Snap, crackle, pop
Source: The Journal of Commerce Breakbulk Handbook, David Biederman, Fall 2008 – Shippers and carriers of breakbulk and heavy-lift cargo routinely solve the world’s most daunting logistics challenges. The question now is how they will respond to what could be their biggest challenge yet: a crumbling infrastructure and the huge cost of fixing it.
A litany of problems is straining the breakbulk and heavy-lift shipping industry, including fuel costs, capacity constraints and a critical shortage of vessels, equipment and skilled labor. In part, the industry is a victim of its own success, riding a worldwide boom in energy, mining and infrastructure projects.
But the infrastructure crisis may pose more formidable challenges. In addition to physical constraints that are driving up the cost of moving goods, there is widespread concern that shippers and carriers will end up paying more than their fair share of the massive bill for maintaining and improving the nation’s road, rail and waterways infrastructure. Add to that an economy in turmoil and the uncertainties of a political transition in Washington, and you have a jittery industry facing an uncertain future.
Even as the infrastructure bill comes due, the industry’s current problems show no signs of abating. Capacity will be strained as the economy improves and demand increases, said Frank Fogarty, senior vice president of sales and marketing, general stevedoring, for Ports America. And the labor shortage will likely worsen as new projects begin.
“It’s the biggest issue in our business right now,” said Peter Huels, chief executive of BDP Project Logistics.
With a new highway reauthorization bill due in 2009 and a new administration set to take charge, numerous business organizations and transportation stakeholders are offering proposals for prioritizing and funding infrastructure projects. The proposals vary, but there is a consensus that a new approach is needed and that the situation has reached crisis proportions.
The stakes couldn’t be higher. On an average day, some 43 million tons of goods valued at $29 billion move on the nation’s network of ports, roads, rails and inland waterways. Poorly maintained roads contribute to a third of all highway fatalities more than 14,000 deaths per year and congestion costs drivers $78 billion annually in time and fuel costs, according to the U.S. Chamber of Commerce.
In 2005, Congress established the National Surface Transportation Policy and Revenue Study Commission to provide recommendations for maintaining and upgrading the nation’s roadways.
The commission found that at least $225 billion in annual spending will be needed over the next 50 years to maintain and upgrade the existing U.S. surface transportation system, but that less than 40 percent of that amount is currently being spent.
The U.S. lags far behind its global competitors in infrastructure spending as a percentage of gross domestic product. China spends 9 percent of its GDP on infrastructure and India, 5 percent. Since 1980, the U.S. has spent less than 2 percent on average as a percentage of GDP on infrastructure, according to the U.S. Chamber.
The facts are grim across all modes. The American Society of Civil Engineers concluded in a 2005 report that 27 percent of the nation’s approximately 600,000 bridges are structurally deficient or functionally obsolete. The report estimated that it would cost $9 billion annually for 20 years to fix the bridges alone.
“From a trucking perspective, the U.S. roadways infrastructure is terrible at best,” said David Lowry, president of Bennett Motor Express, a heavy-haul specialist.
On the rail side, the U.S. Department of Transportation forecasts that by 2035, demand for freight rail transportation will have increased by 85 percent from 2002 levels. The National Rail Freight Infrastructure Capacity and Investment Study, commissioned by the Association of American Railroads to identify what improvements are needed to meet the DOT projections, estimates the industry will have to invest $148 billion over the next 28 years.
The seven U.S. Class 1 railroads estimate that they will be able to generate $96 billion of their $135 billion share of funding through revenue growth, leaving a shortfall of $39 billion. In total, U.S. freight railroads spent $420 billion for maintaining and expanding track and equipment between 1980 and 2007. The nation’s inland and coastal waterways have great potential a single barge can move the equivalent of 58 trailers of cargo at one-tenth the cost but crumbling locks and dams and chronic underfunding for channel maintenance dredging have limited their use. Of the 257 locks on the commercial inland waterway system, nearly 50 percent are functionally obsolete. The locks were designed to last 50 years, but 30 were built in the 19th century.
The cost of deferred maintenance continues to climb. The Army Corps of Engineers estimates that nearly 30 percent of the 95,550 vessel calls at U.S. ports are constrained because of inadequate channel depths. Vessels lose between 50 and 270 tons of cargo for each inch that draft is reduced. Nationwide, queuing delays at locks total some 550,000 hours annually, representing an estimated $385 million in increased operating costs borne by shippers, carriers and consumers.
