Freight Transportation: Short Sea Shipping Option Shows 	 
Importance of Systematic Approach to Public Investment Decisions 
(29-JUL-05, GAO-05-768).					 
                                                                 
A dramatic increase in freight moving on the nation's highways	 
and rail lines, coupled with growing congestion and		 
infrastructure limitations, has prompted DOT to explore new	 
mobility-enhancing options like short sea shipping		 
(SSS)--transporting freight by water between domestic ports,	 
either along the coast or on inland waterways. This report	 
describes (1) why SSS is being considered and factors affecting  
its viability, (2) the department's role in the development of	 
this option, and (3) issues that should be considered by public  
transportation decision makers when making investment decisions  
about this option or other types of projects for addressing	 
freight mobility challenges. This report is based on a review of 
pertinent studies, federal activities, and an examination of two 
new SSS operations.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-768 					        
    ACCNO:   A31538						        
  TITLE:     Freight Transportation: Short Sea Shipping Option Shows  
Importance of Systematic Approach to Public Investment Decisions 
     DATE:   07/29/2005 
  SUBJECT:   Decision making					 
	     Federal aid for transportation			 
	     Freight transportation				 
	     Freight transportation rates			 
	     Inland waterways					 
	     Marine transportation				 
	     Public roads or highways				 
	     Shipping industry					 
	     Ships						 
	     Strategic planning 				 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-05-768

United States Government Accountability Office

GAO	Report to the Senate Committee on Commerce, Science, and Transportation and
            the House Committee on Transportation and Infrastructure

July 2005

FREIGHT TRANSPORTATION

  Short Sea Shipping Option Shows Importance of Systematic Approach to Public
                              Investment Decisions

                                       a

GAO-05-768

[IMG]

July 2005

FREIGHT TRANSPORTATION

Short Sea Shipping Option Shows Importance of Systematic Approach to Public
Investment Decisions

                                 What GAO Found

Transportation experts have cited numerous benefits, such as congestion
mitigation, for developing short sea shipping, but they have also noted
numerous obstacles, such as shippers' reluctance to try a different mode
for transporting their cargo, that impede its development. Absent in-depth
information on the benefits and obstacles, opinions vary on how to
proceed. Some stakeholders favor extensive public involvement, including
federal funding for projects while others see a more limited public role,
such as addressing regulatory provisions that may interfere with its
development. The two new services GAO examined provide insights-but no
clear answers-about the viability of this approach.

The Department of Transportation (DOT) has made short sea shipping a
high-priority option to enhance freight mobility and has drafted a policy
proposal to provide potential federal funding. So far, the department's
efforts have been too narrowly focused. Before determining that federal
funding should be applied to its development, a thorough understanding of
key issues is required, such as the potential effect of federal
involvement on the competitive balance among all transportation modes,
lessons to be learned from recent start-up services, and actions that
could mitigate identified obstacles, particularly with respect to
reluctance to use this option.

Public transportation decision makers are also actively considering short
sea shipping in the context of a range of other options to address freight
mobility challenges in their jurisdictions. Improving freight mobility,
however, is a particularly complex challenge because the freight
transportation system encompasses many modes on systems owned, funded, and
operated by both the public and private sectors. In light of growing
budget deficits, public decision makers must guard against waste of
limited public resources when making investment decisions. This report
contains a four-step approach for helping public decision makers define
the rationale for public involvement, assess the merits of projects,
determine the appropriate level and type of public support, and evaluate
project results.

Self-propelled Short Sea Shipping Vessel United States Government Accountability
                                     Office

Contents

  Letter

Results in Brief
Background
Transportation Stakeholders See Short Sea Shipping As Having

Multiple Benefits, but Also Cite Obstacles That May Impede Development

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

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

Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

1 4 6

10

25

34 45 46 47

Appendixes                                                           
               Appendix I:      Objectives, Scope, and Methodology         50 
              Appendix II:    GAO Contact and Staff Acknowledgments        52 
                           Table 1: Characteristics of Traditional and  
     Tables                              Newer Waterborne               
                                             Services                       8 
                             Table 2: Benefits of Short Sea Shipping       12 
                                      Cited by Stakeholders             
                                  Table 3: Summary of Operating         
                                 Characteristics of SSS Services        
                                           GAO Studied                     15 
    Figures                 Figure 1: The Sea Trader Figure 2: Map of         
                                      the Gulf Coast Service            17 19
                              Figure 3: Map of the Northeast Service       20 
                              Figure 4: Investment Approach to Guide    
                                        Public Investment               
                                            Decisions                      36 

