Delaware River Deepening Project
Comprehensive Reanalysis Needed Gao ID: GAO-02-604 June 7, 2002The U.S. Army Corps of Engineers' February 1992 Final Interim Feasibility Study and Environmental Impact Statement reported that deepening the Delaware River ship channel from 40 to 45 feet was economically justified and environmentally feasible. However, GAO found that it does not provide a reliable basis for deciding whether to proceed with the project. GAO identified several miscalculations, invalid assumptions, and the use of significantly outdated information on the Corps' benefits estimate. In addition, several unresolved issues and uncertainties were not factored into the Corps' economic analysis, the outcome of which could either increase or decrease the benefits and costs of the project. Because of these shortcomings, the actual economic merits of the project will be unclear until the Corps reanalyzes it. The Corps of Engineers has largely addressed the environmental concerns of federal and state environmental agencies. However, several unresolved issues remain, including the issuance of a permit from the state of Delaware governing construction projects that affect state waters.
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Director: Team: Phone:GAO-02-604, Delaware River Deepening Project: Comprehensive Reanalysis Needed
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
June 2002:
Delaware River Deepening Project:
Comprehensive Reanalysis Needed:
Delaware River Deepening Project:
GAO-02-604:
Contents:
Letter:
Results in Brief:
Background:
Corps‘ Analysis Substantially Overestimated Project Benefits:
Corps Has Refined Its Cost Estimate to Reflect Some Changes and
Corrections, but Additional Updates Are Needed:
Further Corrections for Outdated Information and Additional Errors and
Omissions Would Likely Increase Project Costs:
Several Uncertainties Could Further Affect Project Benefits and Costs:
Corps‘ Quality Control Process Did Not Identify Major Flaws in the
Economic Analysis:
Most Environmental Concerns Have Been Addressed, but Several Related
Issues Remain Unresolved:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Under Secretary of the Army:
Appendix III: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Analysis of Annual Project Benefits:
Figure:
Figure 1: The Delaware River Ship Channel:
Letter:
June 7, 2002:
The Honorable Jon Corzine
The Honorable Robert G.Torricelli
United States Senate:
The Honorable Robert E. Andrews
House of Representatives:
The U.S. Army Corps of Engineers‘ February 1992 Final Interim
Feasibility Study and Environmental Impact Statement reported that
deepening the Delaware River ship channel from 40 to 45 feet was
economically justified and environmentally feasible. Following this
assessment, Congress, in the Water Resources Development Act of 1992,
authorized the design and eventual construction of the Delaware River
ship channel to accommodate the movement of larger vessels. The total
estimated cost of the project is over $420 million. The federal share
of the project cost--approximately $287 million--would be for
constructing the deeper channel and the disposal sites for the dredged
material, as well as maintaining the channel for 50 years at a depth of
45 feet. The Delaware River Port Authority (DRPA), the nonfederal
sponsor, would be responsible for most of the rest of the cost. The
Corps‘ economic analysis of the project, updated in 1998, concluded it
would yield annual benefits of $40.1 million, largely in the form of
transportation cost savings related to importing crude oil (about 80
percent of the benefits) and importing or exporting cargo in
containers, as well as bulk commodities including scrap metal, iron
ore, and coal. The economic analysis estimated annualized project costs
of $28.8 million. In addition to questions about the project‘s cost and
benefits, a number of concerns have been raised about whether the
project would have adverse environmental impacts--for example, whether
it would resuspend toxic substances in the water, degrade water
quality, permit salt water intrusion into groundwater supplies used for
drinking and other purposes, or significantly harm fish and wildlife.
We were asked to review whether (1) the Corps of Engineers‘ economic
analysis accurately and appropriately considered the benefits and costs
of the project and (2) the environmental implications of the project
have been fully addressed.
Results in Brief:
The Corps of Engineers‘ economic analysis of the Delaware River main
ship channel-deepening project contains a number of material errors. As
a result, it does not provide a reliable basis for deciding whether to
proceed with the project. In particular, our analysis of the Corps‘
1998 benefit estimate identified several miscalculations, invalid
assumptions, and the use of significantly outdated information. For
example, the Corps misapplied commodity growth rate projections,
miscalculated trade route distances, and continued to include benefits
for some import and export traffic that has declined dramatically over
the last decade. In addition, a number of unresolved issues and
uncertainties were not factored into the Corps‘ economic analysis, the
outcome of which could either increase or decrease the benefits and
costs of the project. While the Corps has established procedures to
ensure that its benefit-cost analyses are fundamentally sound and
properly prepared, in this case at least, the process was ineffective
in identifying significant errors and analytical problems. Because of
the shortcomings we identified in the Corps‘ analysis, the actual
economic merits of the project will not be reliably known unless the
Corps comprehensively reanalyzes it.
The Corps of Engineers has largely addressed environmental concerns
related to the project to the satisfaction of federal and state
environmental agencies. On the basis of the results of the Corps‘ 1992
Final Interim Feasibility Study and Environmental Impact Statement,
1997 Supplemental Environmental Impact Statement, and subsequent
studies, most federal and state environmental agencies have agreed that
the project would not significantly affect such areas as water quality
and fish and wildlife habitat. Consequently, the Corps has obtained
most of the approvals it needs from these agencies. However, a number
of unresolved issues remain, including the issuance of a permit from
the state of Delaware governing construction projects (such as
dredging) that affect state waters.
Given the serious problems we identified with the Corps‘ economic
analysis, we are making recommendations to the Secretary of the Army on
the need to comprehensively reanalyze the project. In commenting on a
draft of this report, the Under Secretary of the Army generally agreed
with our findings and concurred that a new and comprehensive economic
analysis of the project‘s benefits and costs is warranted. The Under
Secretary also concurred that once the economic reanalysis is complete,
an external independent party would be engaged to ensure that the
reanalysis accurately and fairly represents the expected benefits and
costs of the proposed project.
Background:
Figure 1 is a map of the Delaware River Ship Channel that also shows
the locations of various project features discussed throughout the
report.
Figure 1: The Delaware River Ship Channel:
[See PDF for image]
[End of figure]
The Delaware River project plan calls for deepening the main navigation
ship channel from the mouth of the Delaware Bay through Philadelphia
Harbor, and on to Beckett Street Terminal in Camden, New Jersey--a
distance of 102.5 miles. The project includes plans for constructing
three new disposal facilities for dredged material, called confined
disposal facilities, in Gloucester and Salem counties, New Jersey. Two
of these new disposal facilities would be needed to maintain the
current channel, even if the project were not built. The new facilities
and 10 other existing facilities would accommodate the material dredged
during the construction of the deeper channel and during the 50-year
maintenance period that would follow. The project also includes plans
to restore two wetland areas, one in New Jersey and the other in
Delaware, and to replenish a beach site in Delaware.
The Delaware River Port Authority, the nonfederal sponsor, would share
in the costs of the project, according to requirements in the Water
Resources Development Act of 1986 and a project cooperation agreement
that would need to be signed with the Corps before beginning
construction. The Port Authority would be responsible for contributing
25 percent of the total costs of the project‘s general navigation
features--largely constructing and dredging--and for providing lands,
easements, relocations, and rights-of-way necessary for the project.
The Port Authority would pay an additional 10 percent of the general
navigation feature costs after receiving credit for providing for such
items as lands for dredged material disposal areas. The three states
that would be affected by the channel deepening, Delaware, New Jersey,
and Pennsylvania, are expected to contribute funds toward the Port
Authority‘s share of the project.
The Philadelphia district office of the Corps of Engineers is leading
the effort to prepare the various studies and documents required for
the project. It completed a Final Interim Feasibility Study and
Environmental Impact Statement for the project in 1992. This document
was used to inform decision-makers and the public of the Corps‘
recommended plan for the project, potential alternatives to it, its
benefits and costs--annualized over a 50-year period--and its likely
environmental effects. The Corps then prepared a design memorandum in
1996, which provided details on the final design and engineering plans
for the project, and published a Supplemental Environmental Impact
Statement in 1997. In its Limited Reevaluation Report of 1998, the
Corps updated the project‘s benefits and costs. Approval of this report
constituted the Corps‘ decision to budget construction funds for the
project. Corps guidance and procedures require that key decision
documents such as the Feasibility Study and the Limited Reevaluation
Report undergo review by district officials; the Corps‘ North Atlantic
division in Brooklyn, New York; and the Corps‘ Office of Civil Works in
Washington, D.C., before receiving final approval. On April 22, 2002,
the Corps‘ Director of Civil Works suspended work on the project
pertaining to the project cooperation agreement, plans and
specifications, and advertising for construction, until questions
pertaining to the project justification have been resolved.
Corps‘ Analysis Substantially Overestimated Project Benefits:
The Corps‘ analysis of project benefits contained or was based on
miscalculations, invalid assumptions, and outdated information. After
taking these problems into consideration, we found that the project
benefits for which there is credible support would be about $13.3
million a year, as compared to the $40.1 million a year claimed in the
Corps‘ 1998 Limited Reevaluation Report. Some of the major problems we
identified in the Corps‘ analysis of project benefits are discussed
below.
