Framework For Getting The Most Out Of Infrastructure Investments In US Ports

In a December 3 notice in the Federal Register, the DOT invited public comments on its draft Strategic Framework. The notice sought input by December 17 on six strategic goals reflecting the Secretary’s priorities that will be included in the DOT’s upcoming five year Strategic Plan. Those priorities are safety, economic strength & global competitiveness, equity, climate & sustainability, transformation and organizational excellence.

My comments will be focused on a framework for accomplishing a precise segment of DOT’s mission and how that framework fits with the Secretary’s priorities. Specifically, they will be on an approach to get the most out of the historic investments in US port infrastructure resulting from the bill recently passed into law. This investment program will be overseen by DOT’s Maritime Administration. My qualifications in support of these comments include four decades of senior level operating and investing experience in the shipping industry.

I’ll preface my comments by saying that I believe the transportation sector is at or near the top in terms of tangible products and benefits that governments at all levels can deliver to the public as a result of thoughtful infrastructure investments. The interstate highway system at the federal level, EZ Pass and other automated toll systems at the state level and bike paths and sharing systems at the city level are all examples of infrastructure projects with high ROI’s. The 48,440 mile interstate highway system cost $114 billion to build (around $530 billion today) but is some of the best money ever spent by the federal government. When all the benefits resulting from that system are tallied, it has paid for itself many times over and continues to deliver large economic benefits to all Americans. That realization makes me an optimist when it comes to disbursing the largest amount of funds ever set aside for US port infrastructure. Being an optimist also has me believing that we’ll get the most out of those investments if they result from a framework that strives for the ideal.

When President Eisenhower developed his plan for the interstate highway system in the 1950’s, it was a national plan that laid out where all the highways that were eventually built would be. A data point that drove that was an early decision that any city with a population over 50,000 would be connected with into the interstate network. There was clearly a realization that cars go to and from where people live. Once all those points were determined, connecting the dots with highway lines was straightforward. In other words, the factual data itself drove what would be the interstate map and it has benefited the entire nation ever since.

That is actually a good template to follow in developing a framework on how to get the most out of infrastructure investments in US ports. First and foremost, it should be based on a national plan that would deliver the largest collective benefits to Americans. It should also be centered on the long-term picture. Among the key benefits that must be quantified in developing that national plan are the economic, carbon emissions and congestion impacts. I refer to that as the ECC factor and it should drive decisions. The first two components can be readily measured. While the third is more anecdotal, with the maritime supply chain bottlenecks now in the news and its adverse consequences, it should be a key component. With the focus squarely on the best collective benefits, various demographic factors can be incorporated into models that can highlight where infrastructure investments in US ports will result in the highest returns to Americans. In that sense, the factual data can actually point to where investments should be prioritized, just as demographic data drew the map for the interstate system. With a broad geographic distribution outlined, attention can be turned to what in terms of the types of infrastructure investments that deliver the greatest benefits.

My focus here is on a broad framework of the where and what related to infrastructure investments in US ports. With billions to be spent, the time should be taken at the outset to develop parameters and priorities. As an optimist in terms of what can result from the most thoughtful infrastructure investments, I’ll swing for the fences and highlight points and things that are long term ideals to strive for. Before getting to the where and what, I’ll set the map as it exists today and the macro factors that influence the long term future we should plan for and embrace.

Setting The Map

Ports are the gateways through which trade flows. The collective economic benefits from trade are irrefutable and anything that can be done to make those gateways operate more efficiently and seamlessly will result in further economic benefits. In cases where the expected benefit comes out of an infrastructure investment, calculating the ROI should always be the metric by which arrays of possible investments are economically ranked. But sorting through countless projects with no other parameters and without regard to other components is hardly the way to start off. How US trade exists today and its likely direction in the future provides a guide on a better way to frame the where and what of US port infrastructure investments.

