San Pedro Bay Ports Clean Truck Program CTP options analysis

San Pedro Bay Ports Clean Truck Program
CTP options analysis
March 2008

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Context for this document
This report presents the findings from an analysis of the San Pedro Bay Ports Clean
Truck Program (CTP) conducted by the Boston Consulting Group (BCG) on behalf of the
Executive Director of the Harbor Department
This report addresses the following deliverables per the Executive Agreement between
BCG and the Harbor Department
• Defined operating model options for the CTP
• Economic evaluation of these CTP options in the context of the port drayage market
• Evaluation of the CTP options against the goals for the CTP
• Assessment of interdependencies and/or other undesired outcomes consequent to any
operating model(s)
• Evaluation of the risks associated with each option and steps that could be taken to
mitigate these risks
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Agenda
Executive summary
CTP objectives
Operating model components and levers
• Range of options available within framework
BCG’s analytical approach
BCG’s evaluation of the operating model options
• Short term and long term impacts
• Key risks
Comparison of options and conclusions
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Agenda
Executive summary
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Executive summary (I)
Context and objectives
The Clean Trucks Program (CTP) is a core component of the San Pedro Bay Ports (‘the Ports’) Clean Air Action Plan
(CAAP). Our evaluation of the CTP has as its goal determining what would best serve the Ports as a functioning
enterprise to deliver on the following three sets of objectives which are critical to assuring the continued functioning,
growth and vitality of these Ports as major transportation enterprises into the long-term future:
•
Environmental: near term (removal and replacement of older “dirty” trucks) and longer term (a sustainable trucking market
with participants who are have the income to properly maintain and update trucks to use new greener technologies)
•
Operational: ensure continuity of port operations and deliver a sufficient supply of both trucks and drivers while in the
longer term assuring addition of drivers needed for projected cargo growth in a manner that enables “green growth” and
allows the SPB to retain its important role in the national and regional economy
•
Safety and security: includes both vehicle safety (in terms of vehicle maintenance, repair and replacement from both
environmental and operating condition) and driver safety (in terms of concession/ LMC responsibility for driver safety
training and compliance as well as maximizing port security.
The drayage market in the Ports of Los Angeles and Long Beach today has the following characteristics:
•
A large number (appx 16,000) of independent owner operators (IOOs) who contract with a large number (800-1,200) of
Licensed Motor Carriers (LMCs) to provide drayage services on a regular basis (more than ~3.5 trips per week)
•
IOOs, paid by the dray and also providing trucking services in other markets outside the port, provide a reservoir of
trucking to accommodate the wide swings (+/-30%) in demand for drayage on a week-by-week basis
•
Market is highly competitive with rates per dray bid down to low levels.
•
Many costs are externalized and borne by others. These include: underutilized capacity and inefficiency which are borne
by the IOOs; the costs of environmental impacts which are borne by the local communities in the burden of air pollution
and serious and expensive impacts on human health and premature death rates; the costs imposed by drayage on the
local community in terms of congestion, and neighborhood ingress/egress and parking of trucks; and the costs and
complexity of ensuring safety and security in a highly fragmented market of IOOS and LMCs.
•
As a consequence of this market structure truckers in the drayage market earn incomes below those of truckers in other
comparable Southern Californian markets
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CTP objectives
The Port’s objectives for the CTP span three dimensions:
environmental, port operations, and safety/security
Environmental
Port operations
Safety and security
• Reduce emissions from
• Improve stability of the
• Ensure compliance with
drayage (port trucking) to
port trucking market
safety standards
comply with CAAP
– establish stable drayage
– vehicle safety
guidelines
service business
– driver
– avoid service disruptions
• By 2011, CAAP requires
during implementation
• Ensure that port security
an aggregate reduction in
objectives are met
pollutants from all Port
• Ensure long term
sources including trucks
sustainability
– 47% DPM
– truck fleet and market
– 45% NOx
participants
– 52% SOx
– incomes that attract and
retain drivers
• Enable continued
migration towards newer
• Enable green growth
and cleaner technologies
– improvements in trucking
over time
operational efficiency
and reliability
Source: CTP / CAAP presentations, 2006 CAAP Overview
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Executive summary (II)
Approach and options evaluated
We analyzed the impact of the CTP on the supply and demand for trucking and labor (truckers) in the SPB drayage
market and the extent to which alternative CTP models would meet the CTP objectives. Our approach addresses
•
The different elements of the CTP: the environmental cargo fee; the truck ban; safety and security; the concession
program; and the truck financing program;
•
How these elements which work together as an interdependent system to mutually reinforce (or undermine) desired
outcomes;
•
How market structure (i.e. the number of market participants, their capabilities and financial structure) contributes to
sustainability;
•
How alternative CTP models would affect the externalized costs;
We examined three broad options for the CTP
•
Under all of these options the proposed truck ban schedule and safety and security requirements remain constant;
•
The first option we evaluated (Option I, or the “Basic Model”) provides for drayage by both employee truckers and IOOs,
sets a minimum level of concession criteria for LMCs, and makes CTP public financing available to both LMCs and IOOs
for new trucks. In addition exemptions from the ECF are included that are intended to encourage migration towards
cleaner trucks in advance of the ban schedule
•
The second option (Option II, or the “Enhanced Model with Market Incentives”) also al ows for both employee and IOO
drivers, tightens LMC concession criteria to further recognize the impact of marginal LMCs on the community and on
sustainability, and limits CTP public financing to LMCs. In addition, the fees and exemptions to fine tuned to further favor
the ‘greenest’ trucks and private investment. Taken together this interdependent set of elements may have the market
effect of encouraging market consolidation and enable a long term sustainable clean truck program.