Contents

Abbreviations

CMAQ Congestion Mitigation and Air Quality
DOT Department of Transportation
FAST Freight Action Strategy
FHWA Federal Highway Administration
FTA Federal Transit Administration
ISTEA Intermodal Surface Transportation Equity Act
MARAD Maritime Administration
MPO metropolitan planning organization
NYMTC New York Metropolitan Transportation Council
PIDN Port Inland Distribution Network
SEA-21 Sea Transportation Efficiency Act of the 21st Century
SSS short sea shipping
TEA-21 Transportation Equity Act for the 21st Century
TIFIA Transportation Infrastructure Finance and Innovation Act

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

July 29, 2005

The Honorable Ted Stevens
Chairman
The Honorable Daniel K. Inouye
Co-Chairman
Committee on Commerce, Science, and Transportation
United States Senate

The Honorable Don Young
Chairman
The Honorable James Oberstar
Ranking Democratic Member
Committee on Transportation and Infrastructure
House of Representatives

A robust U.S. economy depends on the efficient movement of freight to fuel
domestic production and satisfy consumer demand. In 2002, 16 billion tons
of freight, valued at about $11 trillion in year 2000 dollars, moved
through
the U.S. transportation system. The efficient movement of these goods
across roadways, rail lines, and inland waterways, helps ensure that
factories remain efficient, packages are delivered on time, and retail and
grocery store shelves are stocked. Efficient freight movement also tends
to
lower total shipping costs, helping keep production costs and consumer
prices lower, and these savings to households and businesses help ensure
that American products remain competitive in global markets.

Increases in freight volume coupled with current rail, roadway, and port
capacity problems, however, are stressing the capacity of the U.S.
transportation system and interfering with the efficient movement of these
goods. Estimates made in 2003 suggest that growing international trade and
domestic production will increase overall freight traffic by 70 percent by
2020. Adding this much freight to the transportation system is
particularly
worrisome since the system is currently showing signs of strain. For
example, roadway congestion, which affects 60 percent of the freeway
mileage in urban areas, is causing significant delays for truck traffic in
certain cities. Driver shortages further impact the efficient movement of
goods and make it difficult for trucking companies to expand capacity-a
factor that is particularly relevant since trucks carry 78 percent of the
nation's goods (measured in terms of freight tonnage). Freight movement
by rail is also encountering serious capacity problems in many areas. In
July 2004, for example, Union Pacific took measures to limit service

because increasing freight volumes were affecting service levels.1 The
2002 Mid-Atlantic Rail Operations Study,2 which analyzed rail traffic in
five states in the Northeast, noted that there was a lack of capacity on
critical rail lines in at least 25 different locations. Congestion at
freight gateways- container ports and land border crossings-is also
expected to worsen as containerized imports from our international trading
partners are estimated to double in the next 15 years.

There are no quick and easy remedies for these capacity problems.
Addressing these problems is a particularly complex challenge because the
surface transportation system encompasses many modes-water, highway,
transit, and rail-on systems owned, funded, and operated by the public and
private sectors, or both. State and local governments, for example, have
primary responsibility for selecting projects within their jurisdictions,
while private sector companies conduct most of the actual transportation
of cargo. Public transportation decision makers who attempt to expand
infrastructure capacity face a myriad of funding, planning, and regulatory
constraints. Highway projects costing from $100 million to several billion
dollars, for example, are becoming commonplace and can take as much as two
decades to complete. In the New York City area, transportation officials
estimate that transportation projects will cost an estimated $147.1
billion (in 2005 dollars) by 2030, and most of this money is needed just
to maintain the current infrastructure.3 Freight railroad expansion
efforts, which are largely a private-sector endeavor, are also costly. The
Mid-Atlantic Rail study estimated that it would cost $6.2 billion to
address freight rail capacity needs in that region.4 These problems are
only exacerbated by difficulties in accessing federal, state, and local
funding sources for freight projects. Public officials have noted that
inadequate

1Union Pacific Railroad Press Release (July 8, 2004).

2The Mid-Atlantic Rail Operations Study was a joint product of five states
(Delaware, Maryland, New Jersey, Pennsylvania, and Virginia); the I-95
Corridor Coalition, which represents 13 states in the Northeast; and three
railroads (Amtrak, CSX, and Norfolk Southern).