US port activity is dominated by imports and containers account for the large majority of the economic value in our trade activity. With containers, import volume was 2.2 times export volume in 2020 and well above that in terms of value. There are 25 US ports that have container operations, but the top 10 ports account for almost 90% of total volume. In the bulk commodity trades composed mainly of petroleum, chemical, coal and grain export shipments, most of the activity is concentrated at Gulf Coast ports. Container volume will continue to grow, although not at a rate as high as it has grown in the past. Overall bulk volume, on the other hand, is destined to decline as the world moves away from fossil fuels. A credible forecast by DMV shows worldwide crude oil tanker ton-miles in 2050 will be approximately half of what they are today. The only growing segment across the energy spectrum in which most of our bulk exports fit is LNG where worldwide LNG tanker ton-miles in 2050 will be more than twice what they are today. Given our large natural gas reserves, the US should be a growing exporter of LNG. With the productivity of the US farmer and an efficient inland waterway system to move grain to export facilities, our leadership in agricultural exports will continue. In that commodity segment, however, containers should continue to make inroads. Currently 25% of agricultural exports by weight and 55% by value move in containers.

In the five years from 2015 to 2020, inbound containers to the US grew at a 3.6% annual rate. In the twenty years prior to that from 1995 to 2015, they grew at a 5.4%, which itself was a deceleration from earlier growth rates as the efficiency benefits of containerization had it growing at three or more times real GDP. I’d peg the growth rate going forward for containers over the long term at 2.4%. While that is a marked reduction from the past, it still results in container volume doubling every 29 years. So the 20,947,912 TEU’s of inbound boxes to the top 10 US ports in 2020 becomes 41,895,824 TEU’s in 2049 and 83,791,648 TEU’s in 2078.

That last estimate of 83.8 million TEU’s of incoming volume annually to our largest ports should be the “North Star” that ideal infrastructure investments are benchmarked against. Looking out that far is similar to the time period envisioned in the interstate highway plan when it was initially unveiled. Given the congestion issues and bottlenecks that developed in our maritime supply chain and that have persisted throughout 2021 without any quick fixes, it is clear that many of our ports are operating near their capacity limit. That has occurred even with volume increases that are small compared to the volume increases that are inevitable. Investments that incrementally increase capacity won’t cut it. That is why putting a stake in the ground for the four times larger volume that can be foreseen is an appropriate mindset to have to develop ideal infrastructure investments. When you have investment initiatives that solve for what inbound container volume will be in 58 years, you automatically solve for handling lesser amounts of outbound container volume.

My view is that the billions earmarked for port infrastructure should be prioritized towards those sectors involving real growth and that primarily means things related to containers. Investing where there is real growth is almost always a better pure strategy. Such investments actually move the economic needle in a positive direction. As such, priority should generally be given to offensive, capacity increasing investments in a growing area where the investment can increase growth further in a virtuous circle. Ideally, infrastructure investments should be about fundamental structures and equipment generating revenue throughout a life span greater than humans. Investments that are replacement in nature and driven by a desire to avoid future maintenance don’t fit within that definition. Wariness is in order for things that could be characterized as defensive, non-capacity increasing investments in areas with no growth or expected declines. It is for that reason that less priority can be given to the bulk shipping sector. Negative growth in some of the bulk segments will automatically free up capacity for the segments that will grow. Furthermore, some initiatives focused on container ships such as dredging will have overflow benefits to the bulk ships utilizing some of the same ports.

It’s not clear to me how much of the $17 billion total will be allocated to coastal ports typically used by ocean going ships. If the benchmark for how infrastructure funds were divided in the larger bill was solely based on economic ROI, I’m highly confident that an even larger amount could be readily justified. After all, a double-digit percentage of our tangible GDP moves through those ports. I for one find it puzzling that the entire $17 billion in the infrastructure bill is less than the $25 billion set aside for airports. I understand that everyone likes a new or remodeled airport, but much of those expenditures relate to aesthetics with significantly less incremental economic impact than the same amount spent on seaports. Indeed, many of those airport expenditures likely won’t even move the needle in terms of ongoing benefits, as they are replacement in nature. The data shows that freight moving through our seaports is a larger part of the economy than the people moving through our airports. That remains so even after including the relatively small amount of freight going through airports. But I do recognize that people vote and freight doesn’t.