Corps‘ Benefit Analysis Contained Miscalculations:
Based on a number of miscalculations, the Corps‘ analysis overstated
annual project benefits by about $8.6 million. In one instance, the
Corps misapplied the projections of commodity growth rates for traffic
in the Delaware River ship channel when estimating future project
benefits. For example, for oil imports from West Africa, the underlying
data indicated that the appropriate predicted growth rate for 1992
through 2000 would be 5.8 percent, and 1.4 percent for 2001 through
2005. However, the Corps applied the 5.8 percent growth rate to the
entire 1992 through 2005 time period and repeated the mistake by
incorrectly applying predicted rates elsewhere in its analysis. In
aggregate, this miscalculation led to about a $4.4 million overestimate
of annual project benefits. Corps headquarters officials agreed with
our analysis.
After taking the Corps‘ misapplication of growth rates into
consideration, there remained about a $4.7 million gap between the
Corps‘ estimated annual project benefits and the outcome of our efforts
to replicate its results. The Corps‘ economist for the project told us
that this gap was created by a computer error and speculated that it
could have occurred when files were transferred from one program to
another. Ultimately, however, the Corps was unable to definitively
explain the discrepancy between its original estimate and our attempt
to replicate its estimate and acknowledged that the error overstated
project benefits by about
$4.7 million. Corps headquarters officials agreed with our analysis.
The Corps also inconsistently discounted the project‘s future benefits
to determine their net present value. Specifically, the Corps used
different discount rates, realized benefits at different times of the
year, and used different 50-year project time periods for the various
benefit categories. For example, the Corps estimated project benefits
for coal shipments for the period 2005 through 2055 (note that this is
51 years, not 50 years), while it estimated benefits for container
ships from 2000 through 2050. Also, the Corps used an 8.75 percent
discount rate to discount the coal benefits for present value purposes,
but used 7.625 percent for crude oil. The Corps‘ economist for the
project acknowledged the errors and noted that the discounting
procedures used for net present value purposes should have been
consistently applied. Taking these errors into consideration, as called
for by applicable Corps guidelines for water resource projects, we
found that annual project benefits would be about $0.4 million less
than the Corps had projected.[Footnote 1] Corps headquarters officials
agreed with our analysis.
Finally, the Corps presented its benefit estimates in dollar values for
different years for the various benefit categories. The Corps stated in
its 1998 Limited Reevaluation Report that the benefit and cost
estimates were in 1996 dollars. However, this was not true for any of
the benefit categories: coal benefits were calculated in 1991 dollars;
crude oil, iron ore, and scrap metal benefits in 1993 dollars; and
container benefits in 1995 dollars. A basic principle of benefit-cost
analyses is that benefit and cost estimates be given in the same year
dollar values. Without such consistency, it is not possible to
accurately compare project benefits and costs. Taking this mistake into
account, we found that estimated project benefits increased by about
$0.9 million.[Footnote 2] Corps headquarters officials agreed with our
analysis.
Corps‘ Benefit Analysis Was Based on Invalid Assumptions:
Based on a number of invalid assumptions, the Corps‘ analysis
overstated annual project benefits by about $9.4 million. The Corps‘
analysis of the benefits that a 45-foot channel would be expected to
produce was based on several components, such as time at sea, time in
port, tonnage shipped, and average shipping cost per unit of cargo. For
certain crude oil vessels, one of these components is time savings in
unloading crude oil. Currently, crude oil vessels that are loaded to a
hull depth of more than 40 feet must stop at the mouth of the Delaware
River to transfer crude oil to smaller vessels (a process called
lightering) until the ship‘s hull is no deeper than 40 feet below the
surface. This transfer of cargo takes time and thus increases costs.
With a deeper channel, such ships would spend less time lightering, or
might not need to lighter at all, thus reducing costs. In calculating
the economic benefits that a 45-foot channel would produce, the Corps
assumed time savings from reduced lightering at both the port of origin
and the port of destination. However, the benefits of reduced
lightering are realized only at the destination of the voyage. Thus,
the Corps double-counted this benefit, resulting in an overstatement of
about $2.6 million in annual project benefits. Corps headquarters
officials agreed that its analysis double-counted lightering time
savings and therefore overstated annual project benefits.
The Corps‘ economic analysis also claimed project benefits for
predicted shipments of crude oil on vessels that require a channel
depth of only
40 feet. Currently, some of the vessels that deliver crude oil to the
Philadelphia area refineries require less than a 40-foot channel depth,
but they have the capacity to more fully load, and thus could
potentially take advantage of a deeper channel. To estimate the
benefits of a 45-foot channel for these vessels, the Corps used a
statistical model (two stage least squares) to predict how much oil
these vessels would carry if a
45-foot channel were available. The model predicted benefits by
analyzing 137 combinations of ship types and trade routes. The model
predicted that only 32 of these 137 combinations (or 23 percent) would
require a channel depth of greater than 40 feet to make the trip
upriver to the oil refineries. Nonetheless, the Corps assumed benefits
for all 137 combinations. The Corps‘ economist was unable to provide a
clear rationale for claiming benefits for the 105 ship-type/trade-route
combinations that its model predicted would not benefit from a deeper
channel. The result was that the Corps claimed about $3.0 million in
annual project benefits that were not supported by its model. Corps
headquarters officials told us they believe that a greater number of
these vessels could benefit from additional channel depth, but they
could not verify their model. We agree that the deeper channel could
benefit crude oil vessels with sailing drafts of less than 40 feet, but
the amount of such benefits cannot be determined without a
comprehensive reanalysis.
We also found that the Corps‘ container ship benefit analysis was based
on several invalid assumptions. First, the Corps incorrectly assumed
the same one-way distance (3,600 nautical miles) for each of several
different container ship trade routes (Australia, East Coast of South
America, Europe, and the Mediterranean). For example, the one-way
distance from Australia to Philadelphia via the Panama Canal is about
10,000 nautical miles. Further, for the Australia-to-Philadelphia
route, the Corps assumed that with a 45-foot channel containers would
be shipped on larger vessels and would go through the Suez Canal--as
opposed to using the Panama Canal, the current trade route for this
traffic. But, the Suez Canal trade route is significantly longer than
the Panama Canal trade route, raising serious questions about whether
shipping via the Suez Canal would be more cost-effective.[Footnote 3]
After taking this invalid assumption regarding distances into account,
and using the Corps‘ methodology, we found that--even with a 45-foot
channel depth--the least costly container ship trade route from
Australia to Philadelphia remains through the Panama Canal.
Furthermore, vessels using the Panama Canal are currently restricted to
sailing drafts of 39 feet 6 inches. Thus, the benefits of the deeper
channel for this trade route would be minimal. After taking the invalid
assumptions in the Corps‘ analysis into account, we estimated that
annual container ship benefits would be about $1.7 million less than
the Corps estimated. Corps headquarters officials acknowledged our
findings and their relative impact, as calculated on the basis of the
information presented in the 1998 Limited Reevaluation Report. However,
they now believe that container ship benefits may be higher than
presented in the 1998 report because of changed shipping patterns.
While changes have occurred in the container shipping industry, it
would be premature to speculate on the effect these changes would have
on project benefits without a comprehensive reanalysis.
Moreover, the Corps also incorrectly assumed the same distance for
different trade routes when estimating benefits for the category of
crude oil vessels with sailing drafts less than 40 feet. Taking this
invalid assumption into account reduced annual project benefits by
about
$1 million. Finally, we identified about $1.0 million in additional
overestimated annual benefits due to other invalid assumptions related
to the analysis for scrap metal, iron ore, and coal commodities.
Corps‘ Benefit Analysis Was Based on Outdated Information:
Much of the baseline information that underpins the Corps‘ project
benefit analysis dates from 1985 through 1991. Thus, the data are
outdated and do not reflect current shipping practices and trends. For
example, the data the Corps used in its economic analysis led to a
projection that crude oil imports up the Delaware River would increase
by over 20 million short tons from 1992 though 2000.[Footnote 4]
However, our review of available data indicated that crude oil imports
increased by only about 10 million short tons over this
period.[Footnote 5] We identified a number of instances, discussed
below, in which the information used in the Corps‘ analysis was
outdated. Where possible, we updated the information, and found that
the Corps‘ analysis overstated total annual project benefits by about
$8.8 million.
The Corps‘ 1992 feasibility study included benefits for the time
savings related to reduced lightering of crude oil by tankers with a
sailing draft of greater than 40 feet. The Corps estimated that crude
oil could be unloaded from crude oil tankers to the refineries‘ storage
tanks about twice as fast as it could be transferred to lightering
vessels. Since that time, however, the company that provides lightering
services in the Delaware River has modified its fleet of vessels that
performs this service. Based on information provided by several
refineries and the lightering company, lightering rates are almost the
exact opposite of those used in the Corps‘ analysis. According to these
sources, crude oil can be transferred from oil tankers to lightering
vessels almost twice as fast as it can be unloaded from oil tankers to
refineries. The Corps‘ use of the outdated information resulted in
overstating annual project benefits by about $3.2 million.
