by: Issues: January / February 2009. Tags: Strategy. Categories: Strategy.

Once the lynchpin of an interdependent, smooth-running North American economy, the freight-transportation infrastructure now stands crumbling, serving as Exhibit A for committing billions to re-building that infrastructure. This author analyzes the decline and consequences of a rotting, dysfunctional system, and outlines what is needed to get the trains running smoothly again.

The deterioration of infrastructure in North America – in Canada, the United States and Mexico – has reached crisis proportions. It is a crisis because key sectors of our economies depend on deeply integrated, continent-wide production systems. The auto industry and many others rely on smoothly functioning, cross-border supply chains that enable companies to develop economies of scale and combine locally specific resources from regions across the continent, thereby enhancing their competitiveness and creating jobs. This is what economists call “deep” or “structural” integration. In simple terms: The auto industry is North American. Mexico, Canada and the U.S. do not sell autos to each other. We make them together.

But supply chains depend on efficient, secure and sustainable freight transportation systems. Congestion, poor maintenance, conflicting regulations – whatever creates delay — erode supply chain efficiency and undermine competitiveness. Few would disagree that the unsatisfactory state of the freight-transportation infrastructure is seriously compromising the efficiency of supply chains. For example, the North American Transportation Research Council conducted a review of recent research on freight transportation infrastructure. The review concluded: “The JIT –lean inventory advanced manufacturing system developed since the 1970s that enables North America to compete successfully with Asian and European manufacturers is now reaching its capacity limits. The supporting transportation infrastructure is now inadequate to handle the projected volume growth of North American supply chains freight flows.1

In its final report, the prestigious U.S. National Surface Transportation Policy and Revenue Study Commission stated that “Applying patches to our surface transportation system is no longer acceptable.” And it continues, “We can predict, with some certainty, the consequences of failing to take bold action.” The consequences include: “America’s economic leadership in the world will be jeopardized when we cannot reliably and efficiently move our goods”.

The declining performance of the surface transportation network—as a result of both inadequate capacity and inefficient management—will choke economic progress, preventing the U.S. economy from growing to its full potential. It is not an overstatement to say that the Nation’s potential for the creation of wealth will depend in great part on the success of its freight efficiency. Without changes, countries such as China and India, with more dynamic policies for transportation and economic growth, will challenge the U.S. in economic power and world influence.”2

If these reports speak only of the United States, it must be clear to Canadians and Mexicans that the words apply equally to them. Simply put, the impact of a deteriorating freight transportation system will affect all North Americans.

The magnitude of the transportation infrastructure crisis is well recognized. But responses to the crisis remain structured by Canadian, U.S. and Mexican, rather than continental, visions and by modal silos (ports, rail and trucking groups interact poorly). Given the fragmented government systems, implementation is typically shaped by local interests and perceptions. Too much is at stake – not just money (in fantastic amounts) but also the opportunity to re-shape North American competitiveness for the next decades – to permit the same errors that have characterized transportation system planning for the past decade. This article assesses the situation and offers an approach to finding a better solution.

Failing infrastructure

The crisis we are confronting is not just a crisis of infrastructure. It is a perfect storm that includes the end of excess capacity that characterized North American freight systems in the 1980s and ‘90s, congestion caused by increasing volumes of goods coming across the Pacific, the failure, before and after NAFTA, to harmonize critical regulations affecting transportation, the impact of delayed maintenance and, of course, the impact of post-9/11 border policies – along with infrastructure.

But infrastructure failings are absolutely critical, and remedying this situation will entail innovative policies and enormous investments. Remember that the North American railroad system is essentially more than a century old, and that the U.S. Interstate and the Trans-Canada highway were constructed in the middle of the 20th century. Our road systems are dated and have been poorly maintained.

We face a great opportunity and a terrible threat. We are now building or about to start building the transportation infrastructure that will support our production systems and our competitiveness in global markets for the next decades – perhaps for the next century.