3Estimates are from the New York Metropolitan Transportation Council
(NYMTC). NYMTC is an association of governments and transportation
providers that serves as the metropolitan planning organization for New
York City, Long Island, and the lower Hudson Valley.

4This estimate is not expressed in dollars of one particular year because
components of the cost were estimated in different years, but it roughly
represents the estimated cost in 2000 or 2001 dollars.

funds for freight projects also hinder expansion efforts. Finally, in many
larger urban areas, a lack of available land to build new roads or rail
lines adds to the constraints imposed by the costs to expand capacity.

The continued growth in freight volume has led the U.S. Department of
Transportation to explore alternatives to improve freight mobility. One of
the options the agency is exploring involves the use of waterborne
freight, known as short sea shipping. Broadly defined, short sea shipping
encompasses waterborne transportation of commercial freight between
domestic ports through the use of inland and coastal waterways.5 The
department is exploring whether moving more freight in this manner could
provide an economically viable option to relieve some highway and rail
congestion while increasing freight mobility. We conducted this study to
provide information to the Congress about this effort as it considers
various ways to enhance freight mobility. Our report addresses (1) why
short sea shipping is being considered as an option for addressing freight
mobility concerns and the factors that affect its viability as an
approach, (2) the Department of Transportation's role in the development
of short sea shipping, and (3) issues that should be considered by public
transportation decision makers when making public investment decisions
about short sea shipping or other types of projects for addressing freight
mobility challenges.

To determine why short sea shipping is being considered as an option for
addressing freight mobility concerns and the factors that affect its
viability as an approach in the United States, we conducted a literature
review of public- and private-sector reports and studies related to
freight mobility issues and the waterborne transport of goods, and
interviewed known short sea shipping experts in the public and private
sectors. To determine whether the issues identified through the literature
review and interviews were evident in practice, we visited two short sea
shipping operations and interviewed a wide range of public and private
transportation officials involved with or knowledgeable about the
services. In identifying existing services, we relied on information
gleaned from the literature review and interviews, and selected a
private-sector operation that ships cargo along the Gulf of Mexico and a
publicly funded operation that ships cargo between the Port Authority of
New York and New Jersey and the Port of

5The U.S. waterway system consists of approximately 25,000 miles of
inland, intracoastal, and coastal waterways and channels, of which about
12,000 miles are capable of handling commercial traffic.

Albany. We also interviewed officials at the federal level, including at
the Department of Transportation and the Department of Homeland Security's
Customs and Border Protection agency, to supplement information obtained
through the literature review and interviews. To determine the Department
of Transportation's role in the development of short sea shipping, we
interviewed officials at the department and its agencies, including the
Maritime Administration and the Federal Highway Administration. We also
collected and analyzed documents supplied by the department and its
agencies. To determine issues that should be considered when making public
investment decisions, we analyzed the results of this review of short sea
shipping and built on the perspectives gained from our past work in
transportation systems and federal investment strategies.6 We performed
our work from July 2004 through June 2005 in accordance with generally
accepted government auditing standards.

Results in Brief	Transportation stakeholders representing both the public
and private sectors believe that incorporating short sea shipping into the
surface transportation system can produce numerous public benefits, but
stakeholders also note that numerous factors may limit the development of
short sea shipping services in the United States. Potential benefits of
new applications of short sea shipping, according to these transportation
stakeholders, include improved freight mobility, improved air quality, and
reduced public expenditures on large infrastructure projects. For example,
some transportation officials in the Northeast believe that a short sea
shipping service operating out of the Port Authority of New York and New
Jersey could relieve congestion in and around New York City because cargo
could move by ship rather than by truck. Transportation officials note,
however, that numerous legal, operational, and acceptance-related factors,
such as laws that increase start-up costs, necessary modifications to port
facilities, and a general reluctance among shippers to try new modes, may
present obstacles to a wider development of short sea shipping services.
For example, ports may be mainly set up to lift containers from large
cargo ships using cranes, but short sea shipping operations may

6Transportation Research Board, Special Report 252: Policy Options for
Intermodal Freight Transportation (Washington, D.C., 1998); Transportation
Research Board, Special Report 271: Freight Capacity for the 21st Century
(Washington, D.C., 2002); GAO, Highway and Transit Investments: Options
for Improving Information on Projects' Benefits and Costs and Increasing
Accountability for Result, GAO-05-172 (Washington, D.C.: Jan. 24, 2005);
and GAO, Freight Transportation: Strategies Needed to Address Planning and
Financing Limitations, GAO-04-165 (Washington, D.C.: Dec. 19, 2003).

