Freight Transportation: Short Sea Shipping Option Shows Importance of Systematic Approach to Public Investment Decisions
Released: 2005-07-29T00:00:00

Letter

Background

Transporting freight by water has been part of the freight network for many years in the United States, but most operations have traditionally been used for the movement of bulk commodities, such as coal, petroleum, grain, and lumber. Waterborne modes, sometimes referred to as short sea shipping (SSS) operations, currently operate along the Mississippi River system, across the Great Lakes, through the St. Lawrence Seaway, and along some coastal routes. Together, these operations moved about 6 percent of the nation’s freight tonnage in 2000. SSS is one of the most cost-effective ways to move heavy, lower-value, and non-time-sensitive goods, but since it is slower and less reliable than trucking or air, shippers tend to move higher- value and time-sensitive freight by faster and more reliable modes, such as trucking or air.

Recent years have brought an increasing focus on developing new SSS options that are better suited for moving cargo that normally travels by truck and tends to include higher-value and time-sensitive goods. (See table 1 for examples of traditional and newer waterborne services.) Some of these proposals rely on traditional waterborne methods, such as tug-and- barges, that are adapted to move containerized cargo instead of the traditional bulk commodities. For example, one operation we examined uses a tug-and-barge to move containers between two cities in the Northeast. Other proposals, however, look much different from the traditional waterborne modes. For example, one operation has proposed using two self-propelled ships to move containerized cargo along coastal waterways at faster speeds than tug-and-barges. Another proposal calls for building a dozen “next-generation” vessels that could move trucks and passenger cars along an extensive waterway network at more than four times the speed of tug-and-barges.

To develop these newer types of SSS operations, some transportation stakeholders have called for extensive public-sector involvement, while others have advocated for a more limited government role. For example, some transportation stakeholders believe that the federal government should provide money for SSS demonstration projects or heavily subsidize start-up operations to prove to shippers that this is a viable mode of transportation. Others, however, see a more limited government role and argue that government officials should focus their efforts on addressing regulatory provisions that may interfere with the development of SSS operations.

The waterborne transportation of freight has a strong presence in Europe, where European Union policies have encouraged its use. In Europe, SSS grew steadily between 1970 and 1998. Shipping in Europe, however, is not directly analogous to shipping higher-value freight in the United States. For example, Europe’s rail system is less efficient for moving freight than the U.S. rail system, and because of Europe’s geography, many of Europe’s main industrial centers are close to waterways. Thus, in many cases, SSS routes in Europe may provide the fastest and most reliable service between destinations. In addition, legal provisions—such as road taxation and driving restrictions—increase the cost of road transport in Europe and play a role in the greater use of SSS.

Federal funding that could potentially be used to assist with the development of SSS in the United States is currently limited. Under certain circumstances, however, current federal laws could provide some financing for waterborne options because these laws allow states more flexibility to expend federal aid on certain nonhighway freight projects. The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) and its successor, the Transportation Equity Act for the 21st Century (TEA-21), broadened the reach of programs established under title 23 of the United States Code to fund and finance surface transportation projects with user tax receipts credited to the Highway Trust Fund and distributed to states through annual apportionments according to statutory formula. While funds apportioned to the states are most often used to build and maintain roads, innovations in ISTEA and TEA-21 allow transportation decision makers some flexibility in using funds for freight improvement projects. For example, funds can be used to make improvements to rail lines and port facilities. The current federal framework also allows for greater use of public-private partnerships through programs such as the Transportation Infrastructure Finance and Innovation Act of 1998, a program that provides federal loans or loan guarantees to be used in concert with funding from other sources, including the private sector.

Transportation planning occurs at the federal, state, and local levels. Although the last two surface transportation reauthorizations provided enhanced project-specific decision authority for the use of formula funds to the state level, the U.S. Department of Transportation (DOT) has responsibility for nationwide transportation planning, as well as program- level oversight. DOT has recently become involved in exploring the potential of SSS to expand the capacity of the freight transportation system to improve freight mobility and reduce congestion. In its strategic plan, DOT states that the U.S. coastal and inland waterway system is underutilized and could provide a practical, safe, and efficient means of transporting freight. Through its National Freight Action Agenda, DOT has specifically identified SSS for accelerated development. As the primary operating agency within DOT responsible for promoting SSS, the Maritime Administration (MARAD) has also made SSS a high-visibility component of its strategic plan. MARAD’s Strategic Plan proposes that greater use of the maritime transportation system, through elements like SSS, offers the potential to reduce passenger and freight congestion, as well as facilitate increased U.S. military reliance on commercial marine transportation systems.

Transportation Stakeholders See Short Sea Shipping As Having Multiple Benefits, but Also Cite Obstacles That May Impede Development

Stakeholders, including transportation officials and maritime stakeholders representing both the public and private sectors, see SSS as a potential option for improving freight mobility and creating other benefits, especially in high-demand transportation corridors, but they also note that certain obstacles may limit its development. Benefits cited include improved freight mobility, reduced infrastructure spending, and improved air quality. Potential obstacles to being an effective competitor include laws that increase start-up and operating costs, port facilities that are not readily adaptable to SSS operations, and a general reluctance among shippers to try new modes. For the two operations we examined, the effect of these potential obstacles varied. Some affected the viability of the operations, but others appeared to have little effect or were overcome by the operators.

Benefits Cited Include Improved Freight Mobility, Improved Air Quality, and Reduced Infrastructure Spending

According to stakeholders, the development of SSS operations may produce a number of public benefits. (See table 2.) By providing an additional option for transporting freight, stakeholders contend that such services would increase the capacity of certain freight routes, thus alleviating many of the capacity stresses that currently affect the surface transportation system. For example, an SSS service that moved cargo from New York to Miami might reduce the number of trucks on Interstate 95, the major highway between the two cities, thereby reducing overall roadway congestion. Similarly, SSS services that move containerized cargo out of busy ports to less congested ports could help alleviate dock congestion and reduce the number of trucks and trains traveling on crowded port access routes, thus alleviating capacity constraints affecting many ports. Stakeholders also contend that since SSS services are more fuel efficient than trucks, SSS operations can help improve air quality in certain locations by reducing pollution. Finally, stakeholders contend that SSS services could provide a more cost-effective alternative to building new roadways and rail lines, thus reducing the amount of money spent on infrastructure projects.

Potential Obstacles Cited Include Legal, Operational, and Acceptance Issues

While stakeholders contend that such SSS operations can produce a number of public benefits, they also note that various obstacles could make it difficult for operators to start and sustain an SSS service that competes effectively with other modes. Since few SSS services have actually been created, there is no consensus about the effect, if any, these obstacles would present to SSS development. The potential obstacles cited involve legal, operational, and acceptance-related challenges. Legal requirements could present a barrier to SSS development by increasing the start-up or operating costs of operations. Operational challenges involve incompatible infrastructure and potential strains on port capacity. Finally, a general unwillingness among the shipping community to switch from well- established modes, such as trucking and rail—even if SSS can be shown to be a competitive option—can present a barrier to SSS development.

Legal Requirements

Paying the Harbor Maintenance Tax. Some proponents contend that the Harbor Maintenance Tax, a general levy on the value of cargo moved through a port, would make SSS less competitive with other modes, such as truck or rail, because it places an additional tax burden on shipping by water. The fee, which pays for such activities as harbor dredging, is levied on the value of cargo (0.125 percent) as it is loaded or unloaded from a commercial vessel in a U.S. port. Stakeholders argue that since shippers may avoid the tax by utilizing other modes, such as trucking or railroads, few would choose to use SSS services. For example, a shipper moving cargo from New York to Miami using SSS would be subject to the tax, but the same shipper can avoid the tax if the shipment travels by rail or truck. Trucking associations note, however, that they, too, are subject to user taxes, such as tolls and federal taxes.

Potentially higher vessel costs because of Jones Act requirements. Some SSS stakeholders contend that certain provisions in the Jones Act, which requires that any vessel (including barges) operating between two U.S. ports be U.S.-built, owned, and operated, may increase the start-up costs of SSS operations because ships built in U.S. shipyards tend to be more expensive than vessels that can be acquired from the global market. These higher costs, in their view, could increase start-up costs and make it difficult for operators to create SSS services or sustain profitability. Another stakeholder argued that SSS operators are overstating the cost differences between U.S. and foreign-built ships and note that even if U.S.- built ships are more expensive, these additional capital expenditures, given the long operating life of a ship, would add little to the cost of each trip.

