For example, the Chamber of Commerce of the United States, in its policy declaration, declares: "The costs of building, operating, and maintaining any domestic transportation facility provided by government should be met by fair and equitable charges paid by those benefitting from such facilities."

Another group that has endorsed waterway user charges is the National Taxpayers Union, which in its March, 1977 issue of Dollars and Sense, made this evaluation:

An example of an especially wasteful Corps endeavor is its improvement and operation of inland waterways. These facilities benefit special interest groups rather than the public at large, but waterway users pay no fees of any kind for the use of these expensive facilities, and they make no contributions either to construction costs or to operation and maintenance costs. The taxpayer foots the bill-at a cost of $400 million a year.

This waste and inequity can be terminated by requiring waterway users to pay for the facilities they use. Moreover, to end the promotion of unnecessary construction, prospective users should be required to make an initial contribution to the capital costs of new waterway investments, and should, after the project is completed, eventually repay all capital costs. Unless private investments can cover a significant percentage of total construction costs, the project should not be authorized, and the facilities should not be built. If prospective users and investors find a waterway development too questionable to risk capital on it, why should the taxpayer do so? Unless the private sector manifests an interest in the investment, the public has every right to suspect that the proposal has more to do with the institutional imperative for construction-and with the political interest in pork barrel projects-than with economically productive use of public funds.

The National League of Women Voters has stated support for cost-sharing on water resources projects by "private interest in relation to benefits received."

The National Industrial Traffic League is the Nation's oldest association of shippers, dating back to 1907, with a membership of 1.800 companies. Acting as a voice of the shippers, with no members who are carriers, it has said this about waterway user charges.

(1) The League endorses the principle that users of waterways and waterway facilities, created, improved, and maintained by public funds for navigation purposes, should pay a reasonable user charge, determined by appropriate authority, and reflecting the extent and character of use made or the benefits derived.

(2) In the determination of such waterway user charges the following factors shall be take into consideration:

(a) Each waterway or section thereof shall be treated separately, and not be required to carry part of the burden of more costly projects.

(b) The effect of such user charges on the movement of traffic, or the navigational use, of an established waterway, specific industries, and particular sections of the country.

(c) The established policy of governments with respect to the improvement and maintenance of shipways and harbors of ocean ports, recognized as the function of government for military as well as commercial purposes and the harbors and channels of the Great Lakes.

We have received a letter under cover of April 5th from the general offices of Boise-Cascade indicating that they are users of both modes of transportation, having spent approximately $130 million in rail transportation in 1976, clearly supportive of user fees as a means of better balancing the modes of transportation. [The letter from Boise Cascade follows:]

BOISE CASCADE CORP.,

Hon. PETE V. DOMENICI,
U.S. Senate,
Washington, D.C.

TRANSPORTATION AND DISTRIBUTION DEPARTMENT,
Boise, Idaho, April 5, 1977.

Dear Senator: Thank you for your letter of March 25, 1977 concerning the issue of user charges on the inland waterways and the Corps of Engineers' proposal to rebuild Locks and Dam 26 at Alton, Illinois.

Boise Cascade is not a substantial user of the inland waterways system but is a very substantial user of rail transportation, having spent some 130 million dollars on railroad transportation in 1976. Our interest in this proceeding is two-fold:

1. We are concerned that the railroads who must depend upon their own resources to provide a right-of-way cannot long term remain viable and compete with other modes who are subsidized by the Federal Government. There are two dissipating effects resulting from the railroads' competition with the federally provided waterway system:

A. Diversion of remunerative traffic.

B. Cross subsidization of freight rates to allow the railroads to compete for traffic rather than lose it to the barge lines.

2. We are concerned that the federal treasury is being drained for waterway improvement projects that do not approach even an equal cost-benefit ratio. Obviously, the user should share in the cost since the user would then become interested in the cost.

I would offer the following specific comments on Senate Bill S.790.

Section 4. Since the Department of Transportation has concluded that there is no urgent need for the expansion of Lock 26, at least until 1990, I see little justification for enabling legislation at this time. It would appear more appropriate to proceed with the establishment of the Mississippi River System Council as proposed in Section 9. This council would, in my opinion, not only allow for all of the concerned interests to be heard but would have a Congressional mandate to provide a comprehensive long-term plan within time frames that would allow construction of a new Lock 26 if it were deemed necessary.