instead use trucks to roll containers on and off barges or small ships-an
approach requiring new truck ramps and holding areas. The effect of such
factors, however, remains somewhat unclear, given that few new
applications of short sea shipping have been developed. For the two
operations we examined, many of these factors were apparently not
insurmountable, although there were indications that some factors may
interfere with further development. For example, operators of a service
between several ports in the Gulf of Mexico said the federal requirement
to use a U.S.-built ship for domestic shipping was limiting their ability
to expand capacity, because there are a limited number of U.S.-built ships
available on the market. Sponsors of a service between the Port Authority
of New York and New Jersey and the Port of Albany said that shipper
reluctance to use the service was limiting their ability to attract more
business, even though the subsidized service is being offered at a lower
cost than trucking.

The Department of Transportation has established short sea shipping as a
high priority component of the federal freight transportation strategy and
has drafted a policy proposal to provide targeted incentives for short sea
shipping projects. The department has been exploring the potential of the
option to reduce congestion and expand capacity of the freight
transportation system, but its efforts to date have been narrowly focused-
that is, they have been focused on the option itself and not on the impact
of this option on other transportation modes or of federal involvement in
its development. Nonetheless, the Department of Transportation is already
contemplating a potential role for the federal government; it has
developed policy proposals that would include short sea shipping as a
central component of increased federal investment in the maritime sector.
Before determining that federal involvement is appropriate, a more
comprehensive understanding of key issues should be explored. If a federal
role does exist, key issues that are pertinent to this role are (1) how to
go about providing federal support to privately owned and operated
infrastructure and (2) whether and how to increase funding levels for
freight improvement projects. Considering the implications of these
broader issues can help guide the agency in defining the federal role and
ensure that the federal approach for short sea shipping development is
part of an integrated federal approach to addressing the nation's
congestion and capacity problems.

As the federal role is being defined and clarified, public transportation
decision makers at the state and local levels are also actively
considering short sea shipping and other options to address the freight
mobility

challenges affecting their jurisdictions. Increased funding constraints
and compartmentalized funding programs, however, create challenges for
public decision makers in setting transportation priorities and linking
resources to results to ensure that limited public dollars are wisely and
effectively spent. A systematic investment approach to guide public
investment decisions at all levels-federal, state, and local-could help
public decision makers in making those difficult choices. Building on the
perspectives gained from our past work in federal investment strategies
and the work of transportation experts, we developed a four-step approach
that may be helpful. The first step of the approach involves determining
whether public support for a proposed project is warranted by considering
whether it is expected to produce public benefits, such as reduced
congestion, improved air quality, and economic development opportunities.
If a rationale for public involvement can be established, the second step
involves a closer scrutiny of the proposed project through an analysis of
the costs and expected benefits of the proposed project to determine if
the project is the most cost-effective option among alternatives. The
third step of the approach involves determining the level and type of
public support to be provided. This step involves recognizing that public
support does not necessarily mean financial support, but when financial
support is provided, it should be structured in such a way to minimize
distortion of any competition. The final step involves the evaluation of
ongoing and completed projects to determine if intended benefits have been
achieved and to hold decision makers accountable for their public
investment decisions.

We recommend that the Secretary of Transportation and the Administrator,
Maritime Administration, (1) ensure that a comprehensive understanding of
key issues is developed before defining a federal role that would involve
any substantial federal investment in short sea shipping projects and (2)
use current mechanisms to encourage decision makers at all levels to take
a more systematic approach to making decisions about freight mobility
projects. In commenting on a draft of this report, the Department of
Transportation generally agreed with its contents and agreed with the
recommendations. The department also provided technical comments that we
incorporated, as appropriate.

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
highervalue 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-andbarges, 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.

