September 25, 2016
By: Patrick McGinnis, Senior Advisor for Water Policy and Practice, The Horinko Group
America’s inland waterways, built, operated, and maintained by the U.S. Army Corps of Engineers (Corps or USACE), are at a crossroads. Going forward, two paths emerge. The first path, a continuation of current financing mechanisms, funding levels, operating practices, and governance arrangements, points to continued deterioration of waterway serviceability. A crisis exists with respect to Corps locks and dams. Insufficient funding, extensive deferred maintenance, and a forced fix-as-fail repair strategy have led to unscheduled lock closures and accompanying delays. Shippers and producers are confronted with a system whose reliability is being questioned. Lock unavailability reduces efficiency, increases costs for carriers (and ultimately shippers and commodity consumers), and threatens system reliance.
A second path, involving a shift toward greater private investment, risk transfer, and innovative financing and funding arrangements including public-private partnerships (P3s), if demonstrated in one or two successful pilot proof-of-concept projects, could serve as an alternative resourcing and delivery approach to guide the system’s renewal.
No matter how decision makers elect to proceed, if public dollars are sought to modernize the system then more effective messaging that better conveys the value of the system to the American people must be prioritized.
The following observations first address the case for U.S. waterway infrastructure modernization and more effectively communicating this need to a broader bandwidth of stakeholders. Next, an opportunity is described to demonstrate an alternative path forward to financing and funding major rehabilitation of a significant component of the Upper Mississippi River System, the Illinois River Waterway, in order to transfer a larger share of risk from U.S. taxpayers to waterway users and beneficiaries.
Part I. Making the Case for Waterway Modernization Goes Beyond Waterways
We have amassed almost $20 trillion in national debt. We have a sluggish economy, stagnant wages, and a growing list of unfunded social mandates. Many Americans are frustrated, thinking institutions and key actors that could otherwise make a difference simply are not listening or do not understand what needs to be done.
Communicating the Case for Maintaining the Serviceability of Inland Waterways
Modernizing our U.S. waterways has not garnered Main Street’s attention; nor has the issue forged the political will on Capitol Hill to win requested funding. When politicians authorize improvements, they immediately get bogged down in their efforts to actually fund them. Meanwhile, bureaucrats are left to pursue major maintenance in a piece-meal, stop and start, fix it when it completely fails crisis management fashion. This “fix as it fails” strategy is on its way to leaving U.S. waterborne transportation as a weak link in our commodities supply chain, an uncertain and unreliable mode for moving large amounts of commodities with competitive efficiency. It is time to make the case for waterway modernization that will resonate with the American people, not just waterway lobbyists and users.
The popular argument for modernizing our inland waterways cannot continue to be because our locks and dams are old and need to be replaced; or because continued navigability of our waterways are central to U.S. farm interests in feeding the world; or because of speculative claims linked to the expansion of the Panama Canal forecasting an uptick in interior movement of freight (a modest percentage of which is waterborne); or that tinkering with the existing system of locks and dams will drive a requisite amount of mitigative environmental spending for wildlife habitat and local recreation interests.
The only real case for updating the locks is dependent on how effectively waterway modernization can be linked to a larger planned-for effort to muster regional economic recovery.
The American people need to see and count on a larger legitimate effort to bring back jobs, wages, the economy, and the well being of the communities where they live. They need to be able to visualize how waterway modernization is squarely linked to an actionable plan to improve their quality of life. When they see the linkage, they will concede the need to modernize our waterways, and given the populist political climate, politicians will follow.
Lobbyists and special interest groups have been largely unable or unconvincing in their efforts to make the social case for large-scale waterway infrastructure modernization. Instead, many seem resigned to fist pumping over each new federal water resources development act that authorizes major improvements but fails to muster funding for those same improvements. These new authorizations and re-authorizations produce a hollow victory when few new projects are actually funded, and unfunded major maintenance to existing projects remains largely deferred. Special interests are no longer able to use Congressional earmarks as a public interest work-around. Today, federal program managers need greater buy-in by the American people. And, to get that buy in, the people need to see real value. When the case for funding is fuzzy and real public value is difficult to recognize, cost externalities are glossed over, and the ask is large, the argument for public interest will be perceived as contrived, and the public will turn a deaf ear. The case for social relevance cannot be skated past.
Effectively Linking Waterway Modernization to Regional Economic Recovery
Waterway modernization as an engine for greater economic prosperity cannot simply be a claim put forth by a narrow bandwidth of waterway stakeholders. You cannot merely say improving the locks is important. You cannot claim lock modernization somehow links to some vague, open-ended effort to improve the economy. You must show your efforts are squarely part of a larger well-stated, planned-for effort to improve the situation for everyone. U.S. taxpayers have grown weary of publicly funding big projects and programs where they cannot see the benefit. Again, having moved past the era of Congressional earmarks, making the case for modernization to the American people in this new era of greater transparency has become acutely important.