Section 5-Sub Para (C) and (D).-These paragraphs seem to be so specific that I wonder what is left to be determined by public hearing. I believe it is appropriate for Congress to specify the mechanisms as outlined in Sub Para (D), but it would be more appropriate for users and operators to make a determination of a fair and equitable basis to be used through public hearing. I would support the balance of the legislation as it is currently written. Respectfully yours,

D. W. BERG,

General Manager, Transportation Services. Senator DOMENICI. We will be glad to hear from the two econo

mists.

Let's try to use the same rules we did this morning. If you have. prepared statements, we would very much like you to introduce them and summarize them if you can.

If they are short, of course, you can do it the other way. I have some questions of each of you.

We have about 50 minutes and two more witnesses.

Go ahead and proceed. State your name and background for the record, please.

STATEMENT OF PROFESSOR STEVEN HANKE, DEPARTMENT OF GEOGRAPHY AND ENVIRONMENTAL ENGINEERING, JOHNS HOPKINS UNIVERSITY, BALTIMORE, MD.

Mr. HANKE. My name is Steven Hanke. I am Professor of Applied Economics at Johns Hopkins University in Baltimore, Maryand.

The testimony I have prepared can be put in full in the record. I will summarize that briefly. (The statement appears at p. 806.) Senator DOMENICI. Fine.

Mr. HANKE. The policy conclusions that I have derived that are presented in the written testimony and that I will discuss briefly today were primarily based on a study that Dr. Robert K. Davis and I did for the National Water Commission in 1971. That particular report was entitled, "Pricing and Efficiency in Water Resource Management."

Let me limit my remarks today to briefly what I think to be the important rationale for user fees on inland waterways and then some specifics in regard to the particular types of user fees and the level for those user fees that I would recommend.

The first element that you have alluded to already this morning with regard to a rationale for user fees deals with the concept of economic efficiency. Without belaboring that point, let me just say in order to attain economic efficiency and derive the most welfare or the greatest net benefit from the use of resources, one has to price the resources at their marginal cost, their relevant marginal

cost.

If the price is too low, you tend to overuse the resources and overinvest in it. If it is too high, you tend to under-use it and underinvest in it.

The second efficiency argument that has not been talked about. this morning at any rate, deals with the political incentives associated with not charging a price for output that is equated to the marginal cost of that output. In the political marketplace. if the price for output is below its marginal cost, there is a tendency to put pressure on political representatives to overestimate the benefits to be derived from the output in question.

On the other hand, if the price happens to be too high, there is pressure to underestimate the benefits from those projects. Of course, with regard to cost, if the price is low and zero in the case of waterways, there are political incentives put on to underestimate the costs of these projects.

So that by charging the price that is equated with the marginal cost, not only the pure economic incentives in the market itself for these resources would be improved but also the political marketplace would be improved and the biases that have crept into that particular process would be eliminated or reduced.

The third aspect deals with the bureaucratic incentives, and the bureaus that are engaged in the construction and improvement operation of these waterways are, of course, in the business of doing just that.

Even if the political market was more perfect that it is, there would still be the tendency for the bureaucratic market itself to overestimate the benefits from these projects and underestimate the

cost.

We have a long history of very shoddy benefit/cost analysis not only in the waterway business, but throughout the public estab lishment. The main reason for this is due to the fact that there are indeed great incentives for bureaucrats to bias the benefit/cos analysis.

The only check on these studies is a system of user fees in which the price charged for the output was equated to the marginal cost of that output.

This to my way of thinking is one of the more important reasons for tying the locks and dam 26 to the user fee proposal. You have to have a policy of user fees that is consistent with the assumptions of benefit/cost analysis to have a reliable benefit/cost mechanism to make projections into the future.

The only way that you can do that with the standard benefit/ cost techniques that are used now is to have a user fee that equates price of output to marginal cost of providing that output. So those are three elements in terms of the rationale for user fees.

