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The Seaport Group’s approach to financial evaluations of container terminals involves:

A cost model that incorporates several current container handling technologies from manual to highly automated.

A financial model that brings in the outputs of the cost model and in conjunction with other inputs produces various financial results.

We chose OOCL’s Middle Harbor terminal as a case study because it is timely:

POLB is rebuilding the site

OOCL has been ordering equipment for the terminal

We go through in this newsletter:

A summary of the Middle Harbor project and major inputs.

An overview of the cost model.

An overview of the financial model and evaluations.

The financial results for this case.

The implications for technology choice today.

We have assumed for the evaluations that operations of the Middle Harbor terminal will start in 2015. Site reconstruction by POLB is underway (this involves the consolidation and expansion of Piers E and F) and OOCL was reported in 2012 to have started ordering its main container handling equipment.

Terminal Capital Expenditures and Lease Costs

POLB lists its capital expenditure on the Middle Harbor terminal at US$1.2 billion. POLB will probably provide all infrastructure and superstructure for the terminal as typical in the California ports and we have assumed this. The terminal site area is stated as 304 acres (123 ha) and the terminal capacity is stated as 3 million twenty-foot equivalent container units (TEU).

The public statement by POLB regarding the site use agreement that it is a 40-year lease “worth US$4.6 billion” If this statement reflected a simple lease in 2012 dollars, this would translate to a lease payment in 2012 dollars of US$115 million a year. But it is likely a “preferential assignment agreement,” common in California ports, with:

A guaranteed annual minimum payment specified per acre per year at the time of the lease agreement. In 2008, these ranged from about US$120,000 a year in old agreements to US$175,000 a year in then recent agreements.

Remittance to the port of a portion of dockage and wharfage fees when these exceed the minimum payment.

Because we did not have access to the site use agreement, we had to make assumptions from public information. For our evaluation of the Middle Harbor terminal, we assumed a guaranteed annual minimum payment of US$200,000 an acre or US$60 million a year (POLB has been slowly increasing its minimums over time) and port fee revenue of US$40 per TEU in 2012 dollars as an approximation (US$120 million a year at 3 million TEU capacity). Accounting records showed that the Port of Los Angeles container fee revenue has averaged about $40 per TEU in recent years and the POLB accounts are generally consistent with this amount.

Our sources of information on the Middle Harbor project and its lease included:

1. “Long Beach and OOCL strike 'in principle' agreement over Middle Harbor,” Containerisation International Online, January 20, 2012.

2. Leachman & Associates LLC, “Port and Modal Elasticity Study, Phase II,” report prepared for Southern California Association of Governments, September 7, 2010.

3. Morgan Stanley et al, "Harbor Department of the City of Los Angeles, Refunding Revenue Bonds," June 22, 2011 and other Port of Los Angeles data.

This newsletter evolved from the development by the Seaport Group of linked cost and financial models that are specific to container terminals. We applied the models to a U.S. West Coast container terminal to examine the financial implications of the level of container terminal automation. Finally, we presented the findings of the evaluations at the Terminal Automation Seminar of Lloyd’s Maritime Academy in London in September 2012. The result is a review of appropriate levels of container terminal automation from a terminal operator’s financial perspective at today’s level of technology.

We selected as the basis for this case study Orient Overseas Container Line’s (OOCL) Middle Harbor terminal in the Port of Long Beach (POLB). We chose a U.S. West Coast port because container terminal automation is finally taking off in this region. We used OOCL’s Middle Harbor terminal because it is timely and it will be quite highly automated. We also chose this case because of the large amount of public information available about it: we could develop quite a complex evaluation from such information.

Financial Implications of Container Terminal Automation By Kent Busk and Terence Smyth

The Middle Harbor Terminal

For further information and comments, please contact Kent Busk on +43 699 1558 2001 or kbusk@seaport.com and Terence Smyth on +1 604 732 8255 or tsmyth@seaport.com. August 2013

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Our traffic assumptions for this exercise for the Middle Harbor terminal are:

Base year 2015 traffic of 1.5 million TEU.

Modest annual growth from this base: 5.0% a year for 2015 to 2020 declining in stages to 2.0% beyond 2050.

Our traffic characteristics assumptions reflect those of the ports of Los Angeles and Long Beach:

No transshipment.

Import and export split of 50/50.

Truck and rail split of 50/50.

