Interview_ Admiral Richard Larrabee “It's not like you can just find by bestt571


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									Interview: Admiral Richard Larrabee

                                                   “It’s not like you can just find 400 acres
                                                   and build another container terminal-
                                                   land is scarce in the port.” Rear
                                                   Admiral Richard “Rick” Larrabee,
                                                   heading up the Port Commerce
                                                   Department at the Port Authority of
                                                   New York & New Jersey (PANYNJ),
                                                   talks very much like a businessman -
                                                   with a keen eye for strategic planning.
                                                   At the busy Port Commerce offices in
                                                   Manhattan’s Flatiron district, Larrabee
                                                   talked to Port Strategy (PS) about a
range of topics- including the nearly $2 Billion Capital Plan for port improvements over
the next 10 years, the new type of infrastructure investors, and the “nuts and bolts” of
deepening waterways and raising bridges to accommodate larger vessels.

Larrabee, who came to PANYNJ in 2000, after retiring from the US Coast Guard,
oversees a large landlord port business with 2006 throughput exceeding 5 million TEU
(an 8 percent rise over 2005). Dozens of container lines, serving ports throughout the
world on all water routes, call at PANYNJ’s six container terminals. At times, problems
facing the Port Commerce Department seem daunting. World trade is not standing still;
particularly with the widened Panama Canal set to coming on stream in 2014 (at the same
time that the Kill Van Kull waterway and Newark Bay will be dredged to 50 feet).
Outside stakeholders, recognizing the economic importance of the port (some 320,000
jobs are closely tied to port activity, according to a study by Rutgers University), want a
port that supports economic growth, but also want environmental stewardship and
mitigation of severe congestion bedeviling the region’s streets and motorways. And, the
PANYNJ projects must pay their own way- they do not share in tax collections.

One “high class problem” came onto Larrabee’s radar around 2006, when yield oriented
and pension investors discovered container terminals (and other port related investments).
This asset class offers growing cash flows over long terms- an ideal match for the funds’
financial contours. Within the space of a year, three of PANYNJ’s six major facilities
saw their tenants’ business sold to financial buyers. Larrabee told PS: “Last fall <3Q
2006>, after seeing the investment community interest in this type of investment, we
realized that we’d need to lay out a set of principals- so we could treat investor-buyers
objectively and fairly.” Though all three deals are private (AIG assuming P&O Ports Port
Newark Container Terminal, a Canadian pension fund acquiring New York Container
Terminal from OOIL and a Deutsche Bank entity gaining control of the Maher Terminal
in Port Elizabeth), each transaction entered the media spotlight as the negotiations got
down to short strokes.
“Each of agreements with tenants had extensive provisions allowing a lessee change of
control,” said Larrabee, who enumerated three criteria spelled out by PANYNJ for
evaluating infrastructure buyers. “First, are the potential new owners suitable, we did
extensive due diligence- they financial resources, management commitment, and
operational resources to properly operate the terminals. None of these companies had any
history at all in our business, we needed to satisfy ourselves that they would make good

Several times, in various contexts, during our hour-long session, Larrabee talked about
increasing throughput through the port- which straddles New York Harbor- across two
states. He stressed that “New York / New Jersey is a landlord port, but everything we do
needs to be self supporting,” and, when discussing the three instances of investment
funds, he said: “Each of these terminal operators will need to make improvements, and
make investments that will increase capacity and improve productivity. We are not going
to do it for them.” Such considerations are in congruence with the second criterion
enumerated by Admiral Larrabee in evaluating the suitability of new terminal owners:
“Where these new owners going to continue to operate these terminals consistently with
the long term interests of this port?” He added “The terminals are valuable for us, and for
them, we wanted to see evidence that they would continue to fund improvements with
capital investments. That’s where some of the big numbers in the trade press, like $54
Million in one case, came from. We asked each one of the operators to commit
themselves to invest what we felt were reasonable numbers going forward.”