Along our major waterways and river corridors, to date, no real “actionable” plan exists for regional economic recovery that reveals a path toward making river basin communities more vibrant and their natural systems more resilient. Until such a plan does exists, is sufficiently vetted as legitimate, and a reasonable implementation strategy is revealed that leverages greater private investment, it is difficult to imagine how the American people can be rallied to galvanize our electorate to act on the narrower issue of improving our inland waterways. The populations that inhabit our large basin catchments and live and work in our large river corridors need to recognize the linkage between working waterways and a planned-for river corridor approach to economic redevelopment.
The winning case is regional and national economic redevelopment and everyone doing their part. Politicians and the Corps of Engineers have a job to do, as do all system beneficiaries, capable private investors, and the American people. More people will care and pay attention to a narrative about economic recovery than a narrative about lock and dam repairs. The latter discussion has to be nested effectively within the former. Modernizing locks and dams is then reduced to the due diligence execution of one aspect of a larger, more compelling strategy for regional economic recovery.
How much longer can we afford to wait before we effectively communicate a thoughtful planned-for approach that reveals the linkage between waterway modernization and economic recovery that the American people will understand and trust?
Part II. Demonstrating A New Path Forward for U.S. Waterway Modernization: Shaping a Successful Regional P3 Pilot for the Illinois River Waterway
Alternative financing and funding considerations may hold the promise of transferring risk from taxpayers at a critical moment for rebuilding our U.S. Inland Waterway System, as well as rebuilding taxpayer confidence along the way. Waterway stakeholders need to take on a larger role to demonstrate that public-private partnerships (P3s) can produce a breakout strategy to advance us past the legislative and executive gridlock confounding the financing and funding of previously authorized, but unfunded, improvements to our waterway system.
To their credit, some effort is already being made by stakeholders to better understand the role that expanding public-private resource leveraging could have in capitalizing waterway modernization; however, many others continue to push back against P3s, hoping Congress will appropriate sufficient funds for the big federal fix.
A successful regional P3 pilot needs to be put forth and tested. In attempting to describe a set of necessary next steps, the following narrative focuses attention on three specific areas for consideration: cost containment and revenue generation; establishing a non-government entity to partner with the Corps of Engineers on project design and delivery; and milestones guiding development of a transparent and measurable plan of action to take the overall effort through project design, revenue assignment, and an acceptable transaction structure.
Cost Containment and Revenue Generation
Relative to cost, there should be greater evidence that stakeholders are fully testing pre-development assumptions regarding Corps project cost estimates. Major rehabilitation of existing lock sites need to narrowly focus on critical mechanical, electrical, and structural features. Current modernization and major rehab estimates need to be scrubbed for savings. Maintaining the serviceability of our inland waterways should not be used as cover to update/upgrade noncritical features at each lock site. Current cost estimates need to be value engineered to drive out all cost features that do not improve lock reliability.
The Corps also needs to disclose its overhead and indirect costs associated with engineering improvements as a percentage of total project costs (reportedly as high as 60+%) and be challenged to get those costs down below 50%. The Corps has to become a more cost effective and cost responsible partner. Indirect costs need to be capped at a more conservative percentage of total project costs, and the Corps needs to be challenged to move toward greater business process efficiency.
The matter of facility expansion needs to be tabled indefinitely. For the Upper Mississippi River, the Corps’ Navigation and Environmental Sustainability Program (NESP) is unrealistic. NESP’s call for system expansion is unwarranted and costly. Record tonnages occurred in the mid 1990’s. Today, tonnage is 30% lower than the amount the system handled effectively in the mid 1990’s. U.S. Department of Transportation projections indicate an uptick in waterborne movement of cargo, but it only comes in around 1-1.5% recovery per year over the next twenty years, which if realized, will not even fully recapture tonnages handled successfully in the mid 1990’s. Expansion of facilities to add 1,200 ft locks would be an underutilized luxury in lock redundancy that taxpayers, investors, stakeholders, or potential fee payers cannot afford. Removing expansion from consideration and instead focusing on a return to full serviceability of the existing footprint could shave millions of dollars off modernization cost estimates.
