HJR 72: Joint Subcommittee Studying Public-Private Partnerships Regarding Seaports in Virginia

October 22, 2008

The joint subcommittee met in Norfolk for its third meeting.

Presentations

Michael McClellan, Norfolk Southern Corp.
Norfolk Southern is the second largest eastern railroad carrier in terms of revenue and track mileage. In the last four quarters, Norfolk Southern generated over $10 billion, with coal and intermodal accounting for about 47% of this revenue. Intermodal is 20% of revenue and 41% of units. While Norfolk Southern serves most of the primary ports on the east coast and does significant intermodal and dry cargo business at all of them, the port facilities of Hampton Roads are of particular importance to the railroad for several reasons.

First, Norfolk Southern owns and operates a large general merchandise port facility, Lambert's Point Docks. Second, Norfolk is home to Lambert's Point coal piers, which provide the majority of Norfolk Southern's capacity for coal exports. Finally, the Hampton Roads container terminals, including the Portlock facility in Chesapeake, are a critical part of Norfolk Southern's overall intermodal network.

Mr. McClellan advised that Norfolk Southern has an extensive intermodal network serving the East Coast ports, but that the company could not comment directly on the merits of privatizing all or a portion of the property or operations of the Virginia Port Authority (VPA), as it does not know the structural form or economic costs and benefits that the Commonwealth might be considering for such a transaction. However, given that Norfolk Southern has a large portion of its international intermodal business generated from VPA facilities, it is a key stakeholder in this process and wants to ensure that whatever structure is ultimately adopted promotes the viability of this port. To this end, Mr. McClellan recommended three key criteria in evaluating any change in the current structure of the container operations of the VPA: economics, development, and investment.

The first criterion should be preserving and enhancing the port's economic competitiveness. Steamship lines are extremely sensitive to even small changes in their overall cost structures. When costs go up for either port or inland services, the steamship lines have proven very adept at quickly shifting their networks to lower cost solutions when cost inputs change. This is particularly true when they perceive that these cost changes are structural and permanent. Thus, if a change in the current structure of the VPA would result in an increase in the cost structure and price structure of the port in a meaningful way, Norfolk Southern believes that this would be a negative for the port overall. Such a cost increase might manifest itself in container fees, increased debt by a new entity, or increased land rents or taxes, all of which would ultimately drive up the prices per unit to the steamship lines and ultimate shippers, driving away freight. Mr. McClellan suggested that developing privately funded and operated terminal facilities on Craney Island seems to be one of the approaches that the VPA might engage in to ensure cost competitiveness of the port, particularly for those steamship lines that are demanding their own terminal assets on the East Coast.

The second criterion is preserving and enhancing the port's economic development role and capabilities. While the vessel and port economics are the opening ante when steamship lines determine their vessel rotations, having a strong base of customers that receive or generate cargo is required for a winning hand. Competition to develop landside customers and facilities up and down the East Coast is fierce, and ensuring that the VPA or any new entity has an economic development mission, and is closely aligned with other economic development entities in the Commonwealth of Virginia, is a very important capability for the success of this, or any, port.

The third and final criterion is ensuring the continued investment in the port for both capacity and productivity. While it is conceivable that a change in structure of the VPA and its operations might not result in any immediate increase in today's cost structure, if such a deal inhibited investment in the port's facilities, it would be easy to envision a gradual erosion in the strategic competitiveness of the port. Capacity growth capability and ongoing operational productivity improvements are key determinants when steamship lines select ports for their operations. Any degradation in the ability of a new owner to invest in capacity and productivity, whether perceived or real, will degrade the strategic competitive position of any port.

One criterion not mentioned is the ultimate value that could be derived by the Commonwealth from the privatization of all or part of the VPA and its operations. The competitive position of all of the ports in Hampton Roads is of extreme importance to Norfolk Southern, and not just because the ports in Hampton Roads produce more container volume for Norfolk Southern than any other port. Norfolk Southern, along with the Commonwealth of Virginia and the federal government, and with the support of the VPA and the Virginia Maritime Association, are undertaking one of the most expensive and complex clearance and line improvement projects in the company's history.

Thomas J. Simmers, Ceres Terminals, Inc.
Thomas Simmers discussed the number of vessels, operating income, revenue, and locations of the operating and landlord ports of Ceres Terminals, Inc. Mr. Simmers discussed how, in his opinion, privatizing works from an operating perspective. According to Mr. Simmers, the privatized model of ports operations increases profit margins, decreases costs, better utilizes assets, delivers more seamless service, and focuses on both land transportation and vessel production. Moreover, Mr. Simmers testified that privatization frees up government capital for other public projects and can make the ports more competitive because private industry can build quicker and more efficiently than the government.

Andy Hecker and Mike Crist, Moffatt & Nichol
Andy Hecker and Mike Crist delivered a presentation about the 2040 Master Plan update for the Port of Virginia. The presentation began by the gentlemen discussing the purposes of the Port of Virginia: the promotion of maritime commerce, economic and local business growth, job creation. Next, Mr. Hecker and Mr. Crist discussed the needs of the Port of Virginia being met by balancing demand and capacity, long-term planning, investments, and fiscal discipline. Noting the efficient transportation, such as rail improvements, assists in the generation of statewide benefits, Mr. Hecker and Mr. Crist stated that opportunities exist to grow demand of port use, maximize productivity gains, promote distribution of jobs, buildings, and cargo, and advance technology through operational efficiency and automation. Furthermore, Mr. Hecker and Mr. Crist acknowledged the uncertainty of the national economy, that competition for cargo and land distribution centers is fierce, and the need for continual evaluation of short-term and long-term capital and resource allocations. Mr. Hecker and Mr. Crist stated that port activity continues to generate benefits for Virginia; a fiscally conservative plan supports growth and needed investments; capital improvement plans relating to Craney Island fit funding scenarios; and economic uncertainties affect the pace of long term plans. All the presentations can be found in their entirety on the joint subcommittee’s website.

Next Meeting

The next meeting is scheduled to meet in Norfolk at Old Dominion University on December 1, 2008.

Chairman:
The Hon. Harry Purkey

For information, contact:
Kevin Stokes and Caroline Stalker, DLS Staff

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