also have aided railroads in clearing obstructions to operation of double- stack container trains on the railroads’ mainline routes, and Chicago and other hub cities are seeking solutions to their freight-related congestion problems. States can receive only limited federal assistance for these kinds of projects under existing federal program rules. The committee’s charge is not limited to transportation activities directly affected by the federal surface transportation acts (which cover highways and some intermodal activities). Air freight and ports are affected by fed- eral aviation and water resources programs, and federal tax law and trade regulations affect transportation finance activities. The charge also is not limited to questions about federal policy. The states have been the leaders in developing public–private freight projects and inworking out finance arrangements. The committee has considered

the proper balance of federal, state, and local government responsibili- ties with regard to these activities, as well as the rationale for public involvement at any level of government. The private sector undertakes nearly all infrastructure investment in railroads and provides facilities at ports, airports, and intermodal terminals. Government actions that affect private-sector investment deci- sions are within the scope of the committee’s charge to evaluate finance options. Such actions may include taxes, regulations, and subsidies, as well as actions to involve the private sector in functions that are now carried out by government (for example, private operation of roads). Recent policy discussions concerning freight finance in the United States have tended to concentrate on arrangements for nonhighway facilities, especially railroads; for port facilities and highway and rail access routes to ports; and for intermodal terminals at ports and inland. These facilities have been the focus because highways already have well- established finance arrangements with dedicated revenue sources and defined federal and state roles, and because port interests have been prominent in political efforts to gain more support for freight-related projects. Nonetheless, as Chapters 2 and 3 will show, most freight trans- portation infrastructure spending is for highways, and most shipper expenditures for freight transportation are for trucking services. The com- mittee’s findings and recommendations in Chapter 6 concern primarily public involvement in finance arrangements for nonhighway facilities. However, the principles underlying the recommendations would be appli- cable tohighwayfinance, if at some time thehighwayfinance systemunder- goes comprehensive reform. The TRB committee that authored The Fuel Tax and Alternatives for Transportation Funding (TRB 2006) identified possible directions for such reform. The study charge stipulates that “financing options will be evaluated and compared based upon the greatest net benefit and least cost per pub- lic dollar expended.”Criteria appropriate for evaluating alternative finance arrangements were identified by the TRB committee that authored The Fuel Tax (TRB 2006, 18–19): Finance arrangements are central to the performance of the transportation sys- tem.Choices about fees and taxes charged to users and about funding sources are critical not only to the feasibility of a transportation project or program 22 Funding Options for Freight Transportation Projects

Introduction 23 but also to the likelihoodof its success. The finance system is amajor influence on decisions about which projects and services are provided and how existing facilities are utilized. Therefore, any fundamental change in finance arrange- ments (e.g., replacing current user fees with fees of a different form) would strongly affect transportation system performance. Decisions on finance also determine the distribution of the costs and benefits of transportation pro- grams. Finance alternatives should be evaluated in terms of these impacts. The committee understands the criteria stated in its study charge and in The Fuel Tax report to be consistent. In assessing alternative finance arrangements, the committee has applied The Fuel Tax study’s criterion of impact on the performance of the transportation system, taking into account not only revenue adequacy but also the effect of finance arrange- ments on investment decisions and the behavior of users. The commit- tee sought finance arrangements that promote efficient investment and operation. Finance arrangements will promote efficiency if they incor- porate incentives favoring investments that yield benefits exceeding their costs and discouraging investments that do not, and incentives that favor operating practices on existing facilities that discourage uses that have less value than the cost of providing service (TRB 2006, 19). The cost of transportation services includes congestion, environmental costs, and accident costs. In summary, the committee interpreted the study charge as a series of questions concerning government’s role in providing freight transporta- tion infrastructure and the best way to pay for infrastructure: how to determine the projects that require public-sector investment, how to define the scope of the federal government’s responsibility, and what finance arrangements would result in the best performance of the freight system from the point of view of the public. EXAMPLESOF FINANCEARRANGEMENTS The study charge refers to financing strategies and financing options for freight transportation projects. To indicate the diversity of such projects and of the finance arrangements supporting them, this section describes two government programs that provide funds to pay for freight trans- portation infrastructure construction and three large freight-related proj- ects that have received public support. The examples below also serve to

