The Case for the Federal Hopper Dredge Fleet On the Pacific Coast.

The Case for the Federal Hopper Dredge Fleet

On the Pacific Coast

Issue Areas:

Goals of Public Law 95-269

Importance of hopper dredging to West Coast ports

Cost of the federal dredge fleet

Competitiveness in the hopper dredge industry

Impact of operating limitations on cost effectiveness

The cost of the ready reserve

Data gaps

Key Findings and Conclusions

Goals: Develop a domestic commercial hopper

capability

Reasonable prices in a timely manner

Emergency and national response capability

The Goals of PL 95-269

05

10152025

1970

1980

1990

2000

Curr

ent

Commercial Fleet Corps Fleet

Num

ber

of

Vess

els

Findings: Corps hopper dredges

decreased from 14 to 4

Industry hopper dredges increased from 0 to 17

Industry now owns over 80% of the national

hopper fleet.


The Goals of PL 95-262(continued)

Industry: Performs 83% of federal

dredging (volume)

Accounts for 89% of program (expenditures)

Performs about 75% of all hopper dredging

Hopper contracts average $135 million per year



Distribution of Work

(Volume)

I ndustry Non-

hopper 65%

I ndustry Hopper

18%

Corps Non-

hopper11%

Corps Hopper

6%

Conclusions:

The goal to establish a commercial hopper dredge industry has been met.

No further restrictions on the Corps fleet are necessary.



Can the program be more responsive Can the program be more responsive and cost effective?and cost effective?


The Importance of Hopper Dredging to West Coast Ports


Findings: Hopper dredging:

50-60% of all West Coast dredging85% of Oregon dredgingCorps dredges = 60%

Unique conditions:High proportion of small projectsHigh incidence of adverse weatherOnly one private firm on West Coast5 to 12 weeks to move dredge from East Coast...

The Importance of Hopper Dredging to West Coast Ports

MobilizationTimes and Distances to West Coast

Florida to Texas1400 Miles, 1 Week

6

East Coast N-S2100 Miles, 1-2 Weeks

Portland to Alaska1500 Miles, 1 Week

Between East andWest Coast via Panama Canal8400 Miles, 5 Weeks

Between East an dWest Coast via Cape Horn20000 Miles, 12 Weeks

Portland to Hawaii2000 Miles, 1 ½ Weeks

Great Lakes to East Coast, 2000-3000miles, 1-2 Weeks


= Corps

= Industry


The Cost of the Federal Dredge Fleet

Hopper Fleet Cost ComparisonsAverage cost per cubic yard - current policy

FiscalYear

Private HopperDreges

Corps HopperDredges

1996 $2.31 $2.33

1997 $2.18 $1.93

1998 $2.61 $2.65

1999 $3.02 $3.14

2000 $2.59 $3.03

5 Year Avg $2.54 $2.62

On average, Corps hopper dredges cost$.08 per yard more (3%) than private hopper dredges



The Cost of the Federal Dredge Fleet(continued)

Comparison of Operating Cost

Small Class Vessels - West Coast Projects

$4.65$4.45

$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

CHR COQ ROG SI U YAQ GRH Total

Projects 1997-2001

Cos

t ($

per

Cub

ic Y

d)

Yaquina

Westport

CHR = Chetco RiverCOQ = Coquille RiverROG = Rogue RiverSIU = Siuslaw RiverYAQ = Yaquina RiverGRH = Grays Harbor

Impact of Removing Operating Limits

Corps rates can be reduced 12%-16% by increasing Corps rates can be reduced 12%-16% by increasing the number of days in the operating yearthe number of days in the operating year


Yaquina Annual Operating Cost and Rental Rate

$8.8 $9.5 $9.7 $9.9

$49.5$41.5 $38.9

$36.1

$8,000

$8,500

$9,000

$9,500

$10,000

$10,500

178 230 250 275Operating Days per Year

Ann

ual C

ost

($ 0

00)

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

Dai

ly R

enta

l Rat

e ($

000)

Annual Operating Cost Cost per day


Competitiveness in the Hopper Dredge Industry


Competitiveness in the Hopper Dredge Industry (continued)

Bidders per Contract vs.

Bid Amounts as % of Gov Estimate

60%

70%

80%

90%

100%

110%

1.5 2.0 2.5 3.0 3.5

Average No. Bidders per Contract

Bid

% o

f G

ov't

Est

Impact of Competition on Bid Price

90%

43%

25% 26% 28%

42%

0%

20%

40%

60%

80%

100%

1 2 3 4 5+ All

Number of Bidders Per Contract

% o

f Con

trac

ts E

xce

edin

g

Gov

Est


} ~ 17% of contracts exceed estimate dueto limitedcompetition



Volume Advertised vs.

Average No. of Bidders

1.0

1.5

2.0

2.5

3.0

3.5

4.0

25.0 35.0 45.0 55.0 65.0

Material (MCY) Advertised Per Year

Avg

No.

of

Bid

ders

per

Con

trac

t


Criterion for an Open Competitive Market

Large number of independent buyers and sellers

Freedom to enter or leave the market

Substitutability of product

All participants have equal access to information


Commercial Hopper Fleet Industry Consolidations

1980s

GLDD / NATCO

Manson / Osberg Co.

C.F. Bean Co.

