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Harboring Hope

By 2010, Puerto Rico’s $1 billion transshipment port could generate 50,000 new jobs and inject $6 billion a year into the island’s economy.


September 7, 2000
Copyright © 2000 CARIBBEAN BUSINESS. All Rights Reserved.

Build it and they will come

Puerto Rico government gives $360 millionvote of confidence to proposed ‘megaport,’ Invites worldwide shipping industry to invest in massive south coast project.

By 2010, Puerto Rico’s proposed transshipment port in the island’s southwestern region could capture more than one third of the world’s ocean going trade now navigating the nearby Mona Passage.

If construction started by year’s end, 10 years from now, this mega economic development project would be generating 50,000 direct and indirect jobs and $6 billion a year for Puerto Rico’s economy.

It’s been the subject of much discussion by members of the public and private sectors since CARIBBEAN BUSINESS first wrote about it six years ago. Since then there’s been a lot of talk, some studies, but no final pronouncement. Until now.

The government finally appears committed to facilitate the development in Puerto Rico of the ultimate, world-class, state-of-technology, port structure–to be called Puerto del Sur, or Southern Port–to take advantage of the vast economic benefits that value-added operations in transshipment port-related free trade zones will bring about.

Last year, Gov. Pedro Rossello commissioned a study from international port authority Ernst Frankel to determine the economic feasibility of building the most technologically advanced transshipment port and logistics center in the Caribbean. On July 24, the governor made public the results of Frankel’s Puerto Rico Transshipment Port Feasibility Study and Project Outline, which supported the economic feasibility and potential success of the project in Puerto Rico.

The governor announced that, consistent with the recommendations in the study, the project would be developed in and around Guayanilla harbor, in acreage spanning the municipalities of Guayanilla and Peñuelas.

Earlier reports based on a working draft of the document have given rise to controversies, mostly focused on the issue of the port’s location. But until now, no one except the government agencies directly involved with the project had examined Frankel’s study.

Recently, CARIBBEAN BUSINESS reviewed the complete Frankel report, comprised of more than 1,000 pages of findings documented with evidentiary data, and spent more than 10 hours discussing the study’s results with Puerto del Sur project coordinating directors Lourdes Rovira, president of the Government Development Bank; Miguel Cordero, executive director of the Authority for the Financing of Infrastructure (AFI by its Spanish acronym); and project consultant Pedro Vazquez.

"A detailed study of the physical, economic, and commercial feasibility of the development of a large transshipment port hub and associated free trade industrial zone in Puerto Rico found such a project to be financially, economically, and commercially feasible and attractive," concludes Frankel.

Frankel’s study provides the government with the economic and technical information needed to negotiate contracts with the major international maritime carriers and transport operators who will bid for this project, as well as investors and port users. The study will be the basis of the presentation the government will make during a two-day Industry Outreach for interested companies worldwide to be held in Puerto Rico in October.

The Puerto Rico advantage

Puerto Rico’s suitability as a maritime transshipment hub appears evident.

The island is at the crossroads of most of the international north-south and east-west trade routes that cross the region navigating through the deep waters of the Mona Passage that separates Puerto Rico from the Dominican Republic.

Boasting the region’s largest and most prosperous economy and the most highly developed financial, banking, telecommunications, transportation, and utilities infrastructure, Puerto Rico competes favorably with any foreign country. The island’s educated, bi-lingual, and nimble workforce is another asset.

Most importantly, according to Frankel’s study, the market for a transshipment port in Puerto Rico could conceivably add up to at least one third, or two million TEUs (the acronym for shipping containers known as twenty-foot equivalent units), of the nearly 6.48 million TEUs of container traffic using nearby north-south and east-west shipping routes.

In addition, Puerto Rico’s actual foreign trade base, estimated at 321,000 TEUs a year (the highest figure among any other Caribbean transshipment center), would result in a total 2.3 million TEUs transshipped annually. With a 12% growth rate estimated conservatively by industry analysts, the island’s importance to the worldwide shipping industry could be significant.

"Frankel’s study provides us with a guideline of the port’s basic needs and the potential results that a successful operation can bring. But our main goal is not just to build a transshipment port, but also to develop a regional manufacturing and trading port center, with value-added activities operating in a free trade zone," Vazques told CARIBBEAN BUSINESS.

According to Vazquez, there will be three distinct functions involved in the operation and management of the facility.

"First, is the real estate business, which will be the government’s responsibility. This includes the acquisition and reclaiming of lands, environmental and other regulatory permitting, and some minor infrastructure conditioning which the government will perform and for which it will charge rent to the operator," said Vazquez. Although the government has already calculated the rent per acre they expect to charge, officials will not divulge it in order not to loose negotiating ability vis-a-vis interested parties.

The second function involves the actual maritime port construction, financing and operation. "The government will enter into a long-term lease with the operator of at least 25 years, maybe more, after which the franchise will revert to the government, not for the government to operate, but to be able to renegotiate or choose a different operator," Vazquez explained.

The third, and perhaps most important function, will be the development by different operators of port-related activities in adjacent free trade zones. They are known as value-added activities because they enhance the value of transshipped cargo. Their performance at a transshipment facility reduces costs for the foreign vendor.

According to Frankel, value-added activities are a necessary component of any transshipment facility to "modify the form, usability, type, technology, or packaging of the goods in transit. [They] may involve simple packaging or labeling, consolidation or deconsolidation, technology addition (software), assembly, reconstruction, customizing and more."

"It is the investment made in the port’s third component, a value-added area within a free trade zone, that will enhance the manufacturing and technological development sector in Puerto Rico. We are not just talking about the capacity to move cargo, but to become the most important transshipment and logistics hub in the Caribbean," said Rovira.

