PORT OF PHILADELPHIA: Controller Studies Southport’s Potential

In a report released earlier this year, City Controller Alan Butkovitz analyzed in detail the impact of developing Southport on jobs and revenue. Several different options were examined; all would have strong economic benefits for the city and region, he found. Excerpts are below.

Controller Alan L. Butkovitz … analyzed the three most‐discussed uses for Southport – as a modern container terminal, as an automobile or logistics facility, and as an energy port, or some combination thereof. The Controller’s analysis clearly shows the greatest economic impact, measured by jobs created and tax revenues generated, would flow from devoting as much acreage as possible to the creation of a modern container terminal. In the context of recent interest in developing Philadelphia’s potential as en “energy hub,” the Controller also believes making accommodations for an energy port also seems to make long‐term economic sense. While the direct employment impact of an energy port would be small, especially relative to the container terminal, the indirect possibilities are immense; as long as the acreage devoted does not impinge upon the scale necessary to create a modern container terminal.

US SEN. Robert Casey, a longtime supporter of Port of Phila., is seen here visiting Packer Avenue Marine Terminal this past April. Casey reported on his recent efforts to secure additional funding needed to complete Delaware River Main Channel Deepening Project. Thanks to Senator and other key legislative allies, project is now 75% complete and on track for final completion in 2017. Seen from left are Casey; PRPA Exec. Dir. James T. McDermott, Jr.; Leo Holt of Holt Logistics/Greenwich Terminals, which operates Packer Avenue facility; and PRPA Chairman Jerry Sweeney.

The Potential Of Southport
There are competing visions for the development of Southport. Some would like to see the entirety of Southport’s acreage devoted to containers; others want it to serve primarily or even exclusively as an energy export facility; still others would like to see a hybrid facility, part devoted to containers, part to energy export, and part to automobiles or logistics. Currently there are three types of cargo that are most-commonly cited as potential anchors for the Southport parcels. Each of these visions for the port correlates with growing industrial sectors in Philadelphia.

The potential economic impact of Southport is a function of how it will be developed. Which type of port will maximize Philadelphia’s potential additional capacity while bringing the greatest return in terms of employment and tax revenue? If Southport attempts to accommodate all three types of cargo, there is a real danger that it will lose the economy of scale and optimal density necessary to make an investment in a modern container terminal feasible. Economic impact must be measured based on a number of port‐specific factors, such as the type of cargo and level of capital investment or the Minimum Efficient Scale. The MES of a container terminal can be defined as the smallest scale at which output can be produced at minimum average long-run cost. Scale can be associated with the size of the terminal or the size of the terminal‐operating firm.

After the passage of Act 38 in 2010, the Commonwealth reached an agreement with Delaware River Stevedores to develop the entire Southport acreage into a container terminal. It was estimated at the time that devoting just 120 acres to containers the Southport Terminal would add an additional 750,000 TEU of capacity and create 6,000 new jobs at the Port of Philadelphia – or one new job for every 125 additional TEU. This estimate seems conservative in comparison to other recently modernized ports.

For example, the Port of Jacksonville saw an increase of 128,000 TEU and 1,634 jobs from 2008 to 2013, or one job for every 78 TEU.30 The Maryland Port Administration reported a smaller ratio of jobs to TEU: In 2010, 387,000 containers came through the Port of Baltimore, directly supporting 3,515 jobs, one job for every 110 TEU. In 2012, the Packer Avenue Marine Terminal supported nearly 2,000 jobs with 273,190 TEU, which equates to 136 TEU per job. Extrapolating, this would mean nearly 8,100 jobs supported by 1.1 million TEU.

Container ports create jobs not only for longshoremen, but in trucking, warehousing, and customs houses as well. Applying the range of metrics from these other ports, if Philadelphia were to garner 1.1 million additional TEU, between 8,100‐14,000 direct new jobs could be generated.