Taking everything I outlined above, I think that the long-term growth rate for inbound containers into the US is an excellent benchmark to start with to begin framing what a US port infrastructure investment strategy should look like. What that translates into in terms of total container volume at various future points will be a template by which various alternative investments can be compared. Prior to getting that, however, we also need to set the map in terms of where containers currently come into the US.

In 2020, 52.9% of the inbound containers at the top 10 US ports came in through the West Coast with the remaining 47.1% coming through East/Gulf Coast ports. There are five ports in each broad range. I publish a detailed monthly analysis of volume at these large ports and the latest report for November is available at https://conta.cc/33AZIKw. While there are 25 US ports that handle containers, the top 10 ports account for almost 90% of total volume. When the smaller container ports on the East and Gulf Coasts are taken into account, the current overall distribution is in the range of 48% for the West Coast with the 52% balance for the East/Gulf Coast ports.

There has been a subtle but consistent coastal shift over the years in where inbound containers first land in the US. To demonstrate this, I’ll refer to precise differences related to the top 10 ports as that is where I have detailed historical information, but the data for all the ports would show nearly identical swings.

The distribution of inbound containers into the US by coast has been distorted by a number of factors, key among them the advent of double stack train service in the 1980’s. Going back to the situation then where the conferences established the same rate for containers moving to various East Coast points whether they moved by the speedier intermodal route or the slower all-water route, its not surprising that most shippers chose the former. As Asia was the largest origin for containers, the West Coast became the entry point for some three-quarters of all containers, with many of those moving across the country to other regions. By 1998, there had been a gradual shift and the West Coast represented 66.3% of total inbound containers at the top 10 US ports.

The coastal shift away from the West Coast continued and by 2016 it represented 56.8% of total inbound containers, an average annual decline of 53 basis points since 1998. With the opening of the expanded Panama Canal and the more than three times larger container ships that were allowed, the shift accelerated. In 2020, 52.9% of the inbound containers into US ports came in through the West Coast, an average annual decline of 98 basis points since 2016. During the latter part of 2021 there have been even more pronounced coastal swings away from the West Coast, driven by shippers rerouting loads to avoid the widely reported congestion issues.

The gradual shift away from the West Coast can be expected to continue under any scenario. The larger point is that the current distribution of inbound containers by coastal range shouldn’t be viewed as ideal. A strong case can be made that infrastructure investments that encourage an acceleration of what will happen inevitably results in significant favorable economic, carbon emissions and congestion benefits. As those benefits will really be disbursed across and throughout the country, when viewed from the standpoint of a national plan, they clearly override any local disruption.

Connecting The Dots On Where To Prioritize Investments

Regardless of the coastal range inbound containers initially land in the US, the products inside invariably end up where people live. The correlation between final destination and population density is therefore significant. Despite the relative shifts away from the West Coast that have already occurred with inbound containers, from an economic, carbon emissions and congestion (ECC) cost standpoint, there are still too many load loads that come in through those ports. Those differences are quantified in an November 5 article I wrote entitled “Reflections On The Speed Of Container Freight And The Real Costs Of Faster Speed (Economic, Carbon & Congestion)” which is accessible at https://medium.com/@john-d-mccown/reflections-on-speed-of-container-freight-and-the-real-costs-of-faster-speed-economic-carbon-75a19869aa41.

The article included a comparison of two methods to move a container from Shanghai to New York. The quickest container movement between those points is referred to as an intermodal move, with the container going by ship to the West Coast and then across the country on a double stack unit train. Alternatively, that container could go the entire way by ship with a much longer voyage via the Panama Canal. Between the fact that trains are faster than ships and the intermodal move involves less total distance, the all water movement inevitably takes longer. The quickest method was 7.6 days or 31% faster than the all-water movement. However, that speed benefit comes from the intermodal routing that results in $1,310 of additional costs. To put that difference in perspective, looking just at the cost items affected by the routing choice and ignoring other underlying costs that are unaffected, it is 206% higher. The article goes into more detail on these costs. In addition, the total carbon emissions are 207% higher and increased congestion that isn’t readily calculable but is 12 to 65 times higher based on two relevant measures. The ECC cost of moving containers over the West Coast for the sole benefit of getting them to the East Coast slightly quicker is quite significant.