Operational Issues

Potential need to alter port facilities. Current port infrastructure is often designed to accommodate large and deep-draft oceangoing vessels and may not be compatible with ships designed for SSS operations. For many oceangoing ships, large cranes are generally used to load and unload containers. This approach, referred to as “lift-on/lift-off,” may be compatible with some SSS operations, but others may use different loading and unloading techniques. For example, some SSS operations may use a different approach, such as “roll-on/roll-off,” in which trucks drive off and on the ship. Therefore, starting an SSS service might require ports to build ramps that allow trucks to move on or off the ship or additional dock-side space where truck trailers wait to be loaded and unloaded from the ramp. SSS vessels are also smaller than oceangoing ships, and this size difference has raised concerns that SSS ships will not be compatible with docks designed for larger oceangoing vessels.

Added handling costs. Shipping operators must pay dockworkers to lift cargo on or off ships, and some stakeholders have argued that the cost of these “lifts” will make SSS services less cost competitive with other modes. A shipper moving a container by SSS from New Orleans to Houston, for example, would need to pay for at least two “lifts”—one at the port of departure and one at the port of arrival. This could add hundreds of dollars to the total shipping costs, according to some proponents. A shipper choosing to move the goods by truck avoids the costs of the “lifts.” An SSS service using a roll-on/roll-off approach rather than cranes to load its vessels, however, might encounter cost savings.

Potential strains on port capacity. While some SSS services may improve port efficiency, thus reducing strains on port capacity, other types of SSS services might have the opposite effect, according to some stakeholders. For example, a service that attracted additional containers to a port for shipment by SSS rather than by truck would add to the number of containers entering and leaving the port. Because of these concerns, some proponents have advocated basing SSS services at ports that handle less cargo than the nation’s major freight gateways, but these are often further away from the major market areas that demand the cargo.

Acceptance-Related Challenges

A viable economic advantage. Some stakeholders note that short sea shipping must offer economic advantages before shippers would be willing to use such services. Stakeholders note that for shippers to be willing to try this new approach, SSS operations would need to provide service that is cost-competitive with other modes and is as consistent and reliable. In addition, shippers would need to identify some advantages to shifting to SSS services, such as faster, more reliable, or cheaper service than other transportation modes.

General reluctance to try new modes. A general reluctance among shippers, freight forwarders, and others involved in moving freight to try new shipping modes, regardless of the potential benefits, poses an additional challenge, according to many stakeholders. One transportation stakeholder told us that since shippers have operated under negotiated contracts with trucking companies for many years, they may be unwilling to shift business to SSS operations regardless of perceived benefits.

SSS Services Examined Were Operationally Different, but Both Attempted to Address Similar Freight Capacity Concerns

While the two SSS services we examined—one in the Gulf Coast and one in the Northeast—differed in many ways, both of the services were designed to address capacity concerns. The two operations differed in such ways as the types of vessels used, operating schedules, types of cargo moved, and structure of funding (public or private). (See table 3.) Both services, however, were designed to provide a modal alternative that could help improve freight mobility around ports and along congested cargo routes.

The Gulf Coast service, which began in 2000, is a private-sector initiative designed to attract shippers concerned about several freight capacity issues at ports and along key transportation routes. Operating on a 7-day cycle around the Gulf of Mexico, the Gulf Coast service uses a self- propelled U.S. flagship vessel (named Sea Trader) to move international and domestic containerized cargo, such as building supplies, finished manufactured goods, and chemicals, to and from ports in Houston, New Orleans, Tampa, and other cities as needed. (See fig. 1 for picture of the Sea Trader.) For example, the service moves finished manufactured products from Houston to Tampa and empty containers from Florida to Gulf Coast ports. The self-propelled vessel completes these types of trips in about half the time of a tug-and-barge service, according to the operators of the service. Speed is important, they said, because it allows them to compete with trucking along these cargo routes.

The service has provided a successful solution to several of the freight mobility concerns in the area, according to operators. (See fig. 2 for a map of the Gulf Coast service.) Two concerns, in particular, attracted customers to the service, according to officials we spoke with. One was the difficulty of finding truck drivers for several routes covered by the service. These routes, such as Houston to Tampa, are reportedly undesirable to many truck drivers because they involve a long-distance trip that may take multiple days, and the drivers often receive compensation for only one leg of the trip. One logistics provider told us that a company in the region began using the SSS service because it was unable to find drivers willing to move cargo from Houston to destinations in Florida. Operators of the service maintain that the service provides shippers with an alternative means of moving cargo along these routes. The second concern was declining rail service, which has become increasingly unreliable, according to the operators and the logistics provider we spoke with.

According to the operators, the service has also been able to help relieve port congestion and provide other public benefits, including the following: Because containers can be transferred directly from other ships to the SSS vessel at the Port of Houston, fewer trucks will need to travel along port access routes, thus reducing congestion on roadways leading to and from the port.

This ability to pick up cargo from the port also increases the amount of cargo that can be removed from the docks during a 24-hour period, increasing overall port capacity and reducing the amount of time that cargo normally sits on the docks before it is loaded onto another mode for delivery to its final destination.

Finally, to the degree that containers are transported to their destination on the SSS vessel instead of on the highway, the service reduces the number of trucks traveling along congested roadways.

The Gulf Coast service has been able to attract enough business that the service is currently covering most of its operating expenses. The logistics provider we spoke with said the cost of the service was competitive with trucking rates. Although the service has been able to move enough cargo to sustain operations, the operators said that they are still operating below full capacity and have had a difficult time attracting more business from shippers in the area. Nonetheless, the operators said they plan to add an additional self-propelled vessel to the Gulf Coast route within the next 12 months. They expect future customers to be attracted because of (1) problems that trucking companies are having with finding drivers for certain long-distance routes and (2) continued concerns on the part of shippers about rail service in the region.

Northeast Service

The Northeast service, which began in April 2003, is a public-sector initiative designed to help alleviate many of the port capacity problems at the Port Authority of New York and New Jersey as well as relieve congestion on crowded roadways in the New York City area. The Port Authority of New York and New Jersey, the Port of Albany, and regional and state planners spearheaded an SSS service for moving containerized cargo up and down the Hudson River between the Port Authority of New York and New Jersey in the south and the Port of Albany in the north. This service is part of a proposed inland distribution network that planners hope will include multiple rail and SSS services.

This service, called the Albany Express Barge, uses a privately owned and operated tug-and-barge to transport the containers, which are primarily loaded with bulk commodities, such as logs and silicon. (See fig. 3 for a map of the Northeast service.) Shipping containers between these ports by barge is slower than shipping them by truck, so the two ports decided to use a public subsidy to make the shipping rate more attractive to potential shippers. With the help of the public subsidy, the ports were able to set a shipping rate 10 percent below the rate for shipping by truck. Officials at the Port Authority of New York and New Jersey, faced with space limitations and expecting a dramatic influx of international cargo in future years, believed that within 15 years, such operations would be able to transfer more than 18 percent of all containerized cargo moving into and out of the Port Authority of New York and New Jersey.

To set a shipping price that was lower than trucking rates, the ports have used public funding from several sources as a way to supplement the amount the operator is receiving. The main sources for this subsidy are two federal grants secured by the Port of Albany through the Congestion Mitigation and Air Quality Improvement (CMAQ) program. The first grant was for $3.3 million for 2003 to 2004; the second, an extension of the first grant, was for $2 million for 2005. Under the rules of the CMAQ grant, Port of Albany officials are required to provide a 20 percent match to receive the funds. The Port of Albany has been providing much of this amount from its budget, although Port Authority of New York and New Jersey officials have recently provided $500,000 to help meet the requirement. Operators of the service also collect a fee from users of the service for each container shipped, which, according to port officials is about 10 percent less than what it costs to move the same goods by truck.

