How Congress Can Improve the Army Civil Works Program
Statement of G. Edward Dickey, Ph.D.
Submitted to Committee on Environment and Public Works
United States Senate
June 18, 2002
Mr. Chairman, members of the Committee, I appreciate this opportunity to present my views on how Congress can improve the Army’s Civil Works Program executed by the Corps of Engineers. My remarks draw upon my two decades of experience in policy development and implementation in the Office of Assistant Secretary for Civil Works, my years as Chief of Planning for the Corps of Engineers, and my education as an economist. Having worked many years with many fine professional and dedicated people in the Corps, both civilian and military, I know first hand of their capabilities and their desire to be responsive to the values and priorities of the public as expressed in law and executive branch policy.
Water resources are indeed precious and warrant careful management. Water is not only a vital factor in human activities, it obviously also profoundly influences the environment. These influences are realized though complex physical, chemical and biological processes that also support our economic well being. The Civil Works Program is the major mechanism for the Federal Government to make investment and management decisions regarding use of the Nation's water resources. As a result of past investments, we have a valuable legacy of facilities that allows us to manage and redirect those resources in the interest of human welfare. These facilities must be periodically modernized and their operations modified to respond more fully to current demands including those of natural ecological systems. In addition, construction of new facilities can both add to our nation's productivity and restore damaged natural ecosystems.
If Civil Works projects are a vital governmental responsibility, why has it been increasingly difficult for the program to compete for budgetary resources? In my view, the answer is simple; not all proposed projects are equally meritorious. Some are unproductive; that is, they would not produce benefits commensurate with their economic and environmental costs. Past policies and practices have not resulted in a uniform inventory of compelling investments, and available funds are not always applied to the best projects. The tools are available to change the situation. Congress and the Nation can have the full benefit of the Army Corps of Engineers unique and indispensable ability to plan and implement the development, management and restoration of our nation’s water resources.
Congress needs to provide a consistent and unambiguous policy framework and allow the executive branch to develop recommendations to Congress within that framework. The Corps is a highly responsive agency; it will bring the full power of its expertise to solve problems in a more productive way if that is what the Congress directs. New authorizing legislation is the means for Congress to provide a new and clear direction and to remove the vestiges of earlier generic and project-specific accommodations of special interests which have so powerfully shaped the program in the past and which now limit its ability to compete for budgetary resources.
My statement addresses three policy elements, which, if incorporated into legislation, would produce a total package of changes necessary for the effective redirection of the program. They are (1) the project planning and decision-making process; (2) project cost sharing; and (3) Corps organization to maximize professional capabilities. Congress and the President must work together to achieve success in modernizing Civil Works. Congress can provide clear direction in each of these areas; however, the executive branch has an essential role to play in modernizing the program as well.
The need to update planning guidelines
Congress assigned responsibility for Corps of Engineers planning framework to the President and the U. S. Water Resources Council in the Water Resources Planning Act of 1965 (P. L. 89-80, as amended). Pursuant to this authority, President Reagan issued the present statement of Economic and Environmental Principles for Water and Related Land Resources Implementation Studies in 1983, and the Council issued its Economic and Environmental Guidelines for Water and Related Land Resources Implementation Studies that same year. These Guidelines are composed of “Standards” and “Procedures,” which are more specific guidance to the Corps (as well as the Bureau of Reclamation and the Natural Resources Conservation Service) on the conduct and content of water project implementation studies.
These Principles and Guidelines direct the Corps to develop systematically cost-effective plans that also address all Federal concerns, as expressed though environmental and other laws and executive branch policy, as well as state and local concerns. The present Principles and Guidelines are the third version of Water Resource Council planning guidance issued since 1973. I believe the current Principles are carefully crafted and, collectively, define a planning framework that is both powerful and simple. They essentially direct agencies to weigh the economic and other benefits and costs for every reasonable alternative and to recommend the best plan considering all benefits and costs. As a planning model, they are far superior to other decision frameworks that govern other Federal programs that are based on standards, such as in the case of the water quality program.
Congress should direct the U. S. Water Resources Council to review its Economic and Environmental Guidelines for Water and Related Land Resources Implementation Studies and to update them to reflect the improvements in economic and other evaluation techniques and the changes in law and policy that have occurred in the last two decades. In this regard, the reports of the National Research Council’s Committee reviewing Corps procedures pursuant to Section 216 of Water Resources Development Act (WRDA) of 2000 will provide valuable information to the executive branch concerning the most appropriate evaluation techniques.
