Most ports along the Eastern United States are seeking federal funds to permanently deepen their harbors so they can take advantage of the Panama Canal expansion that will double its capacity. Bigger cargo ships will help businesses move goods faster and could lower the prices consumers pay. But with the federal debt and deficit soaring, there is little taxpayer money available for harbor deepening.
Public-private partnerships (PPPs) can help supply the needed port funds. This paper outlines the background of this issue, the federal process involved, and how public-private partnerships can help finance port deepening projects.
When the deepening of the Panama Canal is complete in 2014, ships from Asia will be able to unload their cargo at Atlantic Ocean ports. Currently, electronics, clothing, and other products shipped from Asia are unloaded at Pacific Ocean ports, like Long Beach, Los Angeles and Oakland, and then carried by truck, train, plane, or some combination to reach East Coast markets. This increases costs for consumers and decreases profits for producers.
The deepening of the Panama Canal could speed up the movement of goods and be a boon for consumers. Currently, most East Coast and Gulf Coast ports are not deep enough for the next generation of container ships that are 50 percent larger than current vessels. For example, the 42-foot-deep Port of Savannah in Georgia requires vessels to come in only half full so the ships do not run aground. Using only half the cargo capabilities of these large ships is not cost-effective or logistically efficient.
CURRENT FUNDING PROCESS
Most ports do not have the local funds to deepen their harbors. The cost of deepening ranges from $600 million for the port of Savannah to $1.3 billion for the port of New York.
Ports must go through a cumbersome, lengthy, and unpredictable process to obtain federal funding that is governed by the Water Resources Development Act of 2007 (WRDA 2007). The first task in the current federal process is a reconnaissance study, which examines the cost-benefit ratio. Conducting the study requires a Congressional authorization and an appropriation and must show a cost-benefit ratio of 1.0 or higher, where the benefits of deepening the port are greater than the costs, for the process to continue.
The feasibility study, the next step, includes an Environmental Impact Study, Design Overview, and Economic Analysis. This Economic Analysis often compares one port to another port to determine if a project has a net national benefit. In the analysis the Army Corps of Engineers studies incremental increases such as deepening a harbor from 42 to 43 feet and then from 43 to 44 feet. The Corps studies each incremental increase until it finds the deepening with the greatest benefit. After the Corps has completed the study it transmits the findings, labeled a Chief’s Report, to the Assistant Secretary of the Army for Civil Works. The findings recommend proceeding – if it is appropriate – with the process. If the Assistant Secretary of the Army for Civil Works agrees with the recommendation, the plan will be forwarded to the Office of Management and Budget, which must also approve the project, and Congress.
At this stage the project is approved, but it is not yet funded. Currently OMB has a freeze on funding all new port deepening projects because it is prioritizing public safety projects. The Port of New Jersey/New York is the only port to have received sufficient funds -over $600 million- to deepen its harbor. And it took the port almost 10 years from the start of the process until the port began the dredging process in 2008.
Many other East Coast and Gulf Coast ports are on a waiting list for federal funds to permanently deepen their harbors. The following ports have expressed an interest: Boston, MA; Morehead City, NC; Charleston, SC: Savannah, GA; Jacksonville, FL; Canaveral, FL; Fort Lauderdale, FL; Miami, FL; Mobile, AL; Port Arthur, TX; Galveston, TX; Texas City, TX; Freeport, TX; Corpus Christi, TX; and Brownsville, TX.
The current situation is problematic for two reasons. First, with the Panama Canal opening in 2015, other ports cannot afford to wait for a 10-year-long process. Second, with limited federal money available and the prioritization of safety projects, some ports may not receive any federal funding at all.
The U.S. needs another way to permanently deepen harbors. One solution is public-private partnerships. Currently, transportation PPPs in the U.S. are limited to highways (both new and existing facilities) and transit (building new facilities). Port PPPs would deliver needed infrastructure, raise new sources of capital, shift risks to investors, provide a business-like approach, and encourage innovations.
How would a PPP process work at US ports? The private company would pay for and perform the initial deepening and future maintenance of the harbor. To recoup this investment, the company would likely operate the port. Often times, the private company would rent the port from the state via a fixed annual payment to the state, a variable payment or a partial lease.
For example, Maryland has signed a 50-year lease with Ports America to operate the Port of Baltimore. Ports America will invest $500 million in the project and provide $140 million to the state to fund highway, bridge, and tunnel projects near the port. The state received an upfront payment of $105 million and gets annual lease payments of $3.2 million. Maryland has the right to cancel the agreement if certain performance metrics, such as the construction of berth IV at a depth of 50 feet, are not met. Ports America agreed to build/expand berth IV and operate and maintain the Seagirt marine terminal for 50 years.
Public-private partnerships (PPPs) can bring much-needed money to ports at this critical juncture. Busy ports, like Charleston, South Carolina and Galveston, Texas would likely attract a lot of interest from private companies willing to finance expansion and improvement projects.
The PPP would also eliminate many of the steps in the current process, including the wait for an appropriation. Additionally PPPs could lead to the most appropriate ports being dredged first. Currently, the most powerful congressman can determine how many ports will be funded in a particular year guaranteeing their port makes the cut.
PPPs could be further encouraged in the future by changing several parts of the process.
Ports, or the private partner, could contribute more than 50 percent of the funding for the feasibility study-perhaps 80-100 percent allowing the corps to complete the study in a timely manner. If the port deepening project is approved, the federal government could refund the extra funds above the 50 percent benchmark for the feasibility study. Other processes such as the Environmental Impact Study could be shortened. Duplicate studies by state and local governments could be conducted at the same time as federal studies or could be eliminated.
With the deepening of the Panama Canal, East Coast ports cannot afford to sit around and wait for the current appropriations process. The canal’s expansion is going to bring great economic benefits to the ports capable of handling larger ships. Yet, as it stands, most American ports won’t be able to take advantage of the opportunities.
Author Note: The author wishes to thank John Paul Woodley, Jr. for his help clarifying the port deepening process. Mr Woodley is Principal in the Environmental and Energy Practice Group at Advantus Strategies, and served as Assistant Secretary of the Army from 2003-2009.
Baruch Feigenbaum is a policy analyst at Reason Foundation.