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Funding Options for Freight Transportation Projects (2009)

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Suggested Citation:"G39048_TRB_07_Ch06." National Academies of Sciences, Engineering, and Medicine. 2009. Funding Options for Freight Transportation Projects. Washington, DC: The National Academies Press. doi: 10.17226/24702.
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Suggested Citation:"G39048_TRB_07_Ch06." National Academies of Sciences, Engineering, and Medicine. 2009. Funding Options for Freight Transportation Projects. Washington, DC: The National Academies Press. doi: 10.17226/24702.
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Suggested Citation:"G39048_TRB_07_Ch06." National Academies of Sciences, Engineering, and Medicine. 2009. Funding Options for Freight Transportation Projects. Washington, DC: The National Academies Press. doi: 10.17226/24702.
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Suggested Citation:"G39048_TRB_07_Ch06." National Academies of Sciences, Engineering, and Medicine. 2009. Funding Options for Freight Transportation Projects. Washington, DC: The National Academies Press. doi: 10.17226/24702.
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Suggested Citation:"G39048_TRB_07_Ch06." National Academies of Sciences, Engineering, and Medicine. 2009. Funding Options for Freight Transportation Projects. Washington, DC: The National Academies Press. doi: 10.17226/24702.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

6Findings and Recommendations The study charge asks the committee, first, to analyze the rationale for pub- lic investment in freight infrastructure and, as a related question, to assess the relevance of the concept of national significance as a possible crite- rion for determining government responsibility. Second, the committee was to evaluate alternative finance arrangements for freight infrastructure. The first section below presents the committee’s findings concerning government responsibilities for freight infrastructure; the second section presents findings on the adequacy of existing finance arrangements and how alternative arrangements would affect the performance of the freight transportation system. In these two sections, bold text is used to highlight the statements of the major findings. The final section presents recom- mendations for changes in finance practices for freight infrastructure. GOVERNMENTRESPONSIBILITIES FOR FREIGHT INFRASTRUCTURE To analyze the rationale for public investment in freight transportation projects, the committee considered three questions: First, inwhat circum- stances is public-sector involvement in the freight transportation system needed? Second, when is federal government involvement warranted? Third, when does the public-sector responsibility require building or paying for infrastructure, as opposed to any other form of 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 249

250 Funding Options for Freight Transportation Projects near term. Governments provide and operate most freight infrastruc- ture, including the highway system, airports, seaports andharbors, and the inland waterways. Governments impose fees and taxes to support these facilities; provide research and information valuable for public and private planning, operations, and technology development; and impose environmental and economic regulations intended to increase the net benefits of the transportation system. The policy proposals for new freight infrastructure funding mecha- nisms that are described in Chapter 5 all involve incremental alterations of these established government responsibilities: expanding responsibility in some way (e.g., greater involvement in freight rail capacity expansion), increasing direct federal responsibility (e.g., through anational freight plan or new federal-aid program), or expanding the private-sector role in a government-dominated area (e.g., privately developed toll roads). Such proposals should be evaluated carefully and the risks weighed against the possible benefits. Expansion of government involvement should be limited to certaindefinedcircumstances inwhichmarket-dictatedout- comeswouldbe far fromeconomically efficient.These include restrain- ing exercise of monopoly power and dealing with nonmarket costs of pollution, congestion, and accidents.Moreover,government involvement and leadership are practical necessities in complexprojects: large proj- ects that extend through multiple jurisdictions, involve sensitive envi- ronmental issues, and involve coordinated improvements to publicly and privately owned facilities serving passengers and freight. Need for Federal Involvement The federal government’s role also is defined primarily by its existing responsibilities: the federal-aid programs for highways and airports, the systems directly provided by the federal government (air traffic control, inlandwaterways, andmarine harbor channels), essential federal functions such as customs and border security, and federal environmental and eco- nomic regulations.The federalgovernmenthas importantopportunities forcontributing to freight systemperformanceandinfrastructuredevel- opment by improving execution of these established functions. Past TransportationResearchBoard (TRB) committees recommended changes in the federal highway and airport aid programs that would improve the performance of these systems, as well as policies to attain more efficient

Findings and Recommendations 251 management of the federally provided facilities and more cost-effective environmental and economic regulation. The federal government plays a secondary role in most freight infra- structure projects except those on the directly federally provided systems (waterways, air traffic control, and harbor channels). This limited federal involvement is consistent with federal responsibilities and competences. 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 a high-value project unaided. Such circum- stances may include projects fulfilling essential federal responsibilities (e.g., defense andborder controls), projects that impose high external costs on local communities that state and local governments lack authority to control, andunique or unusual projectswith highpotential return but also high risk and for which conventional methods of raising capital are not feasible.Also, through research, demonstrations, and incentives, the federal government can help state and local agencies to developmore successful administrative andfinance arrangements for freight infrastructure projects. The federal government needs more effective instruments, including reforms in financial aid programs, to carry out these responsibilities. The committee’s recommendations address this need. Legislation and policy statements of the U.S. Department of Trans- portation (USDOT) and others over the past two decades have used the term“projects of national significance” todenote a categoryof projectswith certain common characteristics: they are large, are discrete, usually involve improvements to multiple modes of transportation serving both passen- gers and freight, usually are located inurbanareas and involvemultiple gov- ernment jurisdictions and private entities, and have finance requirements that do not match existing funding programs and institutional arrange- ments. The premise of the legislation and policy statements has been that a backlogof critical projects in this category exists. In these contexts, the term “project of national significance” (or “project of national and regional significance”) always has been used to designate projects that are worthy of special federal support (that is, support beyond the established and routine forms of aid) because they possess these characteristics. The case studies described in Chapter 3 illustrate thatmajor transporta- tion infrastructure projects are being carried out today on the basis of the

institutional structures and finance arrangements that are available. In almost every public-sector project, state and local governments have taken the lead in organization and funding and the federal role is secondary, providing usually aminority share of support. State and local governments and private firms routinely construct transportation facilities, without primary federal involvement, that serve nationalmarkets and affect system performance over a wide geographic area. In the nationwide infrastruc- ture networks other than transportation, telecommunications and electric power, the federal government has little involvement beyond regulation. Conversely,much federal transportation aid is for primarily local facilities, such as transit and highway commuter routes. National significance, as the termhas generally beenused in federal laws and in the transportation policy statements of various organiza- tions, is not a definitive criterion for deciding which transportation projects merit extraordinary federal support or involvement. Indeed, any substantial freight transportation infrastructureproject that is expected to yield positive benefits is significant to the national economy. Instead, the federal role should be defined more restrictively: a project merits federal assistance if it is of high economic value andwould not be accom- plished by the state and local governments and the private sector acting alone. The recommendations that conclude this chapter proposemethods of applying such a rule. Forms of Government Intervention The grounds for government involvement identified above are circum- stances where market outcomes would be unsatisfactory because non- market costs are important andwhere the private sector cannot act alone in complex institutional settings. Building or paying for infrastructure seldom is the only option for fulfilling the government responsibility in these circumstances. Government has a variety ofmeans for resolving freightmobility problems. Regulation, taxation, and pricing canmitigate problems of pollution and congestion, and public–private cooperation to resolve a mobility problem does not require shifting of cost burdens for commercial facilities to the public.Once thedetermination ismade that government involvement is required, it is necessary to search for the 252 Funding Options for Freight Transportation Projects