Table 1: Characteristics of Traditional and Newer Waterborne Services
Characteristics Traditional services Newer services

Cargo Mostly lower-value non-time-sensitive Many different types, but many
are targeted

cargoes, including bulk commodities, such as grain, coal, and lumber

at the higher-value time-sensitive containerized freight that normally
moves by truck

Vessel speed/type Mostly slower-moving         Higher-speed self-propelled 
                            tug-and-barge                       vessels; many 
                          operations       propose using ships that can allow 
                                                                    trucks to 
                                             roll on and roll off, instead of 
                                                              the traditional 
                                          methods in which cargo is lifted on 
                                                                      and off 
                                                    by large cranes           

Areas served Along inland waterways and the Proposals include the Great    
                                         Great Lakes and                      
                            Lakes              inland waterways, but many are 
                                                                   focused on 
                                               coastal routes that parallel   
                                               high-traffic                   
                                                        interstates           
                To provide the most economical To remove cargo from busy      
     Purpose                            way to truck cargo                    
                            move low-value and     routes and port areas      
                            non-time-sensitive 
                           freight             

Source: GAO analysis of information from studies, interviews, and other
sources.

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 1998.7 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

7Data on the percentage of freight moved by short sea shipping in Europe
is only available through 1998.

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 Code8 to fund and finance surface transportation
projects with user tax receipts9 credited to the Highway Trust Fund and
distributed to states through annual apportionments according to statutory
formula.10 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
1998,11 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

8Several programs were expanded under title 23 of the United States Code
to allow funds to be used for nonhighway projects, including the Surface
Transportation Program (23 U.S.C. S: 133) and the Congestion Mitigation
and Air Quality Improvement Program (23 U.S.C. S: 149).

9The user taxes include excise taxes on motor fuels and truck-related
taxes on truck tires and sales of trucks and trailers. Formulas consider a
variety of factors, including vehicle miles traveled on the interstate
system and motor fuel usage by each state's highway users.

10Other programs have been established at the federal level to build,
maintain, and operate inland waterways and enhance and maintain harbors.

11P.L. 105-178, 112 Stat. 241 (1998). Seaport projects are ineligible for
funding under the Transportation Infrastructure Finance and Innovation Act
(TIFIA).

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.12 Through its National Freight Action Agenda, DOT
has specifically identified SSS for accelerated development.13 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.14 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.15

  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.

12DOT, Department of Transportation Strategic Plan, 2003-2008: Safer,
Simpler, Smarter Transportation Solutions (Washington, D.C., September
2003).

13DOT has also recently developed the National Freight Action Agenda, in
conjunction with its operating agencies, in an effort to guide DOT and its
partners in making the nation's transportation system better serve its
citizens. The Action Agenda identifies six high-priority freight
initiatives, one of which is to accelerate the development of short sea
shipping.

14Maritime Administration, Strategic Plan for Fiscal Years 2003-2008
(Washington, D.C., September 2003).

15MARAD's Strategic Objective Commercial Mobility aims to address
congestion reduction by promoting the exploration of technology
development and infrastructure that will improve the use of the maritime
system.

    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.16 (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.

16We did not determine, through our own independent analysis, whether SSS
can produce these public benefits, and we were unable to locate studies
that determined, through rigorous analysis, the potential public benefits
of SSS.

Table 2: Benefits of Short Sea Shipping Cited by Stakeholders

Benefit Explanation

Improved freight mobility (increased freight At a basic level,
incorporating SSS into the surface transportation system may add

capacity)	capacity to certain cargo routes because it increases modal
alternatives. SSS operations may also help increase capacity in other
ways, such as helping remove containers from busy ports, thus freeing up
needed dock space for incoming cargo.

Improved freight mobility (less congestion) By taking trucks off the road,
SSS may help alleviate congestion along key corridors.

Improved air quality	Barging services may be more fuel efficient than
trucking, and one barge may be able to carry as much freight as 58 trucks.
Removing these trucks from the road and using a more fuel-efficient option
may reduce emissions and improve air quality.

Reduced need to build roadways and rail lines	By reducing the pressure on
existing transportation infrastructure, SSS can reduce the need to build
new infrastructure. Large infrastructure projects, such as new roadways
and rail lines, are expensive, time consuming, and in some cases may be
limited because of population density or land costs.

Source: GAO analysis of studies, reports, interviews, and position papers.

    Potential Obstacles Cited Include Legal, Operational, and Acceptance Issues

Legal Requirements

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 wellestablished
modes, such as trucking and rail-even if SSS can be shown to be a
competitive option-can present a barrier to SSS development.