The lack of value in additional objectives
I do not believe water project planning would be in any way improved by specifying additional generic planning objectives such as "environmental enhancement" beyond the single objective now stated in the Principles. Section 2(a) of the Principles states: 'The Federal objective of water and related land resources planning is to contribute to national economic development consistent with protecting the Nation's environment, pursuant to national environmental statutes, applicable executive orders, and other Federal planning requirements." The Principles and the Guidelines (P & G) clearly provide for accommodation of other Federal, state and local and international concerns in the context of a specific study. The flexibility of the present P & G was amply demonstrated by the ability of the Corps to develop the Comprehensive Everglades Restoration Project, which was authorized in WRDA 2000.
The present Federal objective is well defined and made operationally meaningful in each individual project study by a broadly accepted body of economic theory. This theory also provides clear and objective standards for measuring economic benefits and costs. Virtually all controversies over Corps of Engineers studies involve challenges to either (1) the quality of Corps' estimates of economic benefits and costs, or (2) the subjective tradeoffs between economic benefits and other values reflected in the Corps' recommended plan. Much can be done to improve the analysis of economic and environmental impacts, but difficult choices between economic and non-monetized values will remain subjective and controversial no matter how well they are analyzed.
In contrast to economic benefits and costs, there are no generally accepted theories of environmental, ecological or social value that allow the executive branch to develop objective, operationally meaningful evaluation standards. Specification of additional objectives will not lead to better analysis or more effective consideration of these kinds of impacts in planning individual Civil Works projects. Moreover, as demonstrated by the 1980 version of the Principles, adding additional planning objectives will only result in unproductive complexity and ambiguity in the planning process, which already is criticized as being overly complex and lengthy.
Improving project productivity
One area in which there is apparent Congressional concern is the economic productivity of Civil Works projects. The Corps of Engineers Modernization and Improvement Act of 2002 (S.1987) would require future projects to have a 1.5 to 1 ratio of benefits to costs at the current discount rate. The issue of project productivity can be best addressed by directly considering the discount rate, which governs the formulation of projects. The discount rate, which is used to convert future benefits and costs to present value equivalents, is an important public policy choice. The present discount rate is based on a formula established by Section 80 of the WRDA '74 (P.L. 93-251). This law bases the discount rate on the current cost of long-term Federal borrowing and also "grandfathers" certain old (now at least over 30 years) projects at a lower discount rate (3.5 percent or less).
In considering the policy regarding the discount rate, it is important to know that the discount rate used in water project evaluation is a “real” or inflation-free rate since all benefit and cost estimates are in constant dollars. Thus, a study being conducted today would project future costs and benefits in 2002 dollars. However, benefits and costs occurring in the future would then be reduced by the discount rate because we place a higher significance (economic value) on benefits and costs when they occur today rather than in the future. The higher the discount rate, the less important we consider a benefit or cost that would accrue in the future. Choice of a discount rate affects not only the number of projects having benefits greater than costs, it also affects the scale of projects and their design. As the discount rate is increased, fewer projects will have benefits greater than costs, and the best projects will be smaller and more capital intensive. Most of the completed Corps projects that are now criticized as “unproductive” were based on low discount rates. The choice of a discount rate has important consequences for our future infrastructure.
The discount rate formula
in Section 80 of the WRDA’74 (P.L. 93-251) is not based on economic
theory. Furthermore, annual
recalculations of the benefits and costs of uninitiated construction projects
are generally required because the rate usually changes based on the required
yearly application of the formula.
Finally, grandfathered discount rates for certain projects create false
expectations about those projects' prospects for future funding. No Administration that I worked for made new
construction start recommendations on the basis of any rate lower than the
current discount rate.
The
Office of Management and Budget (OMB) presently establishes the discount rate
to be used in the evaluation of other public investments. OMB Circular A-94 directs the use of 7
percent real discount rate for these projects.
According to the circular, "This rate approximates the marginal
pretax rate of return on an average investment in the private sector in recent
years."[1] Congress
should either establish a discount rate based on sound economic theory or allow
the Corps to apply the rate used to evaluate other Federal investments.
Allowing the executive branch to fulfill its
responsibilities for good analysis
In my view, Congress should have the executive branch's best analysis and recommendation before it considers a project. Congress may reject that analysis, evaluate the information in the analysis differently, or make its decision based on other considerations; that is Congress' prerogative. However, in some instances Congress has legislated how the Corps of Engineers is to measure certain economic benefits. I am aware of at least two cases where legislation specifies a particular way of measuring benefits that can not be supported by commonly accepted economic theory. In Section 7(a) of the Department of Transportation Act (P.L. 89-670), Congress defines the primary navigation benefits in terms of rate savings to shippers rather than resource cost savings. In Section 219 of WRDA 1999 (P.L 106-53), Congress requires to Corps to "…calculate the benefits of the nonstructural project using methods similar to those used for calculating the benefits of structural projects, including similar treatment in calculating the benefits from losses avoided." --despite the fact that the economic impacts of structural and non-structural alternatives are quite different.