Findings and Recommendations 253 most cost-effective action, considering public investment as well as other forms of intervention. Regulatory and Pricing Alternatives Government responsibilities for environmental protection and for pre- venting anticompetitive behavior can be discharged in many circum- stances throughpricing of public facilities and through regulatory policies, rather than through compensatory subsidies. For example, public support of rail and waterways projects sometimes is advocated as a means to induce a shift of traffic from truck to modes with lower environmental costs, and to offset the freightmarket distortions caused by truck subsidies in the highway program and by the depression of rail investment incen- tives caused by economic regulation. However, subsidies to waterways or railroads to offset subsidies to trucks will lead to overconsumption of all themodes of transportation if the result is that the value of the service to some shippers is less than the cost of providing it. Instead, the states and the federal government could largely eliminate any subsidies for inter- city trucking by adjusting truck user taxes. Similarly, if the railroads’ argu- ment that rate regulation is unreasonably suppressing railroad investment below the economically desirable level is verified, then adjusting the regu- latory policies that are the cause of the problem would be the preferable solution, since this would restore market incentives as a reliable guide to railroad investment decisions. Employing facility user charges for funding freight infrastructure projects to the greatest degree possible will promote sound investment decisions because users will be willing to pay only for projects that yield transportation cost savings in excess of the charges. In contrast,when infra- structure investment is paid for by external grants rather than by facility user charges or other local sources, distributional considerations often take precedence over efficiency in decisions on investment choices; commonly, political imperatives dictate a more or less uniform distribution of aid among regions. This patternwouldbeunsuitable for efficient development ofmajor freight facilities, which require concentration of resources at the major nodes of the system. User charges also provide the most effective means for operators to regulate usage so as to avoid wasteful congestion and provide funding stability for capital and operating expenses, and

254 Funding Options for Freight Transportation Projects theymay be viewed by the public and by users as an equitable method of infrastructure funding. Interventions for Community Impact Mitigation Themotivation for several prominent recent public freight infrastructure projects has been to reduce adverse community impacts asmuch as to add physical capacity to the freight network. The growing volume of freight traffic in port cities and in hub cities like Chicago conflicts with local traf- fic and imposes congestion and pollution costs on residents. Mitigating these impacts will be necessary to allow freight traffic to grow, because communities eventually will seek to halt growth through the political process if the costs are too great. Local freight traffic impactsmay bemit- igated by regulation or by pricing (congestion pricing on highways is an example), but local governments donothave authority in all circumstances to impose charges on carriers or to regulate their traffic. If freight trains are creating road congestion at railroad–highway grade crossings, the local government cannot require the railroad to alter its operations or to pay for anoverpass. The government’s options are to pay for a capital improve- ment tomitigate the impact (e.g., a grade separation) or to pay the railroad to undertake some other mitigation. However, numerous precedents exist for requiring transportation sys- temusers (or private-sector operators of facilities) to pay for impactmit- igation.When new facilities or major expansions of existing facilities are to be constructed, the operator of the facility normally pays for mitiga- tion features. Routinely, regulations require transportation operators to pay for pollutionmitigation features in the design and operation of facil- ities and equipment (e.g., vehicle emission controls and runoff controls). On the basis of an analogous principle, construction of highway noise barriers is funded fromhighway user tax revenue rather than by the local communities requiring protection. In practice, cost sharing in projects like grade crossing separations is determined by negotiation among the interested public and private par- ties.Wherever shippers and carriers can be induced or required to pay for community impactmitigation, this outcomewill not be detrimen- tal to efficient freight systemdevelopment provided the cost of themit- igation is justified by its benefit to the community. In cases where legal,

Findings and Recommendations 255 equitable, orpractical considerationspreventgovernment fromimpos- ing the cost burden on shippers or carriers, it may be in the public interest for the government to pay for mitigation. Government pay- ment formitigationwill be consistent with economic efficiency provided that the government seeks cost-effective options formitigation. As long as the cost of the mitigation measures is less than their benefit to the com- munity and less than the value ofmaintaining service on the freight facil- ity, the outcome will be in the public interest. The risk of an unfavorable negotiated outcome is greater if funding for mitigation is available from the federal government, because the external grant relieves the local par- ties of the necessity of considering all the costs and benefits of alternative resolutions. If the federal government pays a share of costs, then it becomes responsible for the objective and quantitative assessment of the costs and benefits of the alternatives. EVALUATING FINANCEALTERNATIVES The committee reviewed the finance arrangements in prominent projects, the formsof government involvement in project development andfinance, and various groups’ assessments of present finance arrangements and proposals for reforms. The committee did not systematically survey freight infrastructure needs; rather, the projects examined were taken as a rep- resentative cross section of major freight projects that have been carried out recently or may now be seeking funding. The goal was to determine whether existing finance arrangements are adequately serving the needs of industry and the public. The criterion for judging the arrangements has been their consequences for the performance of the freight transporta- tion 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 practices 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. Therefore, to judge the adequacy of finance arrangements, it is necessary to observe the performance of the freight transportation system.