To put a fine point on it, the West Coast ports are the gateway for twice as many containers compared to what an ideal distribution would look like. That ideal distribution comes from allocating the population of each state on the mainland to the coast it is closest to supports that conclusion. Linehaul costs per container mile at sea are well below the linehaul costs per container mile for the two land modes. Broadly speaking, if water mode costs are 1, rail mode costs are four times higher at 4 and truck mode costs are another three times higher at 12. Based on those relative costs across modes, in almost every case the lowest ECC cost will result from a movement by water to the major port closest to the final destination followed by a rail and/or truck movement to that destination.

Based upon a current breakdown of the US population on the mainland, only 24.3% of the people live closer to the West Coast, with the remaining 76.7% being closer to the East/Gulf Coasts. If ECC costs are the only criteria, the West Coast share of total inbound containers should eventually be around half of what it currently is. An even more refined population distribution by county could be prepared, but the results would be largely consistent with the distribution by state. To reinforce the claim that the ultimate destination of inbound containers correlates with where people live, a similar breakdown of distribution center square feet at the largest retailers would be a useful confirming exercise. Similarly, algorithms based on the relative economic costs of each mode will prove that the lowest such cost will almost always come from the major port closest to the destination point. In all cases the lowest economic cost will also result in the lowest carbon and congestion cost, although separate algorithms could also be developed to quantify the last two factors in the overall ECC equation. In most cases, the reduction in those two factors will be even more pronounced than the reduction in economic cost.

Ports in the East and Gulf coasts, in addition to being more cost-efficient gateways for containers moving to those regions, have more additional existing capacity compared to West Coast ports. They include new modern terminals built in Charleston and Jacksonville.

Another differentiating factor to keep in mind is the actual track records of the various ports. Ports with better long term container volume growth records tend to be better managed. Everything else equal, better managed ports is where you want to make investments. There is also a distinction in terms of port structure that tends to be reflected in actual volume growth rates. Ports in the US are either landlord ports, where they just lease land to carriers or terminal companies, or operating ports, where they manage the entire operation. The majority of all US ports are landlord ports, as are 7 of the top 10 container ports. The remaining three, Charleston, Savannah and Norfolk, are operating ports whose volume growth has consistently exceeded that of the landlord ports. Because those operating ports are all on the East Coast, which has also benefited from the coastal shift, it isn’t clear how much of that difference can be assigned to structure. However, the difference appears to be more than can be solely explained by coastal range. My observation is that the operating structure produces better results as one entity is involved in everything while the landlord structure can result in broader issues getting less attention as everyone is focused just on their land.

Given all of the above facts, and keeping in mind the disproportionate congestion and bottleneck issues with the West Coast ports of LA/LB, it seems to me the question of “where” begins to answer itself. With apologies to Horace Greeley, go eastward in terms of giving priority to US port infrastructure spending because that serves the national interest. An ideal project in that area not only has its own high direct return, but it also has the effect of accelerating a coastal shift that will occur anyway which itself acts to mitigate further issues at LA/LB. It’s a multiplier effect of one investment resulting in two positive returns. Actually, a container that comes over LA/LB that is better suited based on ECC cost to land at an East Coast port is a double negative on terminal congestion. First when it comes off the ship and second when 40’ containers are transloaded into 53’ containers for a more efficient cross-country rail movement. The transloading of 40’s into 53’s near the ports goes hand in glove with the excess boxes moving over the West Coast and is an under-appreciated contributor to congestion.

What Investments Give The Most Long Term Benefits

While a redistribution of inbound containers could alleviate the congestion problems if overall volume stayed at current levels, we know that will not be the case as volume will continue to grow. There is no redistribution that will solve all the issues when volume is four times higher than what it is today. New terminals and ports will need to be built and the East and Gulf Coasts have more opportunities for both.

In addition to the new terminals and ports this will require on the coasts, the way existing terminals are operated needs rethinking. The best answers go back to the way terminals were operated in the early days of container shipping, with a key adaptation to take into account the extraordinary growth in volume over the decades.

