oversight

Corps of Engineers: Effects of Restrictions on Corps' Hopper Dredges Should Be Comprehensively Analyzed

Published by the Government Accountability Office on 2003-03-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to Congressional Committees




March 2003
             CORPS OF
             ENGINEERS
             Effects of Restrictions
             on Corps’ Hopper
             Dredges Should Be
             Comprehensively
             Analyzed




GAO-03-382
                                                 March 2003


                                                 CORPS OF ENGINEERS

                                                 Effects of Restrictions on Corps’ Hopper
Highlights of GAO-03-382, a report to            Dredges Should Be Comprehensively
Congressional Committees
                                                 Analyzed



The fiscal year 2002 Conference                  In response to 1978 legislation that encouraged private industry participation
Report for the Energy and Water                  in dredging, the Corps gradually reduced its hopper dredge fleet from 14 to 4
Development Appropriations Act                   vessels (the Wheeler, the McFarland, the Essayons, and the Yaquina) while
directed GAO to study the benefits               a private hopper dredging industry of five firms and 16 vessels has emerged.
and effects of the U.S. Army Corps               Dredging stakeholders generally agreed that the Corps needs to retain at
of Engineers’ (Corps) dredge fleet.
GAO examined the characteristics
                                                 least a small hopper dredge fleet to (1) provide additional dredging capacity
and changing roles of the Corps                  during peak demand years, (2) meet emergency dredging needs, and (3)
and industry in hopper dredging;                 provide an alternative work option when industry provides no bids or when
the effect of current restrictions on            its bids exceed the government cost estimate by more than 25 percent. In
the Corps’ hopper dredge fleet; and              reviewing the cost estimation process, GAO found that the Corps’ estimates
whether existing and proposed                    are based on some outdated contractor cost information and an expired
restrictions on the fleet, including             policy for calculating transit costs.
the proposal to place the
McFarland in ready reserve, are                  The restrictions on the use of the Corps’ hopper dredge fleet that began in
justified. In addition, GAO                      fiscal year 1993 have imposed costs on the Corps’ dredging program, but
identified concerns related to the               have thus far not resulted in proven benefits. The Corps estimates that it
government cost estimates the
Corps prepares to determine the
                                                 spends $12.5 million annually to maintain the Wheeler in ready reserve,
reasonableness of industry bids.                 defined as 55 workdays plus emergencies, of which about $8.4 million is
                                                 needed to cover the costs incurred when the vessel is idle. A possible
                                                 benefit of restrictions on the Corps’ vessels is that they could eventually
                                                 encourage existing firms to add dredging capacity or more firms to enter the
GAO recommends that the                          market, which, in turn, may promote competition, improve dredging
Secretary of the Army direct the                 efficiency, and lower prices. Although there has been an increase in the
Corps of Engineers to (1) obtain                 number of private industry hopper dredges since the restrictions were first
and analyze baseline data to                     imposed, the number of private firms in the hopper dredging market has
determine the appropriate use of                 decreased. In addition, during the same time period, the number of
the Corps’ hopper dredge fleet, (2)              contractor bids per Corps solicitation has decreased, while the number of
prepare a comprehensive analysis
                                                 winning bids exceeding the Corps’ cost estimates has increased.
of the costs and benefits of existing
and proposed restrictions on the
use of the Corps’ hopper dredge                  Although the Corps proposed that the McFarland be placed in ready reserve,
fleet, and (3) assess the data and               it has not conducted an analysis to establish that this action would be in the
procedures used to prepare the                   government’s best interest. Specifically, in a June 2000 report to the
government cost estimate. The                    Congress, the Corps stated that the placement of the Wheeler in ready
Department of the Army agreed                    reserve had been a success and proposed that the McFarland also be placed
with GAO’s recommendations. The                  in ready reserve. However, when asked, the Corps could not provide any
Dredging Contractors of America                  supporting documentation for its report. Furthermore, according to the
generally agreed with GAO’s                      Corps, future use of the McFarland will require at least a $25 million capital
recommendations, but strongly                    investment to ensure its safety, operational reliability, and effectiveness.
disagreed that restrictions on the
                                                 Such an investment in a vessel that would be placed in ready reserve and
Corps’ hopper dredges have not
resulted in proven benefits.                     receive only minimal use is questionable.


www.gao.gov/cgi-bin/getrpt?GAO-03-382.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Barry T. Hill at
(202) 512-3841 or hillbt@gao.gov.
Contents


Letter                                                                                          1
               Results in Brief                                                                 3
               Background                                                                       5
               Corps Has Transferred Most of Its Hopper Dredging to Private
                 Industry, but Still Needs to Retain a Hopper Dredge Fleet                      7
               Restrictions on the Corps’ Hopper Dredge Fleet Have Imposed
                 Costs, but Benefits Are Unproven                                             12
               Corps Has Not Justified the Existing and Proposed Restrictions on
                 Its Hopper Dredge Fleet                                                      21
               Conclusions                                                                    23
               Recommendations for Executive Action                                           23
               Agency Comments                                                                24

Appendix I     Scope and Methodology                                                          26



Appendix II    The U.S. Hopper Dredge Fleet                                                   28



Appendix III   Comments from the Department of the Army                                       29



Appendix IV    Comments from the Dredging Contractors of
               America                                                                        38



Appendix V     GAO Contact and Staff Acknowledgments                                          46



Tables
               Table 1: Summary of Operations and Cost Data of Corps’ Dredge
                        Wheeler                                                               13
               Table 2: Corps and Private Industry Hopper Dredge Fleets                       28


Figures
               Figure 1: Hopper Dredge                                                          2



               Page i                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Figure 2: Maintenance Hopper Dredging Work, Fiscal Years 1995
         through 2002                                                                     10
Figure 3: Estimated Volume of Material Dredged by Industry and
         Average Number of Industry Bids per Corps Solicitation,
         Fiscal Years 1990 through 2002                                                   16
Figure 4: Annual Average Number of Industry Bids per Corps
         Solicitation and Winning Bid as a Percentage of the Corps’
         Cost Estimate, Fiscal Years 1990 through 2002                                    17
Figure 5: Comparison of Number of Industry Bids per Corps
         Solicitation Before and After Restrictions                                       18
Figure 6: Comparison of Winning Industry Bids and Corps’ Cost
         Estimates Before and After Restrictions                                          19




Abbreviations

Army              Department of the Army
Corps             U.S. Army Corps of Engineers
DCA               Dredging Contractors of America
GAO               General Accounting Office




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Page ii                     GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
United States General Accounting Office
Washington, DC 20548




                                   March 31, 2003

                                   The Honorable Ted Stevens
                                   Chairman
                                   The Honorable Robert C. Byrd
                                   Ranking Minority Member
                                   Committee on Appropriations
                                   United States Senate

                                   The Honorable James M. Inhofe
                                   Chairman
                                   The Honorable James M. Jeffords
                                   Ranking Minority Member
                                   Committee on Environment and Public Works
                                   United States Senate

                                   The Honorable C.W. Bill Young
                                   Chairman
                                   The Honorable David R. Obey
                                   Ranking Minority Member
                                   Committee on Appropriations
                                   House of Representatives

                                   The Honorable Don Young
                                   Chairman
                                   The Honorable James L. Oberstar
                                   Ranking Democratic Member
                                   Committee on Transportation and Infrastructure
                                   House of Representatives

                                   Keeping the nation’s navigation channels and ports fully functioning is
                                   vital to U.S. commerce both domestically and abroad. In 2001, shipping
                                   vessels moved more than $700 billion of import and export cargo through
                                   the nation’s ports and harbors. Vessels called dredges remove sediment
                                   from the bottom of navigation channels, ports, and harbors to maintain
                                   waterways at the navigable depths and widths necessary for shipping.
                                   There is a variety of dredge types, each designed to perform optimally
                                   under specific conditions. One dredge type—the hopper dredge—
                                   performs much of the dredging needed in ports, harbors, and access
                                   channels exposed to the ocean, where traffic and operating conditions
                                   render the use of other dredges inefficient or impractical. A hopper



                                   Page 1                GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                          dredge pumps material (e.g., sand and water slurry) into its hopper where
                          it is stored before being transported to the disposal site. (See fig. 1.)