This service is not meeting officials’ expectations. Port officials said that during the first 2 years, it has moved significantly less cargo than originally projected and will likely remain dependent on public subsidies for the next 10 years. The operation initially began as a twice-weekly service, but shortly after its launch, officials cut service to once a week because the volume of freight was not sufficient to sustain two trips a week. During the first 12 months of service, the operation moved an average of 105 containers per month. Usage rose to an average of 383 containers per month in the next 11 months (April 2004 through February 2005), but this higher level is still far less than originally projected. In addition, port officials said that about half of the containers that travel on the service are empty and, thus, do not generate revenue for the service. Because usage is lower than expected, the ports have had to use more grant moneys than expected to meet the operator’s costs. According to port officials, without the 1-year $2 million extension of the CMAQ grant, the operation would likely have been discontinued. Plans for the service after grant moneys are exhausted are uncertain.

Effect of Potential Obstacles Varied for the Two Services

Some of the factors that stakeholders identified as potential obstacles appeared to affect the development and continued operations of the Gulf Coast and Northeast services, but others had little effect or were overcome by the operators. For example, neither the Northeast nor the Gulf Coast operators cited inadequate port infrastructure as a major obstacle to development, but both said that shipper reluctance was affecting the viability of their services. Some factors, such as handling costs, affected the two services in different ways. Below, we describe how each identified obstacle affected the two SSS operations we examined.

Harbor Maintenance Tax. The Harbor Maintenance Tax did not appear to be a significant obstacle to the development or operation of either SSS service, but in both cases, the operators of the services still expressed concern about its potential effect. While users of the Northeast or Gulf Coast service are required to pay the Harbor Maintenance Tax, the operators said they were not sure whether the shippers using these services were submitting their payments. Operators of both services nonetheless said they were concerned that if the tax is ever explicitly levied on these domestic movements, shippers may be unwilling to use the services because they can avoid the cost by using land-based options.

Jones Act requirements. The Gulf Coast operators said that, in general, the high capital costs of U.S.-flag vessels are affecting their ability to expand operations and keep shipping prices competitive with trucking, while the Northeast operators said that this requirement was not affecting them. The difference, however, may lie primarily with the type of vessel each service uses. According to the Gulf Coast operators, this obstacle did not prevent them from starting their service because they were able to buy a used U.S.-flag ship—a cheaper alternative than buying a new U.S.-flag vessel. For expansion, however, the Gulf Coast operators said the limited number of used U.S.-flag ships available on the market poses a greater difficulty. Operators of the Northeast service, by contrast, said the requirement was not a significant concern because they use a tug-and- barge option in which the U.S. and foreign-built versions, compared with self-propelled vessels, are more similarly priced.

Handling costs. The Gulf Coast operators said that handling costs were not a significant concern because they were able to negotiate special rates with dockworkers. In contrast, the Northeast operators said that handling costs are affecting the sustainability of their service. In both instances, the operators were able to negotiate special contracts with dockworkers that reduced the cost of each “lift,” thus helping decrease overall shipping costs. The Northeast operators, however, said even their negotiated rates are still high enough to affect viability.

Port infrastructure. Neither service cited port infrastructure as a problem. Gulf Coast operators said they worked with transportation officials in various locations to provide needed infrastructure additions or upgrades at ports, such as roadway access routes. However, both operators used lift-on/lift-off equipment (such as cranes), and it is unclear whether SSS operators who attempted to use roll-on/roll-off technology would encounter port infrastructure problems.

Adverse impact on port capacity. According to port officials in the Northeast and the Gulf Coast, the SSS operations have not had a significant impact on port capacity. For the Gulf Coast operation, officials at the Port of Houston said that the SSS service was moving a small amount of freight; thus, it did not add to capacity problems at the port. In the Northeast, officials from the Port of Albany and the Port Authority of New York and New Jersey said that the operation was also not adding to capacity concerns.

Shipper acceptance. The Gulf Coast and Northeast operators both said that a general unwillingness among the shipping community to try new and untested modes, such as SSS, was affecting the viability of their SSS services. The Northeast operators said that even though they are offering a service that is cheaper than trucking, they have been unable to convince shippers to switch. The Gulf Coast operators also said that they have had a difficult time convincing many shippers to switch from trucking to SSS, even though they believe they offer a service that is comparable in price and speed to trucking. Our discussions with logistics providers produced two main explanations for this lack of acceptance. One concerns speed. For example, one logistics official in the Northeast told us that SSS services in general are too slow for shippers’ needs, and thus many shippers are unwilling to use them. The other concerns frequency of service. Logistics providers in the Northeast and the operators of the Gulf Coast service said that the SSS services are at a disadvantage to trucking because they cannot currently offer more-frequent service, while trucking companies can move goods daily. This frequency of service, according to logistics providers, is an important factor for many shippers.

Operators of the Gulf Coast service echoed these concerns in their own comments about potential obstacles to keeping or expanding a viable SSS service. They said the ability to provide service that is comparable with trucking is critical, especially if the goal is to remove trucks from major roadways and port access routes. In this regard, they said, tug-and-barge operations are too slow to compete with trucking along certain cargo routes, and even self-propelled vessels are still slower than trucks along many cargo routes. Likewise, frequency of service was a concern because more-frequent service allows shippers to integrate SSS services into their supply chains. The Gulf Coast operators also said that Coast Guard crewing requirements were an impediment to SSS operations that use self-propelled vessels because the Coast Guard requires a larger crew for self-propelled vessels that carry containers. Because the operators of the service must pay for a larger crew, these requirements decrease the cost competitiveness of the SSS operation, according to the operators of the Gulf Coast service. Finally, the most important factor, according to the Gulf Coast operators, is that SSS services must be cost-competitive with trucking if such operations are going to attract business from shippers.

Stakeholders involved with the Northeast service said that a lack of commitments from ocean carriers—those responsible for exporting and importing international shipments—is also affecting the viability of their SSS service. According to officials at the Port Authority of New York and New Jersey, ocean carriers often decide how international cargo entering the United States will reach its final destination, and, therefore, having their commitment to move goods on the Northeast service might make it more successful. This is a factor that could affect other SSS operations in other regions of the country.

The Department of Transportation’s Role in the Development of SSS and Freight Transportation Improvements Needs More Careful Study

While SSS appears to have merits worth considering, it is unclear why DOT has already identified SSS as a high-priority component of the national freight transportation strategy and chosen to promote and accelerate its development. Such an endorsement appears premature given the limited experience in the United States in using this approach, the preliminary nature of the information generated so far through the agency’s exploratory efforts, and the absence of a comprehensive understanding of key issues necessary to define the appropriate federal role needed, if any. Before moving ahead, more work is necessary to establish whether federal intervention in the development of SSS in this country is appropriate. Then, if an appropriate federal role exists, a necessary next step is to consider what changes, if any, might be needed to carry out that role. Two questions appear central to such a discussion: (1) Should federal support be provided for privately owned and operated infrastructure? (2) Should funding levels be increased and existing funding sources expanded?

DOT Has Identified SSS Development as a National Freight Priority before Determining Why the Federal Government Should Be Involved

DOT has identified the acceleration of SSS development in the United States as one of six high-priority freight initiatives through its National Freight Action Agenda and has taken steps to explore the viability of the approach. According to agency officials, SSS is an important concept for the agency to explore because of the potential of the approach to produce public benefits, such as reducing traffic congestion in areas experiencing heavy freight movement and expanding the capacity of the freight transportation system to support continued economic growth. At this stage, however, agency officials acknowledge that all of the public benefits of SSS and factors that may affect its development in this country have not been fully considered. DOT has undertaken a number of exploratory activities, most of which were undertaken to promote and accelerate the approach in the United States. For example, MARAD—the primary agency within DOT responsible for the SSS initiative—has funded studies of the concept, created a public/private partnership of stakeholders to share resources and in-kind services for accelerating SSS development in the United States, and sponsored conferences to exchange industry knowledge of SSS and its potential contribution to the nation’s transportation system. Agency officials emphasize that MARAD’s exploration of these issues spans only a few years and results to date can be characterized as preliminary.

