Rethinking Inland Infrastructure Finance

 

Within the generally sorry state of the U.S. inland waterways infrastructure, there are some locations where conditions are particularly dire. Among those in this latter situation are several locks and dams on the Illinois River, including the La Grange Lock and Dam and the Peoria Lock and Dam, both of which were completed in 1939. Both of them are on the U.S. National Register of Historic Places, which is a dubious distinction for a major transportation facility of the twenty-first century.

 

The farmers in Illinois provide a significant portion of our nation’s corn and soybean crops, and the Illinois River plays an important role in getting those crops from the farms in Illinois to the Mississippi River and thence to New Orleans for export. It would be a major hardship for many corn and soybean growers in Illinois if either of the La Grange or Peoria lock and dam facilities were to become inoperable. However, there remain many competing needs for new construction, rehabilitations and major repairs throughout the inland waterways system, and the funding provided by Congress never addresses more than a small fraction of these needs.

 

Corn and soybean growers in Illinois are understandably worried, therefore, that one or both of the La Grange or Peoria lock and dam facilities might fail before the necessary money is found to keep that from happening. Reflecting this concern, two organizations representing these constituencies—the Illinois Corn Growers Association (ICGA) and the Illinois Soybean Association (ISA)—have recently conducted extensive studies and proposed alternative solutions to fund the refurbishment or replacement of these locks and dams. Both organizations gave detailed presentations of similar solutions at the 12th Annual Waterways Symposium in New Orleans in November 2015.

 

Both organizations propose using public-private partnerships in which some of the funding would be provided by private parties in some combination of debt and equity. As has been previously recognized with other public-private partnership proposals, such a structure needs to include a revenue source to provide economic return to the private party lender or equity investor. Both the ICGA and the ISA proposals include payments in the nature of fees or charges to be paid based on usage of the locks in order to generate this revenue.

 

By and large, the inland waterways industry has opposed having such lock usage fees, by whatever name they might be called, as an element of any proposed public-private partnership for funding improvements to the inland waterways infrastructure. In April of this year, for example, Waterways Council, Inc. submitted letters to the Senate Environment and Public Works Committee and the House Transportation and Infrastructure Committee signed by 75 organizations, including carriers, shippers, port authorities, labor unions, and trade associations (including several agricultural industry groups), opposing the imposition of tolls or lockage fees on inland waterways transportation. This opposition is repeatedly voiced by representatives of the inland waterways industry at conferences and in publications whenever any suggestion of such tolls or lockage fees arises.

 

Those who propose tolls or lockage fees typically emphasize that what they are proposing this is just one suggestion and that other ideas are welcome if they will address the undisputed and urgent needs at hand. To help the inland waterways industry avoid being perceived as only naysayers who oppose tolls and lockage fees but who do not offer constructive alternatives, I wish to present—or perhaps it might be more accurately said, to recall—a public-private partnership approach that largely follows what has been recently suggested by ICGA and ISA, but without the tolls or lockage fees component.

 

The models of debt and equity financing that have been suggested by ICGA and ISA recall those that were proposed in studies done in 2013 by the Texas Transportation Institute for the United Soybean Board and by the Horinko Group for the U.S. Soybean Export Council, but with this difference: the 2013 studies included proposals to use some portion of the fuel tax revenues that are paid into the Inland Waterways Trust Fund to provide the necessary debt service and return on equity for such financing.

 

The use of funds received by the Inland Waterways Trust Fund to support the issuance of bonds is also contemplated by Section 2004 of the Water Resources Reform and Development Act of 2014 (WRRDA 2014). That section of the statute requires the Army Corps of Engineers to study “potential benefits and implications of authorizing the issuance of federally tax-exempt bonds secured against the available proceeds, including project annual receipts, in the Inland Waterways Trust Fund.” By a memorandum dated June 28, 2016, the Corps issued “implementation guidance” which was simply a report that the study has not yet been started since no funds have yet been specifically appropriated for it.

 

In the model presented by ISA at the Waterways Symposium in November 2015, annual revenues of approximately $11 million were projected to support a total of approximately $150 million of combined debt and equity financing. The ISA model also assumed that there would be contributions from the Federal government and other sources totaling approximately $405 million, for a total of approximately $555 million, which could be applied to address the needs of several lock and dam installations on the Illinois River in addition to those of La Grange and Peoria. The ISA model assumed a financing term of 30 years, bond proceeds (i.e., debt) in the amount of $128 million in two tiers with interest rates of 3.5 percent and 4.75 percent, respectively, and an annual return of 11 percent on an equity investment of $22 million.

 

A variation on this theme that should be considered would be the issuance of the same amount of total financing, i.e., $150 million, but comprised entirely of bonds or other forms of debt. According to the presentation by ISA, this amount should be sufficient to address the needs of at least the La Grange Lock and Dam and the Peoria Lock and Dam. Assuming that this bond financing would have the same term as in the ISA model, i.e., 30 years, and that the same amount of annual revenue, $11 million, would be available from the Inland Waterways Trust Fund for the payment of interest and principal on these bonds, this would translate into an effective interest rate of 6 percent on the bonds, which would be attractive in today’s interest rate environment.

 

The ISA model assumed an interest rate of only 4.75 percent on the portion of the bonds with a Standard and Poor’s rating of BBB, generally considered the lowest rating that qualifies as investment grade. Even further, if those bonds were tax-exempt, a possibility contemplated by Section 2004 of WRRDA 2014, then such an interest rate would represent an even higher effective return to the holder of such bonds. On the other hand, if the interest rate on the bonds turned out to be less than 6 percent, then either a greater amount of financing could be raised for the same $11 million of annual debt service, or the required annual debt service on $150 million of bond proceeds would be less, or the length of the financing term could be shortened. Anyone who has refinanced a home mortgage to take advantage of declining interest rates knows how these factors relate to each other.

 

To be sure, committing a certain amount from the Inland Waterways Trust Fund to support a long-term bond financing would make those funds unavailable for any other infrastructure projects during the term of that financing. However, the ISA and ICGA models, the studies for the United Soybean Board and the U.S. Soybean Export Council, other proposals for public-private partnerships, and the Corps of Engineers itself all recognize the cost savings and other advantages that come from borrowing against a future revenue stream to obtain full funding of a project up-front, rather than paying for it piecemeal. To return to the home mortgage illustration, no one buys a home one room at a time, year by year, as each year’s current income allows.

 

In a letter to Congress earlier this year, the Inland Waterways Users Board reported that, for the 10-year period 2005–2014, each penny of the fuel tax paid by carriers on the inland waterways generated $4 million each year for the Inland Waterways Trust Fund. This means that, in effect, less than three cents of the current 29-cents per gallon fuel tax would need to be allocated to supporting a bond financing of $150 million.

 

This alternative proposal would require some legislative changes in order for it to be implemented, but so also would the imposition of some form of toll or lockage fee. Each Water Resources Development Act that is passed by Congress provides an opportunity to enact such changes, as most recently evidenced by the important steps taken in WRRDA 2014. There is currently pending in Congress a bill that will hopefully become the Water Resources Development Act of 2016, and efforts are being made to have such enactments restored to a biennial schedule. Each of them will provide an opportunity to find a way to use public-private partnerships to provide funding to restore and improve the inland waterways infrastructure. In this article, it can be seen that this would be feasible – without tolls or lockage fees.

 

 

 

(As published in the September 2016 edition of Marine News)