US ports and the funding of intermodal facilities: An overview of key issues

Due to economies of scale, the growing use of containers to move freight has led carriers to use fewer but larger ports. In their efforts to attract and retain carriers, U.S. ports have made or are planning substantial investments in new berths, docks, and improved connections with the nation's rail and highway systems. However, the current port financing system-which generally relies on balance-sheet financing and, in most cases, direct public subsidies-could create several serious problems as ports move to carry out their investment plans. To begin with, balance-sheet: financing makes It likely that public ports, not private shipping industries, will bear the risk of new investments. Moreover, subsidized balance-sheet financing means that port officials will tend to underestimate the risks involved with mew investments. This suggests they will fail to choose the best investments and may even overinvest in new facilities. Such overinvestment not only could lead to less-than-optimal use of public resources, but also could force the general public (not carriers, railroads, or the ports) to subsidize both the debt-service and operating costs of uneconomic new facilities. As an alternative, port officials and their political overseers might use true project-based financing, which is being used around the world in a variety of forms of infrastructure, to fund new facilities. Such funding strategies are appealing not only because they shift risk from public to private entities,but also because they seem likely to lead to improved decision-making about investments in intermodal facilities. This paper, which represents the first phase of our research into this issue, explores these concepts by (1) providing an overview of the changes in the containerized shipping industry, (2) examining how these changes affect ports, (3) detailing how ports have responded to the changes, (4) explaining how the current port funding system might lead to less than optimal decision-making by port officials and (5) suggesting some alternative funding models that could produce better investment decisions. In a second phase of this research, we intend to closely examine new strategies being used to fund port improvements outside of the United States to see if those efforts offer important insights on how to restructure the U.S. port funding system.