Figure 1: Hopper Dredge




                          The U.S. Army Corps of Engineers (Corps) is responsible for dredging U.S.
                          ports and harbors. The Corps is to carry out projects for improvements of
                          rivers and harbors, by contract or otherwise, in the manner most
                          economical and advantageous to the United States. Until 1978, the Corps
                          performed all hopper dredging work with its 14 hopper dredges. In 1978,
                          legislation directed the Corps to (1) contract out much of its dredging
                          work to private industry as industry demonstrated that it could perform


                          Page 2                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                   the work at reasonable prices and in a timely manner, (2) reduce the
                   federal fleet as industry demonstrated its ability to perform, and (3)
                   maintain a minimum fleet of federal vessels for emergency and national
                   defense purposes. The act also directed the Corps to retain as much of the
                   fleet as it determined necessary to ensure that the federal and private
                   fleets together could carry out necessary dredging projects. As a result,
                   the Corps reduced the size of its hopper dredge fleet to four vessels—the
                   Wheeler, the McFarland, the Essayons, and the Yaquina. In the 1990s, in
                   an effort to further promote private industry participation in hopper
                   dredging, the Congress imposed restrictions on the Corps’ hopper dredge
                   fleet. These restrictions (1) effectively reduced the annual work schedule
                   of each of the Corps’ hopper dredges from about 230 to about 180
                   workdays and (2) limited the Wheeler to 55 workdays per year plus
                   emergencies (referred to as “ready reserve” status). Furthermore, in fiscal
                   year 2002, the Congress directed the Corps to confine the McFarland to
                   emergency work and operations in the Delaware River. The Corps was to
                   periodically evaluate the effects of the ready reserve program on the costs,
                   responsiveness, and capacity of the Corps’ and private industry’s hopper
                   dredges.

                   The fiscal year 2002 Conference Report for the Energy and Water
                   Development Appropriations Act directed GAO to study the benefits and
                   effects of the Corps’ dredge fleet. In response, we examined (1) the
                   changing roles of the Corps and industry in hopper dredging and the
                   characteristics of the hopper dredging industry; (2) the effect of
                   restrictions currently in place on the Corps’ hopper dredge fleet; and (3)
                   whether the existing and proposed restrictions on the Corps’ hopper
                   dredges, including placing the dredge McFarland in ready reserve, are
                   justified. In addition, during the course of our work we identified
                   concerns related to the government cost estimates that the Corps prepares
                   to determine whether industry bids for dredging work are reasonable.


                   In accordance with legislative direction, the Corps has reduced its hopper
Results in Brief   dredge fleet, while the private hopper dredging industry has steadily
                   increased its share of the annual hopper dredging workload. Today, of the
                   20 hopper dredges in service in the United States, five private industry
                   firms operate 16 vessels and perform about 72 percent of the nation’s
                   hopper dredging maintenance work, while the Corps operates 4 vessels
                   and performs the remaining 28 percent of the work. Corps officials and
                   representatives from the dredging industry, selected ports, and the
                   maritime industry generally agreed that the Corps needs to retain a hopper
                   dredge fleet to (1) provide additional dredging capacity during peak


                   Page 3                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
demand years, (2) meet the emergency and national defense needs
identified in the 1978 legislation, and (3) provide an alternative work
option at times when industry offers unreasonable bids or no bids at all.
To determine the reasonableness of private contractor bids, the Corps
develops a government cost estimate that serves as a benchmark against
which industry bids are compared. If the bids exceed the government
estimate by more than 25 percent, the Corps may elect to perform the
work itself.

During our review, we identified a number of concerns regarding the
Corps’ government cost estimate. Specifically, the Corps uses outdated
industry cost data to determine the reasonableness of contractor bids
when developing its cost estimate. In addition, the Corps continues to
follow a policy that expired in 1994 when calculating contractor transit
costs to the dredging site for some of its contracts. These concerns raise
questions about the practical value of using the Corps’ cost estimate as
protection against high industry bids.

Restrictions on the use of the Corps’ hopper dredge fleet, which began in
fiscal year 1993, have imposed costs on the Corps’ dredging program, but
have thus far not resulted in proven benefits. Most of the costs of the
Corps’ hopper dredges are incurred regardless of how frequently the
dredges are used. For example, the Corps’ placement of the Wheeler in
ready reserve—55 annual workdays plus emergencies—reduced the
vessel’s productivity by 56 percent but reduced costs by only 20 percent.
The Corps estimates that it spends $12.5 million annually to maintain the
Wheeler in ready reserve, of which approximately $8.4 million is needed to
cover the costs incurred when the vessel is idle. A possible benefit of
restrictions on the Corps’ vessels is that they could eventually encourage
existing firms to add dredging capacity or more firms to enter the market,
which, in turn, may promote more competition, improve dredging
efficiency, and lower prices. Although there has been an increase in the
number of private industry hopper dredges since the restrictions were first
imposed, the number of private firms in the hopper dredging market has
decreased. In addition, during the same time period, the number of
contractor bids per Corps solicitation has decreased, while the number of
winning bids exceeding the Corps’ cost estimate has increased. Another
potential benefit of the restrictions is enhanced Corps responsiveness to
emergency dredging needs. However, the Corps is unable to evaluate
whether emergency dredging needs have been met more or less efficiently
since the restrictions went into effect because it does not specifically
identify and track emergency work performed by either Corps or industry
vessels.


Page 4                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
             In a June 2000 report to the Congress, the Corps stated that the placement
             of the Wheeler in ready reserve had been a success and recommended that
             the vessel remain in ready reserve. However, the report contained a
             number of analytical and evidentiary shortcomings, and, when asked, the
             Corps could not provide any supporting documentation for its
             recommendation. In addition, the report also proposed that the
             McFarland be placed in ready reserve, but the Corps did not conduct an
             analysis to support this proposal. Furthermore, according to the Corps,
             the McFarland will require at least a $25 million capital investment to
             ensure its safety, operational reliability, and effectiveness for future
             service. It is questionable whether such an investment in a vessel that
             would be placed in ready reserve and receive only minimal use is in the
             best interest of the government.

             We are making recommendations to the Secretary of the Army regarding
             the need to comprehensively analyze the costs and benefits of existing and
             proposed restrictions on the use of the Corps’ hopper dredge fleet and to
             update the information and methodology that the Corps uses for its
             hopper dredging cost estimates. In commenting on a draft of this report,
             the Department of the Army agreed with all the recommendations and
             provided time frames for implementing each of them. The Dredging
             Contractors of America generally agreed with our recommendations, but
             strongly disagreed that the benefits of the restrictions are unproven.


             Since 1824 the Corps has been responsible for constructing and
Background   maintaining a safe, reliable, and economically efficient navigation system.
             Today, this system is comprised of more than 12,000 miles of inland
             waterways, 300 large commercial harbors, and 600 small harbors. From
             fiscal years 1998 through 2002, the Corps has removed an average of about
             265 million cubic yards of material each year from the navigable waters of
             the United States, at an average annual cost of about $856 million (in
             constant 2002 dollars). Private industry performs most of the overall
             dredging, except for the work done by hopper dredges, in which both the
             Corps and industry perform a significant amount of the work. Of the $856
             million spent annually on overall dredging, about $197 million is spent on
             all hopper dredging (both maintenance and new construction), with
             industry vessels accounting for about $148 million annually and Corps
             vessels accounting for about $49 million.




             Page 5                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Each of the Corps’ hopper dredges typically operates in a specific
geographic area. The Wheeler, a large-class dredge, 1 usually operates in
the Gulf of Mexico. The McFarland, a medium-class dredge, usually
operates in the Atlantic and Gulf of Mexico. The Essayons, a large-class
dredge, and the Yaquina, a small-class dredge, typically work along the
Pacific coast.

Legislation enacted in the 1990s sought to further increase the role of
industry in hopper dredging by placing operational restrictions on the
Corps’ hopper dredges. Specifically, the Energy and Water Development
Appropriations Act for fiscal year 1993 and subsequent appropriations acts
required the Corps to offer for competitive bidding 7.5 million cubic yards
of hopper dredging work previously performed by the federal fleet. Since
fiscal year 1993, the Corps has addressed this requirement by reducing the
use of each of its four dredges from about 230 workdays per year to about
180 workdays per year. The Water Resources Development Act for fiscal
year 1996 required the Corps to initiate a program to increase the use of
private hopper dredges principally by taking the Wheeler out of active
status and placing it into ready reserve. The Corps implemented this
requirement by allowing the Wheeler to work 55 days a year plus
emergencies (which includes urgent and time-sensitive dredging needs).
The 1996 act did not alter the Corps’ duty to implement the dredging
program in the manner most economical and advantageous to the United
States, and it restricted the Corps’ authority to reduce the workload of
other federal hopper dredges. The conference report that accompanied
the act directed the Corps to periodically evaluate the effects of the ready
reserve program on private industry and on the Corps’ hopper dredge
costs, responsiveness, and capacity. The Energy and Water
Appropriations Act for fiscal year 2002 placed another restriction on the
use of the Corps’ dredge McFarland, limiting it to emergency work and its
historical scheduled maintenance in the Delaware River (about 85
workdays per year). Taken together, these restrictions have increased
private industry’s share of the hopper dredging workload.

In theory, restrictions on the use of the Corps’ hopper dredges could
generate efficiency and cost-savings benefits to both government and
industry. For example, restricting the Corps’ hopper dredges to fewer



1
 A hopper dredge’s class is determined by its capacity—hoppers with up to 3,000 cubic
yards of capacity are considered small, medium hoppers have capacity from 3,000 to 6,000
cubic yards, and large hoppers have a capacity of 6,000 cubic yards or more.




