Investment in Seaports’ Long-Term Growth Is Critical to Successfully Achieving Economic and Environmental Sustainability Goals
By Mike Jacob, President, Pacific Merchant Shipping Association
One of the hallmarks of the federal approach to freight mobility and supply chain infrastructure in the United States has been the historical lack of dedicated national funding and investment. Whether public or private, most American seaports, railroads, and airports are nearly all funded and financed at a state, local, or corporate level.
Without direct access to dedicated federal revenues it is up to a decentralized entity to complete funding or financing, and as a result, the primary source of building a funding and financing model for any intermodal freight facility is capturing revenue derivative of traffic that benefits from the use of that facility. Tolls, tariffs, fees, wharfage, and lease revenues are the basic building blocks of all of our intermodal infrastructure, including our nation’s seaports.
As a result, the costs and ability to build projects based on future revenues need to be backed by financing that relies on projections of future demand. This means projections of demand-based volumetric growth remain just as integral to the ability of intermodal facilities to underwrite their investment in infrastructure as ever.
When a state or local government provides direct funding or supports the financing for the development of new seaport, airport, warehousing, or distribution center infrastructure, it is implicitly (via funding) or explicitly (via financing) placing its confidence that the benefits derivative from the future demand and use of the facility will exceed the costs of development. In other words, volumetric growth is always the hallmark of a successful intermodal supply chain investment. On the private side of this equation, it lowers average costs and marginal costs for customers and cargo owners – creating a virtuous cycle of market efficiency. On the public side of the equation, it grows jobs, economic benefits, and direct and indirect tax revenues. These revenues can pay for other non-revenue generating expenses and overhead in excess of original financing baselines. For ports, the most expensive non-revenue producing overhead are investments in environmental improvements.
This all works well when financing and funding parties benefit from long-term growth. But, when infrastructure generates lower cargo volumes than anticipated by the public or private sector, the situation runs the risk of a negative outcome: higher per unit costs for customers and the opposite of a virtuous cycle. Fewer jobs, lower economic benefits, and less tax revenues. In the long run, the existing infrastructure and overhead, including environmental costs, can ultimately squeeze out all future room for additional funding or financing. As private revenues which are shrinking over time cannot reasonably underwrite ever greater levels of capital for new capital costs.
This is our current dilemma on the US West Coast: without more robust growth in volumes, it is hard to reinvest in new, more expensive ports and carry the anticipated large, non-revenue generating overhead associated with the environmental improvements that loom on the horizon. Cargo volumes are already substantially lower than anticipated that supported the existing infrastructure and higher environmental costs compliance in the current system.
One recent example: the additional costs that will ultimately need to be paid by cargo owners or the Ports of Los Angeles and Long Beach due to the significant debt refinancing taken on for the construction of the Alameda Corridor in Southern California. This project is now at a critical point where one might surmise that no future room for additional revenue bonding exists, where even projected potential growth in volumes is so underwater that they cannot reasonably underwrite greater levels of capital for new environmental and infrastructure costs, even if they could potentially be associated with entirely new revenue streams.
This type of low volumetric growth situation will result in lower economic returns and less funds available for environmental overhead. And, if such improvements are needed exepeditously, it will be incumbent upon policymakers to dedicate greater levels of public investment in our intermodal port infrastructure. This will be necessary not just to pay for the overhead, but to develop actual public subsidies for financing that incentivize growth, leveraging economies of scale and lower per unit costs, reducing marine terminal operating and capital costs.
Such a pro-investment and volumetric growth-friendly freight policy by public agencies would yield greater levels of investments in infrastructure that policymakers are anticipating than waiting for financing to be forthcoming from a low or stagnant volumetric growth market. To successfully meet both long term economic and environmental sustainability goals, it is imperative to integrate growth and financing goals with volumetric-growth inducing infrastructure so the investments align higher volume goals with public subsidies and environmental mitigation. On the other side of the same coin, state and local regulatory agencies need to be exceptionally sensitive to the risks of any new non-revenue generating mandates or costs, including any type that could potentially act as a cap on volume, which ultimately could undermine the ability of entities that rely on volumetric-based financing to pay for non-revenue producing overhead.
The bottom line for US West Coast port stakeholders is unequivocally clear: it is imperative that policymakers support the alignment of public funding and private financing to underwrite the investments in long-term infrastructure necessary to grow the economy and meet our environmental goals.