Ports Ponder Public Private Partnerships

 

Seaport and marine terminal finance draws from a wide range of funding sources, often combined to pay for a particular project. Ports are public goods, and as such, sometimes they also see varying contributions from federal, state, regional and local entities. At its lowest common denominator, the port business is all about connectivity; hence ‘port’ projects will frequently include an intermodal component, linking the actual dockside to the port’s hinterlands – the typical origin of outbound cargo, or ultimate destination for inbound shipments.

 

Paying for all of that has evolved over time. In places like Long Beach, Calif., where a multibillion dollar Alameda corridor project eventually provided excellent rail access into the port complex, the realization that much of port spending will actually be made outside the gates and away from the docks is the right thing to do. Earlier this year, interim Port of Long Beach Chief Executive Duane L. Kenagy told MLPro that, going forward, a great deal of the port’s capital program – about $1 billion – will be to invest in rail facilities. He added, “The first leg of that journey is on rail, and then a short drayage out into the inland empire.” But, he cautioned, “That has to become commercially attractive in order for that to work.” That kind of so-called P3 project also brings with a different risk model, for all stakeholders. 

 

U.S. infrastructure (which includes the waterfront and surface rail and road connections) is in desperate need of investment. In the American Society of Civil Engineers (ASCE) 2017 Infrastructure Report Card, ports earned the grade of C+, and the inland waterway system grade of D. About those grades, the ASCE report advised, “As ships get bigger, congestion at landside connections to other components of the freight network increasingly hinders ports’ productivity. Similarly, on the water side, larger ships require deeper navigation channels … to remain competitive globally and with one another, ports have been investing in expansion, modernization, and repairs.” 

 

The ASCE estimates that ports plan to spend $154.8 billion from 2016 to 2020 on expansion, but they point to a huge shortfall on the landside, which ASCE said is scheduled to receive only $11 billion in new federal funding for freight improvements through 2020, in the face of projected needs totaling $29 billion. Kurt Nagle, President and CEO of the American Association of Port Authorities (AAPA), said, “The port industry has identified a need of $66 billion in federal investments to port-related infrastructure over the next decade.” 

 

Because of the sheer diversity of port ownership and organization, as well as geographic contours – there is no one specific financing formula. Businesses (not governments) are responsible for movements of cargo. Quite often, port finance will include a private component alongside the government investment. Such deals are broadly referred to as Public Private Partnerships (P3), with each transaction having a unique structure. PPPs will only grow in importance under the Trump Administration. Lawyers Albert E Dotson, Jr. and Eric Singer from the Miami-based firm Bilzin Sumberg, wrote recently, “The new plan is anticipated to rely upon public-private partnerships (P3s) to bridge the gap between the cost of needed infrastructure and available government dollars.”

 

Government funding comes in a variety of flavors. An important initiative has been the Department of Transportation’s (DOT) Transportation Investment Generating Economic Recovery (TIGER) program, which has provided finance for dozens of port projects since its inception in 2009. According to the DOT, the grants have provided $5.1 billion of funding for projects since 2009. ASCE data says that port projects have comprised 11 percent of TIGER grants. However, the newly released Fiscal 2018 Budget does not provide any funding for TIGER. 

 

Another set of DOT grants, dubbed FASTLANE, came out of the 2015 Fixing America’s Surface Transportation Act. The ports, who are eligible to apply, have waxed enthusiastic because projects related to intermodal freight are eligible for the awards. Fiscal 2016 awards announced in July 2016 included the Port of Savannah ($44 million for a multi-modal connector facilitating on-dock rail), Portland, Me. ($7.7 million for projects including upgraded rail and highway crossings), Boston ( $42 million for improvements at the Conley Container Terminal) and New York ( $10.7 million for various rail connection enhancements). 