The executive branch
develops implementation guidance that allows the best estimate of economic
benefits within the constraints imposed by law, but benefit-defining
legislation signals that Congress seeks outcomes different from those that
would be produced by objective economic analysis. Unfortunately, S.1987 would move further toward legislating
benefit procedures for the executive branch.
Congress should affirm its
commitment to using the best analytical techniques in every Civil Works project
study by abrogating past benefit-defining provisions and by avoiding new
constraints on objective benefit and cost measurements.
Review is an essential part of the recommendation development process
Sound water project planning requires not only a clear policy framework in which to conduct analyses, it requires time--time to develop a plan and time for review of the plan so that national as a well as local perspectives can be brought to the attention of decision makers. During the last decade, the quality of the internal executive branch review processes has declined; one major reason for this decline is that Congress has authorized many projects that had not received the full benefit of executive branch review. The executive branch project review culminates when the Secretary of the Army transmits a report of the Chief of Engineers to Congress. In the last decade, Congress has authorized dozens of projects without waiting for completion of the report development and review process. Many of these authorizations were conditioned on favorable report of the Chief of Engineers by a future specific date.
Conditional authorizations create enormous pressures on the Corps' review staff. In the interest of time and to avoid disappointing Members of Congress who supported conditional Congressional approval, problems are glossed over and reviewers’ concerns are ignored. In any case, even if the Chief of Engineers’ report is completed by the deadline, the Secretary and the other Departments of Government may not have even initiated their final policy-level review.
It is not surprising that
projects that have been found deficient in one way or another in recent
times—Delaware River Deepening, The Chesapeake and Delaware Canal and the
Dallas Floodway Project were authorized without a report transmitted by the
Secretary of the Army. In the case of
the Upper Mississippi River Navigation study, Congress specifically authorized
the Corps to proceed with engineering and design on expanded locks before even
a draft report was released. Is it
surprising that the Corps was eager to find expansion projects justified? Except in the most extraordinary
circumstances, Congress should authorize only those projects that have
completed the executive branch review process.
Cost Sharing and Improved Resource Allocation
Appropriately structured non-federal financial participation and pricing for project services contribute to at least three important objectives: increased project credibility, increased returns on scarce Federal funds, and better utilization and greater benefits from existing project capacity.
Project cost sharing
The first two objectives
can be realized by non-federal participation in the financing of water project
construction. Whenever a non-federal
sponsor is willing to pay for a major portion of the cost of a project, added
credibility is given to any analytical justification for the project. The absence of a non-federal public entity
willing to pay the non-federal share suggests the project is not being given a
priority by that entity’s constituents, who normally are also the project’s
beneficiaries. Secondly, non-federal
financing allows limited Federal funds to be spread over a greater number of
projects resulting in a greater total investment. The effective constraint in the rate of water resource investment
is the availability of Federal funding.
By requiring every project to have a significant amount of non-federal
financing, unproductive, low priority projects would be set aside, and
productive projects could move ahead more quickly. Congress has not been consistent in its approach to project cost
sharing. Since the major reforms of WRDA ’86, Congress has exempted particular
projects from cost-sharing and, in other cases, eroded cost sharing though
requiring consideration of “ability to pay” in establishing financing
requirements. As an economist, I see a glaring inconsistency between project
advocacy based on the importance of project benefits and a plea that the
beneficiaries, or their governmental proxies, can not possibly pay their share
of project costs. Congress should apply the purpose-specific cost-sharing formulas to all
projects serving those purposes. There
should be no exceptions or exemptions.
Demand management as an essential management
tool
The third objective of financial participation is obtained by improved use of existing project capacity. Efficient management of existing projects requires use of appropriate pricing or other demand management strategies whenever public use begins to exceed their capacity. As consumers, we expect demand management to be an essential part of the normal course of business in the management of utilities –water, electricity, telephone service and natural gas. Airlines and railroads are becoming increasingly sophisticated in this arena as well.
