Future of the Port of Hampton Roads: Vast Opportunities - Daunting Challenges

1. Future of the Port of Hampton Roads: Vast Opportunities - Daunting Challenges Joseph F. Bouchard, Ph.D. Executive Director Center for Homeland Security and Defense April 5, 2007 54 Old Hampton Lane Hampton, VA 23669 (757) 722-5565 joe.bouchard@zeltech.com

2. Starting Point: Where We Are Today • Robust growth over past decade (Avg. 9% annually) • Ambitious development program • Aggressive marketing • Innovative management • Excellent labor relations • Superb record in security & crime prevention • Readily able to leverage the port’s many advantages Port’s Economic Impact on Virginia 165,000 jobs $762 million in business revenue $61 million in state & local taxes 2 Source (graphic and economic impact data): Virginia Port Authority

3. Vast Opportunities • Sustained, robust growth in international trade • Rapid growth of Asian trade through East Coast Ports 3

4. U.S. Containerized Trade 1995-2020 Containerized cargo volume will triple in the next 15 years 4

5. China’s Impact on US Container Trade China accounted for 95% of the increase in US-Asian trade since 2001. Source: Moffatt & Nichol 5

6. China Shipping to West Coast Source: TranSystem 6

7. Public Port Capacity Shortfall 2010 7 Source: TranSystems

8. All-Water Shipping Routes • The Nation’s ports are experiencing a 12.2% increase in container trade with Asia • East Coast ports are Seeing a 31.7% increase in container trade with Asia • All-water shipping routes are both inexpensive and stable Source: Virginia Port Authority 8

9. Panama Canal 9 Source: Virginia Port Authority

10. Suez Canal Source: Virginia Port Authority 10

11. Port of Hampton Roads Projected Cargo Demand and Planned Capacity Source: Virginia Port Authority 11

12. Daunting Challenges • Cost of developing port & transportation infrastructure • Growing competition from other ports • Shipping industry trends • The second revolution in the port industry • Other challenges I won’t be discussing but cannot be avoided: • Environmental policy • Energy costs • Relations with local communities • Labor relations 12

13. Cost of Infrastructure Development Remember this number 13A

14. Cost of Infrastructure Development • Funding sources for the $11 billion bill: • About 2.4% from private investment • About 25% from VPA bonds • About 73% from State and Federal taxes • Federal funds only cover a fraction of the cost of key projects • Only 4% of Craney Island Eastward Expansion – VPA wants 50% • Deficit will have to be made up with VPA bonds or State taxes • State funds slow in coming – even under the new Transportation Plan • Hampton Roads regional plan only provides 75% of the funds needed to complete the projects per the original schedule • Will not be completed until long after they are needed by the port • Third Crossing cannot be funded until all other projects in the plan are completed • Serious negative impact on NIT, the cities of Norfolk and Portsmouth, and congestion in the Downtown Tunnel, Midtown Tunnel and Hampton Roads Bridge Tunnel. This is the weak link in the port’s development plan Remember this number 13B

15. Growing Competition • Savannah, Georgia • Terminal and rail expansion • Charleston, South Carolina • New automated intermodal terminal and inland ports (“Carolinks”) to boost capacity and velocity • Port Authority of New York and New Jersey • $2 billion investment over next decade – terminals and rail • North Carolina: Southport container terminal • Proposed Georgia-South Carolina Port Authority • New port on the Savannah River The Challenge: The Port of Virginia must bring additional capacity on line before these new or expanded terminals become operational, and must be able to move containers to major markets faster and at less cost than competing ports. 14

16. Shipping Industry Trends • Two major trends: • Consolidation: fewer, larger shipping companies • Vertical integration: end-to end service within a single company • Impact on ports: • Increasing competition for fewer shipping companies • Large shipping companies have greater leverage over tariffs charged by ports • Shipping companies want to operate their own terminals • Key question: Is the “owner-operator” business model becoming obsolete? • The challenge: Growing competition from “landlord” port authorities that let shippers operate their own terminals. • Two opportunities: • Innovative management and customer services that exceed the advantages of a shipper operating its own terminal. • Adopt the “landlord” business model. 15

17. The Second Revolution in the Port Industry • The first revolution: containerization of cargo • The second revolution: automation of intermodal cargo operations The opportunity: The Port of Hampton Roads could lead the revolution. The challenge: If the port does not lead the revolution, it could face serious erosion of its competitiveness over the long term. 16

18. Recommendations • Transform VPA: from owner-operator to landlord business model • Emphasize private investment • Craney Island • Sell VIT – cash for port development • VPA help fund transportation projects beneficial to the port • Partner with private companies and VDOT on roads • Partner with Rail companies and Commonwealth on rail • Strategic planning for transportation • Emphasize rail and barge for freight • Roads: Deconflict freight from commuters and tourists • Strategic plan for entire port: port-wide zoning 19