Page 6                      GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                       scheduled workdays could make them more available to respond to
                       emergency dredging needs. In addition, the increase in demand for
                       dredging by private industry could lead to improvements in dredging
                       efficiency. If achieved, firms might be able to dredge the same amount of
                       material at a lower cost or more material at the same cost. Furthermore, if
                       more work were provided to the private hopper dredging industry,
                       competition could increase if the existing dredging firms expanded their
                       fleets or more firms entered the market.2 Consequently, the prices that the
                       government pays to contractors could fall. However, economic principles
                       also suggest that if an industry is given more work without increasing
                       capacity or the number of competing firms, prices could rise because the
                       demand for its services has increased.


                       The Corps’ and private industry’s respective roles in the hopper dredging
Corps Has              market have changed since legislation enacted in 1978 prompted a
Transferred Most of    movement toward privatization of hopper dredging in the United States.
                       Since that time, the Corps has gradually reduced its hopper dredging fleet
Its Hopper Dredging    from 14 to 4 vessels, while a private hopper dredging industry of five firms
to Private Industry,   and 16 vessels has emerged. Corps officials and representatives from the
                       dredging industry, selected ports, and the maritime industry generally
but Still Needs to     agreed that the Corps needs to retain at least a small hopper dredge fleet
Retain a Hopper        to (1) provide additional dredging capacity during peak demand years, (2)
Dredge Fleet           meet the emergency and national defense needs identified in the 1978
                       legislation, and (3) provide an alternative work option at times when the
                       industry offers unreasonable bids or no bids at all. To determine the
                       reasonableness of private contractor bids, the Corps develops a
                       government cost estimate for its hopper dredging solicitations. If the low
                       bid is no more than 25 percent above the government cost estimate, the
                       Corps awards the contract. If all bids exceed the government cost
                       estimate by more than 25 percent, the Corps may pursue a number of
                       options, including performing the work itself. The practical value of this
                       protection against high bids, however, has been limited by the Corps’ use
                       of some outdated contractor cost information and its continued use of an
                       expired policy to calculate transit costs.




                       2
                        Hopper dredging requires large capital outlays—a medium-class hopper dredge costs
                       between $20 million and $40 million and normally takes 18 months to build—making it
                       difficult for firms to enter the market quickly.




                       Page 7                     GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Corps and Industry Roles   Before 1978, the Corps performed all of the nation’s hopper dredge work.
in Hopper Dredging Have    In 1978, the Congress passed legislation to encourage private industry
Shifted                    participation in all types of dredging and required the Corps to reduce the
                           fleet of federal vessels to the minimum necessary for national defense and
                           emergency purposes, as industry demonstrated its capability to perform
                           the work. According to the Senate committee report associated with the
                           1978 legislation, one of the law’s main purposes was to provide incentives
                           for private industry to construct new hopper dredges. Between 1978 and
                           1983, as a private hopper dredging industry began to emerge, the Corps
                           reduced its hopper dredge fleet from 14 to its current 4 vessels. By the late
                           1980s, the Corps stopped assigning its hopper dredges to new construction
                           projects (primarily channel deepening), leaving this work entirely to
                           private industry. Both Corps and private industry hopper dredges continue
                           to perform maintenance work on existing channels.

                           From fiscal years 1998 through 2002, the Corps’ dredges performed about
                           28 percent of the nation’s hopper dredging maintenance work, annually
                           dredging about 16 million cubic yards of material at a cost of about $49
                           million (in constant 2002 dollars). During the same period, industry
                           dredges performed about 72 percent of the nation’s hopper dredging
                           maintenance work, dredging about 40 million cubic yards of material
                           annually, at a cost of about $93 million.3 As a result of the 1978 legislation,
                           seven firms emerged to compete for the Corps’ hopper dredging contracts.
                           Consolidation and firm buy-outs in the 1990s have left five firms in today’s
                           market. (Appendix II contains a more detailed description of the U.S.
                           hopper dredge fleet.)


Corps’ Hopper Dredge       Corps officials and representatives from the dredging industry, selected
Fleet Addresses Several    ports, and the maritime industry generally agreed that the Corps’ hopper
Needs                      dredge fleet currently (1) provides additional dredging capacity during
                           peak demand years, (2) meets emergency dredging and national defense
                           needs identified in the 1978 legislation, and (3) provides an alternative
                           work option when industry provides no bids or when its bids exceed the


                           3
                            A direct and valid comparison of the Corps’ and private industry’s costs to perform
                           hopper dredge work is not possible due to various factors, which include, among other
                           things, design features in the Corps’ vessels in support of national defense missions, which
                           add weight to the vessels and make them less efficient than industry vessels; limits to the
                           number of days the Corps’ vessels may operate—180 days or fewer, compared to about 250
                           days for industry; and differences between dredging projects—such as type of material
                           dredged, type of work and corresponding risk level, and distance from the dredging
                           operations to the disposal site.




                           Page 8                       GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
government cost estimate by more than 25 percent. In addition,
representatives of selected ports and the maritime industry generally
supported the Corps’ retention and operation of a federal hopper dredge
fleet to ensure that dredging needs are met in a timely manner.

One of the reasons for the Corps to maintain a hopper dredge fleet is that
changes in annual weather patterns, such as El Niño, and severe weather
events, such as hurricanes and floods, can create a wide disparity in the
demand for hopper dredging services from year to year. During fiscal year
1997 the Corps and private industry used their hopper dredges for
maintenance work to remove almost 77 million cubic yards nationwide. In
contrast, during fiscal year 2000 they removed about 50 million cubic
yards. (See fig. 2.) Hopper dredging needs at the mouth of the Mississippi
River are particularly variable from year to year, with annual dredging
requirements ranging from 2 million to 50 million cubic yards.
Representatives from private dredging firms maintain that industry is not
likely to build the additional capacity needed to meet demand in peak
years. Corps officials and representatives from the dredging industry,
selected ports, and the maritime industry generally agreed that the federal
government should provide the additional dredging capacity required to
meet the needs of peak demand years.




Page 9                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Figure 2: Maintenance Hopper Dredging Work, Fiscal Years 1995 through 2002




Note: GAO analysis of Corps’ Navigation Data Center data.


The Corps’ hopper dredges are also needed to respond to emergency
dredging assignments. For example, according to a Corps official, it was
necessary for the Corps to send the Essayons to finish work on a project
in Alaska that was critical to complete before the winter season and
freezing conditions set in. In addition, Corps vessels have been used
during instances where industry has submitted no bids in response to
solicitations. For example, when rains in the Mississippi River Basin
caused a build-up of material in navigation channels, the Corps issued a
solicitation, but no bids were received because industry vessels were
unavailable. Consequently, the Wheeler was used to perform the work. In
such situations, the Corps’ fleet acts as insurance to meet dredging needs,
ensuring that shipping patterns are not adversely affected.

The existence of the Corps’ fleet theoretically offers a measure of
protection against inordinately high bids from private contractors. While
the private dredging market consists of 16 dredges owned by five firms,
not all dredges compete for any given solicitation because (1) some, if not
most, hopper dredges are committed to other jobs; (2) hopper dredges


Page 10                       GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                       may be in the shipyard; (3) differences in hopper dredge size and
                       capability mean that not all hopper dredges are ideally suited to perform
                       the work for a particular job; and (4) hopper dredges cannot quickly move
                       from one dredging region to another.4 For example, large hopper dredges
                       may have difficulty maneuvering in small inlet harbors, and small hopper
                       dredges may be inefficient at performing large projects with distant
                       disposal sites. Thus, the Corps’ hopper dredge fleet provides an
                       alternative dredging capability that can be brought to bear when private
                       dredges are not available or when private industry bids are deemed too
                       high.


Corps Bases Its Cost   The Corps’ government cost estimate for hopper dredging work is pivotal
Estimate on Outdated   in determining the reasonableness of private contractor bids. The Corps is
Information            required to determine a fair and reasonable estimate of the costs for a
                       well-equipped contractor to perform the work. By law, the Corps may not
                       award a dredging contract if the price exceeds 25 percent of the
                       government estimate. In such cases, the Corps has several options. It can
                       (1) cancel the solicitation, (2) readvertise the solicitation, (3) consider
                       challenges to the accuracy of the Corps’ cost estimate by bidders, (4)
                       convert the solicitation into a negotiated procurement, or (5) use one of its
                       own dredges to do the work.

                       The accuracy of the Corps’ cost estimate depends on having access to up-
                       to-date cost information. Although the Corps adjusts contractor cost data
                       annually to reflect current pricing levels, this step does not account for
                       fundamental changes, such as an industry vessel reaching the end of its
                       depreciable life or industry acquisition of new vessels. The Corps has not
                       obtained comprehensive industrywide contractor cost information since
                       1988. Since then, contractors have provided the Corps updated cost
                       information to support specific costs included in the Corps’ cost estimates
                       that they believe to be outdated, but they are not required to provide
                       updated information for all costs. As a result, the Corps only has updated
                       cost information that contractors provide. In our discussions with Corps
                       officials, they acknowledged the need to initiate an effort to obtain and
                       verify current cost data for industry vessels.