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,17 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

1726 U.S.C. S: 4461 and 19 C.F.R. S: 24.24. In the case of imports, the
importer pays the tax. In all other cases, the shipper pays the tax.

commercial vessel in a U.S. port.18 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,19 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.20
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

18Cargo entering some ports is exempt, such as those in Alaska, Hawaii,
Puerto Rico, and possessions of the United States. For domestic shipments,
the fee is levied at one port- either the port of departure or the port of
entry, but not both-and it does not normally apply to movements along
inland waterways as long as the ship moving the goods is subject to the
Inland Waterways Fuel Tax (19 C.F.R. S: 24.24 (C) (5) and 26 U.S.C. S:
4042).

19Section 27 of the Merchant Marine Act of 1920 (46 U.S.C. App. S: 883).

20We asked one SSS operator about whether the Jones Act requirement to use
U.S. crews was a potential obstacle to expanding SSS services since U.S.
crews may be more expensive than foreign labor. The operator said the
requirement was not a particularly important issue, but that Coast Guard
crewing requirements, which he believes mandate unnecessarily large crews
for his SSS operations, increase the costs of SSS operations.

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 While the two SSS services we examined-one in the
Gulf Coast and one in Were Operationally the Northeast-differed in many
ways,21 both of the services were designed Different, but Both to address
capacity concerns. The two operations differed in such ways as

the types of vessels used, operating schedules, types of cargo moved,
andAttempted to Address structure of funding (public or private). (See
table 3.) Both services,Similar Freight Capacity however, were designed to
provide a modal alternative that could helpConcerns improve freight
mobility around ports and along congested cargo routes.

Table 3: Summary of Operating Characteristics of SSS Services GAO Studied

    Characteristic     Gulf Coast service            Northeast service        
                    Osprey Line, LLC (private Port of Albany, Port Authority  
Operator/sponsor                 operator) of New York                     
                                              and New Jersey (primary project 
                                                                   sponsors), 
                                                   and private barge operator 
                                                            (vessel operator) 

Funding source     Private funding only: Private funding: Operator charges 
                           Operator charges                          shippers 
                  shippers for the service           for the service          
                                             Public funding: Shipping rates   
                                                           are                
                                                 subsidized with money from a 
                                                                federal grant 
                                            (Congestion Mitigation and Air    
                                            Quality                           
                                             program) and funds from the Port 
                                                                    of Albany 
                                                and the Port Authority of New 
                                                                 York and New 
                                                         Jersey               

Type of cargo    International and domestic International containers (no   
                                 containerized domestic)                      
                            cargo, mostly bulk      carrying mostly bulk      
                          commodities but also          commodities           
                  finished manufactured goods  
    Vessel type       Self-propelled ship             Tug-and-barge operation 
                       (lift-on/lift-off)                  (lift-on/lift-off) 
      Service                                                                 
     frequency         Once every 7 days             Once every 7 days

         Source: GAO analysis of information provided by SSS operators.

Gulf Coast Service 	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

21Some of the transportation stakeholders we spoke with noted that SSS
operations may be less successful on the West Coast because of labor
issues, port density along the West Coast, and a lack of freight movement
along the north-south cargo routes (most freight in the western United
States tends to move west to east).

cycle22 around the Gulf of Mexico, the Gulf Coast service uses a
selfpropelled 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.

22This means that the vessel returns to its port of origin every 7 days. A
shipper moving goods from Houston to Tampa, for example, could make one
shipment every 7 days on this SSS service.

Figure 1: The Sea Trader

Source: Osprey Line, LLC.

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 provider23 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

23Logistics providers, such as third-and fourth-party logistics providers,
work with clients to arrange for the transportation of products. One task
of a logistics provider is to help clients determine which mode of
transportation to use, such as truck, rail, or SSS.

Freight Movement and the Gulf Coast Service

According to the Gulf Coast operators, the Gulf Coast service was created
in response to many of the freight capacity problems affecting the Gulf
region. Transportation officials said that the most significant problems
are at major urban areas-such as Houston and Dallas-and major freight
gateways-such as the Port of Houston and the Port of Laredo. Private
stakeholders and public-sector officials in the region identified the
following problems:

0M Large influxes of cargo from international trading partners have
severely constrained capacity at the Port of Houston, resulting in
extended "dwell times" that now average 7 days. (Dwell time refers to the
amount of time that cargo remains in the port before it is removed by
truck, rail, or another mode.)

0M Roadway congestion around major urban areas and along the primary
access routes to the ports has made it difficult to move cargo in and out
of the port and to the final destination.