In order to achieve 1.1 million TEU annually as initially planned, the Southport Terminal must be more technologically advanced than the current Packer Avenue Marine Terminal. The throughput of a container terminal is a function of two variables. First is crane capacity: how many containers can a crane lift per hour and how many cranes serve the terminal? Second is the capacity of the container yard: How many containers can be stored? This is in turn delimited by the type of stacking and storage equipment the terminal deploys. A cargo yard that is low density, that is, has ample acreage so that containers do not have to be stacked very high, carries lower costs; because fewer containers are stacked, the surface does not need to be as durable and the equipment needed to handle the containers is cheaper.

For the purposes of comparison, consider the Port of Everglades and the Port of Tacoma. The former handles just under 1 million TEU annually, the latter just over 1.1 million. The Port of Everglades has seven New Panamax cranes, while Tacoma has 26 cranes that can handle between 14‐18 columns of containers. According to a 2012 report by Tioga Associates, seven cranes working at 80% capacity can move nearly 1 million TEU a year.36 The Port of Everglades supports 6,359 direct jobs, while the Port of Tacoma supports 8,080 direct jobs. The Port of Tacoma has 494 acres for containers, Port of Everglades has 324 acres; the entire Southport site is 239 acres.

It is possible to make up the yields in a smaller yard by increasing the intensity of use, mainly by stacking containers higher and limiting the space allowed for vehicles; however, this requires greater capital investment. A wheeled side‐picker, the cargo‐yard equivalent of a fork‐lift, can handle only 3three levels of containers. To handle 1.1 million TEU, a 120‐acre cargo yard would need to handle at least 130 TEU per acre, while an 80‐acre cargo yard would require 200 TEU per acre. Either of these alternatives would require an intermediate level of port sophistication with very-expensive equipment outlays and would leave the port with little room for growth.

Further, the greater the density of the yard, the greater the financial risks; the capital investment required to make it work is a function of the operator’s MES and how much container traffic a terminal developer believes it can plausibly attract. The smaller and more dense the yard, the greater the capital investment required to handle large amounts of cargo. The optimal level of capital investment is a function of the container yard or the smallest scale which output can be produced at the minimum average long‐run cost.
In sum, the fewer acres devoted to containers, the more dense the yard, the more expensive the start‐up costs, the more risky the investment.

Southport As An Auto Facility
In 2010, Hyundai and Kia began importing autos and storing them in the Pier 98 Annex, nestled against the southern edge of Columbus Boulevard and Walt Whitman Bridge. This created 270 jobs on the 90‐acre facility, which can store 150,000 autos annually. One oft‐discussed component of a potential Southport proposal would add an additional 75 acres of auto storage. With the additional acres, Southport’s auto storage capacity would increase by 125,000 autos a year, creating about 240 new jobs. Extrapolating from a 2010 report, an auto facility Southport would create between 225 and 525 new jobs, depending upon the number of total acres employed.

The Port of Tacoma moves about 250,000 tons of autos annually, supporting 277 jobs in Tacoma, roughly similar to Philadelphia. In Tacoma, as well as in Philadelphia, one job is created for every 555 autos. However, in Baltimore one job is created for every 433 autos. This may be a function of the fact Baltimore is the largest importer of autos on the East Coast, handling nearly three times the number of autos as Philadelphia; thus, there is probably greater throughput. If Philadelphia matched Baltimore’s intensity, as many as 675 jobs could be created at a Southport auto facility. No current proposals envision converting the entirety of Southport into an auto-import facility; however, the more land devoted to autos, the less that is available for a container terminal; the cost of developing a container terminal increases with increased density.

Hyundai currently ships autos to Philadelphia and stores them on the Pier 98 Annex until they are either purchased or are relocated to a dealership. The number of autos stored at the facility is a function of demand; there are times when the number of autos arriving at the facility exceeds the number leaving. When this happens, the autos overflow the facility and line the streets of South Philadelphia. The 90‐acre lot has a static capacity of 7,200 autos. To be able to move 150,000 autos in a year through a facility, an average 17 days must lapse between when it is offloaded and when it leaves the facility.

