P3 Financing Needed to Rebuild Waterways

by JILL JAMIESON, managing director, JLL | March 30, 2016

Much of America’s inland waterway infrastructure was built in the 1930s, '40s, and '50s, and is now nearing the end of its useful life-cycle.

Inadequate funding has resulted in deferred maintenance and system unreliability that is negatively impacting our national economy. While most everyone agrees that our inland waterways need to be repaired and modernized, there is a divergence of opinions as to how to fund those investments.

Our inland waterway infrastructure is owned and operated by the federal government, acting through the U.S Army Corps of Engineers. Operations and maintenance are entirely funded by taxpayers through general treasury receipts. Taxpayers also pick up the tab on 50% of all new infrastructure, with the remaining 50% deriving from the Inland Waterways Trust Fund (IWTF), which is funded by a modest diesel fuel tax assessed on waterway users.

“Either we continue with the status quo and pay the consequences... or we look for innovative solutions”

— Jill Jamieson, JLL

Given that the vast majority of waterway funding originates from general receipts, spending is rightly measured against other national priorities, such as defense, homeland security, education, healthcare, and other transportation modes. There is simply not enough money in the coffers to address all these needs, so our waterways (like other important sectors) are persistently under-funded.

Despite this ongoing problem, recently the Waterways Council, Inc. (WCI), an advocacy group representing water transportation interests, initiated a public campaign against any imposition of inland waterways tolls or lockage fees. While it is understandable that this group might be reluctant to embrace the concept of usage fees; in today’s fiscal environment, there is no readily available alternative. Either we continue with the status quo and pay the consequences of our deteriorating infrastructure; or we look for innovative solutions that can address the needs of our nation’s critical infrastructure in a more timely and cost-effective manner.

While WCI expresses support for Public-Private-Partnerships (P3), in opposing any consideration of usage fees, it fails to recognize that in order to leverage the benefits of P3, there needs to be a viable funding mechanism in place that is both cost-reflective and able to be dedicated to project-specific purposes. The IWTF is simply not a workable mechanism for P3.

The IWTF is effectively a socialized system designed for cross-subsidization of waterways. Under its current configuration, it does not meet the most basic parameters required for project finance. A few examples highlight this point:

Spending restrictions - Although deposited in a revolving fund, the money in IWTF retains its identity as "appropriated funds" and is thus still subject to the to the restrictions of the Antideficiency Act. As such, it is not possible to encumber future deposits for project-specific purposes, which runs against basic principles of project finance;
Subject to OMB rules - Disbursements from IWTF are made through the appropriations process and subject to congressionally approved matching funds. Ignoring for the moment that there are limited resources available to “match” IWTF outlays; in order to leverage these appropriated funds for a P3, the federal government would have no choice but to recur to availability-like budget payments, which in accordance with current legislation and scoring guidelines (including OMB Circular A-11), would be classified as capital lease payments and scored 100% upfront. So, for all practical purposes, this makes budget approval for a P3 impossible;
No performance incentives - IWTF does not address the ongoing operating and maintenance needs of our waterway infrastructure. It is not a life-cycle approach to infrastructure asset management and does nothing to incentivize good performance.

No, the IWTF is not a viable solution...

To address the crisis facing our inland waterways, it is essential that public sponsors are able to generate revenues that can be committed for project-specific purposes (ring-fencing). User fees should be tied to performance levels, not blindly imposed under an ineffective cross-subsidization regime. Moreover, public sponsors need to be able to enter into financing agreements that encumber future revenues generated from the use of specified assets.

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A pilot program involving user fees for certain waterway systems seems like a good idea

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In the road sector, where there was also once resistance to change, tolls are now commonplace, but they are not assessed on every road network or highway. This would also be the case with waterways. While most systems would continue to be funded as they have been in the past, in the case of heavily commercialized waterway networks suffering from system unreliability, safety issues and other performance problems, it is necessary to seek an alternative approach.

A pilot program involving user fees for certain waterway systems seems like a good idea and perhaps an imperative, if the United States wishes to remain competitive.

Based in Washington DC, the author leads JLL's public institutions practice, advising public and private sector clients on P3 and other forms of alternative infrastructure finance and delivery. This blog first appeared March 25 here.

E-mail: jill.jamieson@am.jll.com

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