24 Funding Options for Freight Transportation Projects introduce some of the policy questions implied in the study charge, as described at the end of the section. Chapter 3 presents a more compre- hensive description of finance arrangements for government-provided infrastructure and case studies of a variety of projects. As an indication of the scale of these activities, recent annual capital expenditures for some components of freight transportation infrastruc- ture are as follows (FHWA 2007, Table HF-10; AAR 2007, 44; BEA 2006, Table 3.7S; MARAD 2007, Table 2; Institute for Water Resources 2004; BTS 2006, Table C-7; CBO 2008; American Short Line and Regional Railroad Association 2007, 12): Expenditures ($ billions) Highways (2005) 75.2 Railroad (Class I and short line) structures (2005) 5.8 Seaports (government) (2005) 2.0 Inland waterways (2002) 0.3 Trucking industry, structures (2005) 0.5 Aviation (government and private) (2004) 14.4 Highways and aviation facilities (as well as rail and water facilities, to a much lesser extent) serve passengers in addition to freight. The Federal Highway Administration’s (FHWA’s) highway cost allocation studies assign heavy trucks the responsibility for one-fourth of all government highway expenditures (FHWA1997, TableV-21). This allocationdepends on some arbitrary assumptions but indicates the current rate of capital expenditure to accommodate truck traffic. Roughly 20 percent of U.S. air carrier revenue is for air cargo. This list of infrastructure expenditures is incomplete; for example, data are not available on expenditures for port facilities built by private firms or for private facilities built by firms whose main business is not freight carriage. The private sector provides intermodal terminals, ware- houses, loading equipment, and other facilities that are elements of the freight transportation system and must be integrated with the publicly provided facilities. The largest share of freight-related infrastructure expenditure is for highways, paralleling trucking’s position in the freight industry—roughly 80 percent of all expenditures for domestic intercity U.S. freight trans-

Introduction 25 portation services are for trucking (see Table 3-3 in Chapter 3). State and local governments carry out nearly all road and highway infrastructure spending. They are reimbursed by the federal government for a portion of their capital expenditures (federal aid in 2006 equaled 43percent of state and local capital spending). State and local governments decide which projects are built and own and operate the completed roads. Railroad expenditures account for the next-largest share and are almost entirely carried out by private firms with private resources. The federal government directly operates three components of freight infrastructure: the inland waterways, the channels in the harbors of sea- ports (with contributions from the port authorities for certain projects), and the air traffic control system (which serves passengers as well as air cargo). At seaports, most infrastructure is provided by the public port authorities, although some structures are built by private-sector termi- nal operators. Airports are operated similarly. Numerous ancillary facil- ities (e.g., truck and rail terminals, yards, and rail sidings) are provided by private-sector firms. Programs The two programs described below are the federal-aid surface transporta- tion program, in operation since 1956, and the Transportation Infrastruc- ture Finance and Innovation Act (TIFIA), a federal program enacted in 1998 to provide credit assistance tomajor transportationprojects.Numer- ous federal programs provide financial aid for freight infrastructure built by others or directly provide infrastructure; these two are presented as illustrations. The federal-aid surface transportation program is the largest federal commitment to transportation infrastructure, and the structure of the program is a focus of the policy debates that gave rise to this study. TIFIA was the first attempt in federal law to respond to demands for insti- tutionalized assistance fornationally significant transportationprojects that are not well matched to existing federal grant programs. Federal-Aid Surface Transportation Program The federal-aid highway program distributed $33 billion to the states in 2007 for spending on highway construction, equal to 40 percent of all highway capital expenditures that year (FHWA 2009, Table HF-10). This

26 Funding Options for Freight Transportation Projects ratio has been fairly constant throughout most of the program’s 50-year history. In outline, the program functions as follows (FHWA 1999; TRB 2006, 31–33): • Periodic federal surface transportation acts provide multiyear autho- rizations for federal highway and mass transportation capital grant programs, set program rules, and set rates for the federal fuel tax and other highway user taxes. The act divides the total funds into several program categories, each devoted to a particular kind of project (e.g., Interstate highways, bridges, or highway safety). • The amounts authorized for each year are distributed annually to the states. Most funds are apportioned according to formulas specified in the act for each program category. Formulas include such factors as each state’s shares of highway lane miles, vehicle miles of travel, and Highway Trust Fund revenue collections. A state has a degree of flex- ibility to shift its federal aid from highways to transit projects, and to a very limited extent, from highways to nonhighway freight projects. • The acts provide contract authority, that is, state spending that incurs a federal obligation may take place as soon as funds are apportioned each year. Congress also establishes an annual ceiling on obligations that typically is somewhat less than the authorization level. Funds are appropriated annually to reimburse the states for the federal share of their expenditures (80 or 90 percent for most kinds of projects). • The federal highway user taxes collected are credited to the High- way Trust Fund, and payments to states are withdrawn from the fund. The trust fund mechanism is intended to ensure that disbursements equal revenue. Authorizations in the surface transportation acts are limited by the balance in the fund and the projected deposits fromuser tax revenues. Federal-aid program rules influence the states’ decisions about proj- ect selection and design in their transportation programs. The federal program categories influence priorities, designs must conform to federal standards, and states must follow prescribed procedures in developing their capital programs. The TRB committees that authored Freight Capacity for the 21st Cen- tury (TRB 2003) and The Fuel Tax (TRB 2006) concluded that the struc- ture of the highway finance system (user fees and dedicated trust funds,