Just what types of user fees would I recommend? The first element that would reflect the marginal cost of operating and maintaining the waterways would be segment tolls in which the segment toll was equated to the relevant marginal cost of maintaining and operating the particular segments in question.

This would be based on a ton-mile basis per segment.

This would be employed, since this decision has to be made on all waterways, whether they are existing waterways or whether they would be new waterways, or improvements in waterways. So if you have the testimony that I prepared in front of you, on the next to the last page, page 11, there is a little table here with the elements of the particular user fee system that I would recommend.

The segment tolls would apply, therefore, on all waterways and be equated to the annual operating and maintenance cost per ton mile on a particular segment involved. Basically, this would give planners information about whether to continue to maintain on an annual basis these waterways or to phase these waterways out.

I might add that the differential in these segment tolls would be rather great. They could be up to 350 times to 400 times different in terms of magnitude; but, of course, the lower Mississippi being extremely low and segments like the Kentucky Waterway being extremely high.

The second component deals with the marginal capital cost associated with either improving a waterway or building a new waterway. This particular component would be captured by an annual license fee again on a segment basis for those waterway users who wanted to use a particular waterway. They would have to have a license. They would pay an annual license for going on the waterways they wanted to operate on. This charge would not be imposed obviously on existing waterways, because there is no marginal or ncremental investment. There is no capital cost associated with hose. It would only apply to the new waterways or improvements in old waterways.

This would give us more accurate information as to the benefits or willingness of shippers to pay for improvements or new extenions to the waterway system. The third component that is also a elevant marginal cost deals with congestion tolls, which have not Deen dealt with, this morning at any rate. These costs are not outof-pocket costs in the sense that operating and maintenance and vestment in new segments or improvements in existing segments

of waterways are. They are costs that the users impose upon themselves in the sense that once a particular user comes into a lock, he not only has to wait himself, but he creates waiting costs for everybody else.

These waiting costs he imposes upon other people are not taken into account in his calculation on whether to enter a lock area at a particular time. But they do in total add up to a social cost that is relevant and should be charged for.

This, to my way of thinking, is a cost that could be reduced or eliminated by congestion tolls at the locks, and it would increase the value of our inland waterway system because the highest valued users of the waterway would be through the locks before the lower valued users of the waterway. Just a simple numerical sample: If you have one barge operator who has waiting costs of $100 an hour and another barge operator with $600 an hour waiting cost. and the $100 operator goes through before the $600 operator, you have lost $500 an hour by having this current existing allocation process that we now have. If you had a pricing process that charged congestion tolls to eliminate the queues, the $600 or higher valued man would go through first, and you would have a net gain of $500.

By the way, the congestion fee should be charged on existing as well as new waterways. Those, in brief, summarize the three elements that I would see as appropriate to attaining economic efficiency in the operation of waterways. The items are consistent with those items listed in the bills in terms of the structure of the system I propose, and the one that could be accommodated within the bills. However, the level of charges is constrained in the bills in the 50-percent provision, and in fact with the system that I am recommending, not only would you collect 100 percent of your out-ofpocket costs, but you would collect revenues in addition to that with a collection of congestion tolls. So it would be more than a 100 percent of out-of-pocket costs that would actually be collected in this kind of system. I might add that not only will the congestion tolls increase the efficiency of the existing waterways, but that revenue could be used to improve the locks and expand the locks where the congestion actually occurred, so you would have there, again a good investment signal sin terms of willingness to pay.

That concludes my testimony.

Senator DOMENICI. Thank you very much.

Rather than question you, let's have both of you testify and ther we will ask questions of both of you.

STATEMENT OF JOHN C. SPYCHALSKI, PROFESSOR OF BUSINESS LOGISTICS, COLLEGE OF BUSINESS ADMINISTRATION, PENNSYL VANIA STATE UNIVERSITY

Mr. SPYCHALSKI. Mr. Chairman and members of the subcommittee my name is John Spychalski. I am a professor of business logistic in the College of Business Administration of the Pennsylvania Stat University. My duties include teaching and research in transpor economics and policy, an area in which the subject of user charge on publicly provided facilities obviously plays a significant role.