Logistics' Need for a World-Class Transportation Infrastructure
How important is the international freight transport system to the U.S. economy? Very.
Adam Wasserman, Managing Partner, GLDPartners (September 2010)
The ability to move cargo in and out of the United States is a critical element in the health of our economy. Though not always understood very well and rarely receiving serious attention, freight transport is the umbilical cord that binds U.S. companies to far away markets. The ability of this umbilical cord to function with world-class efficiency is fundamental to our competitiveness in the global economy. If we are not serious about assuring that our freight system can grow to accommodate the economy 20 or 30 years from now, we are likely to grow less competitive.

Let's consider the United States as compared to the world:
• We are a very small portion of the word's population: The United States represents roughly 4.5 percent of the world's population; i.e., 95.5 percent of the world's marketplace is somewhere else, and to reach those markets U.S. companies rely on freight transportation.

• The U.S. economy has been an economic power for a century and represents 20 percent of the world economy as measured by GDP. However, in 1970 that figure was 40 percent. Our economy is expected to grow further, but the world's economy is growing much faster.

• Trade is a huge foundation of the global economy - 23 percent of the value of world GDP is the value of exported goods (CIA World Factbook).

We are smaller than we think and we are growing proportionally smaller every year. The world population and economy is growing at a far faster rate than the U.S. population and economy. That said, we are still an extremely powerful economy with some truly amazing economic assets and advantages, and if we are serious about mining growth in global markets, we can be even more successful. However, if we sit back and take certain things for granted, we will slowly fail, and that slide will likely become steeper as the years go on.

Ask Area Development

If you have a business question about logistics, infrastructure, or transportation, submit your query below to Ask Area Development and the article author will respond.
Maintaining Economic Competitiveness
To economic planners this must all seem rather simple; there will be increasingly more opportunities to sell U.S. products to others, as there will be more people in other places with more wealth. Nonetheless, U.S. companies are not alone in the world, and it is a very competitive place. Further, we are a long distance from many of these markets, whereas some of our competitors are closer. With tough competition and tight margins, there is little room for inefficiency in our ability to get cargo to and from places like southern Europe or Southeast Asia, western Africa or South America.

The federal government broadly understands this. As an example of high-minded objectives, President Obama has set an extraordinarily high bar for the United States to double its exports from $1 trillion to $2 trillion by 2015. Some call that objective crazy and it may well be - but we need to pay attention to practical issues associated with these sorts of objectives. Exporting by definition will require delivery of goods to a foreign market, and if there are problems in delivering those goods, we are probably destined to lose out to places that have better prepared with strategy and infrastructure.

To the extent that our economy can rely on world-class transportation infrastructure, we have demonstrated that we are not at all serious as a nation. The U.S. Congress seems to show fairly little commitment to investments in road, rail, water, and air infrastructure. It is common to hear frustration from business organizations that because this issue is not "sexy," it gets little attention. Some estimates suggest that we require a minimum of $87 billion of annual infrastructure investment, with some estimates going as high as $148 billion per year (American Manufacturing Institute). Federal investment is not anywhere near those levels, and each year we seem to fall further behind.

Consider the Future
How well positioned are we when considering the next 25 years? There's no status quo in the global economy, and there won't be a status quo in transportation. To expect that things won't need to change is probably naïve, and things have already begun to change quite substantially. Consider the following:

• Our infrastructure system was designed in another era, and we are struggling to create patchwork solutions to transform to a fully integrated twenty-first-century system. We do not have the luxury of some newer economies that have been able to design infrastructure that makes sense from a system perspective.

• If "USA Inc." were operating like a company, there are serious business risk factors - the United States has very modest levels of national policy, investment, and strategy for such matters.

• There are relatively few ports moving too many goods. Our existing legacy system has functioned well enough in the past but will create problems into the future.

• The issue of cargo concentration is a significant and growing one for those worrying about homeland security.

• Some of our load-center port regions are experiencing significant challenges with regard to congestion, air pollution, and community push-back.

• We generally do not integrate transportation and economic development very well. Most state transportation planning is separate from economic development strategy, and - as "generalists" - most economic developers have a modest knowledge of the details of global logistics.

Ask Area Development

If you have a business question about logistics, infrastructure, or transportation, submit your query below to Ask Area Development and the article author will respond.
• Though mostly residing in public ownership, ports are owned locally and decisions regarding strategy are made from a community or state perspective guided by local politics, etc.

• Most capital investment in ports and related infrastructure is localized and seen as a public responsibility. There is little federal funding for ports development and related infrastructure.

• There is patchwork private investment in our rail system and intermodal facilities with long-term planning distinct from public policy and public funding.