Introduction 27 joint federal–state responsibility, formula allocation of federal aid, and state and local control of project selection) historically has been well suited to its task and has contributed to the success of the highway pro- gram in delivering a positive return on the public investment. Both com- mittees recommended maintaining the user-pays principle and better aligning the fees paid by trucks with the cost of providing service (TRB 2006, 3, 5–6; TRB2003, 125–126).However, freight advocates have argued that the federal-aid program is failing to provide needed freight infra- structure. According to this view, the deficiencies include the following (GAO 2003; AASHTO 2007; TRB 2003, 44–46, 139–141): that project eligibility criteria limit states’ ability to carry out freight-related projects (in particular, rail projects); that state and local project selection do not recognize freight mobility benefits and assign low priority to projects important for freight; that program features add expense and delay to projects; and that the program is chronically undersupported because general political opposition to tax increases has frozen user tax rates. The American Recovery and Reinvestment Act of 2009 (the economic stimulus package) (Public Law111-5, February 13, 2009) provided $29bil- lion for federal surface transportation aid according to procedures that departed from normal practice. The spending was to be from general revenue rather than debited against the federal Highway Trust Fund, and no state matching shares were required. The act was characterized as a temporary measure. Chapter 3 describes the freight-related surface transportation provisions in the act. TIFIA The federal government’s 1997 loan of $400 million to the Alameda Cor- ridor project to build a rail access line through metropolitan Los Ange- les to the Ports of Los Angeles and Long Beach was seen as a successful federal intervention. The loan was authorized in a special act of Con- gress. Other regions asked that similar federal assistance be made avail- able to them. In response, Congress enacted TIFIA as a provision of the 1998 federal surface transportation program reauthorization (TEA-21). It offers federal loans, loan guarantees, or lines of credit to freight or pas- senger transportation projects meeting eligibility requirements. TIFIA has a cost to the federal government (from the risk of a federal loss if a loan itmakes goes into default) and therefore provides a subsidy to projects that

28 Funding Options for Freight Transportation Projects make use of the program. However, the magnitude of this subsidy has always been very small compared with total project costs, and TIFIA was not created as a subsidy program. That is, it was not conceived as a means to shift responsibility for infrastructure projects from local interests to the federal government. On the contrary, its provisions were designed to encourage local support. Federal loans and federally guaranteed loans are not to exceed one-third of the total project cost, and project spon- sors’ debts must be backed at least in part by user charges on the facility constructed or by other dedicated local revenue sources (e.g., a dedicated local tax). The rationale for the program was that federal credit assistance would allow completion of economically sound projects that would other- wise have difficulty obtaining credit commercially on account of their novelty, scale, or other factors. The demand for TIFIA assistance has been less than its drafters antic- ipated, and in particular, the program has been little used to aid freight projects. Chapter 3 describes proposals to make the program more use- ful to freight project sponsors. Projects Freight infrastructure projects are diverse in the kinds of facilities they provide, the public and private institutions involved, their sources of funds, and other features of their finance arrangements. Because of this diversity, examining actual projects is the best way to learn about present finance arrangements, the challenges that project sponsors confront, and possible directions for reform of freight infrastructure development practices. Chapter 3 presents case studies and summary descriptions of a variety of projects. The three short descriptions below are intended as an introduction to finance arrangements in a few important recent proj- ects: the Alameda Corridor port access project in Southern California; the Heartland Corridor rail line expansion in Virginia, West Virginia, Kentucky, and Ohio; and an Interstate highway construction project in Louisville, Kentucky. The first two are projects to build facilities serving freight traffic and have novel finance arrangements and exceptional fed- eral involvement. They illustrate how the most complex projects often have individualized finance arrangements, in part because they do not match routine projects for which the established finance arrangements

Introduction 29 are designed. The third example, a large bistate highway project, will serve primarily passenger vehicles but also will have high value for freight mobility. Its finance arrangements will mostly follow conventional prac- tices for highway projects, which are the means of paying for the major share of public freight infrastructure construction. The projects are pre- sented not as models of good practices but as an aid in describing cur- rent practices. Alameda Corridor The Alameda Corridor is the most prominent recent example of an inno- vative freight infrastructure project developed with public leadership (Shafran and Strauss-Wieder 2003; Alameda Corridor Transportation Authority 2006). It is a 20-mile-long rail line constructed, owned, and operated by the Alameda Corridor Transportation Authority, a public agency, connecting the Ports of Los Angeles and Long Beach to rail yards of the BNSF and Union Pacific railroads. Underpasses and overpasses separate trains from road traffic. Trains carrying containers to and from the ports avoid the older, more circuitous railroad branch lines, which have frequent highway grade crossings. The intended benefits are to reduce harmful community impacts of port traffic and to provide port access capacity to accommodate growth in traffic. The corridor began operation in 2002. The $2.4 billion project cost was raised approximately as follows: payments from the ports, $400 mil- lion; state and local government grants, $400 million; proceeds of bond issues backed by corridor revenue (from container fees paid by its users), $1.2 billion; and a federal loan, also to be repaid from corridor revenue, $400 million. The federal loan is subordinate to most of the bonds and was authorized through special-purpose legislation. The Alameda Corridor was seen as a landmark project, combining the joint efforts of federal, state, and local governments; the ports; and the private sector to alleviate a critical freight bottleneck. However, the proj- ect’s organizational and financial model has not been fully applied else- where. The following are among the features of the project that have proven difficult to replicate: • The corridor is exceptional among recent public–private freight proj- ects in its reliance, for a majority of the construction cost, on a special

