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Prospectus Blog Cargo Traffic, Private Investment Growing At U.S. Ports

Forecasts predict a veritable tsunami of maritime cargo swamping U.S. port facilities in the years ahead. In the past 5 years container trade in North America has increased by 6.8%. It’s projected to soar by 50% by 2015, from 48 million TEUs in 2005 to 72 million in 2015. (TEU stands for “twenty-foot equivalent unit,” a standard measure of container capacity).
By 2020 North American ports and their associated intermodal systems will be severely congested, with demand exceeding current capacity by as much as 200% assuming current productivity and growth levels, predicts John Vickerman, an industry expert in planning and design of port, intermodal and freight logistics facilities.
How should U.S. ports respond to this challenge? Some observers suggest that the capacity problem would be solved if port authorities placed operations on a 24/7 basis, as many foreign ports are doing. But there are many good reasons why that would be impractical in the case of U.S. ports, claims Brooks Royster, former director of the Port of Baltimore. These constraints include local regulation and work rules limiting hours of operation, inadequate labor pool of longshoremen, and the need for some slack time to perform routine maintenance. Only Asian ports exceed the productivity of our own ports, Royster contends, and then only because many of them are transshipment ports that do not have to move containers “through a gate” as is the case with destination ports like ours.
In rare cases, large private shippers will take care of their growing needs for cargo processing by constructing their own marine terminals. The Maersk Terminal in Portsmouth, Virginia is the first such in the U.S. to be independently constructed and privately financed by a major shipping line. But in the great majority of cases, major improvements and expansion of physical port capacity and their intermodal connectors currently falls on the shoulders of local taxpayers.
For example, container fees have been used to fund construction of the Alameda Corridor freight rail expressway conecting the ports of Los Angeles and Long Beach (above, left); while “availability payments” would be used to help finance the Miami Port Tunnel, and the Port of Savannah Connector. Private concessionaires will invest in the projects up front and assume construction and performance risks. The public authority will pay the concessionaires an annual fee based on the condition and performance of the facility and its availability for public use. If maintenance, congestion levels, incident response or other stipulated performance measures are not met, the payments will be reduced.
A relatively new trend that may profoundly affect the future of port expansion is the growing willingness of private equity markets to invest in port facilities.
For example, last February, the AIG Global Investment Group bought long term leases to the Port of Newark terminal. The investment division of Deutsche Bank has bought Maher Terminals, the company that runs operations at the Port of Elizabeth in New Jersey. And the Ontario Teachers Pension Fund has taken over the lease from a shipping conglomorate to operate a terminal on Staten Island, N.Y.
In each case, the private investors are expected to inject new capital to improve the facilities and make them more productive. Even larger initiatives are in the offing. The Port of New Orleans is preparing a request for proposals (to be issued in 2008) inviting the private sector to participate in a one billion dollar program of facilities expansion including a new container terminal and a new cruise ship terminal.
Just as in the case of toll roads, the global capital markets have come to recognize that ports are a sound investment. Institutional investors with long-term investment horizons, such as pension funds, look upon these assets as a safe investment that offers future returns comparable to those from fixed income and real estate.
The growing scarcity of deep water port capacity and environmental obstacles to building new “greenfield” ports gives existing port facilities a large “revaluation” potential and more future pricing power — and thus makes them more attractive to private investors, speculates Robert Flanagan, Senior Vice President of First Southwest Company and former Secretary of Transportation in Maryland.
Three recent announcements underscore the interest of global capital markets in transportation infrastructure: Australia’s Macquarie Bank is planning to raise up to $8 billion to invest in European infrastructure assets as it continues its aggressive expansion in Europe, Middle East and North America. Called “European Infrastructure Fund III,” it will be Macquarie’s biggest single fundraising move in Europe, as it seeks to take advantage of plans by governments across Europe to privatize roads, airports and utilities. The Carlyle Group, one of the largest U.S. private equity funds, has announced that its Infrastructure Partners fund has raised $1.15 billion for investments in U.S. and Canadian transportation infrastructure projects. CalPERS, the largest public pension fund in the US ($245 billion in assets), has announced that it plans to shift up to $2.5 billion to a new infrastructure program focused on investments in new roads, bridges, ports, and water systems.
In announcing their decision, Charles Valdes, Investment Committee Chair, said CalPERS could become a major player in solving some pressing capacity problems related to transportation infrastructure.
CalPERS’ action, which is the first such initiative by a major U.S. public pension fund, may augur similar moves by other pension funds.
Private investment in ports will be highlighted on the agenda of the North American Port and Intermodal Finance Investment Summit December 3-5 in Coral Gables, Florida. The Port of Tacoma’s Jeannie Beckett, Senior Director, Inland Transportation, will be among panelists discussing new financing techniques in a Dec. 5 segment titled, “The Road Ahead.”
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