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Still Hoping For A Harbor

Experience has led the company’s management to see licensing and production as Is the window of opportunity for Puerto Rico's $1 billion Ponce/Guayanilla Port of the Americas transshipment complex half closed or half open?


March 15, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

If we build it, will they come? The Port of the Americas could generate billions in economic activity for Puerto Rico and tens of thousands of jobs… if we meet the needs of tomorrow's shipping industry.

In 2001, after Gov. Sila Calderon came into office, she announced that her administration would move forward with the construction of a transshipment port and value-added manufacturing and support services complex in Puerto Rico’s southern area. The news was welcomed, not only because it was a rare example of support for a project begun by a previous administration, but also because it promised to significantly benefit the island's economy.

Fifteen months later, concern is starting to build over whether progress in moving the project forward is fast enough to take advantage of what was once described as a narrow window of opportunity for the economic development initiative.

The renamed Port of the Americas was relocated from Guayanilla to both Guayanilla and Ponce. It would still involve an investment of $1 billion in public and private funds, and still promises to add some $3.5 billion annually to the island’s gross domestic product within five years, with an increase to $6 billion after 10 years when the project becomes fully operational. The new plan maintains the potential to create more than 1,000 jobs in the port’s operation and administration, plus another 20,000 direct and indirect jobs in the value added-zone.

Is it still a good idea to spend so much money on this sort of economic development venture? Most industry experts say… maybe.

"Right now is a very difficult time for the container ship industry," said Dan Clague, a transportation & infrastructure investment banker with London’s Societe Generale.

In 2000, Clague was speaker at the Rossello administration’s transshipment summit, the initial effort to drum up interest and support from international investors. At the time, Clague was impressed by how supportive of this project the government had been, a key factor in its potential success.

"All these businesses were set up during the 1990s to serve the container ship market. Now the shipping industry is going through the worst conditions of the last 20 years, contrasting sharply with the state of affairs in 2000 when international container freight rates were high and people were making money.

"The economic slowdown has had a terrible effect on container ports and ocean carriers are looking to port operators to cut prices. If the operators don’t reduce their rates, there is no hesitancy in abandoning port calls, which in turn affects the global network," said Clague.

Clague says that whatever economic feasibility study is done now for Puerto Rico’s Port of the Americas needs to take the long-term view, since the transshipment market is one of the most competitive maritime sectors, where ocean carriers choose terminals for reasons of cost.

Economic impact of transshipment in southern Puerto Rico

The Port of the Americas could be a profitable business venture–not only from the maritime cargo transportation view but also for the economic development of southern Puerto Rico. After the petroleum industry went belly up in the 1970s, southern towns such as Guanica, Guayanilla, Yauco, and Peñuelas have experienced double digit unemployment rates and average per capita incomes of less than $10,000 annually.

The construction of the Port of the Americas’ transshipment facilities would enhance both the area’s and Puerto Rico’s economic growth, particularly if it creates more than 20,000 direct and indirect jobs over the life of the project. Transshipment expert Ernst Frankel, who compared manning projections for the ports and its value-added areas with other large container terminals in Europe, North America, and Asia, arrived at this number.

According to Frankel, by the end of the ports’ third and final phase (approximately 10 years after the start of operations) about 528 workers would be required to work in port management, operations, engineering, and maintenance. This is due to the high level of technology and efficiency that are needed to operate today’s ports. The spin-off ratio of indirect to direct jobs in transshipment is usually 2.5 jobs generated outside, which would total 1,320 direct and indirect jobs connected to the operation and administration of the Ports of the Americas itself.

But the real attraction would be the creation of 20,000 direct and indirect jobs on 1,000 acres of value-added activity manufacturing and support services areas, located north of Guayanilla Bay and surrounding Ponce’s port. According to estimates, Phase 1 should generate 3,000 to 5,000 jobs three to five years from the start of port operations, resulting in 10,000 to 15,000 indirect jobs. After Phase 2 begins, it could result in an additional 3,000 to 5,000 direct jobs and 5,000 to 6,000 indirect jobs.

This is the real economic impact of building a transshipment port in the south.

Is the window of opportunity still open?

As of today, few experts had chosen to address what was a crucial element of the initial 2000 transshipment project: Are we still in time to develop a successful transshipment and value-added economic development zone in Puerto Rico?