The costs are going to be enormous. The National Chamber Foundation of the U.S. Chamber of Commerce estimates that by 2015, the cost just to maintain U.S. “pavements, bridges, and transit infrastructure” would amount to $295 billion. To improve these systems would cost $356 billion.3 The National Surface Transportation Policy and Revenue Study Commission’s final report looks at cost estimates in more detail, but they are in this same ballpark. Perhaps most importantly, the Commission finds that continuing highway funding at current dollar levels will lead to significant increases in delay, congestion and physical deterioration. There is no alternative but to increase levels of funding significantly.4

With regard to rail, a study of U.S. rail capacity commissioned by the Association of American Railroads estimates that a $148 billion investment for infrastructure expansion over the next 25 years is required to keep pace with economic growth and meet the U.S. Department of Transportation’s demand forecast. Without this investment, 30 percent of the rail miles in the primary corridors will be operating above capacity by 2035. This will cause severe congestion that will affect every region of the country and potentially shift freight to an already heavily congested highway system.5

Note that the low-hanging fruit is gone. Most of the moderate-cost capacity expansions have already been made, the AAR report observes. Future capacity expansions will cost much more because they will require expensive new bridges and tunnels and more track and larger terminals in developed areas. Note, too, the growing shortage in the capacity to build capacity. We are likely to see competition not just for funds, but for construction capacity. This will raise costs and build more delay into construction timetables.

The right and wrong way of infrastructure spending

One example: The failure of successive U.S. highway acts in the 1990s to meet the objective of creating a new national system of high priority, north-south corridors. The first of these acts, ISTEA – the Intermodal Surface Transportation Efficiency Act – was designed to create an economically efficient and environmentally sound National Intermodal Transportation System that would be the foundation of U.S. competitiveness in the global economy and move people and goods in an energy efficient manner.6 It generated disagreements on many issues, but it was was the first U.S. national legislation on transportation since the Interstate Highway System and it was funded at some $198 billion. One key provision called for the designation of a National Highway System (NHS) – an interconnected network of highways linking major population centers, providing access to international border crossings, ports, airports, public transportation facilities, other intermodal facilities, and serving major travel destinations.

What happened? Every trade corridor group – and every group that thought it could create a trade corridor – fought for the “high priority” brand. In response, Congress raised the number of designated high priority corridors in each bill, and everyone joined in to earmark funds for his own favorite corridor. The National Highway System Designation Act of 1995 added 8 more high priority corridors. ISTEA evolved into the Transportation Equity Act for the 21st Century (TEA-21), passed on June 9, 1998. TEA-21 identified 14 more high priority corridors.

Two points are critical: First, the successive acts failed to realize the vision of a system of North American superhighways. There were more corridors and more money for individual projects, but nothing like the promised coherent, rational, high-tech North American highways. Second, in the course of successive highway legislation, more and more of the control of the authorization of funds moved from the Department of Transportation to Congress. Despite noble intentions, the highway funds became a pot into which Congressional etiquette encouraged everyone to dip. The sense of a coherent continental – or even national – plan evaporated in a flood of “earmarks” that provided funds to build a mega-store of individual projects.7

Another example: Port construction and expansion on North America’s Pacific coast – from Lazaro Cardenas in the south to Prince Rupert Port in the north. This includes two large new deep water, post-Panamax container port projects at Prince Rupert Port and Punta Colonet, just south of Ensenada; major expansions at Lazaro and Los Angeles-Long Beach; and substantial expansions at Seattle, Delta and Vancouver – not to mention San Diego, Tacoma and others.

A 2006 report commissioned by the Canadian government found that plans were under way in the 12 Pacific Coast ports for a 53 percent increase in capacity, reaching 22 million, twenty foot equivalent units per year.8 (Note, the report drafted in 2006 did not include the potential capacity of Punta Colonet – projected at 1-2 million TEUs its first year, ultimately enlarging to the 6-8 million TEU range, about the same as Long Beach or Los Angeles.)

