The Private Cure for Crumbling Waterway Infrastructure

Commentary

The Private Cure for Crumbling Waterway Infrastructure

Privatization can help upgrade decaying locks and dams

A recent New York Times article recited the dreadful condition of the locks and dams on our nation’s rivers. The article noted:

“[L]argely out of sight of most Americans, the locks are crumbling. There are 192 locks on 12,000 miles of river across the country; most were built in the 1930s […] and have long outlived their life expectancy. […]

But the president has also called for cuts in the United States Army Corps of Engineers budget, which includes money for repairs of locks and dams….The Corps of Engineers, which maintains most of the system, says it will take $13 billion through 2020 just to fix the decaying locks. Without the money, Corps officials say it will take until 2090 to complete all the projects.”

Given our country’s fiscal condition, it is unlikely that the current or next administration will find the political will and support to fund the cost of rebuilding these assets. The result is a decaying infrastructure.

It doesn’t have to be this way. Given their economic value and potential attractiveness as a commerical investment, the locks are a classic federal asset ripe for either: 1) privatization; 2) a long-term concession (lease) to private investor/operators; or 3) a public-private partnership, with preference in that order.

Despite proposals by both the Bush and Obama administrations to impose a lock usage fee to more directly recover costs from users relative to the current per gallon tax on waterway fuel, it has not been enacted. The Obama administration has also proposed an annual user fee for commercial cargo vessels that use locks. Others have proposed a higher percentage of the capital costs should be recovered from commercial transporters. None of these proposals have been enacted by Congress, and the prospects for passage are not good.

The Times article is silent about most of the real underlying problems with this infrastructure. Although the federal government first began subsidizing navigation on our nation’s rivers in 1824, only in 1978 did the federal government begin to recover any of that capital cost and major rehabilitation cost by requiring commercial river users to pay a portion of the capital cost (and none of the operating cost) of that infrastructure through a $0.04 per gallon on waterway fuel, which increased to $0.10 per gallon in 1986 and $0.20 per gallon in 1995.

The tax was increased to $0.29 per gallon in 2014, effective in April this year. The additional $0.09 per gallon fuel tax is expected to produce $40 million annually, a drop in the bucket towards the $13 billion the locks and dams require between now and 2020. Moreover, because this tax is not indexed to keep up with inflation, the $0.10 per gallon tax in 1986 buys slightly less than one-half of what it bought in 1986 and the additional $0.10 per gallon tax added in 1995 has also been eroded by inflation over the last 20 years.

For taxpayers, the story only gets worse. The commercial users pay only 50% of the capital and major rehabilitation work cost (for major maintenance work over $8 million) of the locks and dams; other users get a free ride. Worse, neither the other users (e.g., boaters), nor the commercial users (e.g., the barges) pay anything for the annual $600 million maintenance cost.

Like other well-intentioned trust funds, the Inland Waterways Trust Fund, into which the waterways’ fuel taxes are deposited, has not worked. The traffic on the waterways has been flat over the last 20 years, despite optimistic traffic projections. The balance in the trust fund, which reached a high of $413 million in 2002, was just $24.8 million at the end of FY2014.

The Times article is illuminating on how the waterways infrastructure came to be in this condition. It quotes Rick Calhoun, the marine and terminal division president for the global agricultural and industrial giant Cargill, who told the Times that the company could still get its products to market with trucks or trains, but that barges were cheaper. He added:

“We prefer that all three modes of transportation be robust in order to maintain healthy competition and keep shipping costs down,” Mr. Calhoun said. “Otherwise, there is a rise in price for transportation that is passed on to the consumer.”

It’s not surprising that transporting products by barge would be seen as less costly when users aren’t paying the full cost of maintaining the infrastructure. Unfortunately the benefits that the waterway shippers and barges believe they get from public ownership of the infrastructure-such as sheltering consumers from having to pay the full cost of the transportation, as the Times article points out-come with a parallel cost: congestion and delay that will only increase so long as that infrastructure is starved for capital investment.

This situation would not happen under a privatization, concession, or public-private partnership. Both the government and investors under any of these alternative ownership models would insist upon two principles: that the new owners invest capital in the infrastructure to bring it back to a state of good-if not better-repair, and that the owners that have assumed the risk of that investment be allowed to recover the cost of that investment, including the opportunity cost of that capital.

Would it mean higher prices for waterway transportation? Yes-you get what you pay for. While shippers today enjoy low prices, they also get congestion and delay. Alternative ownership will also mean greater efficiency in the capital allocation and operation of the locks and dams. And most importantly, it would mean the long term preservation, and hopefully enhancement, of this freight transportation network. The alternative, which we are witnessing today, is the slow degradation of the inland waterways’ infrastructure.

William B. Newman, Jr., is Senior Advisor to HC Project Advisors in Washington, DC. He was a former executive of Conrail, and worked on Conrail’s successful sale by the federal government. Conrail was sold in an initial public offering in 1987, then the largest initial public offering in history. Other articles Newman has written for Reason Foundation are archived here. He can be contacted at: wbnewmanjr@hotmail.com

William B. Newman, Jr., is Senior Advisor to HC Project Advisors in Washington, DC. He was a former executive of Conrail, and worked on Conrail's successful sale by the federal government. Conrail was sold in an initial public offering in 1987, then the largest initial public offering in history.