•
Finally the third option (Option III, or the “Enhanced Model with Market Incentives and an Employee Commitment”)
overlays onto Option II some form of employee commitment that will ensure the phasing in of employees into the drayage
market over time. A range of different forms of employee commitment were considered.
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We evaluated three options for the CTP
III: Enhanced model with
II: Enhanc
II: Enhan ed mod
c
e
ed mod l
market incentives and
I: Basic plan
with market incentives
employee commitment
employ
Approach to
Levers designed to minimize
Create sustainable and orderly
PLUS: Require employees and
achieve CTP
disruptions to drayage
asset based market, incent
asset based market to ensure
objectives
market
faster adoption of clean tech.
long term sustainability
1
$35 / TEU, exemptions based
Environmental
on truck technology, funding
$35/TEU, optimized exemptions to encourage
Cargo Fee
source, and timing of purchase
cleaner technology and private funding
2
Progressive truck ban as outlined
Truck ban
3
PLUS: added control, training
Safety and
TWIC criteria as mandated by TSA
and compliance among
security
employees (via concession)
4
Basic operational criteria
More stringent operational
PLUS: explicit commitment for
allowing LMCs to use
criteria to help maintain oversight
drivers to become employees
Concession
employee and IOO drivers
(without employee commitment)
over a set period of time
5
Subsidies to IOOs and LMCs to
Subsidies given to authorized concessions only (scrap required)
Truck financing
fund upgrade of banned trucks
PLUS: dirty truck buyback program for IOOs and LMCs
program
(scrap required)
PLUS: business outreach program for transition assistance
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Executive summary (III)
Option I (basic model) & Option II (enhanced model with market incentives)
Our assessment is that Option I will satisfy the immediate near term environmental goals triggered by the truck ban but
will fail to create a sustainable long term drayage market that will enable continued progress in improving
environmental outcomes and enabling green growth
•
As the concession requirements for LMCs are minimal and IOOs are enabled to get new trucks but with limited
requirements for them to maintain and replace these trucks the drayage market would continue to be very fragmented,
with marginal economics driving the returns for both LMCs and truckers.
•
The local community will continue to bear the burden of a fragmented IOO pool (e.g. neighborhood parking) while
enforcement of safety/security across many IOOs/LMCs continues to be challenging.
Option II, the Enhanced Model with Market Incentives, addresses these shortcomings by deploying a focused array of
measures that should create the market conditions to encourage evolution of the SPB drayage market towards an asset
based (i.e. LMC truck owning) market. Key elements in Option II and their effects are
•
LMCs are enabled to invest in trucks but are subject to concession requirements that will discourage the marginal, under
capitalized participants.
•
Under Option II, drayage can be provided by employees or IOOs. This will allow an orderly progression from the market
today and be flexible to absorb swings in demand
•
Option II encourages a migration to an employee based trucking market as asset owning LMCs seek out drivers for their
trucks. We predict over time that this should result in a migration of trucker incomes towards prevailing comparable levels
•
Finally, by encouraging consolidation in larger more well capitalized LMCs with employees Option II should also create
incentives for further continual improvement in the efficiency of the port drayage market.
•
The key risks in Option II are
1) That the above benefits may not be realized if, for example, private players continue to fund and support marginal
IOOs, and/or create a ‘marginal contractor’ labor market for truckers who sub-lease LMC controlled trucks
2) That the complex mix of employee and IOO based LMCs complicates the enforcement of safety and security
requirements
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Executive summary (IV)
Option III (enhanced model with market incentives and an employee commitment)
Option III, the Enhanced Model with a Market Incentives and an Employee Commitment, contains all of the elements
found in Option II but in addition specifically favors an employee based trucking model by requiring all LMCs providing
drayage services to commit to use employee drivers
•
Uses concession and other CTP levers to encourage a move towards an asset based, and employee based model while
also requiring LMCs to use some level of employees to provide trucking services
A requirement should guarantee the movement of the drayage market in the longer term towards an asset and
employee based model. This will maximize the likelihood of creating a market in which the reciprocal obligations
between the Port (granting a commission) and LMCs (providing drayage services) create a sustainable reliable supply
of truckers attracted to stable and relatively well paying jobs in an operationally efficient and orderly drayage market.
We considered four broad options for an employee commitment:
•
A 100% employee driver requirement, phased in over five years;
•
A fixed proportion short of 100% (e.g. 80%) requirement reflecting average load, also phased in over time;
•
A requirement that each LMC controlled truck be associated with at least one full time employee
•
A requirement imposed only on those who take public financing
•
Of these options, the 100% requirement is recommended, being transparent, aligning incentives and easiest to administer
With a 100% employee commitment Option III will drive up wage rates more quickly than Option II and will also
eliminate some proportion of IOOs who do not wish to become employees. However, our analysis shows that the
impact of this increase should be manageable provided all market participants behave economically rationally.
•
While trucker supply could fall by as much as 40%, over time other labor pools could be drawn on and additional diversion
will be minimal.
•
Key risk is that BCOs steer work away from the SPB on non direct economic grounds (e.g. through fear of future
disruption or instability). This threat is material; e.g. members of the Coalition for Responsible Trucking alone control
discretionary volume representing 14% of SPB cargo that could be readily diverted to alternative ports.
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