The study found that capacity will track (without Punta Colonet) anticipated volumes of trade. Good news. We know there has been no coordination among the three national governments on these various initiatives, so projections of demand-supply curves were accurate – and lucky.

However, let’s look at this more closely. The assumption driving the commitment of very large resources to port building and expansion is that the growth of trans-Pacific trade will continue on the same trajectory as it has over the past decade. These estimates basically rest on extending projections of what took place over the past 5-10 years – as well as on shippers’ and port forecasts.

It would seem that this is a fairly thin science on which to base such large investments. Should we really assume that what has happened in the past will continue in the future? What other factors might influence trans-Pacific trade? Fuel costs, the cost of environmental regulation, rising wage rates in China, indeed, the downturn in global growth? So how robust are the assumptions underlying all of this construction?

Let’s look at this from another perspective. Assume that trans-Pacific trade continues to expand and that port capacity is fully utilized. How does this line up with anticipated rail and road capacity? With regard to rail, the AAR projects that without massive investment over the next years – as the new port capacity comes on line – increased traffic will pour into an increasingly blocked rail system.

We could ask the same question about border crossings. Mexico and Canada are building large new Post-Panamax ports. They assume that the expansion of trans-Pacific trade will continue and that Los Angeles-Long Beach will be unable to absorb the total increment, which can be re-routed to Lazaro, Punta Colonet and Prince Rupert Port for transshipment back to the United States. If they are right, how will that affect border crossing infrastructure? Despite the best efforts of business, state and metro-government leaders, security requirements have continued to increase at the border – too often with contradictory demands. Will security continue to trump trade, and efficiency and environmental sustainability along the borders?

Moreover, the Canadian Western and Eastern gateway initiatives both assume that goods – perhaps two million or more new TEUs each – will move through Chicago, the most congested region in North America. Will delays in Chicago offset the benefit of Prince Rupert Port and Halifax – in terms of distance from Asian markets and available capacity? And more directly, must we assume that best transportation planners can do is to enshrine Chicago as the black hole of freight transportation for the next 2 or 3 decades?

A better idea

What can we do to make better decisions?

Our current approach with regard to information and analysis is intermittent and incremental; our tools rest largely on projections of past experience.

To change, we first need to think about what an efficient, secure and sustainable North American freight transportation system could look like in the next 25 years. This is the “vision statement”. Incremental change without a vision is just wandering around.

Second, rather than linear projections that extend past performance, we should think in terms of systemic assessments, of scenarios. We cannot predict in a straight-line fashion how trends and patterns will evolve. We have to identify the most important drivers of change – the factors that influence the shape of an emerging system, and try to assess how linkages among these elements in the system work and how, if we push on one piece, the other parts might respond.

For example, we might try to assess the impact of slower global growth, high fuel prices and rising pressure of environmental restrictions on North America’s freight transportation system. A key question here would be how the trucking industry might respond. Or, how might this scenario stimulate innovation in transportation technologies and organizational design?

Another example: Can we estimate if a “tipping point” exists – a point at which rising wages in China, the high cost of bunker fuel and increased environmental regulation drive a return of manufacturing to North America? How might this affect North America’s freight transportation system? How would this affect Mexico?

Transportation stakeholders have become much more aware of the emerging transportation crisis, and our national governments have each taken steps to confront these problems. But despite these new efforts, we remain far behind the rest of the world. In part, this results from the inherently complex nature of planning across the many jurisdictions, national, state, provincial and local who are all involved in infrastructure financing, planning and construction. While the private sector may finance the bulk of transport systems in all three countries, it can do little without a supportive regulatory and operating environment.

Reviews of gateway and corridor initiatives from around the world show clearly that North America has much to learn from developments in Asia and Europe.9 The process of infrastructure renewal and investment is much slower in North America than in Europe or Asia. Europe already has a freight transportation plan and continues to reduce border restrictions. Institutional reforms can provide for seamless movements across borders. New gateway corridor route-way combinations will emerge to provide alternatives to traditional routes and require investments in inland ports, freight highways and improved modal integration.