As part of the deal with Hyundai, the Commonwealth of PA agreed to make some upgrades to the facility; PRPA invested $1 million to prepare Pier 98 Annex for autos. PRPA now receives per‐car rent from Holt, the operator of the terminal, and Philly Ro‐Ro, the company that coordinates the labor. The Hyundai deal was struck right before the massive earthquake and tsunami that struck Japan in 2011, which brought the Japanese auto industry to a virtual standstill; Korean autos made major inroads into the US market. As the Japanese auto industry has recovered and as the US auto market has generally improved, overall demand for Korean autos has leveled off.

Southport As An Energy Terminal
There are also discussions of using the finger pier at the North Berth to load chemicals or petroleum products. Energy has long been a mainstay of Philadelphia’s port business and economy. With the exploitation of the Marcellus Shale fields, there has been increasing discussion of a potential natural-gas pipeline into Philadelphia and of the potential for energy‐related businesses as well as the revival of manufacturing from access to cheap energy. An energy terminal would create about 3,000 construction jobs and about 120 permanent jobs.

It is also possible to imagine that Southport could accommodate both a modern container terminal as well as an energy port, since the latter requires little if any water frontage. Of course, the devil is in the details. The feasibility of combining an energy port with a container terminal depends heavily on the footprint required for the former. By way of comparison, PGW’s Port Richmond Facility is 30 acres, enough space to be a world‐class facility. If the energy port could be contained to 25% or less of the Southport acreage, it would not impinge on the requisite 190‐200 acres need to achieve economic feasibility for the container terminal. Based on conversations with experienced energy executives, the space requirements for an energy facility seem to be more flexible than those for an auto facility, making it easier to imagine co‐existence with a container terminal.

Though several REIs were reportedly submitted by energy companies, regulatory and other restrictions limit Southport’s potential to become a major energy port. First, the US Dept. of Energy would need to approve the site. Second, public safety and national security concerns arise from the proximity of huge ships hauling extremely flammable materials to shore; bridges would also have to be shut down as the ships sail underneath. A third concern revolves around the 40‐meter limit to the air drafts on the Delaware River; almost all long‐haul LNG ships are taller than 40 meters when loaded.

Yet the energy-port idea has a few built‐in advantages: a massive and well‐capitalized refinery nearby, seeking to expand, creating instant demand. At the same time, while there is existing petroleum business, many of the real value‐added natural gas‐related businesses such as urea and ammonium nitrate require the creation of a pipeline connecting Philadelphia to Marcellus Shale. To date there has yet to be a viable proposal floated to build such a pipeline.

The images below were created from PRPA’s promotional video, altered to show the differences in employment structure by port function. In sum, they demonstrate graphically that a container terminal is by far the most job‐intensive use of Southport’s acreage.

The greater the proportion of the Southport land used for a container terminal, the greater the return on investment; as the container-terminal acreage falls below 195 acres, the capital investment required to handle the higher-density cargo yard increases dramatically. There would be significant diminishing returns in terms of jobs from devoting 30% or more of the land to an automobile facility. Dedicating at least 80% of the acreage to containers will produce at least 8,100 jobs, while splitting the acreage with an auto facility will create 5,815 jobs.

Economic Impact
It is quite expensive to develop a modern marine terminal; the original 2010 estimate for Southport was $300 million, but there are reasons to believe this could be an underestimate. Port expansion in Los Angeles recently doubled in cost from $250 million to $500 million. In Philadelphia’s case, the vast bulk of the costs are to be borne by the private operator of the marine terminal not by the public sector. The Philadelphia Regional Port Authority owns the land and would lease it to an operator to develop the port, forming a Public‐Private Partnership.

Terminals are complex systems that facilitate the transfer of goods from one mode of transportation to another. The terminal’s economic impact on the surrounding area is limited because it is primarily a conduit for intermodal cargo handling, rather than a development which creates spinoffs and business clusters.

Nevertheless, there is undoubtedly a huge employment impact that will accrue major economic benefits for the City as a whole. According to Bureau of Labor statistics, the median income for a terminal worker is $41,500. This median figure obscures wide variations in job classifications, employment numbers, and levels of pay; different types of cargo also create dramatically different impacts on Philadelphia’s economy and tax base.