The ideal terminal situation is that when not on a ship, a container is always sitting on a chassis in what is known as a fully wheeled operation. As containerization grew, most ports had no land to expand outwards and began stacking containers. Those stacks add steps to the process both at the beginning and the end and as they grow in height, the steps involved particularly in recovering a specific container expand. Think of it as similar to a Rubik’s Cube. As each gets bigger, the actions needed to solve grow geometrically. The answer can’t just be to stack boxes higher and in some cases many of those stacks are already as high as they should be.

These large stacks compound the issues related to pickup and delivery operations handled by truckers. These truckers are compensated on a per load basis and the delays in making pickups and deliveries has made a difficult job even more so. The ideal situation for them is clearly a fully wheeled operation, where they can perform their duties in a much more straightforward manner without the involvement of numerous other parties to locate, retrieve and mount their container.

One thing that addresses all of these issues is an inland terminal located outside of the port area. Recent press accounts have referred to Savannah making good use of what are referred to as “pop-up” terminals away from the docks. That is certainly the right direction to go in and Savannah, one of the most successfully managed ports, should be applauded for their initiative. However, there should be nothing “pop-up” or temporary about these sort of terminals as an array of variations on that theme are the holy grail in terms of expanding the capacity of our maritime supply chain. Such terminals not only provide additional capacity, but it would provide better capacity if it were set up for a fully wheeled operation. Because those operations require more than five times the amount of land as a stacked operation, the lack of available land makes such an operation impossible in most locations as the ports are penned in.

So if you want additional capacity and you want to make it even better capacity that connects seamlessly with the pickup and delivery by truckers, you need to find a large piece of vacant land away from the port. Whether it’s 20 miles or 50 miles or more, you build a new greenfield terminal that will be connected to where the container ship docks via rail double stack trains that shuttle back and forth. In an ideal situation, the containers could be directly unloaded onto the shuttle train. The costs involved in building the new inland terminals and any rail lines associated with them are classic infrastructure investments. Such an activity lends itself to generating revenue in a model that could fit well into a public private partnership. These partnerships have the effect of leveraging the initial infrastructure investment. In addition to that resulting in more projects to improve the maritime supply chain, the direct involvement of private sector expertise will act to diminish the likelihood of moving ahead on a project that is driven more by politics than economics. The reality is that political appointees who often have little or no actual subject matter experience will influence or make the decisions on these infrastructure projects. The involvement of private sector partners with skin in the game in a way in which they lose if the project isn’t sound is an excellent way of mitigating the risk of undue political influence. Given the well-known knock off effects from large port related projects, the political jockeying for such projects will be very intense.

In a fully-wheeled operation, there is no container stacking and the container itself is moved less times. A framework like that fundamentally takes steps out of the process and results in new inland terminals whose capability to be efficiently expanded is virtually unlimited. Among other things, with containers always on chassis at these inland terminals, the interface with truckers is streamlined and much more efficient compared to an appointment to pick up a container that may or may not have been retrieved from whatever stack it is buried in.

The port related infrastructure investment that checks many of the boxes in terms of moving towards a better maritime supply chain is to build a new showcase inland terminal in the Eastern US that is connected via rail double stack shuttle trains to where a container ship is docked. Because all containers are unloaded directly onto, and all empties are loaded directly from, shuttle trains. There is no terminal adjacent to where the ship docks and it is located whatever distance away is needed to build a greenfield terminal. By decoupling where the ship docks from where the terminal is located and significantly reducing the coastal land requirements, the potential for new terminal locations that will be required has geometrically expanded. Taking the concept of where the terminal should be compared to where the vessel is discharged a little further, there is nothing that prevents an offshore port with a platform for container cranes connected via rail trestle in a sort of ULCV version of the LOOP.

If there is anything that could be today’s interstate highway system equivalent of infrastructure investment in the maritime supply chain, it will be direct to rail double stack discharge on trains that are then shuttled to large new inland ports allowing fully-wheeled operations. There are additional costs involved, but such operations are also removing many steps and the entire inefficient and bottleneck prone stacking operation is eliminated. While I believe a thorough analysis would show it is cost efficient, that can’t be the only objective as we need to develop ways to substantially increase our container capacity and this does that. More importantly, we’ve now directly experienced the extraordinary additional costs to our economy from hitting these capacity ceilings. Any incremental costs that would result from taking measures to dramatically increase capacity are inconsequential to what the congestion costs are if we again hit a capacity ceiling.