According to Port of the Americas Co-manager Hector Jimenez Juarbe, given the current timetable construction will not begin until late 2004 under the most optimistic scenarios.

Whatever happened to Frankel’s window of opportunity, where port construction had to start by 2002 to avoid major port operators investing capital in rival ports currently operational or to be built?

CSX World Terminals Carl Foltz says that the window has closed. Of course, on Feb. 21 CSX initiated construction as port developer of a transshipment facility in the Dominican Republic’s Port Caucedo, which it hopes to start operating by the end of 2003. According to Folst, the port will have a capacity of 500,000 TEUs (twenty-foot equivalent units or containers).

"From a port developer’s standpoint, we do believe there is a need for a modern container handling transshipment facility in the Caribbean. There’s Freeport, Bahamas and Kingston, but we preferred Port Caucedo’s strong indigenous (domestic) cargo and the Dominican Republic’s robust market. Any carrier would like to have a port to call on that handles indigenous as well as international cargo," said Foltz.

Foltz homed in on a theme found in the government’s transshipment port proposal–wouldn’t it be perfect if the 2.3 million TEUs that now pass through the Port of San Juan, which include about 350,000 TEUs of international cargo, moved through the Port of the Americas?

Some experts believe that carriers who now transship cargo in Puerto Rico do so profitably because they are also carrying cargo that stays on the island (domestic). Would those carriers be willing to drop off their domestic cargo in San Juan and continue to Ponce or Guayanilla to transship international cargo? Probably not.

Looking for domestic cargo in the transshipment port

But this seems to be a marketing point in this administration’s future port proposal.

"Puerto Rico is a good market for transshipment because of its international and domestic markets," said Ocean Shipping Consultants Director Andrew Penfold. "When we looked at the future level of demand in the Port of San Juan, we looked at the possibility of improving the facilities. But even after those improvements, we estimate that by 2007 or 2008 the port will reach its limit at approximately 3.5 million TEUs. What do we do then?

"Puerto Rico’s two million TEUs are a result of annual growth in demand over the past 10 years because of a strong economic development, the result of manufacturing and import markets. So the point is to link containers from Europe and Asia to regional markets such as the Caribbean, as well as the U.S. northeast and South America, in what we call a hub & spokes pattern.

"Our second market is linking deep-sea trade. At the moment, lots of TEUs are coming from the U.S. through the Panama Canal and Mona Passage into Asia and vice-versa; also from North America to Brazil and Argentina. Puerto Rico’s location is perfect to link together what we call a relay business. But we also need to consider taking a share of the island’s domestic cargo business. When you look at the ports competing in the Caribbean, none (either existing or planned ports) offer as much domestic container market [as Puerto Rico]," said Penfold.

And what do the big five American flag Jones Act ocean carriers have to say about that?

Only Crowley, Sea Star and Navieras have said they would expect to have some presence at a transshipment port in the south of Puerto Rico, whether Guayanilla or Ponce. One of the companies will consider transshipment only between Puerto Rico and the U.S. But most agreed that any new operation related to the transshipment port would be seen as a completely different kind of venture for the company.

Societe Generale’s Dan Clague also brought up the key words: domestic cargo market.

"If the Port of San Juan’s traffic could be relocated, it would be something different. And with transshipment cargo on top, this would lower prices and make the port very competitive. It would not be surprising if a best economic feasibility study listed as an alternative that the port of San Juan’s cargo eventually moves to the south," said Clague.

CARIBBEAN BUSINESS also spoke with P&O Ports North America Regional Director Robert Scavone, one of the few operators that do not have a large transshipment presence in the Caribbean and is interested in Puerto Rico. The company is a global port operator with container and general cargo facilities in 19 countries.

"If a port already has an important domestic cargo market, that is interesting, but we probably would be more attracted if there wasn’t a large port [such as San Juan’s]," said Scavone.

"Transshipment port activities go where they are cheapest, because cargo stays there only a couple of days. So, Puerto Rico’s U.S [labor] cost structure is a significant factor. The fact that there is transshipment and domestic cargo in one place could justify the investment."

Ponce as part of the transshipment project

In 2001, Ponce Mayor Rafael "Churumba" Cordero insisted that Gov. Calderon’s Port of the Americas project include Ponce’s Port of the South. Many people thought this could be a deal breaker for the project’s eventual realization. But Mayor Cordero actually based his demand on Frankel’s 2002 Puerto Rico Transshipment Port Feasibility Study & Project Outline.