As discussed previously, the Corps overestimated the projected growth
in crude oil imports. Substituting the predicted growth rates used by
the Corps with actual growth rates based on historical import data to
the Philadelphia region (at the time of the 1998 Limited Reevaluation
Report), we found that the Corps‘ annual benefits were overestimated by
about
$3.5 million. In commenting on a draft of this report, the Corps stated
that its crude oil projections (1992 through 2000) were in line with
actual recorded tonnage. However, this statement is misleading because
the crude oil import data that the Corps used to make this claim were
inconsistently collected between 1992 and 2000. Nevertheless, the Corps
stated in its comments that its project reanalysis would need to verify
the database used to establish current and historic shipments to ensure
data reliability. In addition, the Corps‘ predicted growth rates for
container ship imports for some trade routes were also overestimated;
substituting the predicted growth rates with actual growth rates, we
found that the Corps‘ annual benefits were overestimated by about $0.3
million.
Finally, the Corps‘ analysis included benefits for exporting scrap
metal to Turkey and importing coal and iron ore. However, since the
time of the Corps‘ 1992 analysis, trade of these commodities on the
Delaware River has greatly declined. Updating for this information, we
found that benefits for scrap metal, iron ore, and coal were reduced by
about $1.7 million a year (beyond the $1.0 million benefit reduction
mentioned earlier). Corps headquarters officials concurred that
shipments of scrap metal, coal, and iron ore have decreased since the
1998 Limited Reevaluation Report but stated that shipments of these
commodities increased from 2000 to 2001 and may warrant further
analysis.
Table 1 shows the Corps‘ 1998 benefit estimates and summarizes errors
in those estimates based on our evaluation of the Corps‘ analysis.
Table 1: Analysis of Annual Project Benefits:
Dollars in thousands.
Commodity: Crude oil;
Corps‘ estimates[A]: $32,481;
Miscalculations[B]: ($8,883); Invalid
assumptions[B]: ($6,681); Outdated
information[B]: ($6,764); Remaining benefits[C]:
$10,153.
Commodity: Containers;
Corps‘ estimates[A]: 4,546; Miscalculations[B]:
3; Invalid assumptions[B]: (1,742); Dollars in
thousands: Outdated information[B]: (294);
Remaining benefits[C]: 2,513.
Commodity: Scrap metal;
Corps‘ estimates[A]: 2,357; Miscalculations[B]:
406; Invalid assumptions[B]: (938); Dollars in
thousands: Outdated information[B]: (1,465);
Remaining benefits[C]: 360.
Commodity: Iron ore; Corps‘
estimates[A]: 598; Miscalculations[B]: (152);
Invalid assumptions[B]: 9;
Outdated information[B]: (244); Remaining
benefits[C]: 211.
Commodity: Coal; Corps‘
estimates[A]: 160; Miscalculations[B]: 23;
Invalid assumptions[B]: (93); Dollars in
thousands: Outdated information[B]: 8; Remaining
benefits[C]: 98.
Commodity: Total; Corps‘
estimates[A]: $40,142; Miscalculations[B]:
($8,603); Invalid assumptions[B]: ($9,445);
Outdated information[B]: ($8,759); Dollars in
thousands: Remaining benefits[C]: $13,335.
[A] Figures obtained from the Corps‘ 1998 Limited Reevaluation Report.
[B] Negative values are given in parentheses and represent reductions
to the Corps‘ estimates.
[C] Values are given in 1996 dollars and are calculated as the sum of
the previous four columns.
[End of table]
It is important to note that because of the numerous shortcomings in
the Corps‘ analysis, the actual project benefits cannot be reliably
known without a comprehensive reanalysis. To be complete, such a
reanalysis would need to account for the miscalculations and invalid
assumptions we identified. Furthermore, it would need to
comprehensively update the data used in the 1998 analysis to account
for current shipping trends on the Delaware River, and reexamine the
methodology used to estimate benefits.
Corps Has Refined Its Cost Estimate to Reflect Some Changes and
Corrections, but Additional Updates Are Needed:
The Corps has made several changes to reflect project updates and
correct for cost estimating errors since the 1998 Limited Reevaluation
Report. Some of these changes--reducing the volume of material and
locations where dredging would need to be performed--would reduce
annual project costs. But this cost reduction would be offset by
several other updates and corrections that would increase project
costs. Accounting for these increases and decreases, in aggregate,
annual project costs would likely be about $27 million (in 2001
dollars) rather than the $28.8 million estimated by the Corps in the
1998 Limited Reevaluation Report. However, other Corps costs were based
on outdated information, contained errors, or did not take into account
all pertinent information. While the Corps has not yet addressed these
problems, doing so would likely increase project costs. Because of the
interrelationship among the cost categories, the effects of the
individual updates and corrections cannot be readily isolated from each
other.
Reducing Amount of Material and Total Area to Be Dredged Has Lowered
Project Costs:
The Corps has refined its cost estimate to account for new information.
Originally, assuming that the overall depth of the existing channel was
40 feet, the Corps estimated the amount of material to be dredged at
33 million cubic yards. However, new information developed by the Corps
indicates that parts of the channel are already deeper than 40 feet.
Thus, the Corps has reduced its estimate of the material to be dredged
to approximately 26 million cubic yards, thereby lowering the costs of
dredging.
Further, new surveys of the main ship channel and the use of new
technology have given the Corps more accurate information about areas
of the channel that are 45 feet or deeper already and will not need to
be dredged. The new technology--side scan sonar--provides more accurate
mapping of the contour of the shipping channel, thereby enabling the
Corps to determine that less total area needs to be dredged than it
previously believed. Thus, costs for construction and equipment have
declined.
Other Revisions and Corrections Have Increased Project Costs:
In the process of reestimating project costs, the Corps decided to
extend the construction period from 4 years to 5 years. This extension
resulted from concerns that additional dredging equipment needed to
finish the project in 4 years might not be available when necessary.
Moreover, a Corps official told us that the Corps was concerned that it
might not be able to obtain the funding necessary to construct the
project in 4 years.
Additionally, the Corps‘ 1998 analysis included the cost of purchasing
four new confined disposal facilities, but one of these facilities is
no longer available. The Corps now plans to take the dredge material
excavated during construction that was intended for this facility to
another location farther away. The Corps has revised the disposal costs
for the construction phase of the project to reflect this change.
Also, during our review of the Corps‘ cost estimate, we identified a
number of omissions. For example, in its 1998 cost estimate, the Corps
did not include construction costs for confined disposal facilities in
its summary calculations for maintaining the 45-foot channel. A Corps
official was unable to explain why this occurred, but the Corps has
since corrected for the omission.
Finally, we identified a number of errors in the Corps‘ cost estimate,
one having to do with inconsistent discounting. In estimating costs for
maintenance dredging, the Corps used end-year discounting, but for
construction costs and benefit calculations, it used different discount
periods. As discussed earlier, benefits and costs should be determined
using consistent discounting procedures. The Corps agreed that mid-year
discounting is appropriate and has updated project costs for this.
Further Corrections for Outdated Information and Additional Errors and
Omissions Would Likely Increase Project Costs:
The Corps has not updated its cost estimates for maintenance dredging
and deepening the side channels that connect the main channel to the
benefiting firms‘ loading docks. Moreover, a number of specific errors
and omissions in the cost estimate remain to be addressed; making the
necessary corrections would likely increase project costs. For example,
the cost estimate for maintaining a 45-foot channel has not been
revised to reflect that one of the disposal facilities is no longer
available. The alternative location is more distant from the dredging
operation. Corps officials agreed that this problem exists in the cost
estimate and that the additional distance would increase costs. At the
time of our review, the Corps had not calculated how much this
correction would increase project costs. Corps headquarters officials
believe that updating maintenance and berthing area cost estimates to
correct for outdated data and inaccuracies would have a marginal impact
on the total project costs. However, the full extent of the impact
cannot be accurately estimated until project costs have been completely
reanalyzed.
In addition, the Corps‘ current cost estimate assumes that maintenance
dredging for the 45-foot channel would begin after the last year of
construction and continue for 50 years. But maintenance dredging for
some sections of the channel could begin before the 5-year construction
phase of the project is completed because the sections that are to be
deepened to 45 feet in the first years of construction would likely
start to fill in as sand and silt resettle in the channel. The Corps‘
estimate for maintenance costs does not account for the fact that some
costs should be inflated and others discounted to reflect that
maintenance in certain sections of the channel would need to be done at
different times. Taking this oversight into account would increase
costs. Although a Corps official acknowledged this inaccuracy, the
Corps had not, at the time of our review, calculated how much this
correction would increase annualized project costs. Corps headquarters
officials have stated that this problem could potentially be corrected
by modifying the project construction schedule. However, any
modification of the schedule would affect the total project cost.
Finally, the Corps did not include in its estimate all the capital
investments that private companies, such as oil refineries, would need
to make to take advantage of the deeper channel. For example, officials
at two refineries told us that they would need to build additional on-
site storage capacity to take advantage of a deeper channel, but these
costs were not included in the cost estimate. While taking this
omission into account would likely increase annualized project costs,
the Corps had not addressed this issue at the time of our review. Corps
headquarters officials stated that they assumed no land-side costs
attributable to the proposed project at the time of the 1998 Limited
Reevaluation Report. However, these officials further stated that a
reanalysis of the project would reconsider the assumption of no land-
side costs, in addition to other potential capital investment costs
faced by the benefiting firms.