DOT does not yet appear to have a sound basis for identifying SSS as a high-priority component of the national freight transportation strategy. Thus far, federal efforts have focused on studying and exchanging industry knowledge on the concept, and not on whether federal involvement in its development is necessary. This information may be useful in understanding the potential of the approach to reduce congestion and expand system capacity, but it will not help policymakers determine whether federal involvement in its development is warranted, and it does not begin to broach issues involving the effects of federal involvement on the freight transportation system as a whole. For example, DOT has not thoroughly assessed key issues, such as the potential impact of federal involvement in developing SSS on the competitive balance among all transportation modes; lessons learned from new SSS services, such as the Gulf Coast and Northeast services that we examined; and obstacles and mitigating actions necessary to developing SSS, particularly with respect to the reluctance by shippers and logistics providers to using this option.

In-depth insight into these and other issues is an important prerequisite in order to establish the extent of federal involvement needed, if any, in the development of SSS in this country. However, it is unclear at this time whether DOT and, in particular, MARAD are planning to address these issues. DOT’s Office of Freight and Logistics and MARAD’s Directorate of Port, Intermodal, and Environmental Activities, which together account for the bulk of federal SSS activities undertaken to date, have recently reorganized and are rethinking where next to focus their SSS efforts. Both are developing plans for future SSS activities in which they plan to engage, and these plans were not yet finalized and were not available for our review during the course of our work.

Before asserting a federal role in the development of a domestic SSS system, DOT should consider whether federal involvement is even appropriate. As part of the agency’s information-gathering efforts, it would be important for DOT to consider the potential of the private sector to develop SSS without any involvement from the federal government. Many transportation experts maintain that government involvement in freight projects should be limited to circumstances in which market-based solutions would produce less than efficient results. Government-imposed solutions to freight problems have the potential of superseding solutions that the private market would reach on its own. Determining whether SSS development could occur solely in response to market forces is an important issue to explore, in part, because the federal involvement may be spurred by considerations other than freight efficiency. For example, the federal government is interested in maintaining the safety and condition of the transportation system in addition to improving the efficiency of the system. Therefore, without fully exploring the implications of federal involvement, policymakers may adopt an approach that unintentionally causes market distortions and reduces efficiency. In the extreme, providing federal support for a project has the potential of producing overcapacity and distorting shippers’ choices about which transportation mode to use.

Part of determining the advisability of a federal role involves assessing the risks associated with providing federal support for SSS projects. While lessons learned from the two SSS operations we reviewed are not necessarily transferable to other operations, they serve as examples of how government intervention might produce the risk of resources being used inefficiently. One of these services (the Gulf Coast service) had little or no federal involvement and demonstrates the willingness of users to pay for a project; the second (the Northeast service) involved a federal subsidy and demonstrates the risk associated with providing a subsidy when demand is not completely understood. The unsubsidized Gulf Coast service depends on private-sector demand and has been able to attract enough business that the service has been able to cover most of its operating expenses. In contrast, the subsidized Northeast service is not meeting the expectations established for it, even though the ports were able to set a shipping rate 10 percent below the rate for shipping by truck with the help of the federal subsidy. Additionally, an extension of federal funds had to be secured, without which the operation would have been discontinued, according to project sponsors.

At the very least, the lessons learned from the two operations we reviewed suggest that more information should be developed to help policymakers weigh the risks associated with federal involvement in SSS. However, the available evidence indicates that DOT is already proposing a role for the federal government in SSS and is considering federal financing mechanisms that will, in part, provide support for SSS projects. DOT has recently developed federal policies intended to benefit the maritime sector and packaged these policies within a proposal referred to as the SEA-21 initiative. According to DOT officials, the purpose of the SEA-21 initiative would be to create a federal maritime program similar to the surface transportation program governed by ISTEA and TEA-21. This proposal has not been formally introduced, but, according to the prepared remarks of the Under Secretary of Transportation for Policy, DOT has endorsed SEA- 21 and appears to be committed to its eventual enactment. DOT officials have stated that the proposal includes SSS as a central component and involves increased investment in the maritime system by leveraging federal, local, and private sector funds. It would thus appear that DOT has determined that the federal role would involve the provision of targeted incentives for SSS projects. These decisions seem premature by establishing that federal involvement is warranted before determining how SEA-21 will impact the competitive balance among all transportation modes, such as rail and trucking.

If a Federal Role Exists, Key Policy Issues Merit Close Consideration

If DOT determines that federal involvement in the development of SSS is appropriate, changes may be needed at the federal level to realize the concept’s potential. These changes potentially affect the federal surface transportation program established under Title 23 of the United States Code because the vast majority of freight moves across the nation’s roadways, and this program provides most of the federal support forroadways. This program is also important in any discussion of providing federal support to advance freight improvements in that freight transportation is typically intermodal and through these acts the Congress established intermodalism in federal policy.

If a federal role exists for SSS, the potential change involved appears to center on two broad policy questions: (1) Should federal support be provided for privately owned and operated infrastructure? (2) Should funding levels be increased and existing funding sources expanded? Understanding the implications of these broader policy issues can help guide DOT as it wrestles with defining the federal role for SSS development and ensuring that the approach adopted will be part of an integrated approach to addressing the nation’s congestion and capacity problems.

Determining How Federal Aid Could Be Applied to Projects That Provide Benefits to the Private Sector

Accommodating freight projects under federal aid programs involves considering the implications of providing public support to projects both that provide substantial private benefits and that individuals and firms would be willing to pay for on their own. The high level of private sector involvement in freight transportation is a major factor distinguishing freight improvements from other transportation projects. For example, most freight carriers are private companies, and they own and operate significant components of the nation’s freight transportation infrastructure, such as port terminals, trucking companies, and rail lines. Therefore, any freight improvement, including SSS projects, would likely involve privately owned or operated infrastructure. Funding such types of projects might thus provide a significant benefit to the SSS operator that owns and operates the service.

The rationale for considering whether federal aid programs should be broadened to include freight improvements is that these types of projects also have the potential of producing a public benefit. Broadly stated, a freight improvement project may produce benefits that are not captured in market transactions. For example, an SSS project might alleviate congestion over a wide area by removing some freight from highway and rail, thereby increasing the capacity of the surface transportation system. These types of benefits provide benefits to society but do not in themselves generate incentives to the private sector to invest because the benefits do not accrue to the projects’ users and, therefore, would not be reflected in the prices they would be willing to pay.

Although freight improvement projects may have potential to produce public benefits, current decision-making processes and federal funding requirements can limit the consideration they receive. Transportation decision making has been established primarily as the responsibility of state departments of transportation and local metropolitan planning organizations, based on the premise that these levels of government would know best how to identify transportation priorities and dedicate funding to them. As we have reported in the past, however, consideration of freight improvement projects within this state and local process is limited because the process is oriented to projects that clearly produce public benefits, such as passenger-oriented projects. Because of eligibility requirements, many federal-aid programs also limit the use of federal support for privately owned or operated projects. The exceptions to such restrictions include the Congestion Mitigation and Air Quality (CMAQ) program, which requires a correlation between the use of funds and improved air quality, and loan or loan guarantee programs, such as the Transportation Infrastructure Finance and Innovation Act (TIFIA) program, that require that the projects being supported have the ability to take on debt.

When public subsidization is being considered for freight infrastructure projects—which to a large degree would likely benefit the private sector— the appropriate scope of government involvement must be considered carefully. Apportioning the cost burden of freight projects among participants equitably is important not only to guard against the waste of limited public resources but also to enhance the efficiency of the transportation system by supporting only the most worthy projects. Federal subsidies should not be assumed for all projects, since this increases the risk of resources being used inefficiently. Encouraging or requiring state and local decision makers to establish cost-sharing frameworks between the public and private sectors would better ensure that federal funds or support are being applied in the most effective way. Cost-sharing involves two important factors: First, the degree of public involvement, whether local, state, or federal, should be limited to the public benefits the project is expected to produce—for example, those related to congestion reduction, pollution reduction, accident avoidance, and other public benefits. In other words, the cost-sharing framework should ensure that the private sector is assessed the costs of projects commensurate with the benefits it receives from them.