30 Funding Options for Freight Transportation Projects revenue source in the form of a fee imposed by the operating author- ity on the users of the authority’s facility. Railroads pay a fee for each container and loaded bulk commodity railcar that they move through the corridor. Although this revenue source may seem natural for sim- ilar projects, it has rarely been imitated. (The only similar arrange- ment may be for the Shellpot rail bridge reconstructed in 2004 by the state of Delaware, which is being reimbursed by a per car toll paid by the railroad.) • Insofar as the port authorities are public entities, the corridor is a gov- ernment-led solution to a multimodal freight transportation bottle- neck and expands the government’s role in rationalizing the regional port access infrastructure. In other locales, governments may lack the interest or the resources to take on the lead role that the ports played in creating the Alameda Corridor. • Federal involvement was limited but important for the success of the project. The federal government’s loan and its willingness to be last in line for repayment significantly reduced the project’s borrowing costs and therefore the level of fees necessary to recover its costs. Reaction to the special-purpose legislation that provided the federal loan to the corridor was one motivation for enactment in 1998 of the Railroad Rehabilitation and Improvement Financing Program and TIFIA. Heartland Corridor TheHeartlandCorridor is a package of improvements to container freight connections between Portsmouth, Virginia, and Chicago (FHWA 2006; Norfolk Southern 2006; Richards 2006; Kaine 2006). The main compo- nents are relocation of the rail line in Portsmouth to eliminate highway grade crossings and increase capacity; tunnel modifications to provide clearance for double-stack container trains through the Appalachians along the Norfolk Southern Railroad line; and three new inland inter- modal terminals in Virginia, West Virginia, and Ohio. For the railroad, the potential benefits derive from lower costs and increased volume of container traffic from the port terminal it serves to the Midwest. For Virginia, the intended benefits are highway cost savings from diver- sion of traffic to rail, elimination of passenger–freight conflicts in the Portsmouth urban area, and an improvement in the competitiveness of the port in comparison with other East Coast ports. The line will be

Introduction 31 important to the private developer of the new Craney Island container terminal at the port. The estimated cost is $309 million. The Norfolk Southern is to con- tribute $81 million; Virginia, $57 million; Ohio, $0.8 million; the Com- monwealth Railway (the short line at Portsmouth), $11 million; and the federal government, $140 million (FHWA 2006). SAFETEA-LU, the 2005 federal surface transportation legislation, provided $125 million in earmarked federal funds from the Projects of National and Regional Sig- nificance program. According to FHWA, the project’s financial innova- tion is that it marks “the first time that the private freight rail industry has worked together with U.S. DOT . . . to develop and finance a rail improvement project” (FHWA 2006). Theproject is noteworthy in other respects. Project earmarks (i.e., funds that are authorized by Congress for specific projects rather than being shared among the states according to a formula or awardedby federal exec- utive agencies according to criteria specified byCongress) are a controver- sial but still small part of the federal surface transportation assistance program, and federal financial assistance for freight railroads is controver- sial, particularly when it is derived from the federal Highway Trust Fund. Louisville Ohio River Bridges Project The Louisville–Southern Indiana Ohio River bridges project in Kentucky and Indiana is among the largest current highway projects, one of 68 cur- rent federal-aid projects exceeding $500 million in construction cost listed in FHWA’s Active Major Projects Report (FHWA n.d.). The proj- ect will construct two new bridges to carry I-65 and I-265 over the Ohio River and reconstruct an interchange at the convergence of I-64, I-65, and I-71 in downtown Louisville. The present expressway layout requires long-distance traffic to pass through the central urban area to reach the Ohio River bridges. Most of the benefits of the project will accrue to local travelers. However, the location is an important hub for intercity truck transportation. Louisville is at the intersection of three intercity Interstate highways, I-64, I-65, and I-71. A 2005 FHWA-sponsored study of highway freight bottlenecks iden- tified the interchange of I-64 and I-264 at Louisville as one of the top 25 interchange bottlenecks, ranked by annual hours of congestion delay for large trucks making long-distance trips. The interchange handled