                       4
                        There are three main regions where hopper dredging takes place in the United States—the
                       Atlantic, the Gulf of Mexico, and the Pacific. Dredges can move readily from the Atlantic to
                       the Gulf of Mexico (which requires at least a week), but moving from the Atlantic to the
                       Pacific requires several weeks and transit through the Panama Canal.




                       Page 11                     GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                       In addition, the Corps continues to follow an expired policy when
                       calculating contractor transit costs to the dredge site, further calling into
                       question the accuracy of the government cost estimates. The Corps’
                       Engineering Regulation 1110-2-1300, which called on the Corps to
                       calculate industry transit costs to the dredge site based on the location of
                       the second-closest industry dredge, expired in 1994.5 However, the Corps
                       continues to use this method when calculating transit costs for at least
                       some of its solicitations. For example, Corps officials followed the
                       expired policy when demonstrating to us how they calculated the transit
                       costs for a solicitation in Washington State.6 In this case, the second-
                       closest industry dredge was located in the Gulf of Mexico, and the
                       estimated transit costs amounted to about $480,000 because the vessel
                       would have had to travel thousands of miles and go through the Panama
                       Canal. However, the private contractor’s dredge that performed the work
                       was located fewer than 500 miles from the dredge site, for which the
                       transit costs were estimated to be about $100,000. After bringing this issue
                       to the Corps’ attention, the Corps told us that it plans to reexamine its
                       transit cost policies.


                       Restrictions on the Corps’ hopper dredge fleet, which began in fiscal year
Restrictions on the    1993, have imposed costs on the Corps’ dredging program, but have thus
Corps’ Hopper Dredge   far not resulted in proven benefits. Most of the costs of the Corps’ hopper
                       dredges are incurred regardless of how frequently the dredges are used. A
Fleet Have Imposed     possible benefit of the restrictions is that they could eventually encourage
Costs, but Benefits    more firms to enter the market or existing firms to add capacity, which, in
                       turn, may promote competition, improve dredging efficiency, and thus
Are Unproven           reduce prices. Although there has been an increase in the number of
                       private industry hopper dredges since the restrictions were first imposed,
                       the number of private firms in the hopper dredging market has decreased.
                       In addition, during the same time period, the number of contractor bids
                       per Corps solicitation has decreased, while the number of winning bids
                       exceeding the Corps’ cost estimate has increased. Restrictions on the
                       Corps’ vessels could also potentially enhance the Corps’ responsiveness to



                       5
                        In 1994 the Corps replaced the expired regulation with Corps’ Engineering Regulation
                       1110-2-1302, which called on the Corps to base transit costs on a radius for a normal area of
                       operations from the project site that includes a reasonable number of bidders.
                       6
                        Transit costs have a greater impact on solicitations that take place in the Pacific
                       Northwest, where the second-closest dredge may be more distant from the work site than
                       for solicitations that take place in the Gulf of Mexico or the Atlantic.




                       Page 12                      GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                         emergency dredging needs. However, the Corps is unable to evaluate
                         whether emergency dredging needs have been met more or less efficiently
                         since the restrictions went into effect because it does not specifically
                         identify and track emergency work performed by either Corps or industry
                         vessels.


Corps Incurs Costs by    The Corps incurs many of the costs for maintaining and operating its
Keeping the Wheeler in   hopper dredges regardless of how much the vessels are used. Thus, as
Ready Reserve            shown in table 1, when the Wheeler was placed in ready reserve and
                         restricted to 55 workdays plus emergencies, the average number of days it
                         worked per year and its productivity (measured by cubic yardage dredged)
                         declined by about 56 percent, while its costs declined by only 20 percent.
                         Crew size declined by about 21 percent, but payroll costs declined by just
                         2 percent because dredging needs required the Corps to pay the smaller
                         crew overtime to finish the work. In addition, fuel costs did not drop in
                         proportion to use and productivity because the vessel’s engines were
                         utilized for shipboard services (e.g., electricity) while it remained at the
                         dock—a necessary procedure for maintaining minimal vessel readiness.
                         Other costs unrelated to crew or fuel represent the plant or capital costs of
                         a dredge, many of which the Corps incurs regardless of how much a
                         dredge is used.

                         Table 1: Summary of Operations and Cost Data of Corps’ Dredge Wheeler

                             Component                           Before reservea         After reserveb Percentage change
                             Average days worked                            183                      83              -55%
                             Average cubic yards                     11,847,040              5,245,606               -56%
                             Crew size                                        54                     42              -21%

                                            c
                             Average cost                            $17,136,028           $13,631,862                  -20%
                              Payroll costs                           $3,635,146            $3,557,938                   -2%
                              Fuel costs                              $1,206,578              $832,452                  -31%
                                          d
                              Other costs                            $12,294,304            $9,241,472                  -25%
                         Source: U.S. Army Corps of Engineers.

                         Note: GAO analysis of data obtained from the Corps’ Annual Form 27 Report of Operations—Hopper
                         Dredges, fiscal years 1994 through 2001.
                         a
                             Fiscal years 1994 through 1997 represent the time period before ready reserve.
                         b
                             Fiscal years 1998 through 2001 represent the time period after ready reserve.
                         c
                             In constant 2001 dollars.
                         d
                             These costs include, among other things, depreciation and repairs.




                         Page 13                                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                           The Corps refers to the difference between a vessel’s total costs and the
                           value of the dredging services it provides (the net cost) as a “subsidy.”
                           The Corps estimates the annual subsidy to maintain the Wheeler idle in
                           ready reserve at about $8.4 million.7 This subsidy is a direct cost of ready
                           reserve. In addition to the subsidy, the Corps must pay contractors to do
                           the work the Wheeler no longer performs. The difference between the
                           vessel’s traditional workload and its current workload is approximately 6.6
                           million cubic yards. Depending on whether private industry hopper
                           dredges are able to perform this work in aggregate at a lower or higher
                           cost than if the Wheeler performed the work, the total cost to government
                           of the Wheeler in ready reserve status could be either lower or higher than
                           the Corps’ estimated subsidy.

                           In addition to the Wheeler’s subsidy, restrictions have led to inefficient
                           operations for the other Corps hopper dredges, resulting in additional
                           costs for the Corps. According to Corps officials, September is the ideal
                           time to dredge in the Pacific Northwest, because dredging conditions
                           generally deteriorate in October. The officials mentioned that, at times,
                           the Essayons and the Yaquina have reached their fiscal year operating
                           limits and returned to port in September, before the projects they were
                           working on were complete. The dredges were sent back to complete the
                           project after the new fiscal year began in October, even though weather
                           conditions may have made dredging conditions less than optimal, and the
                           Corps incurred additional transit costs. According to some Corps officials,
                           the annual operating limit cannot be extended. For example, the
                           Essayons stopped dredging the mouth of the Columbia River and returned
                           to port at the end of fiscal year 2001 when it reached its operating limit.
                           The vessel returned to finish the work at the start of the new fiscal year,
                           but adverse weather conditions prevented it from fully dredging the river.
                           As a result, some projects may be postponed until the following fiscal year,
                           reprioritized, or canceled altogether.


Benefits of Restrictions   A potential benefit of the restrictions on the Corps’ hopper dredge fleet is
Are Unproven               that an increase in demand for industry’s dredging services could
                           encourage existing firms to make capital investments (e.g., build new



                           7
                            According to the Corps, the Wheeler’s average annual operating cost during ready reserve
                           was $12.5 million. While the vessel is credited for “earning” $4.125 million for its 55 days of
                           work (at a daily rental rate of $75,000), a subsidy of $8.375 million per year is required to
                           maintain the Wheeler idle in ready reserve.




                           Page 14                       GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
dredges or improve existing dredges) or encourage more firms to enter the
dredging market. Dredging industry representatives told us that the
restrictions have already led to an increase in the number of industry
vessels and, as evidence, pointed to the addition of two new dredges, the
Liberty Island, a large-class dredge introduced in 2002, and the Bayport, a
medium-class dredge introduced in 1999, as well as the return of the
Stuyvesant, a large-class dredge, to the U.S. hopper dredging market.
Moreover, they added that since the restrictions, the private hopper
dredging industry has also made improvements and enhancements to its
existing fleet—specifically the Columbia—thus improving the efficiency
of its dredging operations and increasing the capacity of its vessels.
However, the representatives also told us that the restrictions are only one
of several factors the private hopper dredging industry considers when
deciding to acquire or build an additional dredge. In addition, firms must
invest in equipment to remain competitive in any industry. As a result, it is
unclear to what extent the restrictions on the Corps’ vessels were a factor
in industry’s investment decisions to increase its fleet size and add
dredging capacity.

While the private hopper dredging industry has recently placed two new
dredges on line, it has sold the small-class dredge Mermentau and placed
another small-class dredge, the Northerly Island, up for sale. In addition,
during the last decade the private hopper dredging industry has decreased
from seven firms to five firms. Specifically, since 1993, two firms exited
the market, one firm entered the market, and two firms merged. The
consolidation in the industry does not necessarily mean that competition
has been reduced because the new industry structure could have resulted
in enhanced capacity, flexibility, and efficiency for the remaining firms.
However, it is uncertain whether the private hopper dredging industry is
more or less competitive now than it was prior to the restrictions.