Several Uncertainties Could Further Affect Project Benefits and Costs:
There are a number of uncertainties related to project benefits and
costs that could impact the economic analysis. Some of the cases of
outdated information and invalid assumptions discussed in this report
are examples of the uncertainty in forecasting information such as
commodity shipments, technological change, and the economic choices of
industry. Reanalysis of the project might consider a more careful
treatment of such uncertainty. Our review identified additional
uncertainties that the Corps has not addressed in its analysis. If and
when these uncertainties are resolved, expected benefits and costs
could further increase or decrease, thus affecting the project‘s
economic merits.
Uncertainties Related to Project Benefits:
It is uncertain whether the companies expected to benefit from the
project, primarily oil refineries, would undertake the capital
improvements necessary to take full advantage of a deeper channel and,
if so, whether they would do it in the same time frame as assumed by
the Corps. In its economic analysis, the Corps assumed that all
potential beneficiaries would perform the work necessary to take
advantage of a deeper channel, such as dredging side channels and
berthing areas, by the end of the last year of planned construction.
However, potential beneficiaries have made few firm commitments to make
these capital improvements. An official of one company wrote to the
Corps supporting the project, and a public relations official from
another responded to a local newspaper saying the company would look
favorably on the project. In addition, representatives of several other
companies told us they believe the project could benefit them, but
because substantial work could be necessary to deepen their berthing
areas, retrofit docking areas, or expand storage capacity, they would
not make a firm commitment to making these improvements. If any of the
benefiting companies did not perform the necessary work, or if they
delayed these efforts until after the project was completed,
anticipated benefits would be reduced. Corps headquarters officials
reaffirmed the Corps‘ support of the draft project cooperation
agreement, which calls upon the nonfederal sponsor to enter into
agreements with the benefiting firms to complete the necessary work in
conjunction with the construction of the project. The draft project
cooperation agreement provides that the Corps may elect to stop project
construction in the absence of such agreements.
As discussed earlier, one of the benefits of the deeper channel--
included in the Corps‘ analysis--is a reduced need for the lightering
of crude oil. In fact, the company that provides lightering services in
the bay currently estimates that the demand for its services could
decrease by a third, from lightering 90 million barrels of crude oil
per year to 60 million. The uncertainty involves how this company would
react to a reduction in demand for its services. An official of this
company told us that the company might reduce the number of lightering
vessels operating in the bay from three to two, which could potentially
increase the time that vessels might have to wait for lightering
services, increase lightering fees, or both. These scenarios would
likely decrease the economic benefits of reduced lightering. Another
possibility is that the lightering firm could reduce its fees in an
effort to maintain demand for its services. In any event, less
lightering could reduce gaseous emissions that occur during the
lightering process, thus resulting in some environmental benefits.
In addition, Federal Principles and Guidelines for Water Resource
Agencies call for including project benefits that contribute to
national economic development. Yet, it is uncertain whether all of the
potential benefits of a 45-foot channel would contribute to national
economic development because most of the ships coming into Delaware
River ports are foreign-owned. The Corps‘ analysis did not take into
account the distribution of the project benefits between U.S. and
foreign interests; in essence, the Corps assumed that all
transportation savings attributable to the project would accrue to U.S.
interests. In commenting on a draft of this report, the Corps stated
that we are making an implicit assumption that all benefits should
accrue to American interests, and those realized by foreign interests
should be netted out in the determination of U.S. national economic
development. First, we are not making an implicit assumption. The
Economic and Environmental Principles for Water and Related Land
Resources Implementation Studies--a publication that establishes
principles intended to ensure proper and consistent planning by the
Corps--and the Corps‘ own guidance state: ’The Federal objective of
water and related land resources project 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.“ Second, it
is unclear how the Corps can meet that definition of national economic
development without analyzing the distribution of project benefits
between U.S. and foreign interests. In summary, our concern is that to
the extent that some of the transportation cost savings of this
project--as well as those for other similar Corps navigation projects-
-accrue to foreign interests, the contributions of the project to
national economic development are overstated.
Finally, an area of uncertainty that could increase project benefits is
the degree to which there are commodities being shipped on the Delaware
River that the Corps did not include in its economic analysis. For
example, recent shipping data indicate that imports of iron and steel
increased from about 550,000 short tons in 1990 to about 4 million
short tons in 2000. The importers of these and other goods might
benefit from a deeper channel, but the Corps‘ benefit analysis did not
consider these commodities.
Uncertainties Related to Project Costs:
There are several uncertainties regarding project costs. One area of
uncertainty involves mitigation costs for any unexpected environmental
damage that could potentially emerge. While the Corps has included some
costs for assessing the likely environmental impacts of the project,
should monitoring or construction activities reveal unanticipated
problems, the costs to slow the dredging schedule or rebuild damaged
habitat are unclear. In addition, discussed below are several other
uncertainties that we identified during our review that may increase or
decrease costs by an as yet unquantified amount.
One such uncertainty concerns the recent addition of beach
replenishment to the project‘s plan for disposal of dredged material.
The Corps‘ current disposal plan calls for transporting sand dredged
from the lower Delaware Bay to Broadkill Beach in Delaware. However, it
is unclear whether the clean sand will ultimately go to Broadkill Beach
because, pending an agreement with the state of Delaware, another
beach, or beaches, could be selected. Using a beach that is closer to
the dredging area would result in a lower cost for beach replenishment
than is currently estimated. Alternatively, if the selected beach were
farther from the channel-dredging area, the cost of the operation would
be higher than estimated. For example, the current costs of dredging
the channel and transporting the sand to Broadkill Beach are estimated
at $10 per cubic yard; the costs for the same activities with Dewey-
Rehoboth Beach as the destination would be about $18 per cubic yard.
Given the uncertainty about which beach or beaches will ultimately be
chosen, the final cost of this activity is unclear.
It is also uncertain how much purchasing the sites for the three new
confined disposal facilities in New Jersey would cost, and whether the
project sponsor would be able to acquire all of these sites. Currently,
these sites are estimated to cost $15.4 million.[Footnote 6] The Corps
does not intend to update its appraisal of these sites, which would
involve estimating the amount of land to be purchased, until after the
project cooperation agreement between the Corps and the nonfederal
sponsor has been signed. In the meantime, the Gloucester County
Improvement Authority of New Jersey is seeking to buy portions of these
areas for recreational purposes. Given these uncertainties, it is
possible that the costs of land needed for new confined disposal
facilities could increase.
Another uncertainty concerns how much it would cost the Corps to comply
with certain environmental restrictions, called windows. Designed to
protect habitat and vulnerable populations such as horseshoe crabs,
oysters, and winter flounder in certain sections of the Delaware River,
the windows limit where and when dredging, beach replenishment, and
wetland restoration activities can occur. For example, to protect the
habitat of winter flounder, dredging cannot occur in the lower portion
of the river from January through May without relief from the window.
If the Corps could not complete its scheduled dredging from June
through December, it would incur additional costs to stop the work and
start it up again later. The Corps is currently studying the extent to
which fish and surrounding habitat would be harmed by dredging
activities. A Corps official told us that these studies may show that
the current windows are overly protective, a finding that the official
believes would provide some support for federal and state agencies to
provide relief from some of the restrictions. In addition, the Corps
plans to use two dredges in the areas where restrictions are
established to reduce dredging time. In any event, the 1998 estimate
and its recent update do not include the potentially increased costs of
complying with these windows. According to a Corps official, because
the Corps is unsure how much relief it would obtain from the
restrictions, it is uncertain how much project costs would increase.
Corps headquarters officials now state that a significant portion of
the project construction work could be accomplished within the existing
environmental windows. Specifically, they have said that the operations
at Broadkill Beach and Kelly Island would not require relief. However,
to the extent that the Corps cannot obtain the necessary relief in
other areas, project costs would increase.
A further uncertainty concerns whether the Corps will employ the
technique known as economic loading for its dredging operations in the
lower bay area. Using this technique, the water content of dredged
material that has been loaded onto a barge, or dredge, is allowed to
drain back into the river at that site. Therefore, when the barge is
fully loaded, it contains a higher percentage of dredged material,
resulting in fewer trips to the disposal sites. Because of concerns
that the water drained from the dredge material would contain a large
amount of particulate matter that would cause a plume in the water
column, the Corps studied the potential environmental effects of
economic loading in 1999. The study concluded that economic loading
would not cause significant long-term environmental harm. Having
reviewed the results of the study, officials from Delaware and New
Jersey said they would consider allowing the use of economic loading in
the lower bay. However, it should be noted that this option was not
included as part of the Corps‘ permit application to the state of
Delaware and that formal approvals from either Delaware or New Jersey
have not been requested. Should the Corps formally seek and obtain
permission to use economic loading, costs would decrease. In commenting
on the draft of this report, Corps officials said that indications from
the states of New Jersey and Delaware are that this process may be
viable and practical in the Delaware Bay for dredging sandy material.