32 Funding Options for Freight Transportation Projects 16,400 freight trucks daily in 2004, 9 percent of all traffic (Cambridge Systematics 2005, 5-9). One of the bridges in the planned project will complete an outer beltway to the northeast of the city, allowing through traffic to bypass the I-64–I-264 interchange on the inner beltway and the downtown bridges. A final environmental impact statement for the project was approved in 2003, design and right-of-way acquisition are under way, construction is to start in 2009, and completion is scheduled for 2024 (FHWA n.d.). The protracted schedule presumably reflects, in part, the expected avail- ability of funds. The estimated cost is $4.1 billion. Funds will be provided from a mix of conventional and unconventional sources, including regular federal high- way aid to the two states and a specially earmarked federal grant for a small share of the total. Kentucky will issue Grant Anticipation Revenue Vehicle bonds, which are bonds backed by the state’s expected future receipts of federal highway aid funds. A major share of Indiana’s contribution will be from the state’s Major Moves program, which is distributing the state’s lease proceeds from the concession it granted to a private firm in 2006 to operate the Indiana Toll Road. Kentucky is considering tolls on the new facilities and has studied alternative tolling arrangements, but the legisla- ture has not yet made a decision on whether tolls will be used (Kentucky TransportationCabinet and IndianaDepartment ofTransportation 2008). The Louisville bridges project is not the kind of project that typically is cited in discussions of freight infrastructure finance, and freight mobility was not the foremost consideration in its planning. However, highways are the major component of the freight infrastructure, and the federal and state highway programs are the source of most freight infrastructure spending. As this project illustrates, relieving highway bottlenecks that slow freight will be expensive in urban areas, where passenger travel is the predominant concern and reducing conflicts between passenger and freight traffic will be an important design goal. Because of the scale of such projects, finance arrangements will be challenging. Policy Questions from the Examples Although these examples do not represent the full range of public-sector freight project finance arrangements, they suggest some summary obser-

Introduction 33 vations about the challenges of paying for major freight-related projects and possible shortcomings of existing finance arrangements. For the Interstates and other highway freight routes, a highly organized program, with wide acceptance from the public and the interested groups, has pro- vided funds and direction for hundreds of billions of dollars of construc- tion over the past 50 years. However, increasingly in the past two decades, governments have been responding to perceived public needs for invest- ment in kinds of projects that are new to the public sector, including facil- ities that previously would have been built by the private sector (e.g., rail lines) andmixed-mode facilities. The newprojects almost always are insti- tutionally complex; that is, their completion requires the cooperation of numerous jurisdictions and private-sector firms; and in many cases no single entity is prepared to exert strong leadership. For these newprojects, governments have been improvising finance arrangements, employing revenue sources ranging from container fees to lottery tickets. In addition, within the traditional scope of the federal and state highway programs, projects such as the Louisville bridges illustrate that adding capacity in some locations has become enormously expensive and time-consuming, straining the capacities of the established programs. The examples illustrate varying solutions to the problems of selecting projects, providing funds, and delineating government and private- sector responsibilities. Somebutnot all of thefinance arrangements involve formal tests and procedures for determining whether public benefits of the projects are worthwhile, and some embody market constraints. Rev- enue sources in the projects and programs include facility-specific fees (Alameda Corridor), pooled funds of user-tax revenue (the federal-aid highway program), and general or nonuser revenue. By examining the various arrangements, it should be possible to determine that some are structurally better at promoting efficient investment decisions and oper- ating practices. Finally, the examples show steps toward expanding the government role in some activities (e.g., rail freight). At the same time, tentative steps are being taken elsewhere toward contracting the govern- ment role (e.g., private-sector road developments and toll road operating concessions to private firms, some of which have received TIFIA loans). The examples suggest that rules today for determining whether a project should be provided by the government, should be promoted by gov- ernment, or should receive taxpayer support are vague and that a more

34 Funding Options for Freight Transportation Projects systematic or uniform approach to public participation in nonhighway freight projects might be useful. CONCLUSIONSOF EARLIER TRBCOMMITTEES ON FINANCE POLICY Previous TRB studies on related topics provided a starting point for the work of this committee. The Fuel Tax and Alternatives for Transportation Funding (TRB 2006) considered the adequacy of fuel taxes and other pres- ent user fees to serve as the basis of public surface transportation finance; TheMarine Transportation System and the Federal Role (TRB 2004) exam- inedmanagement andfinance arrangements for thediverse federal respon- sibilities with regard to ports and waterways; Freight Capacity for the 21st Century (TRB 2003) examined the potential of improvements in investment decision making, finance arrangements, and operating prac- tices to help the freight system handle growth; Policy Options for Inter- modal Freight Transportation (TRB 1998) identified changes in federal transportation policy that could promote intermodal freight transporta- tion efficiency; and Landside Access to U.S. Ports (TRB 1993) considered the problem of serving inland traffic to and from seaports. Related TRBpolicy studies compared the social costs of truck, rail, and water transportation [Paying Our Way: Estimating Marginal Social Costs of Freight Transportation (TRB 1996)] and recommended coordinated reforms in truck fees and truck size and weight regulations [Regula- tion of Weights, Lengths, andWidths of Commercial Motor Vehicles (TRB 2002)]. In addition, the Water Sciences and Technology Board of the National Research Council, together with TRB, evaluated the Corps of Engineers’ planning for improvements to the locks anddamson theUpper Mississippi, a case study of evaluation and pricing issues in a public freight infrastructure project (NRC 2001; NRC 2004). The TRB studies examined government policies extending beyond finance; however, the committees concluded that finance arrangements are linked to all the main policy questions concerning infrastructure. The following subsections summarize the earlier committees’ conclusions on four topics to which the present committee’s charge refers: the ratio- nale for public involvement in freight infrastructure finance, the scope of