The creation of 8,100 new jobs at a modern marine terminal would generate $336 million in wages and $13.4 million in wage tax revenue annually. Using only 160 acres for a container terminal and the 75 acre parcel of the lot to store cars would create 5,815 new jobs, $241.3 million in new wages and $9.6 million in additional wage tax revenue.

Some worry that splitting the acreage between an auto facility and a container terminal would make the massive capital investment for the terminal unjustifiable, given the Port of Philadelphia’s competitive position. Yet for now the cars are a ‘sure thing’ and the cost of expanding the auto facility is far lower than building a modern container terminal.

It should be noted, however, that projections are based on median wages, which conflate wages for workers who offload containers and those who offload cars.

According to officials of the International Longshoremen’s Association, workers who work containers earn roughly $9 an hour more than those who work other cargo. This significant differential makes the impact of a modern container port even greater.

Data suggest that the direct economic impact of an energy port is smaller than that of an auto facility without the support and additional jobs created by the container terminal. A Petroleum Pump System operator earns $70,300 annually. An energy hub at Southport that employed 120 workers would generate only about $8.5 million in additional wages and $340,000 in additional wage tax revenue annually. If the energy port did not require a footprint any larger than 40 acres it could be combined with a container terminal creating 6,841 jobs and $11.5 million in wage tax revenue.

At the same time, though, an energy terminal could have larger ramifications for the region than either a container terminal or an auto facility; an energy port would be supported by development and processing of petrochemicals which would, in turn, support additional Philadelphia jobs in a wide variety of fields. It is very difficult, if not impossible, to estimate these induced effects, since even the most stalwart energy-hub proponents admit they are speculative.

In sum, it is safe to say that a modern container terminal on 85% of the Southport land, operating at 1.1 million TEU a year, would generate by an order of magnitude the most jobs and revenue for the City of Philadelphia and would have the greatest economic impact. Devoting the remainder of the land to the creation of an energy port would help Philadelphia take the next step toward becoming an energy hub – without sacrificing the employment potential offered by a modernized container terminal…..

Conclusion
The development of Southport offers Philadelphia an opportunity to expand its port capabilities corresponding to the growth areas of the city’s industrial economy as well as the future of the shipping industry.

In recent years the Port of Philadelphia has seen increases in activity as events outside of its control have shifted conditions in its favor. The expansion of the Panama Canal will open up the East Coast to larger ships and direct connections to East Asia. The coast’s ports are making investments to compete for the largest of these ships; Philadelphia’s best opportunity seems to be to capture those ships that are pushed out of the larger ports. Warehouse capacity is moving further south in New Jersey, closer to Philadelphia, to take advantage of cheaper real estate. Specific development opportunities would position the Port of Philadelphia to take advantage of the changes.

First among these is creating a larger, state of the art container terminal, which would ensure Philadelphia is well‐positioned as a port for years to come. Second, more cargo is coming to the port each year, and increasingly, it is arriving in containers; even Philadelphia’s traditional niche strongholds in food products and other breakbulk goods are increasingly containerized. Finally, investing in a modern container terminal would create an order of magnitude more jobs and revenue than any other type of facility. The more land dedicated to containers, the less investment needed in infrastructure to handle density of large stacks of containers. This will help keep overall costs down while ensuring the acreage necessary to create the most jobs.

In sum, the greatest economic impact will accrue from developing the bulk of Southport’s acreage into a modern container terminal. Limiting the acreage of the container terminal in order to provide more space for storing automobiles would have a detrimental impact in two ways – fewer direct jobs flow from autos and, more important, fewer acres for containers means higher density and large increases in capital costs.

The development of an energy facility holds great potential for the city as a whole; however, it too must be developed in such a way as not to sacrifice the minimum required acreage for a modern container terminal, so that direct employment opportunities will be maximized.

If it is the PRPA’s goal to create a port with long‐term viability and maximum economic impact for the region, in line with changes in the shipping industry, it is imperative that Southport become a state-of-the-art container terminal that accommodates an energy port.

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