Second, care should be taken to adequately consider the capabilities and resources of the private, state, and local entities to fund freight improvement projects. These stakeholders may seek to use federal funds to reduce the levels of commitment they would have provided otherwise. Federal assistance, when deemed appropriate, should promote or supplement expenditures that would not otherwise occur and should not supplant private or other public investors.

Encouraging or requiring the quantification of project costs and identifying all parties who will bear the costs can help ensure that costs are apportioned among all stakeholders equitably. When federal support through a loan or loan guarantee is used to advance a project, rather than using federal funds, DOT could consider encouraging or requiring that project sponsors plan the project to be self-supporting by targeting user fees to retire debts. Relying on revenue from users and encouraging public/private partnerships to provide efficient solutions to freight transportation needs should increase the likelihood that the most worthwhile improvements will be implemented and that projects will be operated and maintained efficiently.

There are precedents in which cost-sharing frameworks have been devised for freight improvement projects that stress reliance on federal, state, local, and private partnerships to share in the costs of freight projects. One such example involves a rail project in the Los Angeles area—the Alameda Corridor Project—which created a 20-mile railroad express line connecting the ports of Los Angeles and Long Beach to the transcontinental rail network east of downtown Los Angeles. Project sponsors secured a federal loan to cover a relatively small portion of the project cost and planned the project in such a way that revenues from fees assessed on the users of this service were targeted to retire debts. Also, the Freight Action Strategy (FAST) project in Washington state, involving a series of freight improvement projects in the Everett-Seattle-Tacoma region, received funding from a variety of public sources and private railroads. These projects illustrate how a cost-sharing framework—not largely dependent on federal funding—can be devised in such a way that all stakeholders share in the cost of freight projects.

By requiring or encouraging state and local decision makers to develop equitable cost-sharing frameworks as a condition for public support, the federal government would help ensure that costs are borne by all relevant stakeholders and that public resources are used as effectively and efficiently as possible. This approach would likely involve the least intrusive change at the federal level because it would retain the basic structure of transportation decision making by leaving the identification of transportation objectives and solutions to address those objectives in the hands of state and local decision makers. This change, however, might not change the perspectives of state and local transportation decision makers, who tend to give freight improvements limited consideration in the transportation-planning process. Left in the hands of state and local decision makers, freight improvement projects may continue to receive secondary consideration even if the eligibility requirements of existing federal-aid programs have been broadened to include freight improvements.

Determining Whether Funding Levels Should Be Increased and Sources of Funding Expanded

After deciding if federal financial support should be provided for SSS development, a follow-on consideration is whether additional resources beyond what is currently available should be provided. The primary source of federal support for freight improvements is the federal surface transportation program. The revenues collected and disbursed through this program involve excise taxes on highway users, which are credited to the Highway Trust Fund and apportioned to states by formula. States are given some flexibility in selecting projects on which federal-aid funds are expended, making possible the expenditure of federal aid on nonhighway freight projects in certain limited circumstances. Limited availability of federal funds, coupled with the hesitancy of state and local decision makers to devote public resources to projects that produce direct benefits in readily identifiable forms to the private sector, has resulted in freight improvement projects typically not receiving the level of federal support that perhaps some in the freight industry believe is necessary.

Considering whether Highway Trust Fund revenues should be expanded to nonhighway freight projects is a controversial issue. The argument against increasing flexibility in the use of federal-aid funds is related to the way revenues are collected. However imperfectly it may be implemented, the method by which revenues are collected and credited to the Highway Trust Fund is based on the user-pays principle, which contributes to efficiency. In this instance, the user-pays principle ensures that users value the facility at least as much as the cost of providing it. However, the opposing view holds that highway users do not pay for the effects of air pollution and the congestion delays they cause for others, and user-fee payments are not well matched to highway agency costs attributable to individual highway users. For example, the Transportation Research Board has reported that the heaviest combination trucks pay a smaller share of the expenditures highway agencies incur to serve them. Therefore, an argument in favor of increased flexibility in the use of these funds is that nonhighway uses of trust fund revenues may be defended as offsetting the effects of imperfect pricing of highways. Another argument for increased flexibility is that states should manage their transportation infrastructure programs by defining their transportation objectives and then identifying the optimal means to obtain those objectives. Limiting consideration of nonhighway solutions is an arbitrary constraint that will lead to suboptimal investment solutions.

In the face of controversy over use of the Highway Trust Fund for nonhighway projects, DOT has proposed a separate funding source to address improvements involving the maritime system. According to DOT officials, the SEA-21 proposal—a maritime version of the federal surface transportation program—is intended to benefit the maritime sector. Creating a new system of providing federal funds for freight projects based on one mode, however, addresses neither the problems of the overall system nor the source of the federal aid that will be necessary to implement the SEA-21 initiative. An integrated approach to addressing the impediments to freight mobility involves evaluating investment decisions across modes and making modal trade-offs. For example, a nonhighway project, such as SSS, may have the potential to relieve highway congestion and is, therefore, not a project that should be viewed in isolation of other modes.

Adopting an approach that involves new funding sources and federal-aid programs would require substantial changes at the federal level. Therefore, careful consideration should be given to the implications of implementing such changes. More work needs to be done to determine whether new sources of funding are actually required for SSS development or whether existing funding levels and sources could accommodate these types of projects. While the freight transportation industry and transportation agencies might agree that improving freight mobility is an essential factor for maintaining the nation’s economic health and competitiveness and that adequate funding must be made available for freight projects, reaching agreement on where the money should come from or how federal aid should be administered will be much more difficult.

While we have enumerated various factors that federal policymakers should consider in determining an appropriate role in the development and implementation of SSS in the United States, state and local transportation decision makers will also be faced with making difficult choices regarding SSS and other freight-related projects. In the next section, we describe an approach that state and local planners could use to guide investment decisions.

A Sound Investment Approach Is Needed to Guide Current and Future State and Local Public Investments in Freight Improvements

While DOT considers the federal role in the development of SSS activities, transportation decision makers at the state and local levels also face the need to consider alternatives for improving freight mobility. This is a challenge that goes far beyond SSS, because the transportation system involves many different modes and is funded by both the public and private sectors. Successfully addressing the needs of the system in the face of these complex, crosscutting challenges will require state and local decision makers to make tough choices in setting priorities and linking resources to results to ensure that public dollars are wisely and effectively spent. The public investment approach that we have developed, which grows out of our past work and our interaction with transportation experts, may be helpful in guiding public investment decisions.

The Complexities of the Transportation System and Growing Fiscal Constraints Present Challenges for State and Local Decision Makers

Improving the efficiency of the nation’s surface transportation system is a particularly complex challenge because it encompasses many modes— water, highway, transit, and rail—on systems owned, funded, and operated by both the public and private sectors. As primary decision makers, state and local governments have significant and broad responsibilities. On the front lines of transportation decision making, state and local governments must address multiple and sometimes competing priorities, such as maintaining the safety and condition of the transportation system while, at the same time, improving the efficiency of the system.

Addressing these transportation challenges in light of federal and state budget constraints will require an understanding of existing transportation program constructs and financing mechanisms to ensure that limited public dollars are wisely and effectively spent. For example, the current method of dispersing federal transportation funds to the states does not necessarily encourage transportation decision makers to address the needs of the system in a systematic or rational manner. Much of the public funding for system maintenance and improvement for surface transportation projects comes from federal programs established under Title 23 of the United States Code, with funds from the Highway Trust Fund apportioned to the states by formula without regard to the needs or capacity of the recipients. Because decisions are primarily made by state and local governments, there is little assurance that the projects selected and funded best meet the nation’s mobility needs. Improving freight mobility in particular is hampered by the highly compartmentalized structure and funding of federal transportation programs. The structure and funding of these programs give state and local transportation agencies little incentive to systematically compare the trade-offs between investing in different transportation alternatives to meet mobility needs because funding can be tied to certain programs or types of projects. For example, while passenger and freight travel occurs on all modes, federal funding and planning requirements focus largely on highway and transit. This framework makes it difficult for freight projects to be integrated into the transportation system.