With reference to congestion, I’ll close out this section by talking about the transloading that now occurs on the West Coast as its an under-appreciated contributor to congestion. Transloading is the process of stripping cargo out of 40’ containers and putting it into 53’ containers, where three of the former can fit into two of the latter. This process requires truckers to move the 40’s from the terminal to warehouses or distribution centers and then from those facilities to railroads. That’s two additional truck moves and the massive transloading activity is a major draw on local truck capacity. Almost all of the containers that are better suited for eastern ports are transloaded, because despite the time and cost of transloading, the cost efficiency it results in for the rail movement justifies it.

While not something that would fit as a government involved infrastructure investment, I described a private initiative that could address the congestion resulting from transloading. An October 12 article I wrote entitled “Time To Strengthen Our National Maritime Strategy With Tangible Goals And Initiatives” was a white paper on steps that could be taken to grow the US flag merchant marine. The key commercial initiative outlined in the article to grow the international US flag merchant marine was an express transpacific weekly service between China and the West Coast exclusively using 53’ containers. The article is accessible at https://medium.com/@john-d-mccown/time-to-strengthen-our-national-maritime-strategy-with-tangibles-goals-and-initiatives-99cb42a5d0d2. As detailed in the white paper, the cost and time savings from taking the now unneeded transloading step out of the process would give such a service a competitive cost advantage despite higher US crew costs.

With some 43% of inbound containers into the US coming from China where all the 53’ containers are built and where they are legal, a new service between China and the US built exclusively around the equipment size that has dominated US freight movements for two decades has some compelling inherent cost advantages. In addition to obviating the costly and time consuming transloading step, the same quantity of freight can be handled in one-third less container crane moves. While it’s these economic cost reductions from fundamentally taking out steps that should drive any decision on such a new service, the emissions and congestion benefits tangential to less economic cost are considerable. The marketing advantages of launching such a bold U.S. flag initiative would be meaningful and the best candidates for that are large American transportation companies with no present involvement with shipping.

How My Where & What Fit With The Secretary’s Priorities

The Secretary’s six priorities that will be included in the upcoming strategic plan are safety, economic strength & global competitiveness, equity, climate & sustainability, transformation and organizational excellence.

I believe my framework for getting the most out of US port infrastructure investments fits squarely with all those priorities. Less steps in processes equals safety, less cost is more economic strength & global competitiveness, following factual data is equity, sharp reduction in emissions equals sustainability, innovation is transformation and selecting the highest return projects is organizational excellence.

Perhaps the one area where I think someone reading this may quibble would be equity. They may view my eastward bias as un-equitable if the view is that geographical balance is a major determinant. That, however, should not be a concern if it is appropriately looked at as a national plan and what is in the best interests of the country. To use another interstate highway system analogy, when the plan with its initial $25 billion funding was unveiled the states weren’t told “submit your projects on where and what kind of roads you want to build we’ll select the best $25 billion worth”. No, they were given a roadmap with the lines precisely drawn based on a uniform four-lane separate highway system. Wyoming wasn’t carping that it had much less miles of interstate than Illinois even though it was bigger because they knew they would benefit from the efficiency of the overall system. That’s what a NATIONAL plan is all about and that should be the template here.

Well thought out initiatives backed up by the judicious investment of the $17 billion in the infrastructure bill can result in a material improvement in America’s maritime supply chain. It primarily requires some out of the 40’ marine box thinking with a focus on how boxes (preferably 53’ if they are coming from China) fit into our extraordinarily efficient domestic transportation system.

John D. McCown has four decades of experience in the maritime sector including serving as CEO of a U.S. flag container shipping company he co-founded and leading transportation investments at a multi-billion dollar hedge fund. Mr. McCown was mentored by Malcom McLean, the inventor of containerization who he worked with for twenty years Mr. McCown is the holder of two maritime related patents as well as a MBA from Harvard Business School and is the author of the recently published book “Giants Of The Sea: Ships & Men Who Changed The World”.