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Building the Ports of the Future
Find out what Jacksonville Port Authority Executive Director Rick Ferrin has to say about financing the ports of the the future.
With one new container terminal to open later this year and contract talks to build another, our dream for JAXPORT is swiftly becoming reality.
But wait. How will we fund the necessary improvements in infrastructure, facilities and equipment? This is where I usually wake up.
Let’s look at the competition. Both Savannah-Brunswick and JAXPORT compete for the same discretionary cargo; in each case 80 percent plus, of the cargo that crosses our docks comes from or is heading to places including Chicago, Detroit, Cleveland, Louisville, Memphis and even Denver. The Georgia Port Authority (GPA) and Jaxport are recognized as tremendous economic engines sustaining tens of thousands of regional jobs.
In 2005, the GPA announced that it planned to invest $700 million in port expansion, improvements and equipment over the next decade. That estimate has since been raised to $1.2 billion. Most of that money and the debt service for bonds to produce that capital will come from the State of Georgia; where there is a widespread appreciation for the incredible return the region gets investing that capital in its ports.
Better, cheaper, faster.
Those of us in the port business must remember three words: better, cheaper, faster. That’s what our customers think about, and they will vote with their wakes, leaving a port with yesterday’s technology, facilities and infrastructure for a port that moves cargo better, cheaper and faster. Of course, that’s where the new business will go as well. In 1996 the GPA was handling just over 600,000 TEUs (containers) and that number today stands at a staggering 2,600,000 TEUs.
That meteoric rise in container throughput represents thousands of new jobs and tremendous positive economic impact on their region. Why did this happen to Savannah? The answer is very simple: investment, not of a few million here or there but large investments of hundreds of millions on facilities, equipment and intermodal infrastructure and the acquisition and development of an industrial periphery that provides sites for massive distribution centers and processing centers where arriving and departing cargoes can be consolidated deconsolidated or processed in some fashion.
Unfortunately, most ports do not have the luxury of being a state’s only child. Instead they must compete with sibling ports for dwindling municipal and state funding. While there is a general cognizance and a regional appreciation for the economic impact of a port, there are few if any states other than Georgia that will step in to fund the 35 percent local share of a $400 million dredging project performed by the U.S. Army Corps of Engineers. Nevertheless, the need for dredging, the need to build new cargo-capable terminals and the need for efficient intermodal transportation infrastructure to move cargo to and from our ports grow exponentially.
Maritime Darwinism
Ports are examples of Darwinism. Those that survive and flourish evolve and adapt to changes in their habitat (business environment). In nature mutations and adaptations take many generations within a species. Ports must be more nimble and adapt rapidly to competitive forces. JAXPORT has done just that over the past decade. We have transformed ourselves from what I have often described as a solid second tier port concentrating on Puerto Rican trade and automobile imports to versatile cargo and cruise port that in the next decade will rival Savannah for the position of third largest cargo port on the East Coast and exceed it in the cruise category.
This transformation is well underway supported by an innovative capital financing program that has evolved dramatically over the past decade. I agree with my friend, colleague and arch competitor, Doug Marchand, Executive Director of the GPA, that when it comes to growing ports “it all revolves back in one form or another to capital.”
A short decade ago, the funding for port capital programs came from several limited sources. The first was retained earnings. But only a very few ports that served a large captive audience and did not rely on discretionary cargo were able to accumulate sizeable amounts of retained earnings. Most ports raised needed capital through bond offerings, such as special purpose facility bonds and revenue bonds. This bonded debt was retired with the revenue streams the ports generated through long term contracts with ocean carriers and terminal operators.
A few ports in the U.S. are taxing authorities and enjoy annual tax revenues which can be bonded to raise large amounts of capital. A very few states including Florida realized the tremendous 6 to 1 return on funds that are invested in port intermodal infrastructure and undertook underwriting bond issues. In Florida in 1996 and again three years later, the state pledged gas tax revenues to repay two bonds that yielded $400 million for the 14 ports of the Sunshine State. JAXPORT was the very grateful recipient of approximately $80 million, without which we would still be a solid second tier port.
While bond grants from the state have assisted the ports of Florida immensely, each cycle means intense competition with so many other needs for state funding. While we do receive a substantial amount of tax revenue from the City of Jacksonville, the city is facing a dramatic reduction in revenue with the passage recently of an ad valorem property tax “reform” program.