Empty containers of 5% of inbound TEU and 45% of outbound TEU (which is down from some 60% outbound empty a few years ago).

Labour costs:

Are based on 2011 Pacific Maritime Association data.

Include estimates of straight time costs plus shift and skill differentials.

Are adjusted to 2012 prices.

Reflect typical working hours by terminal area.

Terminal Traffic

Although we take the perspective of an operator of a common-user terminal in our evaluations, the Middle Harbor terminal will be a line-operated terminal as are most container terminals in the ports of Los Angeles and Long Beach. The main exceptions are the common-user POLB Pier A and Pier C terminals operated by SSA Marine. Line-operated terminals usually handle the shipping line’s own vessels and those of its alliance partners, and sometimes provide third-party services.

OOCL is part of the Grand Alliance and two OOCL / Grand Alliance services called at POLB in 2012. In the Port of Long Beach in 2011, the average annual volume per existing container terminal was about 1.0 million TEU and the larger terminals (line operated) seemed to handle 1.5 to 2 million TEU. We expect that traffic growth in U.S. ports will be quite modest over the longer term.

Labour Costs

Labour is a major cost factor on the West Coast because of the wages, benefits and practices of the International Longshore and Warehouse Union (ILWU). We based our estimates of ILWU payroll costs on the 2011 data of the Pacific Maritime Association (PMA), the association that provides labour relations and dispatching services for the West Coast terminals and other maritime employers. The items that went into our estimates of payroll costs were:

Estimates of base straight-time payroll costs.

Application of shift and skill differentials.

Adjustment to 2012 levels.

The PMA overall average payroll cost charged to terminal operators, including base wages, differentials, overtime pay, holiday pay, benefits and PMA administration costs, was estimated at about US$95 per hour at 2012 prices.

We also needed an estimate of the rate of escalation of payroll costs. Some trends in U.S. ILWU labour costs were:

Base wages increased slightly slower than inflation over the last decade.

But benefits increased well in excess of inflation, with major increases in 2007 to 2009.

As did the sum of wages and benefits.

We assumed for the evaluations that payroll costs will increase at 0.5% a year in excess of inflation.

We used labour practices based on West Coast experience to develop weighted average costs by position. These form the basis of the labour cost inputs to the cost model.

These labour costs are for typical operations over all working days in a year, such as:

Vessel operations on up to 3 shifts a day, 7 days a week as required.

Intermodal yard operations on up to 3 shifts a day, 7 days a week as required.

Truck gate activity on day and evening shifts, 6 days a week.

The Middle Harbor Terminal Continued

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The following inputs are required for the cost model:

Conceptual terminal layout.

Container volume forecast.

Service level requirements.

Labour union conditions.

Local legislation impacting the efficiency and/or cost of the operation.

The cost model generates:

Organization size.

Manning plan.

Procurement requirements, based on existing assets and asset lifetime.

Cost estimates for infrastructure, superstructure, equipment, IT and automation technology.

Annual capital expenditure (CAPEX) and operating expenditure (OPEX) for the operation.

Working sections of the financial model are:

A parameters worksheet that controls many of the variables in the model.

The cost model input and exchange worksheets.

Container volume projections.

Escalation factors.

Estimates of start-up and miscellaneous operating costs.

Input and allocation over time of infrastructure costs.

Depreciation schedules for reporting (financial statements) and taxation.

Project financial structure and working capital estimates.

Income tax calculations.

Summaries of results.

The Cost Model

The cost model for container terminal operations is based on key performance indicators (KPIs) from major container terminals and benchmarks of existing terminal operations. The model addresses cases that range from major proven terminal technologies to unproven technologies. These range from reach stacker and straddle carrier terminals to cantilever rail-mounted gantry cranes to the most technologically-advanced automated concepts with automated stacking cranes, automated shuttle carriers, lifting automated guided vehicles and driverless quay cranes. The cost model can be used both for expansion of existing terminals and greenfield terminals.

All of the cost model estimates are in constant-dollar or real terms in this evaluation; they do not incorporate escalation. The cost model does have the capability to escalate costs for circumstances in which it is required.

The Financial Model and its Structure

The financial model brings in the cost results from the cost model and other sources (such as cost estimates for terminal infrastructure) for the evaluations. It also utilizes parametric inputs such as revenue per container and tax rates. The financial model has several intermediate working sections that are used to handle inputs, conduct intermediate calculations and summarize results.