The PANYNJ has been making, and continues making investments to grow its maritime
business, a theme highlighted in Larrabee’s investment discussion. He told PS: “And
finally- the third criteria in our decisions on investors, which got labeled as the ‘Consent
Fee’, was an acknowledgement of direct investment that we had made in the facilities.
We wanted a certain percentage, one third, of those expenditures that we had made.” He
stressed that indirect expenditures, such as those where PANYNJ splits to the cost of
channel deepening with the US Army Corps of Engineers, were not considered.
Explaining further, Larrabee explained: “An important part of the value earned by the
Sellers, a premium over what they might otherwise have gotten, was due to public
investment- improvements in the facilities made by this Agency <PANYNJ>.”

“At the end of the day, we were able to tell our Board that we had satisfied the three
criteria- then, we had three brand new owners.” Larrabee told us. “Going forward, we
would expect all new investments to be made by that terminal operator. That’s not the
model that some other big ports are using, resembling a triple net lease. But for us, that’s
part of the attraction of this type of new investor. They can access money efficiently, and
put it to work- from a strategic standpoint, that’s something we are interested in.”

This part of the interview provided a segue into a conversation about the $2 Billion
Capital Plan- which includes monies for the local cost share (65 %, going forward) of
channel deepening to 50 feet, for common area improvements of roadside infrastructure
near the terminals, and ongoing work on the ExpressRail system- where rails connect
directly with PANYNJ container terminals. The ExpressRail projects eliminate the
drayage component, substantially reducing the time and cost (even after the $45/ lift fee
paid by shippers), providing an obvious environmental benefit, as well. Larrabee also
raised an issue not addressed by the Capital Plan- potentially raising the Bayonne Bridge
(crossing the entrance to Newark Bay) from its present air-draft of 151’, to 187’, at a cost
estimated to be around $750 Million.

“There is no clear revenue stream from roadways, we need to figure out how we can
pay.” “The rail business is self supporting, with the tariff for lift fees, and it may be a
model for supporting roadway projects.” He hints that the answer may come from
facility leases with a throughput component, a feature in one ground-lease presently, and
points out that: “In 2008, a throughput revenue stream kicks in, for two other leases we
have.” Regarding the Bayonne Bridge, “we’re grappling with funding approaches.”
Larrabee told PS that ship designs vary- “in fact some 8,000 teu vessels that will be
calling here <in Suez trades and in Asia trades after the Panama Canal widening> can fit
under the bridge,” he said. But he added: “…to be honest, we don’t see a fix to the bridge
in the next 10 -15 years.”

Larrabee, whose Coast Guard career including three years as Captain of the Port in New
York, necessarily takes a long term view. As our conversation would down, he touched
on the Port Inland Distribution Network (PIDN) and the PANYNJ’s attempts to jump-
start a barge service to draw containers from the hinterland, in upstate New York, down
to the PANYNJ’s terminals. He says: “People with cargo, they were willing to
participate,” but he said that “..the shipping lines wanted to see a long term commitment-
they would have needed a rearrange the way they move land-side cargo. They were not
excited about it.” Larrabee talked about the environmental benefits of the barge link, now
terminated, and is quick to add that “we have gone forward with the rail side of the
program- with links to Buffalo (upstate New York) and Worcester (eastern
Massachusetts) set to open soon.” And, putting his planner hat on, he told PS, “…the rail
links get back to our concept of moving more cargo, being more productive.”
“Portions of the PIDN funding were based on congestion mitigation”, Larrabee says,
“..everything we have talked about reflects elements of a broader environmental strategy.
For example, on dredging, every cubic yard of material pulled out will be used
beneficially. We’ve also mitigated 100% of the emissions from the dredges for the life of
the project.” But, at the end of the day, it is pragmatism of Rick Larrabee and his team
that drives the PANYNJ’s port activities. “All of our projects are analyzed for economics,
and then in terms of their environmental impacts. When we renovated our terminals, we
brought in new technology and reduced emissions (from yard equipment) by 30%- even
though cargo is growing by 25% during the period. But, even on the environmental side
of the equation, we are very sensitive about getting the most benefit for our dollars,” he
told PS. Like land alongside the quay, the dollars are scarce.

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