On the matter of additional revenue generation to provide an adequate return for private investors, the narrative quickly turns to a discussion of fees and tolls – a topic proving controversial with waterway users. Related to this is the matter of more effectively utilizing “existing” revenue(s). In addition to user contributions to the Inland Waterway Trust Fund, other revenues are generated annually by Corps business lines, including hydropower, navigation, and recreation. By the Corps’ own estimates, these three business lines are generating annually over $2 billion directly to the U.S. Treasury (some Corps reporting estimates are significantly higher), but the amount being returned to the Corps each year to upkeep its hydropower plants, navigational locks, and recreational areas is sorely inadequate to maintain the serviceability of this revenue-generating Corps infrastructure. This revenue, which is generated but lost somewhere in the General Treasury, needs to be accounted for and a greater portion “dedicated” to facility upkeep and modernization. Waterway users would be less inclined to push back against fees if they were more confident that a greater portion of these fees were being dedicated and returned to maintain, and when needed, available to recapitalize the system.
There is also a need and opportunity to drive costs out of the environmental mitigation actions taken by the Corps attendant to navigation improvement projects, while also ensuring actions measurably address and improve the resiliency of the system instead of producing local cosmetic habitat improvements with increased operation and maintenance requirements, which has been largely the case with past environmental mitigative efforts.
In order to move ahead with navigation improvements on the Upper Mississippi River System, and do so without further environmental litigation, Congress passed legislation in 1986 establishing the Upper Mississippi River System-Environmental Management Program (UMRS-EMP), which has funded long-term resource monitoring and a robust number of local, placed-based habitat improvement/reclamation projects. These projects have proven expensive to capitalize and in many cases expensive for local partners to operate and maintain. And, worst of all, these projects have not proven to make the natural system more resilient. Past focus on these so-called environmental restoration projects has produced costly outputs and has not improved system processes overall or produced sustainable outcomes.
Rather than focus on local habitat enhancement, there is a larger system need to recalibrate mitigation toward a focus on source water protection and system resiliency outcomes that are sustainable. For instance, riparian vegetative buffering would be much less expensive than water control structures and pumping. Buffering would advance regional source water protection and address stressors that are worsening Gulf hypoxia, an issue with strong federal interest.
Thumbnailing a P3 Approach for the Illinois River Waterway
In 2010, the Inland Marine Transportation System (IMTS) Capital Investment Strategy Team produced an IMTS Capital Projects Business Model Report at the request of the Inland Waterways Users Board that represented a collaborative effort between navigation industry representatives and USACE inland navigation experts.
The report put forth a proposed 20-year capital investment strategy generally addressing the highest priority new construction and major rehabilitation projects. With a $380 million average annual investment level, this strategy addressed at least 27 candidate projects that had been identified by Corps districts.
With a total program recommendation of $380 million per year, the average IWTF non-federal contribution would be $110 million per year, with the federal cost-sharing requirement averaging $270 million per year.
Just for sake of discussion, and generally applying the above federal/non-federal cost sharing split suggested in the IMTS Recapitalization Plan, consider modernization of the Illinois River Waterway System, a prominent segment of the U.S. Inland Waterway System. The Corps has estimated $560-600 million to rehab/repair all Illinois River locks. Perhaps a worthwhile starting point would be to challenge the Corps to revisit requirement costs to arrive at a $500M alternative.
To appreciate how cost and risk would be shared, the following scenario is offered based on a project cost estimate of $500M and ten years to complete all major work features. Let’s say the Inland Waterway Trust Fund was challenged to kick in $110M ($11M per year for ten years). The federal government could be challenged to come up with $270M ($27M per year for ten years). This $270M/$110M split would be in the ballpark with what is generally prescribed in the IMTS Plan (excepting nuances for certain levels of major rehab that are arbitrarily assigned at 100% federal cost…which someone else can explain).
This would show taxpayers a significant transfer of risk. Why? Because, although the current federal cost share formula calls for waterway improvements to be funded 50% federal and 50% Inland Waterway Trust Fund, the reality is that the overall cost of operating and maintaining the system annually comes in around 92% federal and only 8% non-federal. American taxpayers and many legislators would quickly warm to the notion of transferring a larger measure of this obligation and risk to users and the private sector and away from U.S. taxpayers.
So with $270M as the federal contribution and $110M from IWTF toward completion of the $500M project, we find ourselves still being short a $120M gap to close one way or another. To close or reduce this gap, a non-federal entity (local sponsor) should be challenged to identify revenue streams including fees, cost savings, activity bonds, and a P3 transactional structure with return on investment that would cover the remaining $120M ($12M per year for ten years), or whatever the sponsor’s portion could be driven down to, applying value engineering to drive out costs and the ingenuity of investors and private development teams.
If investing in our inland waterways is a good deal for taxpayers, which is what we are told, we may find it’s also a good fit for private investors under the right circumstances. It is time to let the private sector step up and tell us what conditions they would require to invest in reducing the vulnerability of this commercial commodities supply chain.