The document, prepared for the Rossello administration’s transshipment proposal, stated, "Ponce’s best use would be as an interim facility while the larger capacity port areas are developed [in Guayanilla Harbor.] Its greatest advantage lies in the possibility of starting to develop a transshipment business and to commence operations [in Ponce] at a date that would be earlier than…Guayanilla."

After some negotiation, the Port of the Americas became a joint project with port facilities and value-added activity areas going up in Ponce and Guayanilla. As a result, Ponce’s Port of the South will get millions of dollars in infrastructure improvements and new construction, plus new equipment and machinery. (See related story.)

The task to navigate through all the intricacies of a joint Environmental Impact Statement (EIS) from the U.S. Army Corps of Engineers (USACE) and all its permits and studies now falls on Port Manager Hector Jimenez Juarbe and co-manager Ramon Torres Morales, Ponce port director.

"We all know this is a very complex project, described as such by the USACE," said Jimenez Juarbe. "It has various stages and the first one consists of all the studies that need to be made, especially in the environmental area, to identify terrain and value added activity areas, maritime traffic and a myriad other studies. My job is the coordination of all these studies, culminating in the selection of the Port’s operator and the financial structure of the project," said Jimenez Juarbe.

Value-added activity is the key

Jimenez Juarbe has also been working with the Economic Development & Commerce Department (EDCD) and Puerto Rico Industrial Development Co. (Pridco) on a master plan outlining the development of the port’s more than 1,000 acres of value-added activity.

The concept study includes an analysis of the types of business activities that would bring the most economic benefit to the project. In addition, the study has identified companies in the manufacturing, service, and other related industries that would qualify for and be interested in establishing operations within the value added zone.

Some of the companies identified are in electronics (Hewlett-Packard Co., Solectron Corp.), pharmaceutical manufacturing (Baxter Healthcare Corp., Eli Lilly & Co., SmithKline Beecham); retail (Costco Wholesale Corp., Goya de Puerto Rico Inc., Home Depot), shipping (Danzas Holding Ltd.), construction (Siemens), and technology (Waters Technologies Corp.).

"When we talk about job creation related to the Port of the Americas, we know that the port facilities alone have a high information technology content that is capital intensive and will create 500 new jobs and up to 1,000 jobs when it is completely developed," said EDCD Assistant Secretary for Strategic Business Edgardo Torres Caballero, who is working with Pridco in the planning of the value added component.

"But what will really produce jobs is the attraction of value added businesses realizing minor assembly or finishing processes that add value to products coming from Asian or European markets. The product would pass through Puerto Rico’s transshipment port [and value added zones] for redistribution to markets in the Caribbean, Central America and South America," said Torres Caballero.

The government has identified approximately 1,000 acres between the Ponce and Guayanilla/Peñuelas areas that could be developed for value added activities. Approximately 380 acres are available near the Port in Guayanilla. The rest lie in Ponce, some near the port zone and other land surrounding Mercedita Airport.

The EDCD and Pridco, along with the ports’ managers and an economic development committee made up of private and public sector members also discussed future prospects for businesses that could be attracted to the Port’s valued added areas. The group identified three main criteria for companies: they must be export-activity oriented, focused on high value-added manufacturing activities, and must have sustainable competitive advantages.

Pridco Executive Director William Riefkohl recognizes that the selling of the port’s value added area would rest on his organization’s promoters. In February, Riefkohl appointed Manuel Reyes Alonso director of Pridco’s Commercial Representative in Europe. Neil Watlington heads similar efforts for the agency’s U.S. mainland efforts.

"We are going to have to make an enormous effort and Pridco’s promoters are already adding the kind of marketing that the port’s value added zone will entail to their program," said Riefkohl.

"We have already visited similar value added zones in the U.S. such as Houston’s to become familiar with the concept. In order to sell the value added activities related to the port’s area, we have to deal with strong components such as packing, assembly, and adding value by installing small equipment or finishing products with minor manufacturing. This is a kind of marketing that is more aggressive than the type we have been used to do in the past but we will market the port forcefully," said Riefkohl.

Among the types of activities targeted, logistics and distribution companies are highly rated. Other activities include contract manufacturers, chemicals and allied products such as pharmaceuticals manufacturers, industrial machinery & equipment companies, food & beverage distributors, electronics companies, professional & scientific instruments manufacturers such as medical devices producers, fabricated metal products companies, and automotive parts assembly businesses.