Introduction 35 finance strategies, criteria for evaluating finance options, and the defi- nition of national significance. Rationale for Public Involvement Four kinds of activities directly involve government in the freight trans- portation industry: government plans and builds infrastructure, operates transportation facilities, raises funds from taxes and user fees to pay for construction andoperationof facilities, and imposes regulations (e.g., with regard to traffic management, pollution, safety, and carrier competition) on the operation of facilities and freight services. (Through the Postal Service, government also is a provider of freight services; otherwise, all freight services are provided by the private sector.) These activities are interdependent; in particular, finance arrangements influence which projects are constructed, and pricing is a mechanism for managing the operation of facilities (TRB 2003, 122–123). The scope of government responsibilities for freight transportation dif- fers internationally among the high-income countries, and in the United States responsibilities differ frommode tomode for reasons related to the historical path of development of the transportation system as well as to technical differences among the modes. In the United States and globally, government roles are changing, and proposals for improving transporta- tion system performance often entail changes in government responsi- bilities (for example, proposals for privatization of facilities such as the air traffic control system, devolution of responsibilities from the federal to state and local governments, and government financial assistance to freight railroads). The TRB committee that authored Freight Capacity proposed the fol- lowing guidelines for establishing the scope and objectives of govern- ment freight programs (TRB 2003, 120): • Economic efficiency ought to be the primary goal of government trans- portation policy; that is, capital improvements and operating practices for public facilities should be selected that yield the greatest net economic benefit, considering all costs. • Government involvement should be limited to circumstances in which market-dictated outcomes would be far from economically efficient. Such circumstances include preventing exercise of monopoly power and dealing

36 Funding Options for Freight Transportation Projects with nonmarket costs. Government also . . . has a historically established responsibility (for certain facilities) that could not feasibly be altered in the near term. . . . The federal government is responsible in instances where a conflict exists between nationwide and local interests. . . . • A government responsibility to provide facilities or leadership in develop- ing a project does not necessarily justify government subsidy of the costs. Reliance on revenue from users will increase the likelihood that the most worthwhile improvements will be carried out and that facilities will be operated and maintained efficiently. The TRB committee that authored Intermodal Freight examined cir- cumstances in which a project could yield a net benefit to the public and yet not attract sufficient private-sector support: it could reduce external pollution and congestion costs, generate external economic develop- ment benefits (i.e., allowing efficiencies beyond those recognized by the shippers and carriers using the facility), or offset the harmful effects of preexisting subsidies in the freight market (as when the existence of subsidies to trucks is cited as justification for subsidies to railroads) (TRB 1998, 30–35). Both committees intended the criteria to be restrictive, arguing that the circumstances justifying government involvement are likely to be less common than proponents of government aid for particular projects may aver. They recommended that projects under consideration for govern- ment involvement pass quantitative tests, using standardized evaluation methods, to show that they meet the criteria. However, the committees found that governments commonly lack the expertise and incentives to conduct such evaluations. Finally, both argued that public investment or subsidy often will not be the most cost-effective remedy for the under- lying source of inefficiency. For example, rather than subsidize rail infra- structure to divert traffic from highways, governments could raise the fees paid by highway users to bring them in line with the cost of provid- ing additional service (TRB 2003, 119–122; TRB 1998, 30–37). The Freight Capacity committee recommended an integrated fed- eral freight policy. It concluded that the tendency in policy debates to define federal freight policy primarily in terms of grant and credit pro- grams is myopic. Through an array of federal activities—building and operating infrastructure, disbursing grants to state and local govern-

Introduction 37 ments, environmental and safety regulation, imposition of transporta- tion user taxes and fees, and general taxation—the federal government exerts far-reaching influence on freight system performance and capac- ity development. Scope of Project Finance The earlier TRB committees argued that finance policy options must be defined in a way that takes into account the inevitable connections among practices with regard to sources of funds, pricing, facilities operation, project selection, and governance. The Fuel Tax commit- tee concluded that a comprehensive public infrastructure finance reform package would contain four elements (TRB 2006, 121–123): a defined goal for the package, with reference to overall transportation policy goals; an assignment of responsibilities for finance arrangements and for governance among the federal, state, and local governments and the private sector; rules governing user fees and pricing; and rules gov- erning decision making on budgets, project selection, and disposition of revenues generated by facilities. In Chapter 5, this framework will be used to examine some prominent recent proposals for transportation finance reform. Evaluating Finance Options The Fuel Tax committee reviewed a series of high-level studies con- ducted by states and the federal government that considered reforms of transportation finance and tax policy (TRB 2006, 11–15, 62–68). It con- cluded that “the criteria that the states and Congress recognize [for eval- uation of finance and revenue options] are revenue adequacy, fairness, and administrative practicality. . . . Explicit consideration of how changes in user fees and other funding arrangements will affect transportation sys- tem performance or the economic benefits derived from transportation programs seldom enters into finance or fee decisions” (TRB 2006, 68). The revenue adequacy criterion is emphasized in the most commonly stated diagnosis of the overall freight infrastructure finance problem: that the transportation system suffers from a gap between the rate of spending that would allow service to be maintained and improved and