256 Funding Options for Freight Transportation Projects The three findings summarized below concern deficiencies in present finance arrangements, the need for reformof finance arrangements to pro- mote efficient development andoperationof the freight transportation sys- tem, and the possible effects of alternative reforms on systemperformance. 1. Present finance arrangements are inadequate for maintaining and improving freight transportation system performance. It is unlikely that the established finance arrangements will be able to sup- port optimum capacity expansion at the most congested nodes of the freight transportation system because public-sector finance arrange- ments often are not designed to provide incentives for efficient develop- ment and operation of transportation facilities. Numerous past studies of infrastructure policy have concluded that finance arrangements are unsatisfactory. However, observers have most often characterized the primary problem simply as insufficient revenue and have overlooked the fundamental linkage between the structure of finance arrangements and the performance of the freight transportation system, specifically, that pricing is the most effective means of managing congestion and that reliance on user fee revenue is a strong incentive against selection of investment projects that have low economic value. Freight infrastructure finance arrangements (that is, the sources of funds for operations and investment, methods of raising capital, policies with regard to pricing and fees, and authority andmechanisms for spend- ing decisions) are diverse. Four principal methods are employed today to pay for freight infrastructure capital projects: appropriation of funds from general revenue or other sources, trust funds that pool revenue fromuser taxes, explicit charges for use of particular facilities provided by the pub- lic sector, and private-sector provision of revenue-generating facilities. Sometimes the government effectively pays part of the cost of private capital expenditures through tax incentives. Among all these arrange- ments, the federal and state highway user tax–trust fund system gener- ates the most revenue, and highway capital spending constitutes the majority of investment in freight-related infrastructure. Because the test of finance arrangements is the performance of the freight system, the committee identified major categories of problems that today appear to hinder efficient operation and optimum invest- ment. Several are closely related to finance arrangements and could be

Findings and Recommendations 257 ameliorated by finance reforms. The first group of problems arises from the practices of infrastructure providers (primarily public-sector agencies): • Operating andmanagement practices of public infrastructure providers that fail to optimize performance. Usersmust tolerate congestion that could be avoided by better demand management through pricing or othermethods.Maintenance practices do notminimize life-cycle costs because capital grantsmake capital spending cheaper thanmaintenance for local infrastructure providers and because political imperatives dictate wide geographic distribution of aid funds. • Investment decisionmaking that lowers the average return on invest- ment. Capital spending often is directed according to distributional considerations (i.e., either to aid particular groups or regions or to ensure that all regions receive proportional shares) rather than targeted to investments that would yield the greatest public benefits. Such goals maybe legitimate andmanyprojects chosenon this basismaybeworth- while, but the cumulative result will be to reduce economic return on investment and compromise the goal of freight efficiency. Return on investment is depressed also because facilities are not efficiently oper- ated. Public agencies do not systematically and objectively evaluate economic benefits of alternative investments. [Throughout this report, “economic benefit” includes nonmarket consequences of investments (e.g., environmental and safety impacts), as well as reductions in costs to shippers and carriers.] • Public policies that add to costs and discourage investment by public- and private-sector participants. These include regulatory delays dur- ing project development that increase costs and risk; subsidies that distort competition, including subsidies for truck andwater transport that discourage railroad investment; restrictions on foreign ownership and operation of domestic air and water transport facilities; and tax laws that place private-sector investment in highways at a disadvantage with respect to public investment. • Lack of institutional capacity to undertake unique and complex proj- ects at major ports and transportation hubs. Typically, such projects involve coordinated improvements to multiple modes with multiple objectives. They may be outside the scope of the established public

258 Funding Options for Freight Transportation Projects funding programs (e.g., the federal and state highway programs) and outside the authority of any of the individual established organiza- tions (highway departments, port authorities, railroads, etc.). Con- gestion in the Chicago region involving conflicts among rail and truck freight, highway passenger, and commuter rail traffic is an example of a circumstance where this problem is critical. A second group of problems arises from social and economic trends external to transportation infrastructure providers: • Patterns of freight demand are changing rapidly. Growth in inter- national merchandise trade,most dramatically during the 1991–2007 period, caused bottlenecks at the major ports and inland intermodal hubs. The likely magnitude of such changes over the next decade is unclear; transportation demand trendsmay relieve capacity pressures to some extent. Growth in the volume ofmerchandise importsmay be more moderate; demographic trends point to slower growth in high- way passenger vehicle miles traveled; and higher fuel prices will slow traffic growth, alter logistics practices, and affect shippers’ transporta- tion mode choices. • Increasing population density and wealth are driving up the costs of infrastructure expansion. In an increasingly urbanized society, costs of congestion and pollution are rising in importance, and these costs generally are not accounted for in market transactions. Competition from alternative uses of land is increasing, and the public is more concerned about environmental and land use impacts of expanding infrastructure. Organized opposition to infrastructure expansion in developed areas and at environmentally sensitive sites will exert still greater influence on investment decisions. • Security requirements, especially at ports and land border crossings, are imposing new capital and operating costs and creating new administrative bottlenecks. • Public (and, hence, political) support is lacking for user tax rates at the levels that would be required to maintain performance in the user tax–funded programs under present management practices. Increas- ing levels of investment in freight infrastructure in the next decadeswill be both economically justified and necessary tomaintain a level of per- formance conducive to economic growth. However, while the costs of

Findings and Recommendations 259 building infrastructure are increasing, maintaining revenue from fuel taxes, the largest present source for government transportation pro- grams, is complicated by higher fuel prices and by government energy and environmental policies. The TRB Fuel Tax committee pointed out that public reluctance to support maintaining user tax revenue is a problemonly if public skepticism about the likely benefits of increased public investment ismisplaced, and it speculated that taxpayers would be willing to pay more if they perceived a better return on investment, in the form of improved performance (TRB 2006, 21). These external challenges will call for flexibility and responsiveness in infrastructure programs and in finance arrangements, and theywill place a greater premium on improving efficiency of use of facilities as a sub- stitute for some new construction. 2. Finance reforms shouldbedesigned topromote productivity gains. Maintaining and improving the performance of the transportation system will depend on achievingmore efficient utilization of existing capacity and on improving the returnon investment innewcapacity. In an environment of strong upward pressure on costs, maintaining performance solely by building new physical capacity is not economically practical. Finance arrangements can be a powerful instrument for improving the performance of the freight transportation system. Choices about fund- ing sources and fees charged to users strongly influence investment deci- sions and the utilization of existing facilities. Any new program to increase freight infrastructure investment would risk yielding disappointing results if it was not accompanied by finance reforms that strengthened incentives to choose investments with the greatest public benefits, avoid investments with low returns, and operate existing facilities efficiently. Similarly, efforts to improve performance through better planning, improvedmanagement techniques, or technological innovation will have limited success if not accompanied by complementary reforms in finance arrangements. 3. Finance reform options differ in their probable impacts on freight system performance. The committee reviewed the proposals for newfinance arrangements that have been prominent in discussions of transportation infrastructure pol- icy: a federal-aid program for freight, a national infrastructure authority,