The Corps estimated that if economic loading were permitted, it could
result in a 30 to 40 percent reduction in the unit cost of dredging,
which the Corps stated previously would translate into approximately $2
million in annualized cost savings. However, the Corps recognized that
it is uncertain whether economic loading would be used, and that this
issue would need to be investigated in any reanalysis of the project.
Finally, a new dredging technology, known as a ladder pump, increases
dredge material production rates and has the potential to decrease
costs for some of the dredging operations that would occur during the
construction and maintenance phases of the project. However, the Corps
did not incorporate the use of this new technology into its cost
estimate, and it is not known whether the contractors that would
conduct the project‘s dredging operations would use it.
Corps‘ Quality Control Process Did Not Identify Major Flaws in the
Economic Analysis:
The Corps has a three-tiered quality control process designed to ensure
that its economic analyses of proposed projects are factually accurate
and based on sound economic principles. Three organizational levels are
involved: the Corps‘ district offices, division offices, and
headquarters. In general, for projects such as the Delaware River
deepening project, the following process is used:
* The relevant district office is responsible for conducting a
feasibility study that addresses the technical and economic aspects of
a proposed project and manages the planning, engineering, and design
work that follows. The district office also prepares the Limited
Reevaluation Report that updates the technical and economic data as
needed. Once it has developed these project justification documents,
the district office reviews them for technical accuracy and quality,
and upon approval, it forwards them to the division for its review.
* The division‘s responsibility is primarily procedural. It reviews the
project justification package to ensure that the district has prepared
the required documents such as the Feasibility Study and Limited
Reevaluation Report and has obtained all necessary approvals. It does
not review such documents for technical accuracy or to verify the
underlying analysis. The division ensures that reports such as the
Limited Reevaluation Report have undergone a technical review and that
the district has issued a quality control certification report with the
required district office level approvals. Once the division is
satisfied that procedures have been followed, it approves the package
and forwards it to headquarters.
* Headquarters is responsible for ensuring that critical documents such
as the Feasibility Study and Limited Reevaluation Report, the major
assumptions on which the justification is based, and the
recommendations adhere to Corps policy for conducting benefit-cost
analyses and environmental studies. Headquarters also ensures that any
concerns that it has raised have been addressed. Once headquarters is
satisfied that policy has been followed and that the justification is
based on sound economics and environmental studies, it approves the
project for construction funding.
Although the district, division, and headquarters offices approved the
project according to the procedures in place in 1992 and changes that
followed in 1995, these review processes were ineffective in detecting
and correcting the significant miscalculations, invalid assumptions,
and outdated information in the economic analysis that our review
revealed. For example, we found no indication that problems related to
benefits, such as misapplying growth rates, double-counting lightering
time savings, and miscalculating potential benefits derived from time
savings in unloading crude oil at the refineries, were detected during
the internal reviews and quality control certification process. This
raises serious questions about the adequacy and effectiveness of the
Corps‘ review process. Corps headquarters officials have stated that
notwithstanding the changing and existing procedures, there were
failures in the execution of the process for the development and review
of the feasibility analysis and the Limited Reevaluation Report. The
economic update in the Limited Reevaluation Report was performed in
accordance with existing regulations but did not get to the root of the
underlying problems, some of which were carried forth from the original
report.
Another concern is that since 1995, the primary responsibility for
performing the quality reviews of key project documents has been
largely delegated to the district office level. The Philadelphia
district office prepared the economic analysis and other documents
justifying the deepening project and, following the 1995 change in
Corps procedures, prepared the 1998 Limited Reevaluation Report and
then conducted the technical review and quality control certification
process on the report. The fact that the same office that prepared the
economic analysis was also responsible for conducting the technical and
quality reviews raises questions about the independence of the review
process. Similar concerns about the Corps‘ project review procedures
were addressed in section 216 of the Water Resources Development Act of
2000, which directed the Corps to contract with the National Academy of
Sciences to study and make recommendations with regard to the need for
independent reviews of Corps feasibility studies. The estimated date of
completion for the study is 2003.
Looking beyond the Delaware River deepening project, the number and
magnitude of problems that were not detected by the Corps‘ quality
control process raises questions about whether, or to what degree, such
oversights might exist for other Corps projects. This concern is
shared, at least, to some degree by the Corps of Engineers.
Specifically, shortly after we briefed the Corps‘ Director of Civil
Works on our findings regarding the Delaware River deepening project,
he initiated a pause on projects authorized, but not yet under
construction, to resolve any questions about the accuracy and currency
of the Corps‘ economic analyses, the validity of plan formulation
decisions, and the rigor of the Corps‘ review process.
Most Environmental Concerns Have Been Addressed, but Several Related
Issues Remain Unresolved:
The Corps has largely addressed the likely environmental effects of the
project‘s dredging operations and dredge material disposal to the
satisfaction of federal and state environmental agencies; however,
several issues are not yet resolved. On the basis of their review of
the Corps‘ environmental impact statements and studies of the potential
for the project to disturb toxic dredge material, contaminate water,
and harm wildlife and habitat, most federal and state agencies granted
the Corps the necessary approvals to proceed with the project. A major
exception is the Corps‘ request for a permit to conduct dredging
operations in Delaware waters, which is still pending. In addition,
several other issues remain outstanding.
Most Federal and State Environmental Agencies Have Approved the
Project:
With few exceptions, the Corps has obtained the approvals it needs from
federal and state environmental agencies to proceed with project
construction plans. As required by the National Environmental Policy
Act of 1969, the Corps coordinated with other federal agencies and
states; obtained comments from the agencies, the states, and the
public; and reported on the potential environmental impacts of the
project in the 1992 Environmental Impact Statement and the 1997
Supplemental Environmental Impact Statement. The Corps also made some
changes as a result of agencies‘ comments. For example, in response to
concerns raised by the National Marine Fisheries Service and others,
the Corps eliminated its proposal to dispose of some dredged material
at an underwater sand stockpiling location. On the basis of their
review of these and subsequent documents, as well as consultations
performed by the Corps, officials from the U.S. Environmental
Protection Agency, the National Marine Fisheries Service, the U.S.
Geological Survey, and the states of New Jersey and Pennsylvania
determined that deepening the Delaware River ship channel would not
cause significant long-term harm to the environment. Specifically,
these officials told us they were satisfied that the project‘s dredging
and disposal operations would not degrade water quality, cause
saltwater intrusion, release contaminated sediments, or seriously harm
endangered or other species.
The federal and state approvals were also based on a commitment by the
Corps to conduct additional studies and monitor the environmental
impact of the ongoing channel deepening and construction of confined
disposal facilities. Such monitoring would be central to ensuring that
project activities would not degrade water quality, damage groundwater
through saltwater intrusion, or harm commercially valuable or
vulnerable species. Consequently, the Corps has conducted
preconstruction monitoring studies on whether the project would
adversely affect oysters and water and sediment quality. In addition,
the Corps has studied the likely impact of the project on blue crabs in
the lower part of the bay and on winter flounder, horseshoe crabs, and
shorebirds at Kelly Island. The Corps has provided the results of these
studies to the federal and state environmental agencies for their
review, and Corps officials told us that they would continue to monitor
these and other environmental issues during and after construction.
Federal and state officials told us that should monitoring reveal a
problem, the Corps would have to undertake some form of mitigation,
such as slowing the dredging schedule or rebuilding damaged habitat.
Delaware Permit Is Still Pending:
The Corps has not yet obtained a permit from Delaware to conduct
dredging operations for the project that affect its waters. The Corps
has stated that it will not begin the project until it obtains this
permit. Its Philadelphia district office applied for the permit in
January 2001 and participated in a public hearing on the application in
December 2001. Delaware officials told us that should the state approve
the permit application, the permit could include a number of monitoring
requirements. For example, Delaware could require the Corps to monitor
for possible violations of PCB[Footnote 7] standards near the dredging
zone. As of May 2002, the State of Delaware was still considering the
permit application.
Other Issues and Permit Approvals Remain Outstanding:
One remaining issue concerns the possibility that, under certain
conditions, the project might cause increased saltwater intrusion into
the Delaware River estuary and the groundwater of the area. While
Pennsylvania and New Jersey accepted the results of the Corps‘ earlier
tests for saltwater intrusion, the Delaware River Basin Commission,
which sets water quality standards for the Delaware Estuary, requested
an additional test. To satisfy the commission‘s concerns, the Corps
agreed to the test, which it has not yet conducted.
In addition, New Jersey officials told us that they would encourage the
Delaware River Port Authority to explore alternatives to disposing of
dredge material, such as using it for highway construction, before New
Jersey would grant water quality certificates for the three confined
disposal facilities to be acquired by the Port Authority and built by
the Corps in New Jersey. In addition, the Corps and New Jersey‘s
Department of Environmental Protection have developed a groundwater-
monitoring program designed to ensure that existing confined disposal
facilities in New Jersey do not harm drinking water. A similar program
is planned for the three new confined disposal facilities.
Finally, as mentioned earlier, the Corps has not sought formal approval
from New Jersey and Delaware for using the economic loading technique.