38 Funding Options for Freight Transportation Projects the spending that the public and private sectors are willing to undertake; and that in the public sector, this gap is the result of bias against projects important for freight in spending decisions, arbitrary restrictions on project eligibility in aid programs, and unwillingness of elected officials to increase the special taxes that provide the funds for most government transportation spending (USDOT 2001; GAO 2003; U.S. Chamber of Commerce 2007). The Fuel Tax committee as well as the TRB Freight Capacity and Inter- modal Freight committees concluded that this conventional approach to evaluating finance options in the public sector is insufficient. They argued that capacity problems are to a great extent attributable to inef- ficient operating practices on publicly provided facilities and poor tar- geting of public investment to high-payoff improvements; that finance arrangements are a major determinant of performance, affecting the quality of investment decisions as well as the efficiency of operations; and that finance options should be evaluated in terms of these effects on operations and investment decisions. The Freight Capacity committee endorsed higher spending in the fed- eral surface transportation aid program. It concluded that, by them- selves, increased spending and technology advances will be unable to sustain freight transportation productivity growth indefinitely, but that greater reliance on pricing and market forces to manage facilities and guide investment decisions could do so. The committee observed that “the present inefficient use of much existing transportation capacity should be regarded as a large hidden capacity reservewaiting to be tapped through improved management practices” (TRB 2003, 121). National Significance and the Federal Role The TRB Intermodal Freight committee traced the history of the term “project of national significance” in discussions of federal freight infra- structure policy (TRB 1998, 54–61). It found that the term had been used almost exclusively to indicate a criterion for judging whether a project requires or merits federal government participation. However, the com- mittee concluded that high “national significance” of a project, defined in terms of its impact on the operation of the transportation system, does not necessarily imply that federal involvement is required:

Introduction 39 A project of national significance may be defined as a freight project that has important consequences for the performance of the nationwide freight system. State and local governments often carry out such projects without need of federal leadership. A project of national significance that entails a fed- eral responsibility is one for which government involvement is justified and that state and local governments are unable or unsuited to carry out because the national interest differs from the local, because of the scale of the project, or because essential federal responsibilities are involved (e.g., customs). (TRB 1998, 100–101) The committee concluded that, as a general rule, it would be appro- priate to continue the established practice in which state and local gov- ernments and private parties take the lead on projects and seek federal participation; that is, a new, broadly defined primary federal role in identifying and developing such projects is not needed. The federal government’s policy problems then are choosingwhich locally developed projects it should support and deciding the form that its participation should take. The TRB committee offered guidelines on these questions (TRB 1998, 101) but did not propose any detailed organization for a fed- eral program. The TRB Freight Capacity committee also proposed stringent guide- lines for federal financial assistance programs for large multimodal or nonhighway freight projects: such programs should sustain the user- pays principle that underlies the existing federal-aid highway program (i.e., costs should be paid from revenues derived from direct users of the facilities), the programs should incorporate mechanisms to ensure that the projects built are those that the fee payers recognize as having the greatest value, and federal policy for correcting imbalances in competi- tion among the freight modes should rely on adjustments to user fees rather than on payment of offsetting subsidies (TRB 2003, 128–129). OUTLINEOF THE REPORT The remainder of this report is organized as follows. Chapter 2 examines the performance of the freight transportation system, the threats to con- tinued productivity growth, and the relationship between performance and finance arrangements. Chapter 3 summarizes freight transportation

