Developing Arctic Infrastructure: Assembly Required

 

August 1, 2019



DISCLAIMER: The opinions and views expressed herein are solely those of the author and do not necessarily represent the views, opinions, or interests of the US Department of Transportation or the US government.

The current state of discussions on arctic maritime infrastructure suffer from misuse of the adage “if you build it, they will come.” Nevertheless, “they” are coming, and “it” hasn’t been built. No one has yet clearly determined what “it” is, how and where “it” will be built, and more importantly, who’ll pay for “it.”

Part 1: Investment

Vessel traffic in the Bering Strait region more than doubled from 2008 to 2018. Infrastructure in the Bering Strait region did not.

In any given week, in Washington, DC there are probably a half dozen arctic events – some of which discuss the underlying issues of infrastructure gaps and requirements from a variety of perspectives, where participants hem and haw over the difficulty of the situation. Some events generate lists of gaps, reports, and recommendations; few present actionable measures or clearly defined next steps that could be implemented. The hesitation to present realistic options, with viable funding plans, limits the use of these conversations; despite the identification of problems, inaction prevails.


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A major issue with respect to arctic infrastructure is not a lack of ideas or one-off project proposals, but capital. This situation is not unique to the arctic – given the priorities of political decision makers, the US finds itself strapped for cash to maintain, let alone construct, new, critical infrastructure, ranging from roads and rail, to bridges and ports. Rural America is among the regions hit hard by this shortfall, but Alaska and the US arctic have been hit the hardest. Not only are Alaska communities cold and remote, they also endure some of the harshest weather conditions, have limited physical connectivity, and small populations. Even most rural American communities are connected by road – not so in Alaska; the state capital is not even connected via a land-based highway, the only way in is by air or water.

This level of isolation, combined with vast distances and small populations, makes it incredibly challenging to find attractive investment opportunities both from the public and the private sector. These same challenges make the required investment all the greater. Finding the right funding model and pairing it with the best projects to fit emerging needs is the real barrier to critical infrastructure facing the region.


There are many grant and loan programs for infrastructure through Federal and State entities as listed in the Federal Funding Handbook for Marine Transportation Infrastructure. Most require cost sharing between a federal and state partner or a federal and city partner, and generally at a ratio where the federal government will kick in the majority. But the requirements for these grants and loans can be steep and often include proof of economic benefit to the country or the community. In Alaska, where communities are small and infrastructure is critical for survival, that benefit to cost ratio can be hard to achieve.

Unless significant changes are made to current public funding priorities, there will still be a need for investment from the private sector – not just because gaps in federal and state funding will perpetuate, but also because not all projects are public assets. Many of the critical infrastructure elements and improvements needed to grow arctic maritime commerce support the interests of private companies or public-private arrangements. For communities and regions looking to expand their infrastructure to meet desired and anticipated needs, a major question is: are there attractive investment opportunities that are likely to result in profits?


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Public-Private Partnerships, also referred to as P3, may be one way to meet these investment needs. There are many types of P3s, but in broad terms, there are two groups, one where the private partner assumes the most risk, and a second where the public partner does. The most recognizable form of a P3 is a toll road. A private company partners with a city, state, or other public entity to design, build and possibly manage and maintain a public asset. That company or corporation receives the tolls leveed as their return on investment. These are often long-term arrangements, maybe decades, after which the asset reverts to the public. It can then either be maintained by the public entity or sold.

P3s often have a revenue component which set them apart from simple contracting agreements. By using revenue-based arrangements, alternative mechanisms for financing the investment are created. Arguably, uncertainty in demand is the most important element affecting the viability of an infrastructure project, particularly for new build or projects for which little to no history of use exists, as in the arctic. The amount of revenue received by the private partner varies directly with the use of the infrastructure – if it is used less than expected (e.g., a port with no ships) or at a slower rate, there is less revenue, increasing the risk for the private partner. “Availability payments” represent the other side of the spectrum. These payments are periodic payments made by the government to the private partner as long as the service meets contracted quality standards. Unlike user fees, availability payments are fixed, recurring payments that do not vary with usage of the infrastructure asset.