In JAXPORT’s case, as I am sure is the case with many other ports nationwide, we cannot rely on the seriously depleted treasuries at any level of government as a source for investment capital. The situation at the federal level is even worse. We have magnificent representation in Washington in both the House and the Senate. In each case we are covered on both sides of the aisle by a very powerful Democratic Congresswoman and Senator and a very powerful Republican Congressman and Senator. But there is little funding available for them to seek in the Defense budget for the Corps of Engineers to perform its navigation mission. We are spending our defense tax dollars on other things and not investing much in the navigational infrastructure that is so desperately needed to keep our nation’s ports working efficiently in the post-Panamax world of our global economy.
New sources of capital
So where else do ports go for capital? The trend of customer investment began in Jacksonville over a decade ago when Industrial Cold Storage (ICS) invested private funds in the refurbishment of a dilapidated cold storage warehouse and a marginal chilling-freezing system. The end result was an efficient 120,000 square foot cold storage warehouse with a state-of-the-art ammonia chill and freeze system through which ICS has exported millions of tons of frozen chicken in the past decade. Then in 2004, ICS approached the Port Authority with a proposal for a joint venture. I readily accepted their proposal and the result was the construction of a 552,000 square foot warehouse through which ICS imports a number of commodities, including hundreds of thousands of tons of finished paper imported from Finland and distributed throughout the U.S. The cost of the warehouse on JAXPORT property was $30 million, with the port paying $6 million and ICS providing $24 million.
Project financing evolved a step further in 2005 as we developed a thirty year contract with TraPac, Mitsui O.S.K. Line’s terminal operator. The Port Authority provided the land for the construction of a 158-acre post-Panamax container terminal on the Federal Channel of the St. Johns River. The port would design and manage the construction of the terminal as well as secure all needed permits for the state and federal regulatory and resource agencies. The cost of the terminal, to include all horizontal and vertical construction would be shared between TraPac and JAXPORT with the vast majority of the $226 million price tag being paid by the customer.
The new twist was that TraPac harnessed the Port’s ability to access lower cost money, some of which came from a State Infrastructure Bank loan acquired through the Florida Department of Transportation and another source was our ability to raise some of the needed capital through Special Purpose Facility Bonds. The Port acted more as a broker or a conduit to lower cost capital for the customer who assumed the debt and pays the debt service.
Their tremendous investment in improvements and facilities on JAXPORT property is reflected in the favorable terms of the lease and operating agreement and the extended term of the lease which allows TraPac to amortize their very significant investment at JAXPORT for at least thirty years. In return JAXPORT now boasts the near completion of the most modern, state-of-the-art container terminal on the East Coast, capable of handling post-Panamax vessels, opening for Jacksonville our first solid linkage to the Asian trade lanes and ultimately providing over 5,700 new direct and indirect jobs and nearly a billion dollars’ worth of annual economic impact for the region. I am delighted to report that construction of the terminal is on time and on budget with a scheduled opening at the end of 2008.
The most recent evolutionary mutation in the financing of port infrastructure needs came last year as we began to develop the MOU with Hanjin Shipping of Korea. Certainly they appreciated the innovativeness with which we financed the construction of the TraPac terminal, but they were not as comfortable with the assumption of the cost of the terminal which could approach $400 million. So, we began to explore other options, quickly eliminating all of the previous financing mechanisms used by the port. Coincidentally, we were approached by several highly reputable companies that manage and invest large capital funds. They showed keen interest in investing as much as hundreds of millions in port transportation infrastructure. This entrance of private sector investors into the public domain of the nation’s ports is referred to a “P3” investment, standing for public-private party investment. We have been surprised and delighted at the quality and wealth of potential investors with whom we have visited and, in many cases, have visited the Port. While P3 investment is new and uncharted territory for us, it represents the optimal solution to our achieving JAXPORT’s immense developmental potential.
Ron Baker, my Deputy and CFO has issued a Request for Information which is similar to a Request for Qualifications. From the responses we receive, we will prepare a list of companies which show an interest and the ability to invest in significant transportation infrastructure projects at JAXPORT. Those companies will receive a comprehensive Request for Proposals, which the Port will carefully evaluate this spring for the selection of a P3 partner early this summer. Our partner will be asked to provide the capital to design and build various new marine terminals and transportation infrastructure thus sharing in the relatively low risks and potentially enormous rewards of the facility development and its long term operation.
From my perspective this new evolutionary wrinkle is the key to funding JAXPORT’s future as a premier container port, ready for post-Panamax vessels, and insuring our future as an immense economic engine and the center of the identity of Jacksonville as the Southeast’s center for transportation and logistics - a gateway to the world.
Courtesy of Florida Shipper magazine