 

A Washington, D.C. group advocating infrastructure investment, the Coalition for America’s Gateways and Trade Corridors (CAGTC) applauded the 2018 budget, stressed that Federal grant programs attract private capital (at a ratio of 3.5x) and noted, “Public-private partnerships will not be the solution to all infrastructure needs, they can help advance the Nation’s most important, regionally significant projects.” 

 

The roster of projects in south Florida (a P3 friendly state), from the bigger access projects to the very specific business-related efforts, provides a good example of how varied funds sources – including those from the private sector – can be combined. In Miami, the new tunnel for trucks opened in mid-2014, nearly four years after construction began. The tunnel, which links the interstate highway network directly with the containership berths on Dodge Island, enables trucks to circumvent the congested downtown streets. A ‘win-win’ for everyone.

 

Financing for the tunnel was done through a web of highly complicated deals. In classic PPP style (a structure known as “Design-Build-Finance-Operate-Maintain,” where construction risk stays with the private participants), an investor consortium, consisting of Meridiam Infrastructure (a fund packager which raises money from institutional investors) and Bouygues (a construction behemoth worldwide, with headquarters in France) owner of the project’s equity, constructed the tunnel (and then got paid).

 

The State of Florida, through its Department of Transportation (FLDOT), paid for 50 percent of design/construction (handled by the construction division of Bouygues), originally pegged at around $670 million. The remaining 50 percent of the design/construction costs were divided up between Miami-Dade County (which oversees the port in its role as a “landlord”) and the City of Miami. The operations and maintenance are subcontracted to a private “concessionaire” until 2044, when ownership reverts back to FLDOT. According to the US DOT, total capital cost of the project was $1.1 billion, and total payments (including annual “Availability Payments” paid each year to the private concessionaire) are estimated to be $2.65 billion – much of it coming from the state. The private investors – insurance companies and pension funds who have invested through the Meridiam Infrastructure North America Fund – see their return over decades. 

 

Separately, and to accommodate the bigger post-Panamax vessels, a $220 million dredging project for deepening the channel to 52 feet, was paid for by the state ($112 million), with Miami-Dade County investing the $108 million balance. The state also contributed $20 million, approximately half the cost of four new cranes, with a reach of 22 containers, to serve the larger vessels. A related project – this one to improve intermodal freight connections – linking the port with the rail network, was paid for jointly by the state, the Florida Department of Transportation (FDOT), and the Port of Miami. TIGER grants played a role in funding this project, and privately owned Florida East Coast Railway also provided capital.

 

Further up the coast, at Port Everglades, which is operated by Broward County, expansion is in the works. Following a late 2016 authorization, the port has embarked on an expansion plan (with completion in 2022) that includes dredging to deepen its entrance channel and turning basin from its present 42 feet depth to 50 feet. The estimated $374 million cost is set to split mostly between the Federal government and the Port, with money generated solely from user fees. The state is contributing a small amount towards design. In late May, Port Everglades announced plans for a $437.5 million expansion project where new berths for larger vessels would be added (alongside an expanded turning area), and crane rail infrastructure for new Super Post-Panamax cranes on order would be added. 

 

Port Everglades has now received approvals from Broward County for its Port Everglades International Logistics Center, LLC (PE-ILC), a foreign trade zone (FTZ) that will be completed in 2019, replacing an obsolete facility. The port, which encompasses Hollywood, Dania and Fort Lauderdale, is no stranger to P3 arrangements. Steven Cernak, the port’s President and Chief Executive Officer, told MLPro, “One of most successful public-partner partnerships has been with the Florida East Coast Railway and the State of Florida.”

 

Mid-2014 saw the opening of an Intermodal Container Transfer Facility (near dock rail) that brings containers close to the berths via the FECR, instead of draying them through a congested part of Fort Lauderdale. In this deal, as described by the port, “Port Everglades contributed 42.5 acres of land … valued at $19 million. Construction costs are estimated to total $53 million, which will be paid through $18 million in grants through FDOT’s Strategic Intermodal System program, a $30 million FDOT State Infrastructure Bank loan, and $5 million from FECR’s capital plan. Cernak, who is also Chairman-elect of the AAPA, noted, “Together, we were able to build a 43-acre Intermodal Container Transfer Facility that can handle both domestic and international freight.”