Historical data reveal that, in general, as shown in figure 3, in years when
more material is available to private industry, industry submits fewer bids
per Corps solicitation. For example, during fiscal year 1991, when the
Corps estimated that 31.3 million cubic yards of maintenance material
would be contracted out to industry, the average number of bids per
solicitation was 3.2. In contrast, during fiscal year 1998, when the Corps
estimated that 53.7 million cubic yards of maintenance material would be
contracted out to industry, industry submitted an average of about 2 bids
per solicitation.




Page 15                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Figure 3: Estimated Volume of Material Dredged by Industry and Average Number
of Industry Bids per Corps Solicitation, Fiscal Years 1990 through 2002




Notes: GAO analysis of the Corps’ Dredging Information System data.

Each point represents a fiscal year.

The inverse, linear relationship is statistically significant at the 95 percent level.


Likewise, as shown in figure 4, in years when there were fewer industry
bids per Corps solicitation, the average winning industry bid, as a
percentage of the Corps’ cost estimate, was higher.8 For example, during
fiscal year 1991, when the average number of bids per solicitation was 3.2,
the average winning bid was 79 percent of the Corps’ estimate. In
contrast, during fiscal year 1998, when the average number of bids per
solicitation was 2, the average winning bid was 97 percent of the Corps’
estimate.




8
 As previously discussed, we have identified concerns related to the Corps’ cost estimate.
However, these concerns were largely present both before and after the restrictions, thus
we have no reason to believe that these concerns would materially affect the use of the
cost estimate in the information presented.




Page 16                           GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Figure 4: Annual Average Number of Industry Bids per Corps Solicitation and
Winning Bid as a Percentage of the Corps’ Cost Estimate, Fiscal Years 1990
through 2002




Notes: GAO analysis of the Corps’ Dredging Information System data.

Each point represents a fiscal year.

The linear relationship is statistically significant at the 99 percent level.


In general, when there are fewer industry bids per solicitation, the winning
industry bid relative to the Corps’ cost estimate increases. In fiscal years
1990 through 2002, more than half of the solicitations for hopper dredging
maintenance work received just one or two bids from private contractors.
During these years, when only one contractor bid on a solicitation, the bid
exceeded the government estimate 87 percent of the time. In contrast,
when there were three or more bids on a solicitation, the winning bid
exceeded the government estimate only 22 percent of the time. After the
Corps’ hopper dredge fleet was effectively restricted to 180 workdays
(fiscal years 1993 through 2002), the number of industry bids per
solicitation declined from about 3 to roughly 2.4. Specifically, as shown in
figure 5, when there were no limits on the use of the Corps’ hopper
dredges (fiscal years 1990 through 1992), only 5 percent of solicitations
received one bid. After limits were placed on the Corps’ hopper dredges
(fiscal years 1993 through 2002), 19 percent of solicitations had only one




Page 17                            GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
bid.9 Moreover, before the restrictions, 67 percent of the solicitations had
three or more bids, whereas, after the restrictions, only 42 percent had
three or more bids. These changes might have been expected because,
after the restrictions, industry’s share of hopper dredging work increased
while the number of hopper dredging firms decreased from seven to five.

Figure 5: Comparison of Number of Industry Bids per Corps Solicitation Before and
After Restrictions




Note: GAO analysis of the Corps’ Dredging Information System data.
a
Fiscal years 1990 through 1992 represent the time period before the restrictions were implemented.
b
Fiscal years 1993 through 2002 represent the time period after the restrictions were implemented.




9
  In the 5-year period following ready reserve of the Wheeler (fiscal years 1998 through
2002), there were roughly 2.5 industry bids per Corps solicitation, and 19 percent of the
solicitations had only one bid, while 51 percent received three or more bids.




Page 18                        GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Furthermore, in the time period following the imposition of the 180-day
restriction, the frequency with which the winning industry bid exceeded
the Corps’ cost estimate has increased. For example, as shown in figure 6,
prior to the restrictions, the winning bid exceeded the Corps’ cost estimate
24 percent of the time. After the restrictions were imposed, the winning
bid exceeded the Corps’ estimate 45 percent of the time.10 This finding is
consistent with economic principles; that is, all else equal, an increase in
demand for dredging by private industry with fixed supply would result in
higher prices.

Figure 6: Comparison of Winning Industry Bids and Corps’ Cost Estimates Before
and After Restrictions




Note: GAO analysis of the Corps’ Dredging Information System data.
a
Fiscal years 1990 through 1992 represent the time period before the restrictions were implemented.
b
Fiscal years 1993 through 2002 represent the time period after the restrictions were implemented.




10
  In the 5-year period following ready reserve of the Wheeler (fiscal years 1998 through
2002), 42 percent of the winning bids exceeded the Corps’ cost estimate, and 58 percent of
the winning bids were less than the Corps’ cost estimate.




Page 19                        GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
It should be noted that the extent to which the restrictions contributed to
the decrease in the number of industry bids per Corps solicitation and the
increase in the winning industry bid relative to the Corps’ cost estimate is
unknown. Other factors could have also contributed to these changes.
For example, an increase in the demand for hopper dredging services for
new construction projects or beach nourishment could lead to a decrease
in the number of bids received for maintenance projects. Similarly, the
introduction of environmental restrictions on when hopper dredging can
take place could contribute to an increase in the winning industry bid
relative to the Corps’ cost estimate. Nevertheless, the decrease in the
number of bids per solicitation and the increase in bids exceeding the
Corps’ cost estimates raises questions about the effects the restrictions
may have had on competition and prices, demonstrating the need for a
comprehensive analysis of the effects of the restrictions on competition,
efficiency, and prices.

Another potential benefit of restrictions on the use of the Corps’ vessels is
enhanced responsiveness to emergencies. However, there is disagreement
within the Corps on this issue. One Corps official believes that a dredge in
ready reserve is better able to handle emergencies than if it were working
180 days because it is in a “standby” status at the dock, ready to respond.
In contrast, others in the Corps believe that a dredge can respond just as
well or better to an emergency while working a full schedule because the
dredge can temporarily halt the project it is working on, respond to the
emergency, and then return to its scheduled work.11 During our
discussions with representatives from selected ports and the maritime
industry, we did not learn of any instances of problems in the Corps’
responsiveness to emergencies prior to restrictions or instances of
improved response time since the restrictions went into effect.

A major reason that the Corps is unable to evaluate whether emergency
dredging needs have been met more or less efficiently since the
restrictions went into effect is that its dredging database—the Dredging
Information System—does not specifically identify and track emergency
work performed either by Corps or industry vessels. Consequently, the
Corps cannot readily determine how many days have been needed for
each of its vessels to respond to emergencies. In addition, the Corps does


11
  A vessel actively working will respond to an emergency with a full crew, whereas a vessel
in reserve may be called to respond to an emergency during a period when it has a reduced
crew and may be unable to assemble a full crew and respond to an emergency in a timely
manner.




Page 20                     GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                            not know whether it is paying contractors more or less for performing the
                            emergency dredging projects compared to the costs it pays for routinely
                            scheduled maintenance work. Such information would be a valuable tool
                            for determining how emergency dredging needs can be met in a manner
                            that is the most economical and advantageous to the government—that is,
                            when and under what circumstances to contract with the private hopper
                            dredging industry for these emergencies or when to use Corps vessels. In
                            discussing this issue, Corps officials agreed that obtaining information on
                            emergencies is important for managing their hopper dredging program and
                            told us they have initiated efforts to collect such data to incorporate into
                            their dredging database.


                            In a June 2000 report to the Congress, the Corps stated that the placement
Corps Has Not               of the Wheeler in ready reserve had been a success and recommended that
Justified the Existing      the vessel remain in ready reserve. However, the report contained a
                            number of analytical and evidentiary shortcomings, and, when asked, the
and Proposed                Corps could not provide any supporting documentation for its
Restrictions on Its         recommendation. In addition, the report also proposed that the
                            McFarland be placed in ready reserve, but the Corps did not conduct an
Hopper Dredge Fleet         analysis to support this proposal. The costs to place the McFarland in
                            ready reserve are likely to be similar to the costs incurred by placing the
                            Wheeler in ready reserve. Because the McFarland’s workload would be
                            reduced from 180 days to 55 days plus emergencies, the Corps would incur
                            annual costs of about $8 million when the vessel is idle—largely because
                            much of a vessel’s costs are incurred regardless of its level of use.
                            Furthermore, according to the Corps, the McFarland will require at least a
                            $25 million capital investment to ensure its safety, operational reliability,
                            and effectiveness for future service. It is questionable whether such an
                            investment in a vessel that would be placed in ready reserve and receive
                            only minimal use is in the best interest of the government.


Corps Has Not               The Water Resources Development Act for 1996 required the Corps to
Comprehensively Analyzed    determine whether (1) the Wheeler should be returned to active status or
the Costs and Benefits of   continue in ready reserve status or (2) another federal hopper dredge
                            should be placed in ready reserve status, and issue a report to the
Restrictions                Congress on its findings. The Corps issued the required report in June
                            2000, 12 recommending that the Wheeler remain in reserve and proposing


                            12
                             Report to Congress, Section 237, Hopper Dredges: Ready Reserve Status of the Hopper
                            Dredge Wheeler.