260 Funding Options for Freight Transportation Projects acceleration of spending through federally subsidized borrowing, federal assistance to private-sector freight facilities, development of new local or project-specific capacities, and adjustments in the federal-aid highway program. The various proposals differ primarily in four characteristics: • The division between public and private responsibility for providing funds and for investment decisions; • Thedivisionof responsibility between the federal and state governments for providing funds and for investment decisions; • The kinds of fees charged to users of facilities and the dependence of project funding on fee revenue; and • The extent of subsidies, whichmay allow shippers to pay less than the cost of freight service for transporting any shipment. Each of these characteristics influences public and private investment decisions and the decisions of system users about their transportation and logistics practices. Reformsmust be selectedwith these performance consequences in mind. Two criteria are equally relevant to the design of public freight infra- structure finance arrangements: first, to provide incentives for efficiency in investment decisions and operations; second, to generate revenue suf- ficient to fulfill government obligations and to carry out identified high- return capital projects. Provisions in finance arrangements that would promote each goal are identified below. Opportunities for improving performance: Nearly all freight trans- portation infrastructure is paid for by revenue derived from users of the facilities. Pricing is the most effective management tool to reduce the cost of congestion. Public facilities that do not use pricing to man- age demand suffer excessive congestion costs. At the same time, revenue from fees is the most informative measure of the economic value of capacity and therefore of the value of investing in expansion. Although much public transportation infrastructure is paid for by user taxes (e.g., fuel tax revenue dedicated to highways), explicit user charges and pricing are less commonly employed. For example, only 5 percent of revenues devoted to highways is derived from tolls. To attain major improvement in freight system performance, the public sector will need to place greater reliance on themarketmechanism tomanage operations

Findings and Recommendations 261 and to direct investment in public infrastructure programs that are vital to freight transportation. Progress also will depend on improvements in areas beyond finance, including new technology; better alignment of infrastructure respon- sibilities among the federal, state, and local governments; and review of regulatory policies to minimize impediments to efficient public- and private-sector investment and operations. Greater capability in the pub- lic sector for economic evaluation of projects is needed. The ability of the managers of public infrastructure to identify investment priorities is hindered by deficient information. Public investment proposals are rarely subject to credible quantitative economic evaluation. Lack of infor- mation makes erroneous investment decisions unavoidable. The incen- tive for careful economic evaluation is strengthened when projects are expected to be self-supporting through revenue derived from users and especially when projects must rely on projected revenue to raise capital from private investors. Options for providing revenue: If finance arrangements that promote efficient operation and investment were in place, then the second goal— funding sufficient to undertake high-payoff investments—usually would be met, because most projects that promised high returns would be able to fund themselves through user fees. However, refined pricing systems for highways and other major components of freight infrastructure will take time to develop. Therefore, revenue adequacy will continue to be a primary concern. The following are possible revenue sources to support increased capital spending for freight infrastructure: • Dedicating a portion of existing highway user tax revenue to projects particularly valuable for freight; • Increasing the rates of existing dedicated user taxes and fees for pub- licly owned facilities, including federal and state highway motor fuel taxes and other highway user taxes; • Imposing new freight user taxes or fees that are not facility-specific (for example, national or regional container fees), with revenues cred- ited to a trust fund and dedicated to freight projects, following the existing federal and state highway finance arrangements as models; • Appropriating funds from general government revenue or dedicating revenue from a broad-based tax; and

262 Funding Options for Freight Transportation Projects • Instituting new facility-specific user fees that dependon the cost of pro- viding service to the individual users of a facility. Possibilities include expanded highway tolling, fees for harbor dredging, airport landing fees, lockage tolls on the inland waterways, and port access charges. These sources differ in the degree to which they could reinforce the goal of providing incentives for improved performance.New external aid programs that were supported by general tax revenue and that thereby relieved shippers of themajor share of responsibility for the cost of freight services would discourage the development of project-specific revenue sources and rational project designs, which are the keys to keeping invest- ment concentrated on the greatest needs. Such aid would increase the risk of inessential public contributions to projects that could have been accomplished with private-sector resources. Finally, subsidizing capacity stimulates uneconomic levels of freight traffic. The last revenue source listed above would be the most consistent with the performance goal inmost circumstances, although creating new facility-specific fees, especially in the case of large and complex projects, will be challenging. Fee structures must be tailored to the special charac- teristics of each project, and institutions (for example, special-purpose authorities) must be created with powers to impose and collect fees and dispense the revenues. Bond sales, intergovernmental loans and credit assistance, asset leases and sales to private firms, and public–private partnerships do not appear on the list above because they are not revenue sources. Credit is a means of allowing a capital expenditure to bemade before the revenue intended to pay for it is in hand. Privatization may be a means of easing the tran- sition to new revenue sources. However, finance arrangements for any project or programmust select themix of revenue sources to be employed from among the five listed above. RECOMMENDATIONS Recommendations are presented below in five areas: 1. Guidelines for federal assistance to freight infrastructure development. 2. Federal discretionary assistance program reserved for freight projects.

Findings and Recommendations 263 3. Federal credit assistance and tax incentives for freight infrastructure projects. 4. Federal actions to promote new local and project-specific revenue sources. 5. Freight system monitoring, planning, and project evaluation. 1. Guidelines for Federal Assistance to Freight Infrastructure Development Federal programs to assist development of freight infrastructure should adhere to the five guidelines listed below, in order to keep federal policy on a course to support the public’s interest in improving the perfor- mance of the freight transportation system. The guidelines are intended to apply to federal involvement in projects for development of non- highway facilities ormultiple-mode facilities (e.g., coordinated improve- ments to freight rail, highway, and transit) that serve freight and 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 principles underlying the guidelines with regard to the extent of fed- eral responsibility and the importance of user charges are sound for any public transportation infrastructure investment. The federal role in financial assistance should be facilitative and incremental. Federal assistance should be used as a pragmaticmeans to stimulate action by state and local governments or by the private sector on difficult prob- lemswhere the potential economic benefit from improved freightmobil- ity or the potential reduction in external costs is great. In keeping with this objective, the dollar value of any special federal assistance to non- highway projects and multimodal projects normally should not exceed a small share of total project costs. Limiting the federal share and requir- ing substantial investment by other government or private-sector par- ticipants ensure that the projects receiving assistance are those that have high value to their users and local sponsors and increase the leverage of available federal resources. This measure reduces the risk that aid recipients will undertake uneconomic projects or favor capital over noncapital solutions.