"Target industries such as distribution and logistics are important for the Port of the Americas and Aguadilla’s Rafael Hernandez Airport (RHA) because they have good synergy and complement each other as a multi-modal system. If you look at other ports, they have this type of system.

"Panama has its airports, an international cargo movement, ports, and a transport system that interconnects them. In Puerto Rico, we are following this line of development, with infrastructure plans for the southern and western regions’ highways that would connect the Port of the Americas and its value added activities with the RHA," said Torres Caballero.

In December 2001, Gov. Calderon assigned $38.7 million for Port-related infrastructure projects in the Ponce/Guayanilla/Peñuelas region. A 2000 estimate on expenditures related to infrastructure assigned $87 million for all three phases of the project.

Of the actual $38.7 million assigned by the governor, approximately $11 million will be assigned for Ponce’s water, sewerage, and highway infrastructure. The remaining $27.7 will be used for potable water, sewerage, electric power, and highway infrastructure projects in Guayanilla.

Other specialized support services and complementary activities will be promoted within the Port’s regions. Support services include banking, ship handlers, stevedoring services, freight forwarders, tug boat operators, customs brokers, logistics & supply management, among others. Complementary services such as housing, recreational, and cultural activities will be developed to enhance the Ports’ regions.

A development study for the Port’s value added zones has been prepared by CMA Architects & Engineering for an interagency group made up of EDCD, Pridco, the Port’s management, the Department of Transportation & Public Works, and the Puerto Rico Infrastructure Financing Authority. It proposes new land sub-division and zoning concepts for the value added areas, considering high technology industrial uses.

The EDCD is clear that the success of the project will need to be measured continuously. Indicators of what the project will be contributing to Puerto Rico’s economy will include new net exports; new economic activities linked both to the port and to related activities, and derived tax income directly related to the port.

Among the new economic activities’ indicators to be considered are construction, manufacturing, and advanced services, among others. Tax income includes impact on regional share of Puerto Rico’s gross domestic product, regional welfare indicators, as well as income, franchise, property, and construction taxes.

"These indicators will be measured throughout the length of the project. Once you attract new industries, one must continue attracting others. Industries come and go for many reasons–such as competitive issues–but other companies will come because they will be attracted to Puerto Rico’s competitive economic development incentives, its infrastructure, financial capacity, or access to capital.

"Puerto Rico is highly competitive worldwide, in areas that will make up for our high labor costs. When you add and subtract, at the end the island’s incentives balance other factors," said Torres Caballero.

Fifteen months after Gov. Calderon came into office, construction for the transshipment Port of the Americas is scheduled to start in late 2003 or 2004, with operations ready between 2006 and 2007. Jimenez Juarbe and a cluster of consultants are working round the clock on the necessary environmental studies and permits for both Guayanilla and Ponce.

But construction of the transshipment ports cannot start until all the documents are presented to the USACE. When all the documents are in, the USACE will initiate public hearings, examine all the required documentation, and issue the final EIS.

Meanwhile, Frankel is working on a special report about the effect of Jones Act restrictions on international maritime cargo in Puerto Rico. Additional international and local consultants are working on the port’s economic viability study, which will be used to market the project to potential port operators and maritime cargo carriers.

"According to our timetable, if the USACE approves the final EIS by October, we will distribute a request for qualifications for the port’s operator with a Feb. 2003 deadline. By Summer 2003, we should be ready to evaluate qualified candidates and, by September, evaluate their individual proposals. After finalizing the contract, the chosen operator would have about six to eight months to gather all the permits and begin construction," said Jimenez Juarbe.

The port’s operator will need to invest up to $650 million in the project, of which the government will absorb another $350 million in infrastructure development and public works improvements. How, or why, the financing plan is set up to make the Ponce port attractive for the investor to begin transshipment activities is not clear.

"The possibility of choosing one transshipment port over another requires a solid marketing study and analysis. Every company has a limited amount of capital and we try to be selective about what to pursue," said P&O’s Scavone.

"There is more to a market analysis that just the port alone. Our company would consult ocean carriers and other port users to get feedback. In addition to talking to the major players in the value added area we would look at tax exemptions, anything to offset operating costs. But the key piece of the puzzle is the market study," said Scavone.

This Caribbean Business article appears courtesy of Casiano Communications.
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