Lou Smyrlis

Over the past decade I’ve chaired or otherwise participated in a number of panels dealing with the considerable and growing gap between what we should be spending on infrastructure every year and what actually is being spent. If I’ve learned anything it’s that our problems are in no way unique; legislators and transportation stakeholders south of the border are just as pressed to find an effective way to deal with this issue as are their counterparts in Europe and Australia. I’ve also learned that continuing with the same old strategies is going to deliver nothing but the same old problems. We need to consider new approaches, no matter how far they may depart from our current practices.

Over the past year, US legislators and stakeholders have engaged in a debate that may revolutionize their greatly troubled approach to infrastructure spending. The debate is worth following; it’s directly relevant and there is much to learn.

US legislators have had to face the fact that their approach to raising infrastructure funding through fuel taxes is outdated. Current stimulus spending may temporarily mask the depth of the problem but this approach to raising funding has for years been falling short of meeting obligations for highway projects. By last year it was estimated that infrastructure investments from all levels of US government are contributing only about one third of the $190 billion that’s needed every year just to keep up with highway maintenance plus some gradual improvements to stay in line with the increases in trade, population growth and geographic movements of people that is normal over the course of years. It has been reported that from 1980 to 2006 the total number of miles travelled by car and trucks doubled yet highway lane capacity increased by just 4.4%. If you adjust for inflation, real highway spending in the US is down an incredible 50% since the heydays of the Highway Trust Fund of the late 1950s.

Sound familiar?

The problem is a flawed approach to generating revenues for infrastructure spending. The tax is tacked on the price of each gallon of gasoline or diesel yet purchases of fuel are actually dropping as Americans drive more fuel efficient vehicles. For example, Americans drove 108 billion fewer miles in 2008 than they did in 2007. Recessions, of course, further drive down mileage. And with US president Barack Obama pushing for a 40% improvement in gas mileage for cars and light truck fleets by 2020, the continuing demise of the current infrastructure revenue collection strategy seems inevitable.

So the US Congress chartered a special commission to look into the infrastructure funding gap and the commission came back with an interesting recommendation: Phase out the collection of fuel taxes and move towards a direct user-fee system where vehicle owners are charged based on the miles they drive. This way, the cars and trucks that use the nation’s roadways the most, and thus cause the most wear and tear on roadway surfaces, end up paying the most.

How would the government know who is using the highways the most? Well, this is the electronic age so you know there would have to be a technological solution. The commission believes that tracking technology and wireless communication could be used on a grand scale to calculate each vehicle’s travel miles and initiate the billing. The technology to send the data would have to built into all new vehicles over time.

One more thing I learned from the infrastructure panels I chaired or participated in was that if there is an interesting new idea, it’s likely already being tried somewhere. And so it is with user fees based on vehicle miles traveled. Several European countries are either already using them – Germany, Switzerland, Austria -- or planning to in the near future –the Netherlands, Denmark.

Germany’s experience has shown supply chain management improvements such as a clear incentive to consolidate shipments and cut down on out-of-route miles; move a portion of traffic to rail and purchase trucks with cleaner burning engines (the government gives a discount for doing so).

No doubt there are negatives to this approach (errors in tracking spring to mind plus the obvious invasion of privacy through tracking vehicle destinations) but overall I think this approach is worth consideration. What do you think?

Last month we held our second annual Profitability Workshop for carriers in partnership with Dan Goodwill and Associates and with the support of Peoplenet Canada. Profitability, of course, has been an all too elusive concept the last couple of years and that has forced deep cuts in supply chain budgets. I know I personally held some reservations about the strength of the recovery and the health of our industry, the jist of a rather frightening economic discussion at a recent truck show still haunting me.

We thought it critical to address the status of the Canadian recovery at our workshop and invited Carlos Gomes, senior economist with Scotiabank, to share his insights. I’m glad we did because Gomes had a very positive outlook on the economy to counter all the fears. The recovery is gaining momentum and the fundamentals are looking very strong, according to Gomes’ economic analysis. In fact, GDP growth could hit 4% year-over-year; in other words we are lurching towards normal.

Certainly the transportation statistics bear out his optimism. US truck tonnage rose 0.9% in April, marking the sixth increase in the last seven months, the American Trucking Associations reported recently. The ATA's Truck Tonnage Index now sits at its highest point since September, 2008. Overall, US truck tonnage is up 6.5% over the past 7 months. April's tonnage was up 9.4% compared to last April, the fifth straight month of year-over-year gains and the largest year-over-year increase since January 2005. Tonnage is up 6% year to date compared to the same period of 2009.

Share prices for Canada’s handful of publically traded trucking companies is also showing improvement with Transforce leading the way. That’s an indication the market believes the North American economy is improving, according to Elian Terner, director of investment banking at Scotia Capital and also a speaker at our Profitability Workshop.

Truck tonnage volumes are being boosted by robust manufacturing output and stronger retail sales.

For the hard-to-convince, Gomes pointed to several more indicators that the recovery has taken hold: Global trade is bouncing back, with growth in the 14-15% range expected this year. The housing market in the US still has unresolved issues but housing affordability is at one of the best levels on record. The financial system may be tighter than it used to be during previous economic recoveries but it is now healthy and not so tight that it would impede business growth, according to Gomes. And much of the government stimulus, on both sides of the border, will be spent this year.

With so many positive signals, why all the worry about a double-dip recession?

The massive debt western governments are incurring is one reason. Canada’s estimated $50B debt is larger than the mess Paul Martin had to clean up back in the early 90s. But Gomes pointed out it’s important to place the size of the debt in perspective. The Canadian economy has grown a fair bit since the early 90s, enough so that the current debt makes up 3% of Canada’s GDP, which is a smaller percentage than back in the early 90s. In fact, Canada is one of the most financially healthy nations in the western world as we head into recovery.

What explains the volatility we’ve seen in the markets of late? According to Gomes what we are seeing is simply fear-driven concern. Markets hate uncertainty and that’s why we’ve seen some dramatic drops just as things started to improve. But going forward it will be the fundamentals that will drive the economy and, as mentioned, they are solid.

I know skepticism about the health of our economy continues but I must concede it’s hard to argue against a case built on the fundamentals. Perhaps it’s time we all got over the shock of the recession, stopped worrying and got on with the work of rebuilding. For, as Terner pointed out, the carriers that have a clear strategic focus will benefit the most during the economic recovery.

In the meantime, it's always a good idea to stay current with the latest financial outlook, particularly if you can do so while also learning about supply chain strategy. Join us in Torono next Wednesday June 16 at the Airport Marriott and you can accomplish both at our annual shipper workshop, conducted in partnership with Dan Goodwill & Associates. Go to ctl.ca for more detailers and to register.