0M Growing rail inefficiency and a truck driver shortage has contributed
to freight mobility problems. A logistics company spokesperson said that
it was difficult to find drivers to complete "long-haul" trips and that
railroad service is increasingly inefficient.

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:

o 	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.

o 	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 docks24 before it is loaded onto another mode
for delivery to its final destination.

o 	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.

24According to officials at the Port of Houston, cargo normally sits on
the dock for an average of 7 days before a truck removes it.

                    Figure 2: Map of the Gulf Coast Service

Source: Osprey Line, LLC.

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

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.25 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.26
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.27 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.28 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

25The CMAQ program was designed to assist nonattainment and maintenance
areas under the Clean Air Act in attaining the national ambient air
quality standards by funding transportation projects and programs that
will improve air quality.

26This is an advance on a $25 per container payment that the Port
Authority of New York and New Jersey makes to the Port of Albany to help
keep shipping rates on the Northeast service lower than trucking rates.

27Officials from the Port Inland Distribution Network generated
expectations based on the volume of containers actually shipped.

28Empty containers must be repositioned for use when there is a lack of
two-way trade; that is, the containers must be returned to the steamship
companies after the freight has been transported to its final destination.

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.29 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

29While these findings suggest that many of these obstacles may be
surmountable, it is important to note that because we evaluated only two
existing operations, these lessons may not be transferable to other
operations. It is also important to note that because our case-study
approach focused on existing services, it provides no indication of
whether other operators may have considered a service but not followed
through out of concern for any of these obstacles.

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-andbarge
option in which the U.S. and foreign-built versions, compared with
self-propelled vessels, are more similarly priced.30

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

30While some stakeholders have cited potentially higher costs associated
with the Jones Act provision that requires the use of U.S. crews, which
can add to the cost of each trip, neither of the SSS operations we visited
had such concerns.

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.31 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

31The National Freight Action Agenda was developed to guide the agency and
its partners in agency efforts to make the transportation system better
serve its citizens. Within this plan, DOT has identified the following six
high-priority freight initiatives: (1) facilitate the development and
planning of major freight projects, (2) promote intelligent transportation
technologies to improve freight transportation, (3) improve intermodal
connectivity by improving coordination of planning and financing across
DOT programs, (4) enhance DOT's Freight Capacity Building Program, (5)
improve the timeliness and quality of freight data, and (6) accelerate
development of SSS.

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

o 	the potential impact of federal involvement in developing SSS on the
competitive balance among all transportation modes;

o 	lessons learned from new SSS services, such as the Gulf Coast and
Northeast services that we examined; and

o 	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.32 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.

32For example, less than efficient results would include solutions driven
by the private sector that may not recognize certain costs imposed on
others by users of the transportation system, such as congestion,
environmental costs, and accident costs.

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
SEA21 and appears to be committed to its eventual enactment.33 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.34 This program is also important in any discussion of
providing federal support to advance freight improvements in that freight

33Remarks of Jeffrey N. Shane, Under Secretary of Transportation for
Policy, at the September 25, 2003, annual National Waterways Conference
and the May 20, 2004, National Maritime Day Luncheon held in Washington,
D.C.

34Other programs build, maintain, and operate the inland waterways;
provide aid to airports; maintain the air traffic control system; and
maintain harbors. The federal surface transportation program, however, is
the largest of those programs and the most important for 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 Accommodating freight projects under federal
aid programs involves Could Be Applied to Projects considering the
implications of providing public support to projects both That Provide
Benefits to the that provide substantial private benefits and that
individuals and firms

                                 Private Sector

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,35 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.36 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 equitably37 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

35Federal law requires the creation of metropolitan planning organizations
(MPO) for any urbanized area with a population greater than 50,000.
Composed of representatives from local governments and transportation
authorities, MPOs are regional policy boards charged with developing a
comprehensive metropolitan long-range transportation plan and
transportation improvement program that considers a wide array of
interests and factors through cooperative partnerships with stakeholders.

36GAO-04-165.

37The use of the term "equitable" in this regard refers to the principle
that beneficiaries should pay for project costs commensurate with the
benefits they receive from projects.

that federal funds or support are being applied in the most effective
way.38 Cost-sharing involves two important factors:

o 	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.

o 	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

38We discuss the value of conducting benefit-cost analyses in GAO-04-165,
GAO-05-172, and GAO, Surface Transportation: Many Factors Affect
Investment Decisions, GAO-04-744 (Washington, D.C.: June 30, 2004).