A Public Investment Approach Can Help Public Decision Makers Guard against an Inefficient Use of Public Resources

As calls for increased transportation investments come amid growing concerns about the size of federal and state budget deficits, state and local decision makers must guard against any waste of limited public resources when making transportation investment decisions. At the same time, intermodal approaches and coordinated solutions involving the public and private sectors should be considered. Using the work of transportation experts and our own experience in evaluating freight mobility projects, we have developed a public investment approach to guide public decisions about freight improvement projects. This approach incorporates but also expands upon the points discussed earlier in describing the actions we think DOT needs to take in assessing potential federal involvement. As can be seen in figure 4, this approach encourages public decision makers to consider four steps: (1) establish a rationale for public involvement in a project, (2) develop a systematic framework to evaluate the merits of projects, (3) determine the level and type of public support to be provided, and (4) evaluate projects to ensure that intended benefits have been achieved.

Public transportation decision makers attempting to advance freight improvement projects must work within a system that is often designed to favor projects that appear to clearly produce public benefits, such as passenger-oriented projects. Public transportation-planning decision makers are hesitant to give consideration to freight improvements because many freight improvements are undertaken by and directly benefit the private sector. Generally, freight improvements undertaken by the private sector usually arise in response to market forces (e.g., profit) and, as a result, are most likely to produce efficient results. Care should be taken not to artificially stimulate the market by publicly subsidizing an operation inappropriately, especially if the private sector is unwilling to undertake the project in the first place. Otherwise, this would likely be a waste of public resources. Although freight improvement projects may also produce public benefits, public planners are wary of providing public support for projects that would also yield direct private benefits. Within this focus, public- sector attention tends to be directed to freight projects only when there is considerable public benefit as well.

There are, however, freight improvement projects that are unattractive to the private sector but have the potential of producing benefits to the public; one such benefit is reducing the external costs of transportation, such as reducing fuel emissions and roadway congestion. Considering whether the project has the potential to reduce the external costs of transportation provides an indication of a project’s potential for yielding a good return. For example, improving freight mobility through the implementation of an SSS service may have the effect of shifting some freight from truck to water and, as a result, reduce external costs such as pollution and congestion. These benefits can, in turn, produce indirect benefits, such as economic development and employment, that affect the regional or local economy. Lowering transportation costs for users and improving access to goods and services enable new and increased economic and social activity. Over time, indirect impacts, such as changes in land use and development, changes in decisions to locate homes and businesses in areas where housing and land are more desirable, and changes in warehousing and delivery procedures for businesses in order to take advantage of improved speed and reliability in the transportation system may occur. These impacts can lead to increased property values, increased productivity, employment, and economic growth. These indirect impacts, however, may constitute transfers of economic activity from one area to another or are a result of the direct benefits filtering through the economy. Although these indirect benefits represent real benefits for the jurisdiction making the transportation improvement, they represent transfers and not real economic benefits, from a national perspective.

The SSS service sponsored by the Port Authority of New York and New Jersey serves as an example of how public involvement in a proposed project appears to be justified. SSS was being explored by the port authority as a way to transport a portion of the international containers entering the congested and capacity-constrained Port Authority of New York and New Jersey to the less congested and capacity constrained Port of Albany. Public officials believe that an SSS service between these two ports has the potential of diverting international containers from trucks to barge and by doing so, truck emissions, fuel consumption, roadway wear and tear, and roadway congestion (i.e., external costs) would be reduced. Public officials also believe that the service will create new economic development opportunities at public facilities, if successfully implemented. Potential private benefits identified include increased efficiency for terminal operators, reduced highway congestion for truck drivers, and stable and reliable scheduling and defacto free warehousing of inventory for shippers. Project sponsors also believe that both sectors would gain service insurance and security benefits due to the redundancy aspect of the new service and its safety advantages in transporting hazardous materials outside of populous urban highway and rail corridors. However, establishing a rationale for public involvement is not enough to justify financial support for a project. Rather, it merely supports closer public scrutiny of a proposed project through benefit-cost and other analyses to determine if the project is worthwhile.

Step Two: Developing a Framework to Evaluate the Merits of the Proposed Project

Once public interest in a project appears to be justified, investment decisions based on a systematic benefit-cost analysis could provide a structure for rational analysis and a factual basis for public discussion of public decisions. Benefit-cost analysis enables decision makers to more closely scrutinize the justification for a project by quantitatively considering whether the proposed project is a low-cost alternative to constructing new highway capacity and whether it is the most cost- effective option among other modal improvements. By including a comparison of other modal improvements, the public planner gains an understanding of the trade-offs and relationships among alternative solutions involving different transportation modes.

A carefully considered list of public and private benefits and costs should be developed and the costs and expected payoffs should be quantified. For freight improvement projects, the costs and expected benefits largely mirror those of highway and transit projects. In recently published work on highway and transit investments, we provided information on the types of costs and benefits decision makers typically consider when evaluating highway and transit projects. We reported that these types of projects have the potential of producing direct benefits, such as travel-time savings, and collateral benefits, such as a reduction in the adverse environmental impacts of transportation. These direct benefits can produce indirect benefits, such as economic development opportunities that affect the region or local economy. Freight improvement projects seek to produce the same benefits. Highway and transit projects also produce costs, including the direct costs to construct, operate, and maintain the project as well as other potential social costs resulting from the construction and use of the facility, such as unmitigated environmental effects. Any freight improvement project under consideration would include similar categories of costs.

Although public decision makers may view freight projects as being somewhat different from highway and transit projects, state and local decision makers can use similar categories of costs and benefits. The SSS service operating in the Northeast illustrates this point. Project sponsors considered the proposed SSS project as an option that had the potential to reduce congestion in and around the Port Authority of New York and New Jersey. The project was considered to be an environmentally sound method for moving international containers from the congested port, via a biweekly barge service, to a less-congested port area. In this example, project sponsors quantified potential project benefits such as congestion reduction, improved air quality, and economic development opportunities for the feeder port. Costs considered included the capital and operating costs of the barge service.

In conducting benefit-cost analyses, accurate and relevant data are essential to the evaluation of freight improvement proposals because such data are needed to evaluate forecasts of transportation demand and the effect a project would have on diverting traffic to and from other transportation modes. However, in past reports, we have found that state and local decision makers do not have data to sufficiently evaluate freight projects. Without such forecasting, the analyses will not expose the true costs and expected payoffs of a project. The SSS service operating in the Northeast provides insights into what might occur if sufficient data are not available to forecast demand. While this service appeared to be a project in which public involvement was justified, acceptance-related issues with the potential users of the service were apparently not adequately considered to accurately predict outcomes. For example, project sponsors did analyze data indicating that there were sufficient cargo flows to support the new service, but they had difficulty estimating the level of acceptance of the new service by stakeholders within those markets. They acknowledged, however, that shipper acceptance is perhaps the most critical factor that has held back the project so far. After starting the service, they realized that factors beyond market size, level of service, and service cost must be taken into account. Consequently, once the service began operating, service had to be cut back from twice a week to once a week, and the federal grant being used to subsidize the operation was expended more quickly than anticipated. Juxtaposing this example with another illustrates the significance of this point. The SSS service operating in the Gulf of Mexico performed a market survey before implementation to determine that a market existed for the service. In this case, the service was advanced by the private-sector and not surprisingly, depends on private-sector demand.

While benefit-cost analysis ensures that decision makers closely scrutinize proposed projects objectively, we recognize that other factors work against using this kind of analysis. These factors may involve the way federal programs are structured and funded, federal requirements that place demands on analytical resources to other areas, and the high cost of such analyses. In addition, factors other than those considered in analyses of projects’ benefits and costs can play a greater role in shaping state and local public investment choices. Some of the factors considered reflect local or regional priorities and needs; others are required to be considered in the decision-making process by federal legislation. These factors may not be easily considered in traditional benefit-cost analysis. Nevertheless, as we have recommended in an earlier report, the increased use of benefit- cost analysis can provide important information that can be used to inform discussions on transportation investments.