40 Funding Options for Freight Transportation Projects infrastructure finance arrangements today, with the aid of examples and observations from case studies of freight projects that the commit- tee commissioned. Chapter 4 considers how the national significance of a freight project can be defined and the problem of determining the scope of federal government responsibilities for freight infrastructure. Chapter 5 summarizes proposals from a variety of sources for reforms of public-sector finance arrangements for transportation projects. Chap- ter 6 presents the committee’s findings and recommendations. REFERENCES Abbreviations AAR Association of American Railroads AASHTO American Association of State Highway and Transportation Officials BEA Bureau of Economic Analysis BTS Bureau of Transportation Statistics CBO Congressional Budget Office FHWA Federal Highway Administration GAO General Accounting Office MARAD Maritime Administration NRC National Research Council TRB Transportation Research Board USDOT U.S. Department of Transportation AAR. 2007. Railroad Facts: 2007 Edition.Washington, D.C., Nov. AASHTO. 2007. Transportation: Invest in America’s Future: America’s Freight Chal- lenge. May. AlamedaCorridor TransportationAuthority. 2006. Fact Sheet. www.acta.org/newsroom_ factsheet.htm. American Short Line and Regional Railroad Association. 2007. Short Line and Regional Railroad Facts and Figures: 2007 Edition. BEA. 2006. National Economic Accounts. U.S. Department of Commerce, Aug. 15. www.bea.gov/bea/dn/FA2004/index.asp. BTS. 2006. Transportation Statistics Annual Report.Dec. Cambridge Systematics (in association with Battelle Memorial Institute). 2005. An Ini- tial Assessment of Freight Bottlenecks on Highways. Prepared for Federal Highway Administration, Oct. CBO. 2008. Issues and Options in Infrastructure Investment. May. www.cbo.gov/doc. cfm?index=9135.

Introduction 41 Dalton, H. 1922. Principles of Public Finance. Routledge. FHWA. 1997. 1997 Federal Highway Cost Allocation Study. Aug. FHWA. 1999. Financing Federal Aid Highways. Aug. FHWA. 2006. PPP Case Studies: Heartland Corridor. www.fhwa.dot.gov/PPP/case_ studies.htm. FHWA. 2007.Highway Statistics 2005. FHWA. 2009.Highway Statistics 2007. FHWA. n.d. Active Major Projects Report. https://fhwaapps.fhwa.dot.gov/foisp/public Active.do. GAO. 1996. Intermodal Freight Transportation: Projects and Planning Issues. July. GAO. 2003. Freight Transportation: Strategies Needed to Address Planning and Financing Limitations.Dec. Institute for Water Resources. 2004. Inland Waterways Trust Fund Analysis. Feb 5. Kaine, T. M. 2006. Testimony Before the Committee on Transportation and Infrastruc- ture, Subcommittee on Highways, Transit and Pipelines, U.S. House of Representa- tives. May 24. Kavinoky, J. F. 2007. Statement of the U.S. Chamber of Commerce on the Importance of Transportation Infrastructure to the American Business Community. Statement to Committee on Transportation and Infrastructure, U.S. House of Representatives, Sept. 5. Kentucky Transportation Cabinet and Indiana Department of Transportation. 2008. Louisville-Southern IndianaOhio River Bridges Project: Initial Financial Plan. Jan. 2008. www.kyinbridges.com/pdfs/Initial_Financial_Plan_200801.pdf. MARAD. 2007. U.S. Public Port Development Expenditure Report. U.S. Department of Transportation, July. Norfolk Southern. 2006. Agreement Reached on Federal Funding forHeartlandCorridor. NS Newsbreak, Vol. 2, No. 10, Oct. NRC. 2001. Inland Navigation System Planning: The Upper Mississippi River–Illinois Waterway.National Academy Press, Washington, D.C. NRC. 2004. Review of the U.S. Army Corps of Engineers Restructured Upper Mississippi River–Illinois Waterway Feasibility Study: Second Report. National Academies Press, Washington, D.C. Prest, A. R., and N. A. Barr. 1979. Public Finance in Theory and Practice (6th ed.). Weidenfeld and Nicolson, London. Richards, G. 2006. Road or Rail? A New Study Aims to Find Out If Virginia Should Invest in Upgraded Rail Lines. Norfolk Virginian-Pilot,Oct. 19. Shafran, I., and A. Strauss-Wieder. 2003. NCHRP Report 497: Financing and Improving Land Access to U.S. Intermodal Cargo Hubs. Transportation Research Board of the National Academies, Washington, D.C.

42 Funding Options for Freight Transportation Projects TRB. 1993. Special Report 238: Landside Access to U.S. Ports.National Research Council, Washington, D.C. TRB. 1996. Special Report 246: Paying Our Way: Estimating Marginal Social Costs of Freight Transportation.National Research Council, Washington, D.C. TRB. 1998. Special Report 252: Policy Options for Intermodal Freight Transportation. National Research Council, Washington, D.C. TRB. 2002. Special Report 267: Regulation of Weights, Lengths, andWidths of Commercial Motor Vehicles.National Academies, Washington, D.C. TRB. 2003. Special Report 271: Freight Capacity for the 21st Century.National Academies, Washington, D.C. TRB. 2004. Special Report 279: TheMarineTransportation Systemand the Federal Role:Mea- suring Performance, Targeting Improvement.National Academies, Washington, D.C. TRB. 2006. Special Report 285: The Fuel Tax and Alternatives for Transportation Funding. National Academies, Washington, D.C. U.S. Chamber of Commerce. 2007. Transportation Infrastructure in Crisis—Talking Points. Aug. 3. www.uschamber.com/issues/index/transportation. USDOT. 2001. Financing Freight Transportation Improvements Workshop Proceedings: April 29–May 1, 2001.