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 After deciding if federal financial support
should be provided for SSS

Levels Should Be Increased and development, a follow-on consideration is
whether additional resources

Sources of Funding Expanded	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.39 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.40 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

39Transportation Research Board, Special Report 252: Policy Options for
Intermodal Freight Transportation (Washington, D.C., 1998).

40Transportation Research Board, Special Report 252.

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.41 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.42 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.

41GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO05-325SP (Washington, D.C.: February 2005).

42Other programs have been established at the federal level to build,
maintain, and operate inland waterways and enhance and maintain harbors.

    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.43 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.

Figure 4: Investment Approach to Guide Public Investment Decisions

Establishing a rationale for involvement

Does the project have the potential to reduce external costs and produce
public benefits?

Source: GAO.

Evaluating the merits of a proposed project

Is the project a lowcost alternative to constructing new highway capacity?

Is the project the most cost-effective option among other modal
improvements?

Determining the level and type of support

Can the project be self-supporting?

If not, to what extent should stakeholders share in the cost of the
project?

Evaluating the Performance of Projects

Have intended benefits been achieved?

If not, what modifications can be made to achieve benefits?

43Transportation Research Board, Special Report 252 and Special Report
271; GAO-05-172; and GAO-04-165.

Step One: Determining Whether Public Support in a Freight Project Is
Warranted by Establishing a Rationale for Involvement

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, publicsector 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

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

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.44 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.45 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.

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

44According to project sponsors, the warehousing benefit is becoming more
important to shippers and ocean carriers as terminal operators, in an
effort to handle more cargo within their facilities, continue to put
pressure on the shippers and carriers to move containers off their piers
as quickly as possible.

45According to project sponsors, the lack of freight system redundancy is
particularly troublesome in corridors such as Interstate 95 where the loss
of any individual segment could have an impact.

constructing new highway capacity and whether it is the most costeffective
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.46 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.

46GAO-05-172.

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.47 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

47GAO-04-165 and GAO-05-172.

not be easily considered in traditional benefit-cost analysis.48
Nevertheless, as we have recommended in an earlier report, the increased
use of benefitcost analysis can provide important information that can be
used to inform discussions on transportation investments.49

Step Three: Determining the If evaluation supports the merits of public
involvement in a freight project,

Level and Type of Public Support the public decision maker must determine
the level of public support to be

to Be Provided	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.50 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

48GAO-05-172. 49GAO-05-172. 50Transportation Research Board, Special
Report 252 and Special Report 271.

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

Step Four: Evaluating the Performance of Ongoing and Completed Projects

will eventually be paid from the fees charged to the direct users of the
service.

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.51 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

51GAO-05-172.

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 	We recommend that the Secretary of Transportation and
the Administrator of the Maritime Administration undertake the following
two actions with

Executive Action	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.

o 	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.

o 	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 [email protected] 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.

JayEtta Z. Hecker Director, Physical Infrastructure Issues

Appendix I

                       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
inperson 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

Appendix I
Objectives, Scope, and Methodology

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.

Appendix II

                     GAO Contact and Staff Acknowledgments

GAO Contact JayEtta Z. Hecker, (202) 512-2834

Staff 	In addition to the individual named above, Jason Berman, Jay
Cherlow, David Hooper, Elizabeth McNally, Sara Ann Moessbauer, Alex
Sarapu, Stan

Acknowledgments	Stenersen, Seyda Wentworth, Randall Williamson, and Susan
Zimmerman made key contributions to this report.

GAO's Mission	The Government Accountability Office, the audit, evaluation
and investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of The fastest and easiest way to obtain copies of GAO
documents at no cost

is through GAO's Web site (www.gao.gov). Each weekday, GAO postsGAO
Reports and newly released reports, testimony, and correspondence on its
Web site. To Testimony have GAO e-mail you a list of newly posted products
every afternoon, go to

www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone	The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone:	Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

  To Report Fraud, Contact:
  Waste, and Abuse in Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: [email protected] Programs Automated answering system: (800)
424-5454 or (202) 512-7470

Congressional	Gloria Jarmon, Managing Director, [email protected] (202)
512-4400 U.S. Government Accountability Office, 441 G Street NW, Room 7125

Relations Washington, D.C. 20548

Public Affairs	Paul Anderson, Managing Director, [email protected] (202)
512-4800 U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
*** End of document. ***