19. Conclusion • The Vast Opportunities: • Steady, robust growth in international trade over the long term • Growing competitiveness of East Coast ports for Asian trade • The Daunting Challenges: • Scarce Federal and State tax dollars for critical development projects • Growing competition from other East Coast Ports • Consolidation and vertical integration in the shipping industry • Ever increasing congestion on highway networks • Key questions: • Can transportation infrastructure – road, rail and barge – be developed fast enough to support continued robust port growth? • The shipping and port industries are changing rapidly. Will the Port of Hampton Roads be able to transform itself to stay ahead of its competitors? 17

20. Questions? • If you want to know more, I encourage you to attend: • The Virginia Maritime Association’s International Trade Symposium, May 10, 2007, Norfolk Waterside Marriott. • The ODU Maritime Institute’s Speaker Series at Nauticus. 18

21. Backup Slides • Growth in US-China Trade, 1986-2006 • China Building Port Capacity for Exports • Global Containerized Trade, 1995-2024 • Distribution Centers in Virginia • Port of Virginia: Cargo Flow • APM Terminal Portsmouth • Craney Island Marine Terminal • Heartland Corridor • Private Investment in the Port Industry 19

22. US-China Trade: 1986-2006 China Joins WTO Source: U.S. Census Bureau, Foreign Trade Division 20

23. China Building Port Capacity for Exports 21 Source: TranSystems, 2007

24. Global Containerized Trade: 1995-2024 Containerized cargo volume projected to increase 186% 2005-2024 Source: Global Insight, 2004 22

25. Distribution Centers in Virginia Over 80 distribution centers are fed by the Port of Virginia Source: Virginia Port Authority 23

26. Port of Virginia – Cargo Flow Source: Virginia Port Authority 24

27. Maersk/APM Terminal - Portsmouth • $450 Million Private Investment • Open 2007 (Stage 1) • Complete 2009 • Handle 2.1 Million TEUs Per Year Source: Virginia Port Authority 25

28. Craney Island Marine Terminal Total cost: $2.2 Billion; capacity about 2.5 million TEUs First phase complete in 2017; final phase complete in 2032 26 Source: Virginia Port Authority

29. The Heartland Corridor Source: Virginia Port Authority 27

30. Notes for Slide 13 1. Costs taken from VPA briefings to the Virginia Senate Finance Committee, 9/21/2005, Board of Commissioners, 11/22/2005, and Transportation Accountability Commission, 1/31/2007. 2. Of the $614 million for Craney Island eastward expansion, $24.6 million will be funded by the Army Corps of Engineers, leaving $589.4 million to be funded by VPA or the state. 3. Costs taken from Hampton Roads Planning District Commission, “Hampton Roads 2026 Regional Transportation Plan,” June 2004. The projects listed are those identified by VPA as essential for the port. 4. Published cost estimates for the Third Crossing vary widely. The amount shown here ($4.5 billion) is the total amount reported by HRPDC as of June 2004. Only Segment 1 of the Third Crossing project ($1.8 billion) is included in the Hampton Roads 2026 Regional Transportation Plan; the remaining segments of the project ($2.7 billion) are not included in the plan due to lack of funding. Private companies offering public-private partnerships have stated that they can build the Third Crossing for $3.2 billion to $3.7 billion. 5. Norfolk Southern gives the total cost of the Heartland Corridor as $323 million. That includes the Western Freeway Rail Relocation ($60 million). 6. The CIMT Corridor includes both rail and road. The road portion of the CIMT Corridor is an element of the Third Crossing project. This project is listed separately because VPA has identified it as a separate project in its list of land transportation enhancements required to support CIMT. 7. The other enhancements include the total cost of five rail projects recommended for Virginia Rail Enhancement Fund (REF) funding in 2006-2008 by the Virginia Department of Rail and Public Transportation (DRPT), which was endorsed by the Virginia Rail Advisory Board (RAB). 8. Cost taken from VPA briefings to the Virginia Senate Finance Committee on September 21, 2005 and to the Board of Commissioners on November 22, 2005. 28

31. Private Investment in Port Industry • An historical example • The Outcry in Congress • 37 bills introduced • DP World coerced into divesting • the US holdings of P&O Ports • The Reality is foreign ownership of Maritime Terminal Operators • Of the top 20 maritime terminal operators, only one is US owned; and it is for sale! • What would happen if a Chinese-owned maritime terminal operator tried to invest in Hampton Roads? 29