Step Three: Determining the Level and Type of Public Support to Be Provided

If evaluation supports the merits of public involvement in a freight project, the public decision maker must determine the level of public support to be provided. While in most cases, public involvement is often assumed to mean subsidization of a project, such involvement need not necessarily imply the need for or appropriateness of subsidization. A subsidy is any cost imposed on taxpayers as a whole to pay for benefits that are received by users of the service. Therefore, if a public decision maker plans a project to be entirely self-supporting from user fees and private-sector contributions, no public subsidy is involved. Relying on revenue from users increases the likelihood that the most worthwhile improvements will be implemented, operated, and maintained efficiently. Fees assessed on the mode in question should be accurately aligned with the costs other modes or vehicles impose on the transportation system. Otherwise, one mode may enjoy an advantage over another in competing to transport goods. For example, according to the Transportation Research Board, the heaviest trucks pay a smaller share of the expenditures that highway agencies incur to serve them. From an economic standpoint, this level of taxation distorts the competitive environment with other modes by making it appear that the heavier trucks are a less-expensive means for shippers to transport goods. Ultimately, an accurate alignment of fees to costs could provide incentives for shippers to make modal choices and transportation options based on true costs.

A rail project designed to improve freight mobility illustrates how a project can be planned with relatively little federal subsidy. The Alameda Corridor Project in the Los Angeles area created a 20-mile, $2.4 billion railroad express line connecting the ports of Los Angeles and Long Beach to the transcontinental rail network east of downtown LA. The express line eliminated approximately 200 street-level railroad crossings, relieving congestion and improving freight mobility for cargo. The project was funded through a blend of public and private sources. While the federal government contributed to the funding, its share was about 20 percent of the total, of which 80 percent was in the form of a loan. Revenues from user fees paid by the railroads have been targeted to retire debts. Decision makers have planned the project so that fees would be charged to the direct users of the system, which, in this case, are the railroads. The railroads are paying $15 for each loaded container, $4 for each empty container, and $8 for other types of loaded railcars, such as tankers and coal carriers. Over a 30-year period, fees will be increased between 1.5 percent and 3 percent per year, depending on inflation.

The planning of this rail project contrasts with the manner in which the SSS operation in the Northeast was planned. Project sponsors involved with the Northeast service planned to subsidize the capital and operating costs of the service from the outset rather than through fees charged to the direct users of the service. Project sponsors acknowledged that they knew the service would experience an operating deficit during the first several years of the operation due to the need to achieve a sufficient level of demand to be economically viable.

When public involvement does mean direct financial support for a project, benefit-cost analysis allows a public decision maker to determine the level of public support to be provided on the basis of the public benefit the project is expected to accrue. Therefore, there should not be an expectation that public dollars should automatically fund the entire or even majority of the project. Rather, costs should be apportioned among all relevant stakeholders. This apportionment involves identifying the relevant stakeholders, determining the level of benefits they are likely to derive from the project, and apportioning costs on that basis. Beneficiaries should pay the costs of projects commensurate with the cost of providing the service to the users. For example, when users are the direct beneficiaries of a project, user fees are the preferred method that should be considered for projects that directly benefit the users. When external benefits, such as the reduction of pollution or congestion, result from a project, the direct users should pay the net cost of the use of the service after deducting the public benefit. In the case of the SSS service operating in the Northeast, the true costs of the service were not apportioned among all of the relevant stakeholders because the service was being completely subsidized with public funds—that is, 80 percent with CMAQ funds and 20 percent with port funds. However, project sponsors believe that as demand for the service increases, the service will eventually meet expectations and rise to the level necessary for self-sustainability, which means that operating costs will eventually be paid from the fees charged to the direct users of the service.

Step Four: Evaluating the Performance of Ongoing and Completed Projects

The final component of our public investment approach involves evaluating results and incorporating lessons learned into the decision-making process. Evaluating the effectiveness of ongoing and completed projects could provide public planners with valuable information for determining whether intended benefits have been achieved and whether the service should be modified. With thorough evaluation of projects, the public sector can learn from experience, improve the performance of its infrastructure investments, and hold planners accountable for their decisions.

Comparing the actual results of a project with the project’s projections tests the economic rationale for a project, provides a self-correcting mechanism, and holds public decision makers accountable for decisions made. A federal transit program provides an apt example of how a federal program can be designed to require such evaluations. The New Starts program provides funds to transit providers for constructing or extending certain types of transit systems and is the primary source of funds for new transit capacity. The Federal Transit Administration (FTA) has recently adopted a requirement for project sponsors to complete before and after studies of New Starts projects. Project sponsors seeking federal funding for their New Starts project must submit to FTA a plan for the collection and analysis of information that addresses how the project’s estimated costs, scope, ridership, and operating plans proposed during planning and project development compared with what actually occurred. This requirement is intended to hold transit agencies accountable for results and identify lessons learned for future projects. In another example, federal program requirements led to both a prospective evaluation of a proposed project and an evaluation of the ongoing project to secure federal funds. Project sponsors of the Northeast SSS service evaluated the ongoing performance of the service to update estimates of future performance in their bid for an extension of CMAQ funds. By monitoring the performance of the service, project sponsors have been able to identify problems and devise strategies to address those problems. For example, project sponsors are developing strategies to reduce some of the operational costs of the service and increase demand. Ongoing evaluations of the service also revealed that within the first few years of operation, the feeder port was providing a disproportionate amount of funding for the service through the local CMAQ match, and as a result, the primary port agreed to provide the local match for the third year of service operation. Monitoring the performance of the service allowed project sponsors to seek ways to improve the service, thereby guarding against a waste of public resources.

Opportunities Exist for Encouraging the Use of a More Systematic Public Investment Approach

The application of a decision tool such as the one we developed could be useful in making more fully informed decisions about transportation projects. However, there is no federal or other mechanism that would require its use or even ensure that it is considered in evaluating transportation investment decisions. This is the case even for projects that receive a substantial amount of funding from the federal government. For example, for federally assisted highway projects, federal requirements specify a wide range of factors (such as safety or environmental impacts) that must be considered when selecting a project from alternatives, but they generally do not specify what analytical tools should be used to evaluate these factors. Federal requirements also do not mandate that in making these decisions, cost-benefit analysis be performed and the results of such analysis considered. Instead, officials have the flexibility to select projects based on their own determination of the community’s priorities and needs. In general, decisions about what transportation projects to adopt are generally made at the local, regional, or state level. In examining how various locations made decisions for highway projects, for example, we found that officials used a variety of approaches and often based their decisions on different criteria. For example, decisions were often based on whether to proceed primarily on the project’s perceived indirect benefits, such as desirable changes in land use or economic development, which are difficult to forecast and were generally not quantified or systematically analyzed.

While federal policy gives transportation planning authorities considerable latitude in deciding how to make decisions about which projects to fund, there are mechanisms available at the federal level for disseminating information about decision-making approaches and encouraging the use of approaches that can make the best use of limited public funds. DOT, for example, issues guidance and information on a variety of matters for which it has responsibility. One such mechanism for doing so is DOT’s Transportation Planning Capacity Building Program, which is designed to equip decision makers, transportation officials, and staff with tools for resolving the issues they face when addressing transportation needs in their communities. This program is a collaborative effort of DOT agencies as well as various public and private organizations. Among other things, it provides communities with background information, examples of effective transportation-planning practices from across the nation, and technical assistance. Our approach, which represents a set of “best practices” stemming from our previous work and our discussions with transportation officials, might be useful as part of DOT’s guidance and information.

DOT has a variety of ways to disseminate such information. One way is through its Web site, which incorporates a variety of program resources, including detailed information related to the Transportation Planning Capacity Building Program. Another way is though its network of seminars, training opportunities, and technical assistance. The scope of training and assistance includes conferences held over the Internet, classroom training, and Internet-based short courses. For example, the Federal Highway Administration developed and implemented a Web-based “Talking Freight” seminar series on many diverse topics, such as freight data and modeling, SSS, and linking freight to economic development.

Conclusions

Expanding the SSS option may be a way to enhance freight mobility by supplementing roadways and rail lines, alleviating congestion in metropolitan areas and freight corridors, and mitigating the need for more highways or rail corridors. However, despite the potential importance of SSS to enhance the nation’s freight mobility, its viability as a cost-effective approach is uncertain, given the legal and operational issues cited by proponents of this option. Also, there is reluctance among shippers to use this option, a factor that affects its acceptance and further development.