No more compelling case
can be made for demand management than in the case of congested inland waterway
locks. The Federal Government, as the
sole manager of the greatest inland waterway system in the world, should be
enthusiastic about adopting congestion management to increase the benefits of
important, highly valuable waterway facilities. The National Research Council’s Committee to Review the Upper
Mississippi River Illinois Waterway Study recommended: “The benefits and costs
of lock extensions should not be calculated until nonstructural measures for
waterway traffic management have been carefully assessed.” Congress
should ensure that the Corps has the necessary authority to make demand
management an integral part of continued modernization of our nation’s inland
waterways.
Study scope and cost sharing
Finally, the Congress should review cost sharing for feasibility studies. Cost sharing by non-federal sponsors has greatly reduced the total cost of Civil Works project feasibility studies and substantially reduced the time to complete them. In cases where a project is likely to emerge from the study process, study sponsors are anxious to get on with it. When the prospects for a project are slim or non-existent, sponsors have better uses for their resources.
There is a downside to study cost sharing, however. The non-federal sponsor may have preconceived ideas as to the desired solution and may resist expending funds on alternatives that it believes would be inferior or beyond its capability or authority to implement. For problems warranting comprehensive basin studies, states or regional bodies should be required to be the sponsor, or other mechanisms should be found to limit study cost and time. For studies of deep-draft ship channel improvements, which are often rightly criticized for their naiveté and lack of regional perspective, Congress should require regional analysis of improvements and adjust study cost-sharing requirements accordingly. Unless the present requirement for feasibility study cost sharing for deep draft navigation channel improvements is altered, unbiased regional port planning will not be done--regardless of the existing requirements for regional studies in the current Water Resources Council Guidelines and the continuing complaints of watch-dog groups and independent project reviewers.
Improving Corps Analytical Capabilities
and Products
To be able to meet the challenges of modern analysis, the Corps must reorganize and concentrate its professional planning resources into centers of expertise. Reorganization would have many benefits: 1) Professionals in the major planning disciplines would be able to share knowledge and experience face-to-face. 2) Enhanced opportunities for professional growth and advancement within a given discipline would be created. And, 3) pressures to “justify” a questionable project would be reduced. Such changes in Corps planning were last proposed at the end of the Administration of George Bush in 1992. Like earlier attempts at reorganization, this last attempt was abandoned in the face of powerful congressional opposition.
The Army and the Corps are taking steps to reestablish an effective internal review process after a decade of decentralization and denigration of the review function.
While consultation with outside experts and independent review of planning documents is appropriate for large, controversial or highly risky projects such as the Comprehensive Everglades Restoration Project and the Missouri River operating plan, it should not become a routine requirement. Such reviews are expensive, time consuming and unlikely to produce a definitive conclusion regarding the best investment or management decision. Moreover, for such outside consultation to be effective, the outside experts must have a clear charter and understanding of the policy context in which their help is being solicited. In short, I believe there is no substitute for an initial high quality Corps of Engineers study that is reviewed thoroughly by the many Federal agency experts in the normal course of development of a final Administration recommendation.
Congress should direct the Secretary of the
Army to reorganize the Corps in the interest of improving its analytic
capabilities and to ensure effective internal reviews for Civil Works
projects. Congress should authorize the
Secretary to utilize the services of outside experts at the beginning of
studies likely to lead to large and controversial projects and to provide for
independent review of those projects prior to their transmittal to
Congress. It should also provide
criteria for the types of studies for which outside consultation and review is
required.
Summary and Conclusions
The Corps of Engineers is
uniquely qualified by its professional resources and its adherence to the Principles and Guidelines to address the full spectrum of the
nation’s water problems. I believe that
the best opportunity for the nation to integrate the management of all water
quality and quantity problems is through the Civil Works planning process under
the existing Principles and up-dated Guidelines.
Congress and the President must work together to take full advantage of the Corps' potential to develop solutions to the nation's water and related land resource problems and to recommend productive, cost-effective public investments. Congress can best ensure that the Corps consistently pursues sound water resources development and management by taking these actions: (1) direct the U. S. Water Resource Council to review and update executive branch planning guidance, (2) remove obstacles to unbiased analysis created by past legislation, (3) authorize only those projects that have completed the executive branch study and review process, (4) re-institute substantial cost sharing for all projects without exception, (5) clarify the kinds of studies it expects and modify study cost sharing to support those studies, and (6) require demand management be an integral part of the delivery of project services when it can increase project benefits. Finally Congress should support the Department of the Army and Corps in strengthening the Civil Works planning and review capabilities and require use of outside experts to guide and review important studies.
[1] CIRCULAR A-94, GUIDELINES AND
DISCOUNT RATES FOR BENEFIT-COST ANALYSIS OF FEDERAL PROGRAMS, page 7.