                            Page 21                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                             that an additional dredge, the McFarland, also be placed in reserve.
                             However, when asked, the Corps official who authored the report told us
                             that he did not have any supporting documentation for the report. In
                             addition, the report had a number of evidentiary and analytical
                             shortcomings. For example, the evidence presented in the report showed
                             that the price the government paid to the industry for hopper dredging was
                             higher in the 2 years after the Wheeler was put in ready reserve than it was
                             the year before. This raises questions about the validity of the
                             recommendation contained in the report.

                             Furthermore, the report did not contain a comprehensive analysis. A
                             comprehensive economic analysis of a government program or policy
                             would identify all the resulting costs and benefits, and, where possible,
                             quantify these measures. Both the quantitative and qualitative costs and
                             benefits would need to be compared and evaluated to determine the
                             success or failure of a program and to potentially be used as a basis for
                             future policy decisions. With regard to the restrictions on the Corps’
                             hopper dredges, a comprehensive economic analysis might contain,
                             among other things, all costs associated with the nonuse of the vessel and
                             the potential benefits that might result due to efficiency gains, increased
                             competition, and lower prices. The analysis might also examine whether
                             ports, harbors, and access channels were maintained more or less
                             effectively, or whether emergency dredging needs were met in a more or
                             less timely and cost-effective manner following implementation of the
                             restrictions.


Corps Has Not                The Corps has not demonstrated that placing an additional hopper dredge
Demonstrated that Further    in ready reserve, specifically the McFarland, would be beneficial to the
Restrictions on the Use of   United States. In its June 2000 report to the Congress on the ready reserve
                             status of the dredge Wheeler, the Corps proposed that the McFarland be
the Corps’ Dredge            the next dredge placed in reserve. However, the Corps did not offer any
McFarland Are Warranted      analysis on the potential costs of placing an additional Corps hopper
                             dredge in reserve or the benefits of such an action. Moreover, to be
                             available for future use, the 35-year-old McFarland requires at least a $25
                             million capital investment to ensure its safety, operational reliability, and
                             effectiveness. The repairs include asbestos removal; repairs to the hull;
                             engine replacement; and upgrades of equipment, machinery, and other
                             shipboard systems. It is questionable whether spending $25 million to
                             rehabilitate the McFarland and then placing it in ready reserve is prudent.

                             Furthermore, if the McFarland were placed in ready reserve, the Corps
                             would incur annual costs similar to the subsidy that is already incurred for


                             Page 22                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                      the Wheeler. Because the Wheeler’s costs do not vary proportionally to its
                      use, the costs to operate the vessel 55 days a year plus emergencies in
                      ready reserve is only marginally less than if it were to operate 180 days a
                      year. The Corps estimates that if the McFarland were placed in ready
                      reserve, it would require an annual subsidy of about $8 million to remain
                      idle. The Corps would also need to contract out the work the McFarland
                      would no longer be doing—approximately 2 to 3 million cubic yards per
                      year. Depending on whether private industry hopper dredges are able to
                      perform this work in aggregate at a lower or higher cost than if the
                      McFarland performed the work, the total cost to government of the
                      placing the McFarland in reserve could be either lower or higher than the
                      estimated annual subsidy. Finally, placing the McFarland in ready reserve
                      could increase competition if such restrictions spurred an increase in
                      investment in private hopper dredges. However, it is questionable
                      whether placing the McFarland in ready reserve would provide enough
                      incentive for industry to make additional investments.


                      Hopper dredges play a critical role in keeping the nation’s ports open for
Conclusions           both domestic and international trade. This function has been and will
                      likely continue to be carried out through a mix of private industry and
                      government-owned dredges. At issue is how to use this mix of dredges in
                      a manner that maintains the viability of the private fleet while minimizing
                      the costs to government. The Corps has proposed to the Congress that
                      additional restrictions on the use of its hopper dredges are warranted, but
                      it cannot provide any analytical evidence to support its position. The
                      limited evidence that does exist indicates that these restrictions have
                      imposed costs on the government, while the benefits are largely unproven.
                      Unless and until the Corps gathers the data, comprehensively analyzes the
                      costs and benefits of restrictions on the use of its hopper dredges, and
                      takes the steps to update its cost estimates, there is no assurance that the
                      nation’s hopper dredging needs are being met in a manner that is the most
                      economical and advantageous to the government.


                      In an effort to discern the most economical and advantageous manner in
Recommendations for   which to operate its hopper dredge fleet, and because the Corps has been
Executive Action      unable to support, through analysis and documentation, the costs and
                      benefits of placing its hopper dredges in ready reserve, we recommend
                      that the Secretary of the Army direct the Corps of Engineers to

                      •   obtain and analyze the baseline data needed to determine the
                          appropriate use of the Corps’ hopper dredge fleet including, among


                      Page 23                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                      other things, data on the frequency, type, and cost of emergency work
                      performed by the Corps and the private hopper dredging industry;
                      contract type; and solicitations that receive no bids or where all the
                      bids received exceeded the Corps’ estimate by more than 25 percent;

                  •   prepare a comprehensive analysis of the costs and benefits of existing
                      and proposed restrictions on the use of the Corps’ hopper dredge
                      fleet—including limiting the Corps’ dredges to 180 days of work per
                      year, placing the Wheeler into ready reserve, limiting the McFarland to
                      its historic work in the Delaware River, and placing the McFarland into
                      ready reserve status; and

                  •   assess the data and procedures used to perform the government cost
                      estimate when contracting dredging work to the private hopper
                      dredging industry, including, among other things, (1) updating the cost
                      information for private industry hopper dredges and (2) examining the
                      policies related to calculating transit costs.


                  We provided a draft of this report to the Acting Assistant Secretary of the
Agency Comments   Army and the Dredging Contractors of America for review and comment.

                  In a letter dated March 21, 2003, the Department of the Army (Army)
                  provided comments on a draft of this report. The Army agreed with our
                  recommendations and provided time frames for implementing each of
                  them. It also provided additional comments suggesting clarification and
                  elaboration on a number of issues discussed in our report. See appendix
                  III for the Army’s comments and our responses.

                  In a letter dated March 3, 2003, the Dredging Contractors of America
                  (DCA) provided detailed comments on a draft of this report. DCA
                  generally agreed with our recommendations. However, it believed
                  strongly that reducing the scheduled use of the Corps’ hopper dredges has
                  resulted in proven benefits. We continue to believe that the relationship
                  between the restrictions and benefits to the government are unproven
                  because (1) the Corps incurs costs related to the underutilization of its
                  dredges, and (2) since the restrictions were first imposed, the Corps has
                  received fewer industry bids per solicitation, and the percentage of
                  winning industry bids that exceed the Corps’ cost estimates has increased.
                  See appendix IV for DCA’s comments and our responses.

                  We conducted our review between January 2002 and February 2003 in
                  accordance with generally accepted government auditing standards. A



                  Page 24                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
detailed discussion of our scope and methodology is presented in
appendix I.


We will send copies of the report 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 V.




Barry T. Hill
Director, Natural Resources
and Environment




Page 25                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
             Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


             To assess the changing roles of the Corps and industry in hopper dredging
             and the characteristics of the hopper dredging industry, we obtained
             Corps’ studies and data from the Corps’ Navigation Data Center that
             provided information on the hopper dredging requirements of the United
             States, including the quantity of material dredged annually by the Corps
             and the private hopper dredging industry, and their associated costs. We
             also reviewed the laws that define these roles. In addition, we interviewed
             Corps officials; representatives from the five hopper dredging firms (B+B
             Dredging Co., Inc., Bean Stuyvesant LLC, Great Lakes Dredge & Dock
             Company, Manson Construction Co., and Weeks Marine, Inc.); the
             maritime industry (the Delaware River Port Authority, Maritime Exchange
             for the Delaware River and Bay, Navios Ship Agencies, Inc., and the
             Steamship Association of Louisiana); dredging and port associations
             (Dredging Contractors of America, Pacific Northwest Waterways
             Association, and American Association of Port Authorities); and selected
             ports (Portland, Seattle, New York/New Jersey, New Orleans, and
             Wilmington). To obtain a better understanding of hopper dredging from
             the perspective of the private hopper dredging industry, we visited and
             toured a medium-class industry hopper dredge working in the Chesapeake
             and Delaware Canal and interviewed its crew. Moreover, we reviewed the
             Corps’ cost estimating policies.

             To determine the intent and effects of the restrictions placed on the use of
             the Corps’ hopper dredge fleet, we analyzed the laws governing the use of
             the Corps’ hopper dredges. We also reviewed studies conducted by the
             Corps and the Pacific Northwest Waterways Association. For qualitative
             information, we obtained documents and interviewed Corps officials from
             headquarters and district and division offices, including Jacksonville, New
             Orleans, Philadelphia, Portland, Walla Walla, and the North Atlantic
             Division, as well as representatives from the private hopper dredging
             firms, selected ports, dredging and port associations, and the maritime
             industry. For quantitative information, we performed descriptive
             statistical analyses using data on the winning contractor bids, estimated
             industry dredging volumes, and the Corps’ cost estimate available from the
             Corps’ Dredging Information System database.