Informing the P3 Process and the Role of the Non-federal Entity as Local Sponsor
In responding to WRRDA 2014, which called for alternative approaches to financing/funding water resource public works projects, who are federal program managers listening to to inform the way forward? First and foremost, P3 and private investment experts—not just stakeholders—need to be brought into the room, during the project pre-development analysis and design phase. Filling up the room with well-intentioned stakeholders will not ensure a workable P3 project design that is investor worthy. The conversation has to shift from what stakeholders want to what is reasonably possible based on the informed input of experts. Stakeholders must be kept situationally aware so they can be effective advocates and critics, but in the project pre-development analysis stage, the input of experts is necessary.
Likewise, a prominent and well-informed Congressional Committee Member from Illinois, familiar with the Illinois River Waterway, needs to be recruited to serve as a federal co-chair overseeing an ad hoc effort to lead the Corps, local sponsor, stakeholders, and potential investors, through a pre-project development effort. Such an effort would identify critical project requirements and design, revenue generation, and return on investment projections, crafting an effective transactional structure for issuance of a Request For Proposal.
At the State level, an appropriate cabinet executive also needs to be recruited. The Director of the Illinois Department of Commerce and Economic Opportunity could serve as a
State Co-Chair with the Illinois Chamber of Commerce and the Chamber’s foundation having key roles in shepherding the partnering and investor recruitment process.
Revealing a Transparent and Trackable Plan of Action
The local sponsor or an initial ad hoc non-federal entity needs to develop an aggressive timetable for an Illinois Waterway Regional P3 (IWRP3) Pilot Project.
The following milestones should be considered:
- Corps provides current condition assessment and initial set of technical work requirements.
- Local sponsor and Corps convene Technical Requirement Peer Review Group to value engineer and scrub technical requirements, eliminating non-critical features and driving down costs.
- Local sponsor and Corps convene Revenue Identification and Development Peer Review Group to target and develop potential revenue generation scenarios.
- A refined Requirements Plan is next shared with a group of P3 project development experts, investors, risk managers, tax and procurement lawyers, and the National Council for Public-Private Partnership representatives, etc. Investors have to be challenged with a single question: Under what conditions would you be attracted to a project design and transactional arrangement?
- Next, the local sponsor and Corps move to Project Design and Transaction Structure formulation to develop concepts, conditions, and key stipulations giving full consideration to investor input.
- Next, the local sponsor would convene a Legislative Review Group to analyze necessary policy and legislative enablers necessary to authorize and support the recommended project design and contractual structure.
- Finally, a recommended IWRP3 Pilot Project Plan would be turned over to the Congressional Committee for legislative action and to the Corps’ Pilot Program Manager to position the agency and the sponsor for the project acquisition process.
There has been too much posturing and perhaps cautious foot-dragging taking place since authorization of the P3 demonstration program in WRRDA 2014. It has been over two years since the legislation was passed. Some of the inertia is due to reluctance by waterway users to move away from the traditional resourcing approach. Regionally, there is a core of stakeholders clinging on to the hope that the UMRS-NESP platform will be funded, which calls for expansion and for taxpayers to carry most of the burden. There is also likely some pushback coming from within the federal ranks by program managers reluctant to embrace change and the larger unknowns associated with alternative resourcing and delivery of large public works projects.
As previously stated, 92% of the total cost of the inland waterway system is currently borne by U.S. taxpayers, while waterway users, via a fuel tax and trust fund, account for only 8%. This has left a resource gap in what’s needed and what’s practically available that P3s, cost containment, revenue capture, and better accounting and use of treasury revenue need to close. A larger burden of risk and responsibility must also be transferred from taxpayer to user. Most of all, we need to find the will to test old assumptions regarding project delivery, and select for efficiency and economy of effort to better serve public interests and the serviceability of our nation’s inland waterways. We cannot simply throw money at the problem. The world has become more transparent and a populist electorate simply won’t support it.
Regardless of the federal government’s current role and the current cost-sharing role of users and user-funded financing mechanisms, such as the Inland Waterway Trust Fund, new strategies demand consideration as old assumptions face up to fact-based testing. If private participation represents part of the solution, any new approach must first be vetted and demonstrated before broader application and acceptance can drive further public and investor confidence. Accordingly, identifying strong candidates, like the Illinois River Waterway, for early and valid demonstrations of workable approaches will be advantageous and the basis for expanded, scaled-up solutions that will likely successfully bundle projects across regional system segments.
Patrick S. McGinnis has served as a passionate advocate and practitioner for sustainable solutions to water resource management challenges over his thirty-five year career as a water resources professional. Mr. McGinnis’ experience and interest focuses on a broad range of economic opportunities for livable community design, strategic planning and facilitation, public/private sector interaction and consensus building. He currently serves The Horinko Group as Senior Advisor for Water Resources Policy and Practice.