Since that time, the Corps has gradually reduced its hopper dredging fleet  from 14 to 4 vessels, while a private hopper dredging industry of five firms  and 16 vessels has emerged. Corps’ Hopper Dredge Fleet Addresses Several Needs

Corps officials and representatives from the dredging industry, selected  ports, and the maritime industry generally agreed that the Corps’ hopper  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  government cost estimate by more than 25 percent. Restrictions on the Corps’ Hopper Dredge Fleet Have Imposed Costs, but Benefits Are Unproven

Restrictions on 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. A  possible benefit of the restrictions is that they could eventually encourage  more firms to enter the market or existing firms to add capacity, which, in  turn, may promote competition, improve dredging efficiency, and thus  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. Corps Has Not Justified the Existing and Proposed Restrictions on Its Hopper Dredge Fleet

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. 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. Recommendations for Executive Action

In an effort to discern the most economical and advantageous manner in  which to operate its hopper dredge fleet, and because the Corps has been  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  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. 4. 5.
Why GAO Did This Study

The fiscal year 2002 Conference Report for the Energy and Water Development Appropriations Act directed GAO to study the benefits and effects of the U.S. Army Corps of Engineers' (Corps) dredge fleet. GAO examined the characteristics and changing roles of the Corps and industry in hopper dredging; the effect of current restrictions on the Corps' hopper dredge fleet; and whether existing and proposed restrictions on the fleet, including the proposal to place the McFarland in ready reserve, are justified. In addition, GAO identified concerns related to the government cost estimates the Corps prepares to determine the reasonableness of industry bids.

What GAO Found

In response to 1978 legislation that encouraged private industry participation in dredging, the Corps gradually reduced its hopper dredge fleet from 14 to 4 vessels (the Wheeler, the McFarland, the Essayons, and the Yaquina) while a private hopper dredging industry of five firms and 16 vessels has emerged. Dredging stakeholders generally agreed that the Corps needs to retain at least a small hopper dredge fleet to (1) provide additional dredging capacity during peak demand years, (2) meet emergency dredging needs, and (3) provide an alternative work option when industry provides no bids or when its bids exceed the government cost estimate by more than 25 percent. In reviewing the cost estimation process, GAO found that the Corps' estimates are based on some outdated contractor cost information and an expired policy for calculating transit costs. The restrictions on the use of the Corps' hopper dredge fleet that began in fiscal year 1993 have imposed costs on the Corps' dredging program, but have thus far not resulted in proven benefits. The Corps estimates that it spends $12.5 million annually to maintain the Wheeler in ready reserve, 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 market, which, in turn, may promote 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 estimates has increased. Although the Corps proposed that the McFarland be placed in ready reserve, it has not conducted an analysis to establish that this action would be in the government's best interest. Specifically, 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 proposed that the McFarland also be placed in ready reserve. However, when asked, the Corps could not provide any supporting documentation for its report. Furthermore, according to the Corps, future use of the McFarland will require at least a $25 million capital investment to ensure its safety, operational reliability, and effectiveness. Such an investment in a vessel that would be placed in ready reserve and receive only minimal use is questionable.