In Alaska, the Delong Mountain Transportation System (DMTS) is an example of a P3. The Alaska Industrial Development and Export Authority (AIDEA) is a public corporation of the State of Alaska. They, partnering with Teck Alaska (private sector operator) and the NANA Regional Corporation (land owner) built, operate, and maintain the 52-mile, 30-foot all-weather gravel industrial haul road from the Red Dog Mine site to the port facility. The system also includes a dock, offshore conveyer system, fuel distribution facility, storage, and power. Construction of the DMTS facilities was executed via AIDEA through cash and bonding; repayment of these bonds is achieved through a “toll” structure for use of the system by mine company customers. The toll mechanism provides a minimum annual assessment (e.g., payment), and additional payments based on escalated zinc prices and higher throughputs. In this way, AIDEA is guaranteed payment each year, and excess payments are distributed between Teck and AIDEA; NANA Regional Corporation receives royalty payments for the use of the land.

This model is unusual because AIDEA, the public entity, funded the project and receives regular payments from the private sector partner, rather than the other way around. This model follows the concept of an availability payment where, if the service meets the terms of the contract, a payment of an agreed amount is made, but with the parties reversed. Either way, the model presents a viable option for development in a region where annual and even seasonal variability creates additional uncertainty in a tolling structure.

New and alternative P3 incentive structures could align public and private sector interests in infrastructure provision and management, and balance the assumed risk. In contrast to the basic user fee or availability payments models that allocate all demand risk (and therefore, revenue risk) to either the private sector partner or the government, there may be opportunities to share the risk though combining availability payments with revenue payment which could bridge the gap between parties unwilling to accept all the risk.


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For example, it may be possible to create an arrangement for a new port facility. Traditionally, a port owner (i.e., landlord) leases the land to an operator who runs the terminal or dock and pays “rent.” The operator may charge wharf fees, utility fees, or others to generate revenue, or the revenue may come from the cargo they move, or from associated charges. If this kind of arrangement were established, a port may attract investment from an operator by adjusting the payment structure to combine revenue from port or dock fees with an availability payment. The private operator invests in improvements or expansion of the dock facility, which brings in more cargo and generates more revenue for the port in exchange for reduced fees, or another offset from the city or state through the port authority. In this way, some of the risk is spread to the city or public entity by offsetting the risk assumed by the private company in investing in enhancing the port facility, but not entirely. This, in turn, provides protection for the public but also an economic benefit to the community if cargo can be brought in or transshipped more efficiently. If a partner investor is brought into the arrangement and if there are several linked or networked facilities across the region, the total risk is spread over a larger area. As such, if one location falls short or is seasonally unavailable, the other locations could make up the difference. This may be particularly true for a network of port reception facilities or other utilities or services regularly used by maritime operators or ports and the communities they serve.

For investments in arctic Alaska to meet a required associated return on investment, they will need to reach outside the “box” and consider innovative ways to make them attractive. Whether that is through a network of assets among communities, or innovative ways to attract private funding by combining traditional fee and payment structures. The status quo of the investment marketplace won’t cut it. By changing the narrative on investment from single investment projects, to identifying mechanisms to create a return across networked arctic investments, both community needs and private investment requirements may be attainable.

Ultimately, it is up to the communities and village and regional corporations, regional operators, and the investors to come together, not just within individual communities but across the regions to identify the projects that can meet the combined needs and qualify for P3 or other government cost-share programs or tax incentives. Not all projects will be a good match. The US arctic is positioned to grow in ways that meet the needs of the region while also leveraging the specific strengths of Alaska communities. Whether those strengths are as a commercial trans-shipment hub, a fisheries stronghold, or ground zero for arctic science and research, there are common threads that connect the needs of the communities. Requirements like power, fuel, sewage, hospitality, connectivity, and transportation could, when networked together provide the kind of investment opportunities attractive to private institutions.

Finding the sweet spot to adapt the existing infrastructure to meet future needs and identifying the specific needs and metrics to create new targeted, improvement strategies are the first steps to creating opportunities that are actionable. All the policy wonks in DC will never solve the investment conundrum of the US arctic – these innovative ideas will come from within communities willing to look through a lens of regional connectivity and see not just the right now needs, but the future requirements. If we can’t adjust the narrative, “they” will still come, and “it” won’t be there to make sure Alaska is a beneficiary.

Next month we’ll look at the actual infrastructure required to support expanded arctic traffic.

Dr. Azzara is an international trade specialist for the US Maritime Administration who holds degrees in Oceanography and Marine Biology with more than 16 deep-sea research cruises and a total of a year of days at sea. Her involvement in arctic issues began in 2012, leading to multiple reports, publications, and presentations on arctic marine shipping, vessel activity projections, infrastructure requirements and investment frameworks.

 
 

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