A major decision in the development of a financial model is if it should be in real terms (i.e., excluding general inflation) or nominal terms (including general inflation). The use of general inflation distorts many kinds of evaluations and can mask the effect of changes in price structures. On the other hand, most benchmarks from financial markets (such as interest rates, bond yields and equity market returns) and most costs of money (such as interest rates on loans) are in nominal terms, and with some minor exceptions governments tax nominal profits.

The most useful financial model would incorporate both nominal and real estimates. This was the approach taken to the Seaport Group financial model: to develop pro forma financial statements in nominal terms and to draw from these statements the cash flows required to estimate financial performance in nominal and real terms.

The figure on the next page shows the basic structure of the financial model. Among other things, it shows what is external to the financial model and what is internal to it.

Basic Structure of Cost Model

The Cost Model and the Financial Model

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The typical discounted cash flow (DCF) evaluations are :

Internal rates of return (IRR), the true yield of an investment. These can be in nominal or real terms, on total or equity capital, and before or after tax.

Net present values (NPV), the discounted values of various cash flow steams such as free cash flow.

Levelized costs, lifetime weighted average costs per measure of volume, usually containers or TEU in the case of container terminals.

Levelized costs:

Are commonly used in the electricity generation industry to compare the long-term unit costs of electricity with alternative technologies, such as a comparison of coal-fired thermal generation versus solar power.

Result in one comparative number, a cost per unit of output, from technologies with widely-varying outputs and costs over time.

Equal the present value of costs divided by the present value of volume, with both items discounted with the same interest rate.

Are very useful for comparisons of container terminal technologies.

Pro Forma Financial Projections

The heart of the model is the estimation of standard pro forma financial statements: profit & loss statement, balance sheet and cash flow statement. The values in this part of the model are in nominal terms; the values include estimates of future inflation. The model has provision for loans and related interest and repayments. It calculates a number of standard financial ratios such as operating margins, returns on capital, liquidity and debt service coverage.

Financial Evaluations

The model draws financial estimates by year from the pro forma statements for calculation of financial performance from discounted cash flow (DCF) evaluations. A little math provides an interpretation of levelized costs because they are not in common use:

Start with a simple discounted cash flow expression: NPV(revenue) = NPV(costs):

This is the general procedure for calculating an IRR

Choose a single value for the unit cost, “U”, which is what we want

Use “Vt” for volume (such as TEU) over time, “Ct“ for costs over time and “r” for the discount rate.

The progression of the logic from general to particular is:

NPV(unit cost times volume) = NPV(costs) in words

Becomes ∑ (U∗Vt ) / (1 + r)t = ∑ Ct / (1 + r)t in a simple formula

Since “U” is a constant, this can be rewritten as U * ∑ Vt / (1 + r)t = ∑ Ct / (1 + r)t

And finally by solving for “U” we arrive at U = ∑ Ct / (1 + r)t / ∑ Vt /(1 + r)t

Or in words the (levelized) unit cost is equal to the present value of costs divided by the present value of volume.

Basic Structure of Financial Model

The Financial Model Continued

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We evaluated six container terminal technologies ranging from a conventional rubber-tired gantry crane terminal to one with automated stacking cranes and automated shuttle straddle carriers. The cases and the abbreviations used on several charts below are:

Rubber-tired gantry cranes (RTG) and reach stackers (RS).

Cantilever rail-mounted gantry cranes (CRMG) and tractor-trailers (TT).

Automated stacking cranes (ASC) and manned shuttle carriers (Man. ShC).

Automated stacking cranes and standard automated guided vehicles (Std AGV).

Automated stacking cranes and lifting automated guided vehicles (Lift-AGV).

Automated stacking cranes and automated shuttle carrier (Auto ShC).

The results show that at a 10% real discount rate:

Automation of the container yard and horizontal transport between the ship and the container yard reduce costs considerably.

The levelized costs with this degree of automation are about US$100 per container lower than with a conventional terminal with rubber-tired gantry crane serviced by tractor-trailers.

Base Case Estimates

We began with levelized costs per container at a 10% real discount rate (operating costs and capital expenditures) for operating conditions on the U.S. West Coast. These levelized costs cover the terminal operator’s total operating costs and return on its capital. The costs include all overtime typical of terminal operations, extra container moves in the container yard and other incidental costs. Comparable unit revenue would not just be the rate in a contract between the terminal operator and a shipping line but the contract rate plus overtime recovery, charges for extra container moves and other items.