DOT deserves credit for thinking “outside the box” in looking for ways to alleviate congestion in the nation’s growing transportation bottlenecks, but the direction it is taking—increasing federal involvement in SSS—needs to be more carefully examined. DOT has made the development and implementation of SSS a national priority for enhancing freight mobility and has undertaken numerous activities but has not articulated a clear rationale for what the federal role, if any, should be. Also, the department’s draft proposal for greater involvement in maritime transportation (SEA-21) calls for financial assistance to further the SSS option. Actions such as those in the draft proposal are premature, in our opinion, until a broader understanding of the federal role with respect to SSS is defined and the potential applications and impacts of such an option on other modes are better understood. Otherwise, DOT runs the risk of “putting the cart before the horse” and is at greater risk for creating inefficiencies within the transportation system and missing opportunities to best apply and leverage federal resources.

State and local public transportation officials are the primary decision makers for planning and financing projects, such as SSS, to enhance freight mobility, and they will largely determine the extent of public involvement in SSS projects and the amounts and types of public subsidies for that purpose. Ideally, a sound investment approach—one based on recognized economic and management principles—is needed to make this determination. But many public transportation entities lack a consistent and comprehensive investment approach to identify, evaluate, and implement competing projects, including potential SSS projects. Having a sound investment approach is critical to better ensure that available resources are used cost effectively to address the most pressing freight mobility needs. The approach we developed based on our past work and extensive literature research will be helpful, we believe, in guiding public investment decisions. DOT can play a role in promoting this approach by interacting with public entities using established communication channels and other mechanisms.

Recommendations for Executive Action

We recommend that the Secretary of Transportation and the Administrator of the Maritime Administration undertake the following two actions with regard to further federal involvement with SSS and greater use of systematic approaches to making public investment decisions: 1. Before expending substantial federal resources on SSS activities or developing a formal program for federal involvement in helping to fund this approach, establish a comprehensive understanding of key issues to determine whether there is a genuine need for federal involvement and what the role of the federal government should be, if any. Such a determination could, for example, involve consideration of the following issues.

To determine whether the private sector would likely undertake SSS projects on its own, policymakers could explore several areas in depth. For example, gaining a better understanding of the conditions and circumstances under which existing SSS started and are being sustained and the potential impact of the regulatory, administrative, and operational barriers to the development and implementation of SSS are both important in determining whether federal involvement is necessary.

To better define an appropriate federal role, if deemed necessary, a number of areas could be explored, including (1) an assessment of the state, local, and private resources that may be likely available for SSS projects; (2) quantitative and qualitative analyses of nonmarket or external factors with respect to SSS, such as reduction in the costs of congestion, pollution, and accidents, that the private sector will likely not be willing to fund; and (3) an evaluation of potential financing mechanisms and incentives to best leverage federal resources, develop an equitable cost-sharing framework among public and private entities, and ensure that users and beneficiaries of SSS services pay for these services commensurate with the costs of providing them. 2. To foster greater use of systematic approaches, use existing mechanisms and communications channels to encourage public transportation decision makers to evaluate SSS and other freight projects using an investment decision tool—such as the one we developed—that incorporates recognized economic and management principles.

Agency Comments and Our Evaluation

We provided a draft of this report to DOT and MARAD for review and comment and met with a number of officials, including the Assistant Secretary for Transportation Policy, the Deputy Assistant Secretary for Transportation Policy, and MARAD’s Associate Administrator for Ports, Intermodal, and Environmental Activities. DOT and MARAD agreed with our recommendations and assured us that efforts within the department to gain a more detailed understanding of key issues surrounding the SSS approach will be undertaken before requesting federals funds for it. The department also provided clarifying comments and technical corrections, which we incorporated, as appropriate. These officials reiterated that while the freight demands placed on the nation’s highways and rail systems continue to grow, the marine transportation system remains underutilized. They said there is a need to explore innovative, potentially viable options to increase the capacity of the nation’s transportation system in order to expedite the flow of goods and support economic growth. These officials stressed that the maritime freight capacity option has received scant attention (with the exception of two small demonstration projects using CMAQ funds to support barge moves of cargo), because ISTEA, TEA-21, and the proposed TEA-3 are essentially surface transportation bills. According to these officials, the department is using a range of actions and discussions, including a thorough vetting of maritime capacity options, to “press the envelope” on freight capacity deliberations as the country continues to experience serious and growing freight congestion issues on key highway and rail corridors.

The DOT officials told us the department has begun to explore SSS as one means to accommodate growth in freight shipments, given the capacity constraints of the national transportation system and the high cost of increasing surface transportation capacity. DOT has also been working to raise awareness of this option among potential industry participants and throughout the government. Further, these officials explained that DOT is now conducting detailed and rigorous studies of the potential for SSS and has been drafting possible policy options as a means to stimulate discourse on the topic within the administration. They maintain it is not premature to conduct these activities since it is necessary to act with an understanding of the considerable lead times involved. They assured us that any request to the Congress for funding related to the SSS initiative will be made only after the option and its implications are fully and rigorously explored and well understood.

The efforts taken to date by DOT and MARAD to begin exploring the SSS option provide a good first step to gain a better understanding of key issues with respect to developing this approach. As DOT and MARAD proceed, we think it is critical that they do so thoughtfully, taking the time to thoroughly consider the implications on other modes and on current SSS operations. Until a thorough assessment is completed in this regard, proceeding with federal intervention such as providing regulatory relief or financial assistance to SSS projects is premature.

We are sending copies of this report to congressional committees with responsibilities for transportation issues; the Secretary of Transportation; and the Administrator, Maritime Administration. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at heckerj@gao.gov or (202) 512-2834. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II.

Objectives, Scope, and Methodology

To determine why short sea shipping (SSS) is being considered as an alternative method for transporting freight and factors that may affect its viability as an approach, we conducted a literature review of reports and studies related to freight transportation issues; interviewed freight transportation stakeholders representing all levels of government; interviewed private-sector stakeholders involved in various aspects of the freight transportation system; and examined two existing SSS operations. Our literature review included reports and studies issued by public- and private-sector organizations, nonprofit organizations, and academia; articles from relevant trade journals; and position papers reflecting the views of freight stakeholders. To supplement the information obtained through the literature review, we interviewed transportation officials representing ports on the East and West Coasts and the Gulf of Mexico; officials involved in transportation planning at the local and state levels; and federal officials from the Department of Homeland Security’s Customs and Border Protection agency. We also interviewed private-sector officials from the trucking and rail industries and other private officials involved with the movement of freight, such as third-party logistics providers. To supplement the information obtained through our literature review and interviews, we examined two existing operations. We selected one publicly subsidized operation in the Northeast and one private operation in the gulf region from information we received from our interviews as well as information we obtained through our literature review. The services were also selected because they were operating in regions of the country that handle a significant portion of the nation’s freight. Because we evaluated only two existing operations, however, lessons learned from the operations may not be transferable to other operations. It is also important to note that because our review focused on existing services, it provides no indication of whether other operators may have considered a service but not followed through because of perceived obstacles to SSS implementation.

To determine the federal role in the development of SSS, we conducted in- person interviews with U.S. Department of Transportation (DOT) officials, as well as officials at its operating agencies; analyzed documents supplied by DOT and its operating agencies; reviewed GAO reports on transportation systems and infrastructure projects; and reviewed studies and reports issued by transportation experts. At the department level, we interviewed officials from the Office of Freight and Logistics, Office of Environmental Activities, and Office of the Secretary. At the agency level, we interviewed officials from the Maritime Administration and the Federal Highway Administration. Our work also included an analysis of documents supplied by DOT and its agencies, including strategic plans, budget documents, and studies and reports on freight transportation issues.

To identify issues that should be considered when making public investment decisions, we analyzed the results of our review of SSS and built on the perspectives gained from our past work in transportation systems and federal investment strategies. We also analyzed reports and studies completed by various federal agencies and other independent experts on public investment strategies.

We conducted our work from July 2004 through June 2005 in accordance with generally accepted government auditing standards.

GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Jason Berman, Jay Cherlow, David Hooper, Elizabeth McNally, Sara Ann Moessbauer, Alex Sarapu, Stan Stenersen, Seyda Wentworth, Randall Williamson, and Susan Zimmerman made key contributions to this report.