264 Funding Options for Freight Transportation Projects 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 imposi- tion of user charges, and federal programs should not offer induce- ments to local authorities to substitute grants for funds that could be raised through user charges or other local sources. Although funding by user charges is not practical or desirable for certain projects, as a rule, reliance on user charges promotes sound investment decisions because users will be willing to pay only for projects that yield transportation and logistics costs savings for them that exceed the charges. User charges provide the most effective means for operators to regulate usage so as to avoid wasteful congestion and provide funding stability for capital and operating expenses, and they may be viewed by the public and by users as an equitable revenue source. Federal assistance programs should be flexible and adaptable to diverse freight infrastructure projects. Chapter 3 demonstrated the great diversity of freight infrastructure projects with respect to size, mode, institutional arrangements, finance structure, and purpose. Earlier in this chapter, it was explained that no definition of national significance is sufficient as a criterion for selecting projects meriting federal assistance; rather, federal program administra- tors must identify valuable projects that would not be completed or that would face substantial delay or higher costs without federal involvement. Thus, any federal assistance program should be structured to address projects on a case-by-case basis and should be flexible enough to address diverse assistance needs. Federal assistance should employ a variety of forms of aid, including grants, loans, and other kinds of credit assistance. Reducing federal restrictions on imposition of user charges also would constitute a form of financial assistance. Recommendation 2 below proposes an assistance program that would incorporate these features. Program administrators would be allowed discretion in selecting projects and in designing assistance to match individual project needs and would

Findings and Recommendations 265 be accountable for demonstrating that the program was succeeding in producing worthwhile 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. Legislation should specify policy objectives andprocedural rules for deter- mining eligibility for assistance to be applied by program administrators. The administrative arrangements in the federal highway and transit pro- grams can serve as models for any future aid programs. The vulnerabil- ity of major intermodal project funding to earmarking, as illustrated by the Projects of National and Regional Significance program in the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), makes federal policies and procedural rules especially critical. 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 goal of federal freight infrastructure policy is to improve the perfor- mance of the freight transportation system, that is, tomake freight services available at lower total cost to shippers and to the public. The scope of fed- eral laws and programs that affect freight system performance and infra- structure development is broad. The federal government makes grants to state and local governments for highway and airport construction; builds and operates inland waterways, the air traffic control system, and harbor channels; regulates safety and environmental impacts of transportation; regulates rates and competition in the railroad and ocean shipping indus- tries; controls international borders; and imposes general tax rules that affect the returnsonalternative investments. Federal actions in eachof these areas influence private-sector investment decisions, the cost of capacity expansion, and theoperating efficiencyof public andprivate infrastructure. A comprehensive federal policy to promote efficient development of freight infrastructure cannot focus solely on grant programs. Rather, it must coordinate actions in all of these areas of federal involvement to

266 Funding Options for Freight Transportation Projects achieve the commonobjective of improved systemperformance. Examples of areas for policy reforms that could improve performance and promote efficient infrastructure development include the following: • Reducing project delivery time. The National Surface Transportation Policy and Revenue Study Commission (as its first recommendation), the TRB 2003 Freight Capacity committee, and other groups have identified specific regulatory andmanagement reforms to speedproject delivery without compromising essential environmental safeguards. • Adjusting rates and structures of federal transportation user fees and taxes to correspond more closely to the cost of providing service. Fees that are out of alignment with costs distort modal competition, discourage private investment, and exacerbate congestion. • Reducing obstacles to foreign investment in U.S. infrastructure, to the extent consistent with national security. Such obstacles include operational restrictions on foreign marine and aviation carriers that make foreign investment unattractive by reducing profit potential and restrictions on foreign equity ownership in U.S. facilities. • Minimizing the impact of economic regulation on investment incen- tives. The railroads maintain that remaining economic regulation of their industry and the threat of increased regulation inhibit investment by suppressing profits. Each of these areas of federal activity presents an opportunity to pro- mote freight infrastructure development and therefore must not be overlooked in the formulation of federal infrastructure policy. 2. Federal Discretionary Assistance ProgramReserved for Freight Projects Congress should create a new discretionary assistance program to support freight infrastructure projects. The objective of the program should be to bring federal 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-effectivemanner. The program should be established initially as a test of the need for and value of a respon-

Findings and Recommendations 267 sive and flexible federal program of assistance to freight projects. It therefore should have a sunset provision, and its outcomes should be formally evaluated. The recommended program would be similar in some respects to the Projects of National and Regional Significance program of SAFETEA-LU (as originally conceived, before project earmarks exhausted the program’s authorized funding) and to theTransportation Infrastructure Finance and Innovation Act (TIFIA) program, but with these important differences: • Dedication to projects in which increasing freight transportation effi- ciency through reduced costs or improved service is amajor objective. The programwould coordinate all federal efforts to promote efficient freight infrastructure development through financial assistance. • Fewer restrictions on the types of freight infrastructure projects eligible for assistance. • Greater flexibility with respect to the forms of aid, but with assistance limited to a minority of total project funding. • Evaluation built into the programand recognized as a priority. The fed- eral government needs to gain greater leverage through its assistance programs to influence the course of freight infrastructure development positively. The program would be an opportunity to test intervention mechanisms to determine the features that would meet this need. 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 SAFETEA-LU Section 1301 Projects of National and Regional Signifi- cance program. [The Section 1301 authorization was $1.8 billion over 5 years. If half of an authorization of that size were used for grants, with the other half used to support the budgetary costs (loan loss reserves) for federal loans, the total amount of the credit assistance portion of the program would be $9 billion to $18 billion.] Funding preferably would not be taken from revenue now dedicated to other transporta- tionpurposes.However, to avoid complications during the trial period, initial funding from existing federal transportation user taxeswould be suitable. Alternatively, general revenue funding, during the trial period only, would be acceptable.