We presented the results in two stages:

A chart of all capital and operating costs.

A chart of the costs that vary most with technology.

The results in terms of total levelized costs per container in 2012 U.S. dollars are:

The costs of a rubber-tired gantry crane / reach stacker terminal serviced by tractor-trailers sum to US$380 per container.

Costs with a cantilever-rail-mounted gantry crane serviced by tractor-trailers costs drop to US$320 per container.

Automated stacking cranes serviced by manned shuttle carriers result in about US$295 per container.

Unmanned equipment (such as standard automated guided vehicles, lifting automated guided vehicles or automated shuttle carriers) for the horizontal movement between the ship and the container yard bring the total cost to about US$280 per container.

The total levelized costs are very similar for these three cases, with lifting automated guided vehicles slightly lower than the others.

Total Levelized Costs per Container (10% Real Discount Rate)

Financial Results

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Sensitivity analysis variations were:

Rate of real labour cost escalation:

Base case is 0.5% a year, an estimate of future escalation on the U.S. West Coast.

Variations are 0% (not likely but it could happen) and 1.5% (probably the upper limit in the long term).

Equipment capex contingency as a measure of variations in capex itself:

Base case is 15%.

Variations are 0% (not likely) and 30% (high for equipment).

Real discount rate for levelized cost calculations:

Base case is 10%, roughly appropriate for a terminal in which an operator provides only equipment.

Variations are 5% (probably the lower limit) and 15% (high for the characteristics of these evaluations).

In all cases, the principal item that changes is labour cost. Shipping lines also care a lot about berth productivity, something we did not address in this exercise. We also did not examine the risks inherent in each technology.

We would surmise from this review that the most appropriate greenfield system for the U.S. West Coast with today’s technology involves:

Automated stacking cranes in the container yard.

Automated guided vehicles of one kind or another between the ship and the container yard.

Manual operations in the rail intermodal yard with tractor-trailers serving it because there are too many manual activities going on in a U.S. intermodal yard to benefit from automation for now. This is primarily due to the need to remove and set cones on containers on rail cars due to containers stacked two high.

Sensitivity Analysis Cases

We conducted a number of sensitivity analyses to see their influence on choice of technology. The cases we addressed are summarized on the left and the results are in the table on the following page.

Closer Look at Major Cost Items (10% Real Discount Rate)

Financial Results Continued

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Are our conclusions cast in stone? No, technology continues to evolve. Some changes that are underway include:

Automated shuttle carriers. While more costly than automated guided vehicles, they do separate the quay crane, horizontal transport and yard crane activities and do not require frames in the container yard as do lifting automated guided vehicles. Although a few terminal operators have prepared their terminals for automated shuttle carriers, at this moment they are not yet considered productive and reliable.

The quay crane. Some terminal operators have ordered quay cranes with remote controls and a degree of automation of some crane cycles. These semi-automated cranes will help the terminal operator improve vessel productivity and reduce costs by providing:

Comfortable working conditions for the crane operators.

The ability to perform effective “hot seat” shift changes.

The possibility to pool crane operators and thereby reduce significantly the required number of operators.

Finally, the remotely-operated, semi-automated quay cranes provide a pathway to increasing crane automation, improved crane design and increased vessel productivity.

Sensitivity Analysis Results

The lowest-cost technologies are highlighted in yellow. While the levelized costs do vary, the choice of technology does not. Automated stacking cranes and lifting automated guided vehicles provide the lowest costs in all cases. As before, the differences in levelized costs between standard automated guided vehicles and lifting automated guided vehicles are tiny. The costs with manned shuttle carriers and automated shuttle carriers are consistently slightly higher in cost than these two.

Some Implications of Our Findings

First, the total levelized cost of a rubber-tired gantry crane / reach stacker system on the U.S. West Coast is about US$380 per container. The total levelized costs of a semi-automated terminal in the same labour environment are about US$100 per container lower, a significant difference.

At the time of our review in mid-2012, the best technology choices on the U.S. West Coast from the financial point of view were:

Automated stacking cranes in the container yard.

Lifting automated guided vehicles between the ship and the container yard. These continue to be a popular choice of terminal operators and several have gone with battery power.

Manual operations in the rail intermodal yard because of the need to remove and set cones on containers on double-stack rail cars.