 

In the new PE-ILC transaction, a long time tenant at the existing FTZ, International Warehouse Services, Inc. (IWS) will be leasing a newly constructed facility which will offer a wide range of logistics services, including 3PL warehousing, government inspections, and refrigerated storage. Eric Swanson, Florida-based Principal at Treadwell Franklin Infrastructure Capital, LLC (TFIC), described his firm’s role, saying, “TFIC is focused on the development of projects that are related to core infrastructure such as seaports, airports and other transit nodes. Our role is to structure, lead and manage the transaction, including attracting the appropriate financing.”

 

The deal’s structure sees a major private component, with Mr. Swanson telling MLPro, “The local partnership that includes TFIC, IWS and ANF Group (a construction company) is doing the predevelopment work and will attract equity and debt financing to the project. The project is a 30-year lease with an option for another 20 years. IWS will be one of the anchor tenants of the project.” He added, “Port Everglades will be providing a milestone payment of $3 million which is essentially to accommodate the site work required on the project as well as other needs. The Port has been very cooperative in working with our group to allow private financing, but has not provided any other funding mechanism.” 

 

For all the publicity and attention given this unique type of financing today, Cernak stressed that port executives are still learning about the structuring of P3s and that going forward, collaboration would be the key to future successes. “Public-private partnerships are both a challenge and an opportunity,” he insists, adding, “We must come together to share experiences on benefits and risks that will help us progress in developing P3s and attract future investments.” Separately, TFIC’s Swanson offered that “P3 projects are essential to the growth and efficiency of port operations. Used properly by both private and public entities, P3s can be effective tools for the execution of Port master plans and operations.”

 

In a recently delivered AIG white paper entitled, “The United States: The World’s Largest Emerging P3 Market: Rebuilding America’s Infrastructure,” the future of P3 structured transportation and infrastructure projects is painted as the way forward for many reasons. But, if the U.S. Department of Transportation (USDOT) defines P3s as “contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects,” then the AIG advice that “All private sector participants will be challenged to accept risk beyond their comfort zone and what had traditionally been the regime in other project delivery methods; and a significant portion of that risk, will not be transferrable to conventional insurance coverage,” should be given equal attention. 

 

In the end, a lot of good is coming from new and innovative financing packages, especially where it involves ports and infrastructure. But, warns AIG in the same white paper, “P3s are never going to be enough to supplant government spending, but government expenditure is no longer enough if the breakdown of vital public facilities is to be reversed.” A cursory look at the state of the infrastructure on our inland waterways probably makes that clear enough.

 

 

Miami, Florida is set to enter a PPP deal of a different sort. In March 2017, cruise giant Royal Caribbean (RCL) broke ground on new terminal that will provide a homeport for its largest cruise vessels. In a recent regulatory filing, RCL reveals: “In July 2016, we executed an agreement with Miami Dade County (MDC), which was simultaneously assigned to Sumitomo Banking Corporation (SMBC), to lease land from MDC and construct a new cruise terminal at PortMiami in Miami, Florida. During the construction period, SMBC will fund the costs of the terminal’s construction and land lease. Upon completion of the terminal’s construction, we will operate and lease the terminal from SMBC for a five-year term. We determined that the lease arrangement between SMBC and us should be accounted for as an operating lease upon completion of the terminal.” At a time that changes are coming to lease accounting, such a lease would remain off the books – not showing up on RCL’s balance sheet. When the deal was signed, local media sources reported, “The County agreed to pay $15 million for new roads to the terminal and surface work, while Royal Caribbean said it would finance the $247 million development (SMBC loan). The cruise company will also pay the county $9.5 million in annual rent.”

 

 

(As published in the May/June 2017 edition of Maritime Logistics Professional)