268 Funding Options for Freight Transportation Projects • Assistance awarded competitively:Determinations of projects to receive assistance, and the form and amount of assistance, should consider the expected benefits of competing projects, the likelihood that proj- ects would fail to advance without federal participation, and the ratio of the proposed federal contribution to total cost. 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 Secretary 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-term program is warranted. If evaluation shows that the program is worthwhile and it is renewed, the continuing program should be funded by a revenue source derived from freight system users. Also, if the program is renewed, the most appropriate form for its permanent organization should be considered. An alternative form would be to create an independent federal entity authorized to award assistance.Organizing theprogramas a government-ownedcorporation (which is the same organizational form as the National Infrastructure Bank proposal outlined in the President’s Fiscal Year 2010 budget message) would have two potential advantages. First, the board of the corporationwould be, to an extent, insulated frompressures to award assistance on the basis of criteria other than national economic benefit. Second, such an entity might be better able than a federal executive agency to develop and retain a technically skilled and experienced pro- fessional staff solely devoted to evaluating andmonitoring infrastructure investment proposals and projects. • Assistance in the formof 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 purposes, which would include the following: – As preconstruction development assistance: Expenditures at this stage carry the greatest risk, and a future revenue stream to repay a loan cannot be assured. – As an incentive for projects that demonstrate innovative finance arrangements and administrative structures.

Findings and Recommendations 269 – As an incentive for multistate projects and for coordination of development among the states. Facilitating interstate cooperation is acknowledged as a federal responsibility. – To give the federal government leverage in promoting projects that are of particularly high economic value yet face especially difficult local obstacles. It will be essential for the long-term success of the program that the subsidy cost provision in the budget of the assistance program reflect objective and accurate estimates of the risk of default of the projects receiving assistance and of the risk of the government incurring any other future liability under the terms of credit agreements. • Limited federal participation: The value to the project sponsor of fed- eral loans and grants should be a small share of total project cost. (For example, the limit might be 20 percent for a grant. The limit for the face value of a loan as a fraction of project cost should be higher than for a grant, because the value of a federal loan to the project sponsor, in terms of financing cost savings, and its cost to the federal Treasury are less than the face amount of the loan.) Projects applying for fed- eral assistance in the program should have a financial plan that includes support from the private sector (except possibly for some highway projects) and from state and local governments. • 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 to equipment and start-up costs associated with operational improvements. High- ways and some other facilities serve both freight and passenger traffic, so thedistinctionbetween freight andnonfreight projects is not absolute. The Secretary should have discretion to decide whether aid to a high- way project (inmost cases eligible for federal aid through existing pro- grams)would be in keepingwith the proposed program’s overall goals. Highway projects that might be considered include local intermodal access links (e.g., a bridge essential for port access). • Preference for projects with user charges: To support projects that have the greatest potential economic benefits and that will be sustainable in operation and to promote increased use of user charges, the evalu- ation criteria for proposals for aid through the program should give

270 Funding Options for Freight Transportation Projects preference to projects whose financial plans call for primary reliance on user charges. • Economic justification: Standardized requirements should be defined fordemonstrating economic justification in applications for aid through the program. Applicants would present their own evaluation, to be reviewed byUSDOT.The requirements should specify the benefits and costs to be considered and acceptable bases for estimation. The primary measure of benefits should be the National Economic Development estimate that is required of U.S. Army Corps of Engineers transporta- tion projects. Applicants’ evaluations and supporting data should be available for public scrutiny, or at least subject to independent third- party review. • 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. Federal involve- mentmay serve to provide incentives and seed funding for early stages of project development and to lend credibility to high-risk but poten- tially high-benefit projects. Determining the value of federal partic- ipation will ultimately be a judgment of the Secretary, guided by the evaluation criteria andby experience gainedwith theprogramover time. • Outcome evaluation: Applicants should be required to present a data and analysis plan and commit to conducting an outcome evaluation of the completed project that compares actual cost and usage with the projections thatwere thebasis of the assistanceproposal.USDOTwould report toCongress periodically on the results of theoutcomeevaluations and onUSDOT’s assessment of the necessity of the federal involvement in the projects. • Integration with other assistance programs: Administration of the pro- gram should be integratedwith administration of freight project assis- tance that is delivered through the TIFIA, Railroad Rehabilitation and Improvement Financing (RRIF), and SAFETEA-LU private activity bond programs. That is, a single application and review process should gain consideration for all available forms of federal assistance. TIFIA, RRIF, and the private activity bond program (although not restricted to freight projects) have objectives similar to those of the proposed freight assistance program, and unifiedmanagement would be neces- sary tomaximize the federal impact. Primary responsibility for ensuring

Findings and Recommendations 271 integrated administration of USDOT-administered programs should reside in the Office of the Secretary rather than in any of the modal administrations. 3. Federal Credit Assistance and Tax Incentives for Freight Infrastructure Projects The federal government shouldmake credit assistancemore accessible and attractive to freight projects thatmerit federal support. Also, Con- gress should reduce the bias in tax law that discourages private-sector participation in development of highways and other transportation infrastructure historically provided by public agencies. Three federal programs—thenew federal assistance program for freight recommended above together with the existing TIFIA and SAFETEA-LU private activity bond programs—would constitute a tool kit of assistance instruments. Each of the two existing programs has a distinct objective. TIFIA credit assistance can be used as an incentive to stimulate local action or to encourage development of project-specific revenue sources. Also, federal credit assistance can reduce the total financing costs for some proj- ects because the federal government is an efficient absorber of risk. The SAFETEA-LU private activity bond program’s objective is to neutralize provisions in the tax law that tend to discourage private-sector participa- tion inhighwaydevelopment. Bothprogramshave demonstrated that they can perform the functions that Congress intended, and the committee assumes that they will be continued. The recommended new freight assistance programwould provide cen- tral policy direction of allUSDOTefforts to promote freight infrastructure development. The program would have its own resources for grants and loans and in addition would oversee freight-related uses of the TIFIA and SAFETEA-LU private activity bond programs. The freight assistance pro- gram could award grants for the specific purposes listed in Recommenda- tion 2 above (for preconstruction development assistance, as an incentive for projects that demonstrate innovative finance arrangements and administrative structures, and as an incentive for coordination of devel- opment among the states). This package of policy tools would not neces- sarily be adequate for all infrastructure problems that may arise, but it would strengthen the federal government’s ability to intervene in a timely