Williams - McWilliams

American Dredging

T.L. James (Gulf Coast Tr.)

Roger J. Au Co.

1990s

GLDD / NATCO

Manson Construction Co.

Bean - Stuyvesant LLC

Weeks Marine Inc.

B+B Dredging Corp.


Increased capability Decreased competition

Private Hopper Dredge Ownership

Great LakesDock & Dredge 40%

Bean Stuyvesant13%

Weeks 13%

B+B 13%Manson 20%

17 total vessels 15 available for

routine maintenance 1 firm owns 40% of

private capability Awarded 37% of work

1 firm on West Coast Awarded 60% of work


Consolidation in ownership of small and large class vessels….

Hopper Dredge OwnershipBy Class of Vessel

VesselClass

(Capacity)

Corps GLDD/NATCO

Manson Weeks B+B Bean/Stuyv

Small(up to 2000 cy)

1(875 CY)

1(1800 CY)

(West Coast)

1(1300 CY)

(Gulf Coast)

1(2160 CY)(For sale)

Medium(2000-6000 cy)

1(3140 CY)

4(ea 3600 CY)

1*(5100)

2(4000 CY)(4800 CY)

2(ea 4000 CY)

1(4425 CY)

1(6000 CY)

1(6000 CY)

Large(over 6000 cy)

1(8000 CY)

(Ready Res)

3*(6350 CY)(6540 CY)

(16,000 CY)

1**(11,000)

* Three GLDD vessels have not participated in federal maintenance dredging:2 for sand mining1 for out-of-country dredging

** Note effort to repeal Jones Act grandfather clause for Stuyvesant


Criterion for an Open Competitive MarketAssessment:

Large number of independent buyers and sellers Only five firms have hopper dredge capability 40% of fleet in one firm Consolidation of large and small dredges One firm on West Coast

Freedom to enter or leave the market Cost of new dredge = $30-$60 Million Relatively fixed demand (average 68 mcy / year) Uncertainty of annual funding

Substitutability of product Limited, due to specialized nature of equipment

All participants have equal access to information


If not an open competitive market, then what is it?If not an open competitive market, then what is it?

Elements of “Natural” Monopoly

High level of initial capital investment

Decrease in marginal cost as output increases Capital costs greatly outweigh operating costs Economy of scale exists over entire demand range

Example: Utilities

Typical Government Responses: Regulated pricing Direct Ownership



The Impact of Corps Operating Year Limitations on Program Cost Effectiveness


The Impact of Corps Operating Year Limitations on Program Cost Effectiveness (continued)

Nationwide:

ChangeChangeFromFrom

FY 90-92FY 90-92toto

FY 93-01FY 93-01

Average No. Private Average AverageAverage No. Private Average AverageVolume Industry Bidders Bid as %Volume Industry Bidders Bid as %Advertised FirmsAdvertised Firms per Contract of Gov Est per Contract of Gov EstINCREASED! DECREASED! DECREASED! INCREASED!INCREASED! DECREASED! DECREASED! INCREASED!

37.2 MCY37.2 MCY

3.03.077

84%84%

51.1 MCY51.1 MCY 95%95%

2.42.455



Impacts of 1993 - West Coast:

4.3 MCY4.3 MCY

2.92.911

89%89%

5.6 MCY5.6 MCY 98%98%

2.42.411

ChangeFrom

FY 90-92to

FY 93-01

Average No. Private Average AverageAverage No. Private Average AverageVolume Industry Bidders Bid as %Volume Industry Bidders Bid as %Advertised FirmsAdvertised Firms per Contract of Gov Est per Contract of Gov EstINCREASED! NO CHANGE! DECREASED! INCREASED!INCREASED! NO CHANGE! DECREASED! INCREASED!

Trends in Demand

Dredging demand fairly stable since 1996 Total demand ~ 270 mcy per year Hopper demand ~ 68 mcy per year

Expansion of existing ports Deeper harbors and channels Operating constraints due to environmental

windows

Trend: An increasing amount of work chasing a limited number of dredge firms

over a decreasing amount of time


Conclusions: New restrictions on McFarland + increased

demand will result in more work for industry More work for industry will result in fewer bidders

per project and increased bid prices unless… More work results in additional competing firms



Allocating more work to Corps vessels will result in:- More competitive bidding- Increased efficiency of Corps fleet- Lower program cost

Recommendations

Impose no further operating restrictions on the Corps hopper dredge fleet.

Repeal the restrictions on the number of days the Yaquina and Essayons are allowed to operate each year.

Ensure the Yaquina and Essayons are maintained to a level consistent with the safe and efficient performance of their missions.

Closing Thought:

““As in the case of public power, a limited government As in the case of public power, a limited government role in a predominately private industry can generate role in a predominately private industry can generate benefits that flow in both directions.benefits that flow in both directions.

The public company is constrained and tested by the The public company is constrained and tested by the record of the private companies, while the private record of the private companies, while the private ones are obliged to measure up to the yardstick ones are obliged to measure up to the yardstick established by the public activity.”established by the public activity.”

From A.K. Okun, Equality and Efficiency, Brookings Institute, 1975.

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The Case for the Federal Hopper Dredge Fleet

On the Pacific Coast

The Case for the Federal Hopper Dredge Fleet On the Pacific Coast.

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