Among the key issues to be considered in the future are the following:
• Cost of energy - The change in the cost of oil is hugely destabilizing to the logistics industry and expected rises can make or break shipping companies that have cost structures with medium to high transport factors.

• Environment - Increasing environmental awareness and new regulatory pressures will only cause costs to rise as federal, state, and local governments increase their requirements.

• Transport congestion - Per the U.S. DOT, there are substantial problems in some key road and rail transport corridors, and these problems are only expected to worsen and will result in increasing congestion and delay.

• Game-changing infrastructure - The expansion of the Panama Canal is a $5.5 billion investment that will allow for much larger vessels to move from the Pacific to the Gulf of Mexico and the Atlantic. Cargo traffic to and from Asia will have more port-of-entry options. Canada and Mexico are making billions in investments in new ports and supporting infrastructure to take advantage of U.S. cargo inefficiencies.

The objectives of the Canadian Gateway strategies are to intercept U.S.-bound cargo in their territory and deliver to U.S. markets. There are several propositions in Mexico to build new world-class port infrastructure for the sole purpose of serving U.S. markets. Both examples would yield huge opportunities for economic development near to the foreign port region. The objectives for these initiatives are to gain from the U.S. inability to deal with our freight system needs, now and in the future.

Can American manufacturers and importers count on the systems that have shaped and supported their businesses since the early part of the 1900s? If we assume that there will be no significant transportation system enhancements, shippers should expect that there will be an impact on them and that they will suffer negative effects. The status quo business model for some industries/companies will not stand, and negative consequences - including time delays, cost increase issues, and decreasing reliability - will increase. Because of congestion, infrastructure overload, and pollution, it is reasonable to expect that some communities will become less willing to bear the burden of moving throughput cargo.

Because of the amalgamated issues articulated above, the movement of cargo will require new infrastructure at existing hubs and new hubs that create route diversity. There will be some emphasis on smaller, specialized hubs that are closer to population and production centers, allowing for more supply-chain efficiency.

Regional opportunities include:
Inland waterway/St Lawrence Seaway - We can begin to follow the example set in Europe by using our inland waterway system and the associated in-place road, rail, and land assets. These assets are severely underutilized.

Gulf Coast - The Gulf is a relatively modest logistics gateway now and can certainly take on more growth and is a gateway to our inland system. The Panama Canal project is an important element bringing more cargo potential, but also the factors of the growing South, good land transport, inland waterway system and land assets.

Western U.S. - Huge existing hubs will still grow but growth rates will be under pressure because of congestion, environmental factors, cost, and community concerns; smaller mini-hubs have a chance to emerge.

East Coast - Large hubs will continue to get larger. There may be opportunity for some smaller port development for specialized cargo and for inland port distribution and intermodal facilities.

In all cases, the connection to "port-centric" operations and development will increase as ports evolve from simple transport terminal facilities to specialized logistics hubs that can provide efficient value-added services.

Ask Area Development

If you have a business question about logistics, infrastructure, or transportation, submit your query below to Ask Area Development and the article author will respond.
Opportunities and Solutions
Economic development - There is significant opportunity for new development in regions that have the necessary ingredients for logistics hub growth. Promoting a logistics hub will allow some communities - especially those places that are emerging centers - to compete for manufacturing and distribution investment previously not possible.

Shipper competitiveness - Shippers and 3PLs will be looking for new less expensive, more reliable, and quicker solutions in getting goods to and from overseas markets. Creating competitive routes to foreign markets can make an enormous difference to shipping companies, and 3PLs and will undoubtedly attract new industrial development.

Money and infrastructure - As with most things, it all comes down to money. The bottom line is that there will be fewer government funds and they will be in higher demand. On the local front, states are in bad shape and won't have adequate resources for the most basic infrastructure and maintenance, much less larger impact projects. Local bodies like port authorities suffer from a lack of market access, poor bond ratings, and generally very tough access to capital markets.

It will be necessary for the public sector to look to creative solutions with private partners to fulfill public objectives. After all, entities like port authorities are business animals - they exist to perform a business function with the private sector. The reality is there is huge need for investment in ports, terminals, roadways, and rail lines. Private investment in property assets will rapidly follow. The further reality is that the U.S. government will not be able to cope with the need, and politics will get in the way of a proper business investment strategy.

Private funders have cash and are looking for viable projects with (1) reliable and sophisticated public partners, and (2) assets that can be utilized to create revenue flows. We will need to think creatively about how to create infrastructure, and the ability to integrate public and private monies will be key.

In the realm of transportation, things will certainly change - they must. How fast things change will depend on a myriad of factors - but those that get out in front will have a good chance to mine the opportunity created by this churn in the marketplace. New cargo route potential will bring the need for large quantities of new infrastructure investment, as well as new property solutions at emerging logistics hubs for companies seeking more efficient strategies.