272 Funding Options for Freight Transportation Projects manner to promote valuable freight projects in circumstances where federal participation appears critical to achieving a successful outcome. Credit assistance programs should be designed and administered to be consistent with the guidelines of Recommendation 1. Costs of federal assistance programs should be presented in the federal budget in a trans- parent manner, so that legislators and the public can understand the full costs of the programs and the incidence of those costs. Federal commit- ments equivalent to spending should appear in spending accounts and be funded by appropriations. The present-value cost of any form of fed- eral credit assistance should be recognized in the budget at the time the commitment is made. The adjustments to the TIFIA and private activity bond programs recommended below would give the managers of the freight assistance program more effective means of intervention. Direct Federal Loans and Loan Guarantees TIFIA is the primary federal program for providing credit assistance to transportation infrastructure projects but, as noted in Chapter 4, has not been frequently used in freight projects. The following changes should be enacted to create a federal loan program that ismore accessible to spon- sors of freight projects and that gives USDOT increased flexibility to adapt the assistance offered to the characteristics of individual projects: • Modify or eliminate theTIFIAnonsubordinationprovision. The statute requires that TIFIA debt be treated equivalently to other senior debt in the event of bankruptcy of the borrower. This provisionmay lower the credit rating that the sponsor can obtain on its senior bonds. The federal government should be willing to accept a higher level of risk (that is, a junior lien position) on projects where it is providing a minority of the total capital and where the higher risk is justified by the potential economic return from the new project. The added risk of a federal loss that would arise from removing this provision from a loan agreement would be reflected in the subsidy cost assessed to the TIFIA-assisted project. In effect, program administrators would be allowed flexibility in allocating the total authorized subsidy cost among the projects receiving aid in a way that they judged would best serve the program’s objectives.

Findings and Recommendations 273 • Allow a contingent federal loan commitment before all other elements of the financial plan are in place. The federal loan commitment could aid in recruiting additional sponsors and investors in the project. • Allow the fraction of total project costs to be covered by the federal loan to be determined on a case-by-case basis and increased somewhat over the TIFIA 33 percent limit for certain purposes, including motivating project sponsors to employ facility user charges. • Streamline federal application and contracting requirements. USDOT could learnmore about credit needs through a survey of project sponsors asking whether applying for TIFIA aid had been considered for their projects and, if TIFIA aid was not sought, whether the reason was lack of awareness or unacceptable features in the federal program. 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 publicmanagementandfinanceof thekindsof facilities that commonly are built by the public sector. Tax-exempt bond finance constitutes a subsidy paid by the federal gov- ernment to the benefit of the issuer of the bonds. It is generally available to state and local government infrastructure projects serving public purposes, but only in restricted cases (for constructing certain types of facilities spec- ified in federal law, andwith dollar limits on the volumeof bonds thatmay be issued for highway and intermodal projects) for projects developed and operated by private entities. In cases where facilities could be built by the public sector, by a private firm, or by a public–private joint venture (e.g., a toll road), the lower cost of public borrowing favors public development and finance over development by the private sector. Encouraging private-sector participation in the finance and manage- ment of facilities such as highways that normally are purely public-sector entities has several potential benefits. Private participation can be a source of innovation in the delivery and operation of facilities. A private operator may have lower costs than the government and may be able to exercise greater flexibility in pricing and in other operating practices than a govern- ment agency. The private-sector participants in a public–private project would be expected to absorb certain business risks that otherwise would

274 Funding Options for Freight Transportation Projects be borne by the government (for example, by guaranteeing a construc- tion completion date). Finally, private participation is a mechanism for attracting new sources of capital. Private activity bonds should be available for private-sector and public–private projects to build highways and other kinds of freight facil- ities that now are provided predominantly by the public sector, in order to offset the tax law bias that now favors public over private development of these facilities. That is, if a state government is contemplating a choice betweenbuilding anew road following traditional public-sector practice or awarding a concession to a private-sector firm to build and operate the road, its decision should depend on considerations of overall public bene- fit and not on differences in treatment under federal tax law. This objective presumably was the intent of the 2005 federal law that expanded avail- ability of private activity bonds for transportation projects. To neutralize this bias fully, it would be necessary to adjust or eliminate the caps in fed- eral law on the volume of private activity bonds that may be issued for highways and other specific categories of projects. Infrastructure Banks Another possible source for government assistancewould be an infrastruc- ture bank: a revolving fund, capitalized, at least in part, by the government. If new federally sponsored infrastructure banks are created, their opera- tion should be consistent with the principles for federal assistance 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 of bank-financed facilities. 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 encourageuseof these revenuesources.Paying for projects from revenue generated by the facilities themselves promotes operating efficiency (because pricing is the most efficient way to manage congestion) and favors efficient investment decision making (because reliance on user fee

Findings and Recommendations 275 revenue favors projects with the greatest benefits to their users). This strat- egymay also be themost practicalmethod of increasing funds available for freight infrastructure, considering that government fiscal constraints and implementation difficulties pose challenges to instituting other forms of revenue sources for freight projects that havebeenproposed (which include general revenue funding, diversionof revenue fromexisting transportation user fees, and nationwide or statewide pooled freight user taxes). The states are responsible for creating the organizational arrangements required for imposition of fees and application of fee revenue for sup- port of facilities that state agencies own and operate.However, the federal government can support such state efforts. The federal government should take the following actions: 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 clear federal policy in support of such charges for the purpose of providing rev- enue for construction and operation of port facilities and road and rail access routes. As described in Chapters 3 and 5, the authority of ports to impose certain user charges has been questioned in the past, and someport charges have been subject to federal regulatory scrutiny. The Federal Mar- itime Commission (FMC) has authority to reject any agreement involving port terminal operators that it judges to unreasonably affect competition, service, or transportation costs, and FMC has applied this authority to review port fees. Congress acted previously, in theWater Resources Devel- opment Act of 1986, to authorize fees (specifically harbor dues to pay for dredging), ensuring that they could not be challenged as inconsistent with constitutional provisions, but also eliciting industry objections that the law implied that the ports’ authority to set fees is narrowly restricted. A feder- ally sanctioned port user charge program could bemodeled on the airport passenger facility charge: it would be voluntary, it would authorize spe- cified forms of charges and charges whose revenues were dedicated to specified uses, proposed uses would be subject to public review and com- ment, and each port would retain all revenue from the charges it imposed. In addition, provisions in the federal-aid highway program that restrict imposition of tolls on highways built with federal-aid funds should be