When the infrastructure crisis is finally addressed, it will almost certainly be under a new funding regime. The new approach is likely to be multimodal, with greater emphasis on national rather than local priorities. All funding options are on the table, from expanding the fuel tax and adding new taxes to user fees and public-private partnerships.
“The new user-financed federal surface transportation program the commission proposes will be performance-driven, outcome-based, generally mode-neutral, and refocused to pursue activities of genuine national interest,” the National Surface Transportation Policy and Revenue Study Commission’s report said.
The transportation community recognizes the value of a multimodal approach. The American Association of State Highway and Transportation Officials has called for public investment in rail transportation to encourage more freight to move by rail. A $30 billion investment in rail infrastructure would save $839 billion in highway costs by reducing the number of long-haul truck routes, according to the group.
The report’s recommendations include shortening the process by which transportation projects are approved and built; consolidating investment mechanisms into a set of performance-based programs for achieving broad national goals, and creating an independent National Surface Transportation Commission to oversee development of a national strategic plan for transportation investment.
Shippers have accepted that user fees are inevitable, but they are jockeying to influence how fees are applied and how much they will be. The American Trucking Associations has offered four broad criteria for surface transportation funding: ease of collection, low evasion rates, funding that is tied directly to highway use and no impedance to interstate commerce. The ATA supports ongoing use of the fuel tax and believes that a reasonable increase could meet most surface transportation funding needs.
Fogarty said fees need to be supplemented with incentive-based programs and partnerships between industry, government and port authorities. “If it’s all going to be user fees, we will be priced out of business,” he said.
The trendsetting state of California where the ports of Los Angeles and Long Beach sometime next year want to begin assessing a $15-per-container fee to fund harbor infrastructure improvements and a $35-per-TEU clean-trucks fee to encourage compliance with stringent emission standards might be a signpost to the future.
In some cases, the money is there; it just isn’t allocated. Harbor Maintenance Trust Fund monies, collected specifically for channel maintenance dredging, must be appropriated annually by Congress. More than $1.4 billion was collected and put into the fund in fiscal 2007, yet only $751 million was allocated to the Corps of Engineers for maintenance dredging.
Infrastructure may not have been a hot-button issue in the current presidential election campaign, but the transportation community paid close attention.
Sen. John McCain has disappointed many in the transportation community with his votes against transportation funding but has garnered support for his pro-business positions. He is a vocal critic of earmarks, many of them transportation-related. Now that he is going back to the Senate, that opposition is expected to continue
But support for more infrastructure spending is expected to be strong in the White House after numerous plugs by President-elect Barack Obama.
In February, the then-Democratic presidential candidate Barack Obama called for the establishment of a National Infrastructure Reinvestment Bank that would invest $60 billion over a 10-year period for highways, technology and other projects. The independent bank would oversee national infrastructure projects costing $75 million or more using private-sector money, raised by issuing tax-credit bonds.
“We’re spending less on our infrastructure than at any time in the modern era,” Obama said at June’s annual meeting of the U.S. Conference of Mayors in Miami. “When it comes to rebuilding America’s essential but crumbling infrastructure, we need to do more, not less.”
With Obama “there are definitely going to be some changes in the financial conditions of this country, and those changes could be very good for the highway system and the railroads as well,” said Wayne Johnson, director of logistics for American Gypsum, a Dallas-based wallboard manufacturer with $922 million in revenue last year.
Some transportation leaders are wary of Obama’s close ties to organized labor and his support for legislation that would make it easier for workers at nonunion companies to organize.
Sen. Barbara Boxer, D-Calif., chairwoman of the Senate Committee on Environment and Public Works, and Rep. John L. Mica, R-Fla., the ranking member of the House Transportation and Infrastructure Committee, are both planning proposals for next year’s highway reauthorization bill that promise to address freight transportation and infrastructure needs.
Given the decaying infrastructure, economic carnage and the cyclical nature of the business, what’s in store for the breakbulk and heavy-lift industry going forward? Paul Wilson, vice president of Houston-based heavy-lift carrier Intermarine and a 30-year industry veteran, wouldn’t be surprised if the bloom comes off the rose. Even though a backlog of projects worldwide should carry the industry for at least a few more years, some forwarders already are reporting a drop-off in requests for proposals.
“All good things come to an end,” Wilson said. “Who knew that we would be sending $700 billion to Wall Street?”