             To evaluate whether further restrictions on the Corps’ hopper dredge fleet,
             including placing the Corps’ dredge McFarland in ready reserve, are
             justified, we reviewed studies and analyses performed by the Corps to
             support its proposal to place the McFarland in ready reserve. We also
             interviewed officials from the Corps and representatives from the private
             hopper dredging industry, selected ports, and the maritime industry to
             gain their views on the possible effects on competition and emergency


             Page 26                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Appendix I: Scope and Methodology




response if the current restrictions on the Corps’ hopper dredges,
particularly the McFarland, were modified. To determine the costs
associated with repairing the McFarland, we obtained and analyzed cost
estimates for the repairs prepared by the Corps’ Philadelphia district office
and discussed the estimates with Corps district and headquarters officials.
We also visited and toured the McFarland when it was working in the
Delaware River and interviewed the McFarland’s crew and Corps officials
from the Philadelphia district and the North Atlantic Division offices.

We conducted our review between January 2002 and February 2003 in
accordance with generally accepted government auditing standards.




Page 27                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
              Appendix II: The U.S. Hopper Dredge Fleet
Appendix II: The U.S. Hopper Dredge Fleet


              There are currently 20 hopper dredges operating in the United States. (See
              table 2.) Of the 20 dredges, 4 are small-class hopper dredges, 10 are
              medium-class hopper dredges, and 6 are large-class hopper dredges. Of
              the 16 private hopper dredges, Great Lakes Dredge & Dock Company
              owns 7, Manson Construction Co. owns 3, and the remaining firms (B+B
              Dredging Co., Inc., Bean Stuyvesant LLC, and Weeks Marine, Inc.) each
              own 2.

              Table 2: Corps and Private Industry Hopper Dredge Fleets

                                                                                          Capacity (in          Year
                  Size         Owner                                  Vessel              cubic yards)          built
                  Large-       Great Lakes Dredge & Dock              Liberty Island             6,540          2002
                  class        Company                                Long Island               16,000         1971
                               Bean Stuyvesant LLC                    Stuyvesant                11,200         1982
                                                                      Eagle I                    6,600          1981
                               Corps of Engineers                     Wheeler                    8,256          1982
                                                                      Essayons                   6,000          1983
                                                                                                                    a
                  Medium-      B+B Dredging Co., Inc.                 Columbia                   4,000         1986
                  class        Weeks Marine, Inc.                     B.E. Lindholm              4,150          1985
                                                                      R.N. Weeks                 4,000          1987
                               Manson Construction Co.                Bayport                    5,000          1999
                                                                      Newport                    4,000          1983
                               Great Lakes Dredge & Dock              Dodge Island               3,600          1980
                               Company                                Manhattan Island           3,600          1977
                                                                      Padre Island               3,600          1981
                                                                      Sugar Island               3,600          1979
                               Corps of Engineers                     McFarland                  3,140          1967
                  Small-       Great Lakes Dredge & Dock              Northerly Island           2,160          1983
                  class        Company
                               Manson Construction Co.                Westport                    1,800         1978
                               B+B Dredging Co., Inc.                 Atchafalaya                 1,300         1980
                               Corps of Engineers                     Yaquina                     1,020         1981
              Source: U.S. Army Corps of Engineers.
              a
               Although the vessel was originally built in 1944 to transport military equipment in World War II and
              later converted to a hopper dredge, according to Corps’ data, 1986 is listed as the year the vessel
              began its service.




              Page 28                                 GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
              Appendix III: Comments from the Department
Appendix III: Comments from the
              of the Army



Department of the Army




              Page 29                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Appendix III: Comments from the Department
of the Army




Page 30                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                         Appendix III: Comments from the Department
                         of the Army




Note: GAO response to
the Army’s additional
comments appear at the
end of this appendix.




                         Page 31                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Appendix III: Comments from the Department
of the Army




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Appendix III: Comments from the Department
of the Army




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Appendix III: Comments from the Department
of the Army




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Appendix III: Comments from the Department
of the Army




Page 35                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
          Appendix III: Comments from the Department
          of the Army




Discussed below are GAO’s corresponding detailed responses to the Army’s six
numbered additional comments.

   1. As discussed in our report, the Corps’ cost estimate is pivotal in determining
      the reasonableness of private contractors bids, and by law the Corps may not
      award a contract if the bid price exceeds the cost estimate by more than 25
      percent. Consequently, we believe that it is critical for the Corps to have
      comprehensive data for all costs and all industry vessels. The Army
      recognized in its comments that the cost information for industry hopper
      dredges is outdated and needs to be evaluated, and has initiated an effort to
      improve the cost data. While we recognize that updating the cost data could
      potentially increase or decrease the Corps’ cost estimates, we believe that
      unless the Corps has updated cost data for all industry vessels, there is no
      assurance that the Corps’ cost estimates are a reliable tool for determining
      whether industry bids are within 25 percent of the government estimate as
      required by law. The Army’s suggestion of clustering several navigation
      projects for west coast contracts—similar to the Dredging Contractors of
      America’s comment numbered 3—is one of several possible options for
      addressing the costs of moving dredges to and from the west coast region.

   2. In our report, we illustrated how a rigid interpretation of the Corps’ policy that
      limits the number of days its vessel can operate resulted in inefficient
      operations. We recognize that the Corps’ hopper dredge owning district has
      the flexibility to schedule the dredge within the maximum allowable number
      of days. However, because time-sensitive dredging needs may disrupt the
      scheduled use of the dredge, we believe that it would be prudent for the Corps
      to examine whether there is a need for some flexibility in implementing the
      annual operating restrictions on the Corps vessels.

       As discussed in our report, the Corps incurs many of the costs for maintaining
       and operating its hopper dredges regardless of how much the vessels are used.
       While it is true that the Corps would save contracting costs if the river is not
       shoaling and the work previously performed by the Wheeler does not need to
       be done, the Corps is still paying money to maintain the Wheeler idle in
       reserve when the vessel could be working to pay for its costs. We recognize
       that it is plausible that private industry’s hopper dredging costs could
       decrease over time if their vessels performed more work. However, more
       important to the government, is how any potential decrease in industry costs
       are passed along to the government in the form of lower prices. The data in
       our report raise questions about whether any cost savings industry has
       realized have trickled down to the government. The Army’s suggestion
       regarding a sensitivity analysis is one of many analyses that it may wish to



          Page 36                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
       Appendix III: Comments from the Department
       of the Army




   consider in its comprehensive analysis of the costs and benefits of existing
   and proposed restrictions on the use of the Corps’ hopper dredges.

3. As acknowledged in our report, private industry has increased its hopper
   dredging capacity. However, the exact change in capacity and the degree to
   which the capacity increases are attributable to the restrictions on the Corps
   vessels is uncertain. While it is plausible that the restrictions may have caused
   industry to make these capital improvements, representatives of the dredging
   industry told us that the restrictions were one of several factors that they
   considered before building or acquiring additional vessels, including the
   construction of the Bayport and the Liberty Island. It is uncertain whether
   these investments occurred as a result of the restrictions or whether the
   investments were necessary to remain competitive in the industry.
   Hypothetically, more vessels and increased capacity should translate to more
   bids and lower bid prices. However, our analysis showed that the number of
   industry bids per hopper maintenance dredging solicitation declined from
   about 3 bids before restrictions to roughly 2.4 bids after restrictions were
   placed on the Corps vessels. This finding reinforces the need for a
   comprehensive analysis of the benefits and costs of the restrictions on the
   Corps’ dredges.

4. The Army’s comment reinforces our concerns about whether the restrictions
   have resulted in proven benefits. This is one of the issues that should be
   considered in the comprehensive analysis we are recommending.

5. The Army recognizes the need to update the information being collected by its
   Dredging Information System and has initiated efforts to address this issue.
   Obtaining and analyzing such information is an important prerequisite to
   determine whether all hopper dredging needs, in particular time-sensitive
   needs, are being met in the manner most cost-effective to the government.
   While the Army refers to a mechanism they have developed with industry to
   ensure that time-sensitive and urgent dredging needs are managed, we believe
   it is premature to claim that the process has resulted in meeting time-sensitive
   dredging needs in a cost-effective manner.

6. The Army’s comments did not address the lack of supporting documentation
   for its June 2000 Report to Congress. Instead, the Army reiterated points it
   has made in its previous comments and raised a number of other issues
   related to hopper dredging. Until a comprehensive analysis is performed on
   the benefits and costs of restrictions on the Corps’ hopper dredge fleet, there
   is no assurance that the Nation’s hopper dredging needs are being met in the
   manner that is most economic and advantageous to the government.