276 Funding Options for Freight Transportation Projects removed, although federal responsibilities (for example, to ensure that interstate commerce is not interfered with) may necessitate some form of oversight. Highway and bridge tolls can be a practical revenue source for highway projects, including port access and other intermodal con- nector projects. States should be allowed to impose tolls on federal-aid roads and allowed flexibility in the design of toll systems. 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. The objective of the incentiveswould be to demonstrate successful arrangements that would attract imitation at other facilities.USDOT’sNational Strategy toReduceCongestion (whichoffered competitively awarded grants to projects to demonstrate congestion pric- ing) is an example of such an incentive program. Incentive grants should be administered through the discretionary assistance programproposed in Recommendation2 above.More attractive credit assistance, as proposed in Recommendation 3 above, also would serve as an incentive for develop- ment of project-specific revenue. Of equal importance is avoidance of grants that relieve the principal parties of primary responsibility. Remove barriers to international investment. Congress should act to reduce legal barriers to foreign ownership, oper- ation, and investment in theU.S. transportation industry, particularly in themaritime and aviation industries, to the extent consistentwith national security. Foreign direct investment is an important source of capital growth inmanyU.S. business sectors. Restrictions on foreign ownership and operation inhibit foreign investment in U.S. facilities. According to ratings of theOrganisation for EconomicCo-operation andDevelopment (OECD), U.S. laws and regulations influencing foreign direct investment in the transport sector are more restrictive than for any other major U.S. business sector, andmore restrictive than the average amongOECD countries for the transport sector. Provide information, planning, and training assistance. The federal government can promote use of local and project-specific revenue sources through information dissemination, planning assistance,

Findings and Recommendations 277 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 sys- templanning andproject evaluation and fordata collection in support of freight systemperformancemonitoring.USDOT has in recent years increased its attention to these functions, and its efforts have produced valuable results. However, a sharper focus on monitoring and evaluation that directly support federal and state decisionmaking on systemmanage- ment and investment priorities, broader coordination among government agencies and with the private sector, and greater resources are necessary. 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. These functions should be organized within USDOT in such a way that they are not per- ceived as primarily the function of any singlemodal administration. The joint program office form of organization is one model to consider. The organization should have established relations with all federal agencies whose policies and programs affect freight transportation and trans- portation finance, or that engage in data collection and analysis related to freight transportation, including the Surface Transportation Board, the Department of Energy, the Treasury Department, and the Depart- ment of Commerce. The organization will require a staff with diverse professional expertise. The organization should also have cooperative relationships with state and local governments and with the freight industry. It should provide products that are useful to state and local governments, including evalu- ation and planning techniques that define best practices. Contact with the private sector will be necessary because the organization’s effectiveness will depend on its understanding of the freight transportation industry and freight markets. The Highway Trust Fund would be one appropriate source of support for the organization’s activities, since most activities

278 Funding Options for Freight Transportation Projects will relate to highway transportation along with other modes, and the other modal trust funds also could contribute. Freight SystemMonitoring 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 transportation system and to identify sources of inefficiency. Monitoring should measure performance in economic terms: trans- portation costs (including costs to shippers and to taxpayers and environ- mental costs) and productivity. Physical measures of performance (e.g., transit times and congestion delays) must be monitored as the basis of the economic measures. Monitoring would identify the most important local physical bottlenecks that are degrading performance, estimate the costs of congestion at these bottlenecks, andmonitor progress in alleviat- ing them. Monitoring also would identify institutional obstacles retard- ing productivity improvement. Obstacles include freight transportation market distortions caused by external costs and subsidies, which lead to inefficient operating practices and investment decisions. Effective moni- toringwill requiremore comprehensive and regular data collection efforts (e.g., regular conduct of the Commodity Flow Survey and regular pooling and sharing of local traffic performance data) and use of advanced data management systems. 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. Because public infrastructure adapts slowly to changes inmarket require- ments, improved planning could have high value. The most important planning functions at the federal government level are (a) to establish an understanding of how government actions affect system performance; (b) to anticipate future developments in transportationmarkets and tech- nology, in the United States and globally, that will affect freight system performance in ways that will require a government response; and (c) to identify and evaluate alternative government responses aimed atmaintain- ing efficient performance in the face of changing external circumstances.

Findings and Recommendations 279 Resources should be devoted primarily to developing planning and analy- sis tools that directly support specific federal decisions. For example, the federal government should have the capability to evaluate the system performance impacts of federal regulations and the effects of alternative structures of federal infrastructure assistance programs on investment levels and priorities. These planning functions should use methods that incorporate consideration of risk and uncertainty. The expected risks of decisions in an uncertain environment should be identified and provision made for monitoring the deviation from present expectations. A risk-based management strategy should be developed that identifies review points where policy can be changed if circumstances evolve differently than anticipated. 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. Evaluation is the process by which governments identify candidate projects, decide which projects are suitable for government participation, and set prior- ities that determine which projects receive support. To negotiate part- nerships successfully in joint public–private projects, government parties must be capable of independently assessing commercial value to the private-sector participants. The public sector must be able to evaluate not only expected costs and benefits but also risks, and how risks would change with alternative finance arrangements for a project. Through this program, the federal government should work closely with state and local government agencies to develop these agencies’ tech- nical capacity in project evaluation. The first steps in the program should be the following: • Targeted research to close evaluation data gaps. Such gaps include information on costs of changes in freight traffic, the causes and costs of congestion, and the value of speed and reliability. • Critical review of past evaluations and of project evaluation methods employed in other infrastructure programs (in the United States and abroad) to identify problems with present practices and themost useful available methods.

280 Funding Options for Freight Transportation Projects • Definition of evaluation frameworks, including principles and prac- tical methods for project evaluation. Any federal program that entails economic evaluation of project proposals should have a standard evaluation protocol that specifies costs and benefits to be estimated quantitatively, estimation methods, and data required. A closely related form of evaluation is the outcomes evaluation: the determination of whether a given investment accomplished its goals. Without such ex-post evaluation, there is no systematic evidence on which to judge the success or failure of a public program. Evaluation of outcomes of government-built and government-aided freight infra- structure projects should be a requirement. When the outcomes evalu- ations show that a program is not meeting its objectives, the program should be revised or terminated. REFERENCE Abbreviation TRB Transportation Research Board TRB. 2006. Special Report 285: The Fuel Tax and Alternatives for Transportation Funding. National Academies, Washington, D.C.

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TRB’s Special Report 297: Funding Options for Freight Transportation Projects explores ways to pay for projects that expand freight capacity or reduce the costs of freight transportation. The committee that produced the report found that present finance arrangements are inadequate for maintaining and improving freight transportation system performance. The report calls for finance reforms that promote productivity gains by targeting investment to projects with the greatest economic benefit and by encouraging efficient use of facilities.

A summary of the report, which was published in the July-August 2010 TR News, is available online.

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