It is time to create a broader continental framework for transportation planning in North America that recognizes the new competitive realities of global supply chains and integrated global manufacturing. Competing with Asia or Europe will require fewer border constraints, increased infrastructure and continental planning. Europe has been able to achieve many reforms in spite of many national jurisdictions and vested interests. The result is seen in huge infrastructure investments like the Channel Tunnel and the tunnel/bridge between Denmark and Sweden and the removal of passport controls.

How can we do better? Clearly, we need a stronger intellectual foundation for thinking and planning about infrastructure and North America’s production systems. We need to create an on-going dialogue among policy makers, transportation specialists and stakeholders. We must review what we already know, ask “if-then” questions, and question the conventional wisdom. We must reassess scenarios, add new data and adjust our vision in light of new data and new ideas. What is needed is not a product – a report – but a process. What we are talking about here is very much like a business plan. Good business plans do not rest on a single assumption; they ask if-then questions and examine an array of opinions; they build in feed-back loops to determine if goals are being met and, if not, what can be learned from the process so far.

Who? There’s no shortage of intellectual resources out there in transportation research institutes, universities and in business. What’s lacking is a way to push collaboration in a continuing process, where there is vigorous secondary analysis of findings and ideas.

Should there be a North American Freight Transportation Working Group? The core might be half a dozen research institutes in the three North American nations, a similar number of business schools and firms. The buy-in for the universities and research centers would be agreement not to demand million dollar chairs or research programs, but to provide resources from existing stocks.

The aim would be a voice that could speak for a wide range of stakeholders in freight transportation, draw on the research assets of key transportation centers, and work with the three national governments but maintaining its independence and autonomy. The Group would require a core organization to ensure that everyone was moving toward the same goals and that materials were circulated quickly among the group. The output would be a series of policy focused papers. We have to move quickly.

  1. Guy Stanley, Review of Recent Reports on North American Transportation Infrastructure, North American Transportation Competitiveness Research Council, Working Paper 3 (September 2007)
  2. The National Surface Transportation Policy and Revenue Study Commission’s final report: Transportation for Tomorrow, pp. 3-4
  3. Future Highway and Public Transportation Finance Phase I: Current Outlook and Short-Term Solutions prepared by Cambridge Systematics, Inc. under contract to the National Chamber Foundation® of the U.S. Chamber of Commerce, 2005)
  4. The National Surface Transportation Policy and Revenue Study Commission’s final report: Transportation for Tomorrow, pp. 4/3-4/6.
  5. Op. cit National Rail Freight Infrastructure Capacity and Investment Study
  6. See “Intermodal Surface Transportation Efficiency Act of 1991 – Summary,”
  7. See a 2007 Department of Transportation report: “The inspector general counted 8056 earmarks worth $8.54 billion within last year’s transportation budget. The majority of these, 6556 earmarks, directed the Federal Highway Administration (FHWA) to spend $5,675,100,200 — fifteen percent of the agency’s 2006 budget — on projects hidden from public scrutiny in the text of laws, in conference reports and in the reports accompanying the 2005 transportation bill known as SAFETEA-LU. An earmark allows an individual member of Congress to identify a need in his district and bypass traditional federal and state planning procedures. This turns something that might previously have been a low-priority project within the state into a mandatory top priority.” Source: Review of Congressional Earmarks Within Dept of Transportation Programs, US Department of Transportation, 9/7/2007
  8. Hanam Canada Corporation, “Container Capacity Expansion Plans at Pacific Coast Ports” Report Commissioned by Transport Canada (January 2007)
  9. Canada’s Asia-Pacific Gateway And Corridor Initiative: Policy, Trade & Gateway Economics Volume 1, U.B.C., Vancouver, 2007