A Corps official told us that the Corps would probably wait until it
knows the outcome of its Delaware permit application before deciding
whether to seek economic loading approval. Similarly, the Corps has not
applied to Delaware or the National Marine Fisheries Service for relief
from environmental windows, which restrict when dredging can be
performed. However, the Corps is conducting an evaluation of essential
fish habitat and is collecting information on the potential effects of
the project on horseshoe crabs, shorebirds, and hibernating female blue
crabs to determine whether to seek relief from regulatory agencies‘
restrictions on dredging. Also, the Corps has not yet obtained a
special use permit from the U.S. Fish and Wildlife Service for its
planned wetlands restoration at Bombay Hook National Wildlife Refuge.
Conclusions:
We found significant problems in the Corps‘ most recent economic
analysis for the Delaware River deepening project. These involved
several miscalculations, invalid assumptions, and reliance on outdated
information. Consequently, we believe that the Corps‘ current project
analysis does not provide a reliable basis for deciding whether to
proceed with the project. In addition, there are a number of
uncertainties about the project that could increase or decrease both
benefits and costs. Because of the significance of the problems we
identified, the uncertainties that surround the project, and the
ineffectiveness of the Corps‘ quality control process, the actual
economic merits of the Delaware River deepening project will not be
reliably known unless and until it is comprehensively reanalyzed.
Recommendations for Executive Action:
Considering the significant problems we identified with the Corps‘
economic justification for the Delaware River project, we recommend
that the Secretary of the Army direct the Corps of Engineers to:
* prepare a new and comprehensive economic analysis of the project‘s
benefits and costs, which includes all aspects of the analysis and
corrects for the miscalculations, erroneous assumptions, and outdated
information contained in the current analysis;
* obtain the information, where possible, that is needed to address the
uncertainties--such as changing commodity movements over the last
decade and alternative dredging techniques--that could significantly
affect project benefits and costs;
* engage an external independent party to review the revised economic
analysis to ensure that it accurately and fairly represents the
expected benefits and costs of the proposed project; and:
* submit the revised analysis, including the external independent
review, to the Congress for its use in considering future appropriation
requests for the project.
Agency Comments:
We provided a draft of this report to the Secretary of the Army for
review and comment. In response, the Under Secretary of the Army stated
that the report is important to the department because it provides a
current, critical look at the proposed Delaware River deepening project
and identifies legitimate concerns that warrant comprehensive
reanalysis. More specifically, the Under Secretary stated that the
Corps concurs that a new and comprehensive economic reanalysis of the
project‘s benefits and costs would be undertaken, and that once the
economic reanalysis is complete, an external independent party would be
engaged to ensure that it accurately and fairly represents expected
benefits and costs of the proposed project. The Under Secretary also
provided additional comments on various aspects of the project, which
are discussed as appropriate in:
the body of the report. The full text of the comments is included as
appendix II.
We conducted our review between July 2001 and May 2002 in accordance
with generally accepted government auditing standards. A detailed
discussion of our scope and methodology is presented in appendix I.
As arranged with your offices, unless you publicly announce this
report‘s contents earlier, we plan no further distribution of the
report until 10 days after the date of this letter. At that time, we
will send copies to the Secretary of the Army, appropriate
congressional committees, and other interested Members of Congress. We
will also make copies available to others upon request. In addition,
the report will be available at no charge on the GAO Web site at http:/
/www.gao.gov.
If you or your staff have questions about this report, please contact
me at (202) 512-3841. Key contributors to this report are listed in
appendix III.
Robert A. Robinson
Managing Director, Natural Resources
and Environment:
Signed by Robert A. Robinson:
[End of section]
Appendix I: Scope and Methodology:
Overview:
Our review had two main objectives: to determine (1) whether the Corps
of Engineers‘ economic analysis accurately and appropriately considered
the benefits and costs of the project and (2) whether the environmental
implications of the project have been fully addressed.
To determine whether the Corps of Engineers‘ economic analysis
appropriately considered the benefits and costs of the Delaware River
deepening project, we assessed the extent to which the Corps met
requirements and followed accepted practices in estimating the various
elements of the benefits and costs, including whether the major
assumptions were reasonable and well supported. To determine whether
the environmental implications of the project have been fully
addressed, we contacted a number of federal and state environmental
agencies such as the Environmental Protection Agency, the Delaware
River Basin Commission, and the Delaware Department of Natural
Resources and Environmental Control. We also obtained information from
environmental groups and other interested parties. For both these
objectives, we obtained the Corps‘ key documents for the project, such
as the Interim Final Feasibility Study of 1992, the Design Memorandum
of 1996, the Limited Reevaluation Report of 1998, the Environmental
Impact Statement of 1992, and the Supplemental Environmental Impact
Statement of 1997. We discussed the content and sources of the data in
these reports with Corps officials and staff responsible for their
preparation and approval.
To validate the data and assumptions the Corps used in its analyses, we
obtained external data and contacted external parties where
appropriate. Where we obtained other analyses or studies, we considered
the points raised in these external studies but conducted our own
independent review. Where we identified problems with or changes to
benefits, costs, or environmental issues, we discussed them with the
responsible Corps staff and considered any new data or revisions that
they provided. If the problems involved miscalculations, invalid
assumptions, errors, omissions, or outdated information that would
affect the project‘s benefits, costs, or the environment, we attempted
to identify how or why these problems occurred. In addition, we
identified uncertainties related to the benefits, costs, and the
environmental implications of the project and considered whether
resolving these uncertainties would increase or decrease the benefits
and costs. We also reviewed the Corps‘ quality control processes. In
the following sections, we provide more detail on our first objective
consisting of benefits, costs, uncertainties, and the Corps‘ quality
control process; and our second objective about the potential
environmental implications of the project.
Project Benefit Estimate:
To evaluate the Corps‘ project benefit analysis, we had three primary
objectives. First we used the Corps‘ data and methodology--obtained
from the 1992 Interim Final Feasibility Report, and the 1996 Design
Memorandum, and through interviews with the Corps‘ economist--to
attempt to replicate the estimated annual project benefits for each
commodity as published in the Corps‘ 1998 Limited Reevaluation Report.
These commodities included coal, containers, crude oil shipped on
vessels with sailing drafts greater than 40 feet, crude oil shipped on
vessels with sailing drafts less than or equal to 40 feet, iron ore,
and scrap metal. Where we were unable to replicate the Corps‘
estimates, we met with the Corps‘ economist to discuss and resolve the
discrepancies. Second, to identify questionable assumptions in the
analysis, we examined the data used and calculations applied in the
Corps‘ benefits programs. To determine whether the Corps‘ assumptions
were supportable, we requested documentation or guidelines from the
Corps‘ economist that validated the questioned approach. In addition,
we met and talked with industry representatives to obtain their
response. Third, to identify whether the analysis was based on up-to-
date information, we reviewed the origin of any changes to the benefits
estimates in the 1998 Limited Reevaluation Report from the 1992 Interim
Final Feasibility Study and the 1996 Design Memorandum. Where no
changes in benefits estimates occurred, we searched for data sources
available at the time of the Corps‘ latest report. Where possible, we
updated the information on the basis of historical or industry trends
at the time of the 1998 Limited Reevaluation Report.
We met with officials from the four companies that own the six oil
refineries representing 80 percent of the benefits in the Corps‘
analysis, as well as Maritrans Corporation, which conducts the
lightering operations for the oil refineries on the Delaware River. We
obtained information on commodity shipments up the Delaware River to
the Philadelphia region from the Delaware River Port Authority. We also
spoke with the Maritime Exchange, which gathers data on ship tracking
and reporting on the Delaware River and represents a cross section of
interests and companies that depend upon or conduct business on the
river. In addition, we met with the firm Rice, Unruh, and Reynolds--
shipping agents--to gather information on shipping practices, and with
the National Ports and Waterways Institute to gather information about
the container shipping industry.
We determined the net effect of the miscalculations, invalid
assumptions, and outdated information on the Corps‘ $40.1 million
annual project benefit estimate by applying an eight-step iterative
approach. In the first four steps, we corrected for an error in the
Corps‘ computer program, the misapplication of growth rates,
inconsistent discounting, and different year dollar values. For the
fifth step, we corrected for the Corps‘ invalid assumptions regarding
trade route distances and its calculation of average shipping costs.
With the sixth and seventh steps, we updated the information used in
the Corps‘ analysis--specifically, the relative difference between the
unloading and lightering rates, and the commodity growth rate
information through 1997. In the eighth step, we corrected for the
Corps‘ incorrect assumption that its statistical model predicted
benefits for the 45-foot channel deepening project--when it did not.
The net effect of the eight steps was a reduction in the estimated
annual project benefits to about $13.3 million (in 1996 dollars).
Project Cost Estimate:
To establish a baseline against which future revisions could be
compared for completeness and accuracy, and to get detailed information
on planning, engineering, and design study costs, we used the 1996
Design Memorandum. We then compared the 1996 estimate with that in the
Limited Reevaluation Report of 1998. Our subsequent efforts focused on
changes to the project, various updates to costs by the Corps,
corrections we identified, and additional issues that could further
affect costs. Where changes in the project had occurred, and where we
identified errors or omissions that the Corps agreed to correct, we
determined whether the changes or corrections would increase or
decrease the annualized project costs.