Table of Sensitivity Analyses

Sensitivity Analysis Results and Implications

  Levelized Costs (US$ per Container)

Container Terminal Technology / Sensitivity Variation

RTG & RS

CRMG & TT

ASC & Man. ShC

ASC & Std. AGV

ASC & Lift-AGV Auto ShC

Base Case $382 $321 $294 $279 $278 $282

Real Labour Escalation (Base 0.5%)

Zero $367 $310 $285 $271 $270 $274

1.5% per Year 416 347 315 297 296 300

Equipment Capex Contingency (Base 15%)

Zero $379 $318 $289 $274 $273 $277

30% 385 325 299 284 283 288

Levelized Cost Real Discount Rate (Base 10%

5% $371 $310 $281 $266 $265 $268

15% 398 336 311 296 295 300

 

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Container Capacity Improvement Program, Port Metro Vancouver, Canada Port Metro Vancouver’s (PMV) Container Capacity Improvement Program (CCIP) is currently at the Environmental Assessment (EA) phase. The focus of the CCIP work is on improvements to the existing Deltaport container terminal to meet near-term demand, and the development of the proposed (container) Terminal 2 (T2) in the Roberts Bank area of the port, and related upland infrastructure, to meet future demand. In the EA phase, Seaport is generally involved in aspects of the project that deal with financial, market and concession issues of Terminal 2.

Seaport’s contributions to the previous project definition phase included evaluation of container ship characteristics, a preliminary market assessment, preliminary layouts for T2, review of container handling technology and automation, review of work of container terminal planning consultants, simulation of intermodal rail yard, preliminary financial evaluations, preliminary review of the concession market for T2 and development of a preliminary concession strategy.

Kalibaru Container and Oil Terminals, Indonesia Port Corporation II (Pelindo II) Seaport provided to Pelindo II commercial structuring and concession development for the Kalibaru expansion to deliver three container terminals, two oil product terminals, a toll road and subsidiary infrastructure with total investment of US$5 billion. Phase 1 of the project will provide 4.5 million TEU of new container terminal capacity in the next few years and the ultimate capacity of the port will be some 18 million TEU.

Seaport’s work included development of an overall strategy for port expansion and assistance with permitting and concession procedures with the Government of Indonesia. Seaport is managing an advisory team to develop and run the tender process to select terminal operators.

Outsourced 2D and 3D Terminal Design, Worldwide Since 2011, Seaport has provided more than 60 two dimensional (2D) and three dimensional (3D) port and terminal designs for one of leading design and planning consultants in Europe. Under this agreement, Seaport has developed a large knowledge base and design capabilities of state-of-the-art container terminal operations and automation technologies. The designs ranged from standard reach stacker and rubber-tired gantry terminals to state-of-the-art automated terminals currently under construction as well as multipurpose facilities.

Identification of Infrastructure and Capacity-Building Projects, US Trade Development Administration, Vietnam Seaport identified likely future infrastructure and capacity-building projects in Vietnam’s port, rail and intermodal transport sectors. The project involved analysis of local resource development and regional trade patterns, port traffic and competitiveness, and passenger and freight rail traffic levels of service and growth. The end product was formulation of the technical aspects of Terms or Reference for future release by US TDA and other US agencies.

Master Planning of Container Terminal Expansion, DP World, Dominique Republic In close collaboration with the management of DP World’s Caucedo container terminal, Seaport developed the master plan for the expansion of the terminal and the adjacent free trade zone. The work included CAEPX/OPEX modeling and advice on technology to enable the terminal to increase its capacity by 50% to 100%. Seaport also provided 3D designs and a 3D inauguration movie of the fully-developed terminal and free trade zone facilities.

Other projects Analysis of vehicle terminal

pricing, North America

Container terminal expansion planning and design, Porto Itapoa, Brazil

Container terminal operations planning, Helsingborg Port, Sweden

Container terminal operations expert for arbitrations case, Caribbean

Technical risk study for automated container terminal, Paceco, USA

Competitive analysis of break-bulk terminals, Canada

Comparative port tariff study of Caribbean ports

Due diligence of bulk terminal acquisition for investors

TOS procurement and contract negotiations, MSC Terminal Valencia, Spain

Review of port vehicle terminal handling market, Canada

Update of port master plan, Barbados Port Inc., Barbados

Development of procedures to implement unmanned, highly-automated container quay cranes: review technology provided by suppliers, define tasks remote crane operators can conduct, determine work station layouts, and develop work instructions, a manual and 3D training videos

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