A National Freight Plan

Will a legislative logjam in Washington translate into gridlock?

John Larkin • Guest Columnist

It is critical for our nation to develop a national freight transportation master plan. Such a plan – if developed and implemented properly (big "ifs") – would ensure that future economic growth across the United States will not be impeded by a lack of transportation infrastructure and freight-hauling capacity.

Presidential leadership will probably be required for such a comprehensive, multi-modal plan to be developed and put into effect. That leadership appears unlikely to emerge at this stage of President Bush's lame-duck term. The president continues to struggle with weak approval ratings, the war in Iraq, escalating energy costs, a sluggish economy, and a Congress controlled by "the opposition."

Today's political dialogue also appears unlikely to encourage discussion of our nation's transportation infrastructure shortfall. The economy, the war, tax policy, the environment, health care, welfare programs, energy self-sufficiency, gay marriage, stem cell research, immigration, abortion rights, etc., dominate today's news coverage.

The likelihood of freight transportation becoming a major plank in a presidential candidate's campaign platform in 2008 appears low at best, which suggests that the next president – regardless of party affiliation – is not likely to place transportation concerns at or even near the top of his or her agenda.

There have been well-intentioned efforts to deal with the issue by Transportation Secretary Mary Peters, the National Surface Transportation Policy and Revenue Study Commission (a commission consisting of knowledgeable transportation professionals representing government agencies and various sectors of the industry), and Representatives James L. Oberstar (chairman of the House Committee on Transportation and Infrastructure) and Peter DeFazio (chairman of the House Subcommittee on Highways and Transit).

But a number of years could slip by before any meaningful progress has been made at the federal level. Those years could mean the difference between developing adequate transportation and logistics infrastructure, and debilitating gridlock on our nation's highways, waterways and railways.

How did we arrive at such a critical juncture? We were lulled to sleep by the huge success of the Interstate Highway System and the deregulation of freight transportation industries in the late 1970s and early 1980s. Since the effective completion of the Interstates about 25 years ago (which took roughly 30 years to build), our highway infrastructure has been the envy of the civilized world.

However, we have stopped adding significant capacity to this system while channeling most highway funding toward the repair of the pavement and bridge structures that were constructed – with a 30-year design life – more than three decades ago.

We are currently treading water with our highway system as vehicle miles traveled continues to steadily grow at an annualized rate of 2 to 3 percent. Extrapolating this traffic growth trend to future years paints a very unattractive picture.

According to the outstanding highway-flow modeling conducted by Dr. Michael Meyer at Georgia Tech, congestion will likely take a dramatic turn for the worse over the next 10 to 15 years unless highway funding is dramatically strengthened in the near future. We will need fewer vehicle miles traveled, more highway lane miles, and/or better utilization of the existing highway system across all hours of the day and all days of the week to ensure we have enough capacity.

While it is currently in vogue to talk about trendy options such as toll roads or public/private partnerships, the likelihood of them making a meaningful dent in this massive issue is remote. We tend to view these strategies as simply "too little, too late."

What is needed is leadership from the president, combined with a bold call for increased fuel tax at the federal level. Increasing fuel tax will discourage unnecessary travel and will provide funding to ensure requisite maintenance and capacity expansion projects. To put in context: Fuel prices have tripled in the past seven years, while fuel taxes have not increased since 1993. A modest 5- to 10-cent per-gallon increase would hardly be noticed by taxpayers. Yet such an increase would provide the funding necessary to eliminate many bottlenecks that clog our system. It would also systematically add the capacity required to handle traffic resulting from ever-changing international freight patterns.

The shortage of transportation capacity is not merely a function of insufficient highway funding. Our country has decided to make highway safety, homeland security and environmental preservation larger national priorities. With those priorities come government-imposed regulations regarding who can drive a truck, how far that truck can be driven each day, and what the composition of that truck's exhaust must be.

Congress feels the need to regulate speed, chassis maintenance standards, stopping distance, fuel composition, and a host of other matters. Our legislative leaders have also decided to inspect most, if not all, imported freight arriving by container. Legislators require driver certifications such as CDLs, TWICs, hazmat endorsements, tanker endorsements, etc. – often for good reason. Yet they are unlikely to allow heavier and longer trucks on the highway system. Virtually all of these safety, security and environmental regulations have the net effect of reducing transportation system efficiency and effective transportation system capacity.

While it is hard to argue against any safety, environmental or security initiatives, we must evaluate the price associated with these regulations and the extent to which they are subtracting from the transportation industry's ability to support the growth of our economy and standard of living.

To make matters worse, the current dearth of transportation capacity has shifted long-run pricing power from shipper to carrier. Carriers are struggling with labor shortages, reduced productivity related to highway congestion, rising energy costs, rising equipment costs, more stringent environmental and land-use restrictions, and changing freight traffic patterns. This shift in pricing power is inflationary for the portions of the economy reliant upon freight transportation, and could leave some domestic businesses unable to compete on a global basis.

All these issues cut capacity from our freight transportation system and, in the face of all of these challenges, carriers seem reluctant to invest in much incremental capacity for fear that the pricing power would shift back to the shipper. It is now widely popular for carriers to maintain debt-free or near-debt-free balance sheets, and to direct free cash flow to share repurchases, increased dividend payments, and other forms of financial re-engineering rather than investments or projects that will result in an enhanced freight transportation network.

Again, leadership in Washington is needed to encourage carriers to invest in capacity additions, intermodal infrastructure and labor-force development. Cries for economic re-regulation of the rail industry, to turn Class 8 trucks into air purifiers, and to reduce highway safety risk as close to zero as possible, need to be replaced with thoughtful economic incentives and long-range plans that will lead to improved fluidity across our nation's increasingly integrated, multi-modal transportation network, without unduly harming the environment, our safety or our national security.

Admittedly, the picture painted here is bleak – we believe a freight infrastructure capacity crisis lurks right around the corner. The individual members of the freight transportation industry are not big enough to solve this crisis unilaterally, and industry lobbying groups have not carved out sufficient political "mind share" in Washington to make much progress.

It might take rampant stock-outs at Wal-Mart, Target and other big-box retailers before grassroots pressure mounts sufficiently for politicians to give this issue the legislative priority it deserves. In the meantime, we may find few options other than to hang on for dear life as the transportation industry's labor shortage worsens, highways become more congested, inbound flows of containers carrying imported goods continue to grow, buffer inventories decline – all while government regulations governing safety, security and environmental protection become more burdensome.

Ultimately, the free market will make the necessary adjustments to costs and, in turn, prices. It is unfortunate that these adjustments are likely to be much more dramatic than they would have been had strong, visionary leadership emerged from Washington while the handwriting was appearing on the wall.

John Larkin is managing director and head of transportation capital markets research at Stifel, Nicolaus & Co. He has been in the industry since 1977, when he started as a research assistant at the Center for Transportation at the University of Texas at Austin. During his career, he has worked for CSX Transportation, Alex. Brown and Sons, and Legg Mason, which was sold to Stifel, Nicolaus in 2005. Larkin was recognized as an all-star analyst by Institutional Investor magazine in 2006 and as a Wall Street Journal all-star analyst for the years 2003, 2004, 2005, and 2006.