Our review included the two main parts of the Corps‘ cost estimate: the
construction costs for the main navigation ship channel and the private
berthing areas, and the operations and maintenance costs for operating
and maintaining a 45-foot channel rather than a 40-foot channel. We
also reviewed the Corps‘ estimates of costs to construct or modify both
new confined disposal facilities and existing confined disposal
facilities. Because the Corps makes extensive use of internally
developed cost-estimating computer programs, we obtained these programs
so that we could replicate construction costs and operations and
maintenance costs using the Corps‘ programs and methodology. We gained
an understanding of the Corps‘ Cost Engineering Dredge Estimating
Program, which estimates costs for each of the three types of dredging
operations used in the project, and the Corps‘ Micro Computer-Aided
Cost Estimating System, which estimates the costs of constructing
elements of the project that require land equipment, such as the
confined disposal facilities. We discussed these programs, and the
major assumptions and information used in them, with Corps staff in
other offices responsible for developing the cost-estimating programs
and providing updates for them.
To identify a more accurate and updated cost estimate, we took into
account changes to the project that had occurred since the 1998 Limited
Reevaluation Report and corrections for errors and omissions that we
identified during our work. We obtained documentation on the project
changes, verified the information, and determined whether any updated
cost estimates undertaken by the Corps accurately reflected the
changes. For example, where new information existed on the volume of
the material to be dredged from the channel, we asked for documentation
from the Corps, not only on the volume of material that had been
reduced but also on where those reductions had occurred in the channel.
When we learned that less of the channel needed to be dredged because
side-scan sonar technology provided better information on the areas of
the river that were already 45 feet deep, we obtained survey maps from
the Corps and verified that the estimated reductions in surface areas
that the Corps was using in its revised costs were reasonable. We also
identified any costs that were in error, or that were omitted, such as
costs to reflect the loss of a disposal site and to transport material
to other locations.
Since the Corps was updating various cost factors and revising its
estimates for changes in the project design and scope at the same time
that we were identifying the extent to which costs were accurate, we
reestimated the overall project costs using the Corps‘ programs and
most recent data. We compared our estimate with that of the Corps and
obtained agreement with the Corps on a revised annualized project cost
estimate that accounted for project changes and corrections that had
been made as of the time of our review.
Uncertainties of Project Benefits and Costs:
During our review, we identified a number of uncertainties related to
project benefits and costs that the Corps had not addressed in its
economic analysis. In some cases, the uncertainties are linked to
decisions that are outside the control of the Corps, while others
concern information that may not be currently available. Some of these
uncertainties are the result of environmental issues that could affect
future project benefits and costs. When we identified an uncertainty,
we sought information from Corps officials and others that would allow
us to say whether the uncertainty would increase or decrease benefits
and costs.
Corps‘ Quality Control Process:
We obtained the Corps‘ quality control procedures to gain an
understanding of its processes and discussed them with Corps officials.
We identified the roles and responsibilities of the district, division,
and headquarters offices as they related to the Delaware River channel
deepening project at the time of the feasibility study in 1992 and any
changes in the review processes after that time. In doing so, we
obtained copies of technical reviews and the quality control
certification for the project, identified the offices responsible for
the reviews, and obtained comments that the reviewers had on the
economic analysis and the environmental impact statement. We also
reviewed the responses of the Philadelphia district staff to determine
whether comments by headquarters and the division were taken into
consideration in any updated analysis.
Environmental Implications of the Project:
To determine whether the Corps had considered and analyzed all areas of
environmental concern, we reviewed the Corps‘ Environmental Impact
Statement of 1992, the Supplemental Environmental Impact Statement of
1997, and other Corps studies. We contacted the Environmental
Protection Agency, the National Marine Fisheries Service, the U.S. Fish
and Wildlife Service, the Delaware River Basin Commission, the U.S.
Geological Survey, and environmental agencies in the states of
Delaware, New Jersey, and Pennsylvania to discuss the project and
obtain studies and documents from them. We also reviewed information
provided to us by environmental groups and other interested parties.
Where the Corps had tested for contaminated sediments and hazardous
materials, and had conducted studies to determine the potential impact
of the project on water quality, groundwater, fish and wildlife and
their habitat, we reviewed the test data and studies and discussed them
with responsible federal and state agencies. Further, we reviewed the
Corps‘ studies and monitoring plans for identifying any adverse impacts
of the project on water quality, groundwater, fish and wildlife, and
aquatic habitat with these agencies.
For example, to address concerns about contaminated sediments from the
dredging operations in the main navigation ship channel, in the private
berthing areas of the oil refineries, and at confined disposal
facilities, we reviewed sampling data in the Corps‘ Supplemental
Environmental Impact Statement. We reviewed the type of tests the Corps
had conducted and the number of samples and sites selected, and we
discussed the tests and results with Corps staff. We contacted
officials from the Environmental Protection Agency, the Delaware River
Basin Commission, and state environmental agencies in Delaware, New
Jersey, and Pennsylvania to determine whether they were satisfied with
the test results and the Corps‘ monitoring plans for identifying
potential problems during and after construction.
Additionally, we identified unresolved environmental issues and any
outstanding approvals that remain open. For instance, to determine
whether and to what extent saltwater intrusion into aquifers from
dredging operations was addressed and what the Corps intended to do to
resolve any outstanding concerns, we discussed this issue with Corps
staff, and officials from the Environmental Protection Agency in
Philadelphia and New York City, as well as with officials from the
departments of environmental protection in Delaware, New Jersey, and
Pennsylvania. We determined how satisfied these officials were with the
Corps‘ studies and tests. We also met with officials from the Delaware
River Basin Commission to discuss their outstanding request for an
additional test for saltwater intrusion under certain drought
conditions. We followed up with Corps officials to identify what they
planned to do to resolve the Delaware River Basin Commission‘s concern.
[End of section]
Appendix II: Comments from the Under Secretary of the Army:
UNDER SECRETARY OF THE ARMY WASHINGTON:
29 May 2002:
Mr. Robert A. Robinson:
Managing Director, Natural Resources and Environment U.S. General
Accounting Office:
Washington, DC 20548:
Dear Mr. Robinson:
This is in response to your May 22, 2002, letter to Secretary White
requesting Department of the Army review of the draft GAO report
entitled ’Delaware River Deepening Project: Comprehensive Reanalysis
Needed“.
We appreciate the opportunity to comment on GAO‘s draft report as well
as GAO‘s cooperation with the Corps of Engineers in providing
clarification of issues and conclusions. The report is important to the
Department because it provides a current, critical look at the proposed
Delaware Deepening project and identifies legitimate concerns that
warrant comprehensive reanalysis.
Enclosed are our comments on the report.
Sincerely,
R. L. Brownlee:
Signed by R. L. Brownlee:
Enclosure:
Overall Corps of Engineers Evaluation of the Report:
The Corps of Engineers has reviewed GAO‘s draft final report entitled
’Delaware River Deepening Project: Comprehensive Reanalysis Needed.“
The report raises serious concerns on the benefits analysis
accompanying the original 1992 authorization and 1998 limited
reevaluation report (LRR) and how well the ten-year period since
authorization is actually reflective of current conditions and
commodity projections. The following discusses GAO‘s report on the
benefits, costs, other uncertainties, the Corps review process,
environmental concerns, and the Corps plan to remedy those concerns.
Because of the complexities and uncertainties since the 1998 timeframe,
the Corps concurs with GAO that a re-analysis is warranted.
Project Benefits:
GAO‘s investigation was based upon an attempt to replicate and verify
the Philadelphia District economic models results from the 1996-98
timeframe and bring those economic forecasts up to date based on
today‘s actual port conditions. The models were the basis for the
original 1992 feasibility report. GAO found, and the Corps concurs,
that the Corps analysis of project benefits contained miscalculations,
invalid assumptions, and outdated information. Concerning model errors,
the Corps crude oil transportation savings models were revised to
correct for the growth rate and trade route tabulation errors as part
of the district coordination efforts with GAO during its benefit
review.
Assumptions in Crude Oil Benefit Evaluations. GAO also stated the Corps
used invalid assumptions in its benefit evaluations. Because of channel
depth restrictions, crude oil vessels calling at port refineries
currently lighter at the mouth of the river, thus enabling safe passage
at reduced draft to the refineries. GAO cited a number of problems in
the Corps analysis from 1998 relating to the lightering process.First,
the timesavings on the lightering process that could be expected from a
deeper channel would be reflected only at the point of destination.
Second, the vessel loading patterns predicted by the statistical model
that the district used to calculate expected crude oil vessel behavior
with a 45-foot channel could not be replicated. Other factors affecting
benefits include the comparative shore side and lightering vessel rate
of cargo transfer for crude oil imports. GAO sources indicated that the
lightering cargo transfer rate was twice as fast as the shore side
cargo transfer rate. The overseas source of crude oil imports has
changed significantly since the 1998 LRR. The reanalysis will verify
this new information as well as other current conditions. For example,
recent information from the oil company accounting for one-half the
benefiting crude oil imports indicates that some of its tankers could
unload at the dock at a rate six times as great as the dockside rate
applied in the 1998 LRR analysis. Accordingly, the crude oil benefits
could be greater and should be reaffirmed in the re-analysis. Corps
crude oil projections were in line with actual recorded tonnage. The
actual tonnage through the six benefiting facilities exceeded projected
tonnage by 15 percent for the year 2000. GAO recommended that the Corps
reexamine all the options and variables inherent in the process.