       Page 37                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                                     Appendix IV: Comments from the Dredging
Appendix IV: Comments from the Dredging
                                     Contractors of America



Contractors of America


Note: GAO responses to
the Dredging Contractors
of America appear at the
end of this appendix.




                           Page 38                GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
          Appendix IV: Comments from the Dredging
          Contractors of America




Page 39                GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
          Appendix IV: Comments from the Dredging
          Contractors of America




Page 40                GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
          Appendix IV: Comments from the Dredging
          Contractors of America




Page 41                GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Appendix IV: Comments from the Dredging
Contractors of America




DCA generally agreed with our recommendations. However, DCA strongly
believes that reducing the scheduled use of the Corps’ hopper dredges has
resulted in proven benefits. DCA stated that available information and
data show that benefits have resulted. However, we believe the
relationship between the restrictions on the Corps’ hopper dredge fleet
and benefits to the government remains unproven. First, the extent to
which use restrictions on the Corps’ vessels were a factor in industry’s
investment decisions to increase its fleet size and add dredging capacity is
unclear. Second, the analysis provided by DCA to support its claim is not
persuasive; it covered an insufficient period of time and presented data in
a potentially misleading fashion. Specifically, DCA only included data for
activities that occurred after the implementation of the first restriction on
the Corps’ dredges. We believe that an analysis of the effects of the
restrictions should include data covering the period before and after the
restrictions because the time period before restrictions establishes the
appropriate baseline to compare changes resulting from the restrictions.

Discussed below are our corresponding detailed responses to DCA’s nine
numbered comments in the three-page attachment to its letter. DCA also
provided 21 pages of appendices, which we have not included in this final
report because of the length. However, we have considered all of DCA’s
comments in our response.

    1. We have added language to expand our description of the
       legislation enacted in 1996 that further increased the role of private
       industry in hopper dredging.

    2. We disagree that the Corps receives adequate, updated contractor
       cost information through claims and other audit-related activities.
       As part of this process, industry only provides the Corps updated
       information to support specific costs that they believe are
       outdated. They are not required to provide updated information
       for all costs. In addition, the updated information obtained
       through claims and other audit-related activities do not ensure that
       data are collected consistently for each of the vessels. For a vessel
       involved in multiple claims, the Corps may have more up-to-date
       costs than a vessel with fewer claims. DCA stated in its comments
       that current cost information should be used because industry
       faces increasing labor, fuel, maintenance, and insurance costs. As
       mentioned in our report, the Corps adjusts estimated costs
       annually to reflect current price levels. These adjustments,
       however, do not account for fundamental changes, such as a vessel
       reaching the end of its depreciable life, which may also affect the


Page 42                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Appendix IV: Comments from the Dredging
Contractors of America




          cost estimate. For example, according to a Corps official, industry
          vessels are depreciated over 20 to 25 years. In 2003, 9 of the 16
          industry vessels were 20 years or older and thus, may be nearing
          the end of their depreciable lives. Unless the Corps has updated
          data for all costs and for all industry vessels, there is no assurance
          that the Corps’ cost estimates are a reliable tool for determining
          whether industry’s bids are within 25-percent of the government
          estimate as required by law.

    3. As our report recommends, we believe the Corps should examine
       its policies related to calculating transit costs. We agree that
       DCA’s suggestion is one of several possible options for addressing
       this issue.

    4. The extent to which the restrictions on the Corps vessels caused
       industry to make the investments that DCA cited as proven
       benefits is unclear. First, representatives of the dredging firms told
       us the restrictions were only one of several factors they considered
       before building or acquiring additional vessels, including the
       construction of the Bayport and Liberty Island. Second, firms
       must routinely replace and update equipment to remain
       competitive in any industry. While DCA stated that there was a
       substantial investment in the Columbia following restrictions, the
       vessel was originally built in 1944 and designed to transport
       military equipment during World War II. We believe it is plausible
       that the restrictions on the Corps’ vessels may have contributed to
       industry’s investment decisions; however, it is unclear to what
       extent the restrictions contributed to these decisions.

    5. While private industry has added capacity, we question the basis
       for DCA’s calculation of the exact change in capacity and the
       degree to which the capacity increases are attributable to
       restrictions on the Corps’ hopper dredges. Over half of the
       increase in capacity cited by DCA is attributable to the return of
       one vessel—the Stuyvesant—to service in the United States.
       However, the Stuyvesant worked in the United States prior to the
       restrictions, and thus it is questionable whether this constitutes an
       increase in capacity. With regard to the portion of capacity
       increase due to the construction of the Bayport and the Liberty
       Island, as previously stated in response 4 above, the owners of
       these vessels said the restrictions were only one of several factors
       they considered in their decisions to build these two vessels. For



Page 43                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Appendix IV: Comments from the Dredging
Contractors of America




          these reasons, we believe it is questionable whether the capacity
          increases cited by DCA are proven benefits of the restrictions.

    6. We believe that DCA’s claims are based on incomplete information
       and can be misleading because its analysis only included data after
       the implementation of the first restriction in fiscal year 1993. As a
       result, DCA only examined the marginal effects after the Wheeler
       was placed in ready reserve, but not the effects of all the
       restrictions. We believe a more appropriate analysis of the effects
       of the restrictions would compare data covering the periods before
       and after all restrictions because the time period before
       restrictions establishes the appropriate baseline to compare
       changes resulting from the restrictions.

          The following example illustrates how not examining the entire
          time period before and after all restrictions may produce
          incomplete and misleading results. We found that the percentage
          of bids less than the Corps’ cost estimate was 55 percent after the
          fiscal year 1993 restriction went into effect (fiscal years 1993
          through 2002) and 58 percent after the Wheeler was placed in
          reserve (fiscal years 1998 through 2002). This finding is consistent
          with DCA’s claim, and taken alone could be viewed as an
          improvement. However, prior to the 1993 restriction (fiscal years
          1990 through 1992), 76 percent of the winning bids were less than
          the Corps’ cost estimate. Thus, although there has been an
          increase in the percentage of bids less than the Corps’ cost
          estimate following reserve of the Wheeler, this change is
          significantly less than what occurred before the restrictions.

          Furthermore, in an appendix to its comments, DCA criticized our
          approach of presenting data as averages across a number of years
          to assess the effects of the restrictions, and argued that a year-to-
          year evaluation should be used. However, in addition to
          restrictions on the Corps’ fleet, a number of other factors can lead
          to changes in the number of bids per solicitation and winning bid
          relative to the Corps’ cost estimate from one year to the next. For
          example, high water flows in the Mississippi River can result in
          high accumulation of material at the mouth of the Mississippi River
          and increase the demand for time-sensitive dredging requirements.
          During such periods, the winning bids relative to the Corps’ cost
          estimate may increase. However, the information necessary to
          control for these factors is unavailable. For example, the Corps
          does not collect data on time-sensitive dredging needs. As a result,


Page 44                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
Appendix IV: Comments from the Dredging
Contractors of America




          we believe that presenting changes as averages across a number of
          years is more appropriate because it mitigates for the annual
          variability in the factors that can also affect the number of bids per
          Corps solicitation and winning bid relative to the Corps’ cost
          estimate.

    7. We disagree with DCA’s comment. In fact, the historical data do
       indicate that, in general, in years when more material is available
       to industry, industry submits fewer bids per Corps solicitation.
       The information presented in figure 3 in our report, shows that
       there is an inverse relationship between the estimated volume of
       material dredged and the annual bids per solicitation, which is
       statistically significant at the 95 percent confidence level.

    8. DCA agreed that seven companies operated in the U.S. hopper
       dredging market prior to the fiscal year 1993 restriction, while five
       companies remain in the market today. However, DCA stated that
       the number of companies competing on a nationwide basis has
       increased from four to five in the last 10 years. Regardless of
       whether dredging firms operated on a regional or national basis,
       prior to the restrictions seven firms provided hopper dredging
       services and now there are five firms. Furthermore, as recognized
       in our report, the consolidation in the industry does not necessarily
       mean that competition has been reduced because the new industry
       structure could have resulted in enhanced capacity, flexibility, and
       efficiency for the remaining firms. Moreover, regardless of the
       number of firms in the industry, DCA acknowledged that the
       number of bids is more indicative of competition than merely the
       number of companies. As stated in our report, the number of
       industry bids per Corps solicitation has decreased on a nationwide
       basis from approximately 3 bids in the 3 years prior to the
       restrictions (fiscal years 1990 through 1992) to roughly 2.4 bids in
       the period following the restrictions (fiscal years 1993 through
       2002).

    9. We agree with DCA’s comment, which is already addressed by our
       recommendations.




Page 45                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
                   Appendix V: GAO Contact and Staff
Appendix V: GAO Contact and Staff
                   Acknowledgments



Acknowledgments

                   Barry T. Hill, (202) 512-3841
GAO contact
                   In addition, Chuck Barchok, Diana Cheng, Richard Johnson, Jonathan
Acknowledgments:   McMurray, Ryan Petitte, and Daren Sweeney made key contributions to
                   this report.




(360163)
                   Page 46                   GAO-03-382 Effects of Restrictions on Corps' Hopper Dredges
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