Because of the complexities and uncertainties since the 1998 timeframe,
the Corps concurs with GAO that a re-analysis is warranted. To ensure
data reliability, the re-analysis would need to verify the database
used to establish current and historic shipments and industry input on
future trends.
Containership and Other Commodity Groups. For containership traffic,
port dynamics have been even more pronounced over the last 10 years.
The original feasibility report and LRR were predicated on traffic
utilizing the Suez Canal route. As further evidence of the dynamic
situation, since the LRR was completed, the trade routing of the
shipper has changed to include New Zealand, other East Coast ports, and
Europe for around the world service. GAO notes, and the Corps concurs,
that these changed conditions warrant re-analysis. What was observed in
the 1998 timeframe has changed today. Furthermore, since the 1998 LRR,
the export of scrap metal to Turkey has ceased but new commodity
traffic--coal, iron ore, and steel--provides substantial new tonnage
and economic benefits which support the need for a critical re-analysis
of both the containership benefit methodology and the verification of
inputs of the economic model.
Project Costs:
The GAO report also examined costs and concluded there were a number of
variables that could potentially affect project costs. As part of its
normal process, the Corps continually updates project costs to reflect
current conditions and provides their current estimate of costs to its
project cost sharing sponsors as a basis for sponsors to use as an
estimate of costs they could be expected to incur and finance. The
Corps is presently estimating an average annual cost of $26.42 million,
which is based on a 5-year construction period, exclusion of an
unavailable disposal area, and discounting for maintenance dredging
costs. The GAO and Corps both acknowledge that cost reductions could
occur based on more current sediment surveys, recalculation of dredging
loads, and economic loading, if permitted.
Capital Investments. GAO stated that the Corps had not included in its
estimate all capital investments that private companies would need to
undertake to realize the benefits of a deepened channel. The Corps
benefit analysis in the LRR assumed that tonnages would be the same in
both the with-and without-project conditions. Thus, any landside
capital improvements to handle increased crude oil shipments would not
be required as a result of the project but would occur gradually over
time, regardless of the proposed deepening project. The essential
factor is that the Corps receives a commitment from the port that non-
Federal berthing areas be deepened to realize the benefits of any
proposed Federal channel deepening. The LRR decision document was based
upon the assumption that there are no associated landside costs
attributable to the proposed project required to be included in the
economic analysis. The GAO industry sources indicated a need to invest
in additional shore side facilities for unloading and inventory in the
with-deepening condition. The re-analysis needs to utilize industry
sources in determining the applicability of any shore side associated
costs needed to achieve the benefits from a deeper channel.
Uncertainties that Could Affect Project Benefits and Costs:
Principles & Guidelines. GAO takes issue with the fundamental
procedures under which potential navigation improvement projects are
analyzed. Under the Federal Principles and Guidelines for Water
Resources Agencies, navigation projects are formulated based upon
transportation cost savings that can potentially be realized in the
proposed with-project condition. The Principles and Guidelines (P&G)
provide that this is based upon transportation savings to U.S. and
foreign-based vessels involved in the import and export of commodities.
GAO is concerned that that there is an implicit assumption that all
benefits should accrue to American interests, and those realized by
foreign interests should be netted out in the determination of U.S. NED
benefits. The P&G does not call for netting out these benefits. The
principle embodied in Corps regulations is that benefits would be
passed on to the U.S. consumer and the national economy as a whole
from the flow of funds generated to producers and consumers
participating in import-export trade.
Local Service Facility Commitments. GAO expressed concern that the
Corps must secure more definitive commitments from the potentially
benefiting parties before any proposed project could be allowed to
proceed. The project cooperation agreement (PCA) provides that before
any construction could proceed, the sponsor must assure that
improvements are made at the local service facilities necessary to
realize project benefits and provide copies of third party agreements
as evidence of their commitment.
Lightering Practices. GAO notes that crude oil lightering needs to be
thoroughly revisited to determine the impact of potential reduced
lightering services, increased lightering fees, and time to wait for
lightering in the with-project condition. The Corps notes that the
lightering service implications need to be fully investigated to
determine the impact on ultimate project benefits. The P&G economic
analysis assumptions are that the improvements are undertaken under a
full employment economy and any resources like lightering ships can be
successfully reemployed elsewhere in the economy. The resource savings
from improvements occur over the 50-year economic analysis period. Any
uneconomic displacement of resources can be expected to be short run
and probably less than one year in duration.
Recent Commodity Changes. GAO notes that an area of uncertainty that
could potentially increase project benefits may result from the
increase in.other commodity traffic that has occurred during recent
years. The Corps concurs with GAO that the importers of iron and steel
could potentially benefit from a deeper channel, and should be
thoroughly addressed in a comprehensive re-analysis.
Potential Reduction in Dredging Costs. Economic loading could
substantially reduce project costs. Indications from the states of New
Jersey and Delaware are that this process may be viable and practical
in Delaware Bay for dredging sandy material. If economic loading were
permitted, it could result in a 30-40 percent reduction in unit cost of
dredging. This is another uncertainty that would need to be
investigated in any re-analysis of the project.
Corps Quality Control Procedures:
This project has highlighted the difficulties in thoroughly analyzing a
navigation project experiencing dynamic changes that extends over a 10-
year planning horizon. Complicating the changes in port dynamics over
the last 10 years were the changes occurring to the Corps review
process. The review process, in the initial stages when the feasibility
report was prepared was sequential; districts were responsible for the
quality of the feasibility report they prepared and its underlying
analysis, with both division and headquarters offices providing
additional technical and policy review.
Between 1992 and when the LRR was prepared, further changes occurred,
which principally moved technical review out of Washington and the
division offices and placed it totally at the district level. This was
in response to numerous sponsor and congressional concerns over the
cost of studies and the length of time from project authorization to
construction. This aspect was driven principally by the additional
costs due to inflation that lengthy delays generally cause, as well as
these costs being absorbed by sponsors, and the Federal Government, in
their respective increased cost shares. During the timeframe of the LRR
through the present, division offices were responsible for quality
assurance of technical review and the headquarters was responsible for
policy compliance. Notwithstanding the changing and existing
procedures, there were basic failures in the execution of the process
for the development and review of the feasibility analysis and the LRR.
The economic update in the LRR was performed in accordance with
existing regulations, but did not get to the root of the underlying
problems some of which were carried forth from the original feasibility
report. Although the established project review process was followed,
GAO notes, and the Corps acknowledges, the failure in the process was
to adequately verify the model and data input. The Corps agrees that it
must re-examine the basis, development, and verification of economic
modeling for commercial navigation projects and its internal checks and
controls to prevent similar problems occurring in the future.
Environmental Concerns:
In general, GAO notes that with few exceptions, the Corps has obtained
the approvals it needs from Federal and State environmental agencies.
GAO did not find any material weaknesses in the NEPA process. The State
of Delaware permit is still pending and the Corps could not, and would
not, proceed to construction without the State‘s Subaqueous Lands/
Wetlands Permit. The PCA specifically recognizes this fact. We concur
with GAO that the Corps would have to receive approval from the
affected states before any potential use of economic loading of dredged
material could proceed.
GAO‘s Recommendations for Executive Action:
GAO recommends, and the Corps concurs, that a new and comprehensive
economic analysis of the project benefits and costs be undertaken.
Furthermore, GAO recommends, and the Corps concurs, that once the
economic re-analysis is complete, an external independent party be
engaged to ensure that it accurately and fairly represents expected
benefits and costs of the proposed project.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Barry T. Hill, (202) 512-3841:
Acknowledgments:
In addition to the individual above, Chuck Barchok, Maureen Driscoll,
Christopher Murray, Ryan Petitte, Harold Brumm, Richard Johnson, Jay
Scott, and Nancy Crothers made key contributions to this report.
[End of section]
FOOTNOTES
[1] We updated the Corps‘ estimates so benefits are realized from 2005
through 2054, at the mid-point of each year, using the discount rate
applicable at the time of the 1998 Limited Reevaluation Report--7.375
percent.
[2] Using the gross domestic product implicit price deflator, we
escalated the input data used in the Corps‘ analysis to reflect
benefits in 1996 dollars.
[3] The difference in route distances for container ship trade between
Australia and Philadelphia via the Suez Canal and via the Panama Canal
ranges from 3,500 to 5,000 nautical miles, depending on the port of
origin (in Australia) and the number of port calls.
[4] The term ’short ton“ is a unit of weight equal to 2,000 pounds.
[5] We obtained historical data on crude oil imports from the project‘s
nonfederal sponsor (DRPA). Data were drawn from the Journal of Commerce
(PIERS) database.
[6] This figure was cited in the 1998 Limited Reevaluation Report; it
is presented in 1996 dollar values.
[7] Polychlorinated biphenyls (PCBs) are highly toxic cancer-causing
pollutants used in producing, among other things, plastics.
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