What’s in it for Puerto Rico

Frankel’s study highlights the dramatic creation of about 5,000 direct jobs and 12,500 indirect jobs (a spin-off ratio of 1:2.5) within five years from the start of construction for both the transshipment port and the free trade zone. Only about 500 of these jobs would be in the port itself. Work at port-related industries in the free trade zones will be the real job generators. Within 10 years of optimum operation, estimates place employment at 50,000 direct and indirect jobs.

With $150,000 to $200,000 per worker entering the economy annually, in five years from the start of operations, the project’s total annual contribution to Puerto Rico’s gross product (GNP) would be $3.6 billion initially and will reach $6 billion per year after 10 years.

Recruitment of this workforce will have an impact islandwide. The government is already involved in the improvement and expansion of sciences and technology curricula. Not only students, but also large numbers of mid-career job applicants will require education and training. Last month, the Department of Economic Development and Commerce granted the University of Puerto Rico-Mayaguez campus $14.2 million in-kind to create higher education degrees in these two areas.

Value-added activities will also diversify Puerto Rico’s labor market. Since the areas involved are both technical and labor-intensive, there will be job opportunities for individuals with a wide range of skills. Opportunities will appear in areas such as process equipment, precision chemicals, energy conversion, medical equipment, measuring equipment, semi-conductors, biogenetic engineering, and environmental protection. Also, in food processing, biotechnological processing, heavy equipment, energy efficiency equipment, water processing, telecommunications, and logistics centers (such as FedEx, DHL, UPS).

Puerto Rico’s financial services industry also stands to gain. The operations of the transshipment port will require and enhance the growth of banks and other financial services; insurance agencies; brokerage companies; fuel, water and electric services; ship supplies; aviation; and hotels, among others.

Local financial institutions will handle an average 30% of associated transactions. Ship and cargo insurance, in addition to brokerage fees, could grow by about $10 million in revenues for each transshipment of 100,000 TEU. In addition, ship supply revenues should be about $500,000 for each 100,000 TEU, as well as fuel and water supplies. The island’s various airport alternatives will also provide ample logistic choices to ship operators who need to relocate crew and personnel frequently.

Location, location, location

In September 1999, the U.S. Army Corps of Engineers released a detailed analysis of 15 potential sites where a transshipment port facility could be built in Puerto Rico. The report highlighted Guayanilla as the island’s largest hurricane-safe harbor and one of the best in Puerto Rico.

"The reefs and island to the southeast break the sea but not the wind; some dragging (of a ship’s anchor) can be expected . . . The harbor, between low Punta Guayanilla on the east and bluff-faced Punta Verraco on the west, is protected at its entrance by extensive reefs which extend one mile or more offshore. The eastern part of the bay is a continuation of the industrial complex at Bahia de Tallaboa; large vessels call there to deliver and load petroleum and bulk chemical products," reads the report.

Although the Corps’ study featured only an inventory of the features of the different potential sites and did not rank them, CARIBBEAN BUSINESS did. A year ago we examined the Corps’ report and concluded Guayanilla was the best site for the transshipment port and logistics center. (CB Aug. 29, 1999)

The project as conceived requires at least 4,000 to 6,000 feet for the construction of a linear deep-water wharf, accompanied by 45 to 65 feet of channel depth. Guayanilla Bay has not required dredging in more than 30 years and is naturally protected by existent reefs from hurricanes or gales.

"In order to build a first-class, technologically superior transshipment port that will outshine any other in this region, we needed a minimum of 4,000 to 6,000 feet for a deep water wharf. The site selected, Guayanilla Bay, is appropriate for this use," Rovira said.

Besides the natural attributes of the harbor, availability of adjacent land in which to develop free trade zone activities was a major consideration in making this decision, and one that disqualified Ponce harbor.

Frankel’s study identifies two possible sites for this project: Guayanilla-Peñuelas and the Rio Matilde area west of Ponce.

According to Cordero, environmental considerations were crucial in determining that the Guayanilla-Peñuelas area–where the petrochemical facilities of the Commonwealth Oil Refining Co. (Corco) and Union Carbide once stood–would be the best site for this project. "The area has already been environmentally impacted because it was previously developed. Obtaining the environmental permits for Rio Matilde would have been uphill, if not impossible" he said.

Although not previously developed, the Rio Matilde area has environmental problems of its own. The Puerto Rico Water Co. has a wastewater treatment plant with an outfall that empties into the entrance channel. This outfall would have to be relocated if the project were to be developed there.

Cordero, who is also executive director of the Puerto Rico Electric Power Authority (Prepa), is very clear about Corco’s land use. "We have been negotiating with Corco executives for over a year to buy the land. But this will only happen after they clean up the environmental problems. Prepa’s intention is to use Corco’s land to develop a petroleum plant which would complement the transshipment project." (See related story)

Vazquez shuns criticism about supposed clean-up costs of the Guayanilla Bay area. "Corco land never figured in our plans to situate the port, except for the use that Prepa may give it. We simply don’t need the Corco land for either the port or the free trade zone," said Vazquez.

The land belonging to Union Carbide will also be left aside for future development, once the clean-up efforts are finished, Vazquez said. "We have already requested a permit from the Environmental Protection Agency (EPA) to include Union Carbide’s land in its "brownfield" clean-up program. If the request is approved, the land will eventually be authorized for use after partial remediation. But even that land is not required for developing the first phase of the project.

Vazaquez explained that in order to ensure availability of land, AFI has already filed Notices of Intention to Reserve for upwards of 1,000 acres of adjacent land for future port development with the Puerto Rico Planning Board. The effect of the filing is to freeze land prices in the reserved area to avoid speculation that could cost the government millions of dollars. Mostly located across Highway 2, the land belongs to a handful of families and this is where officials plan to situate most of the port’s value-added operations.

Show me the money

Having estimated that the cost of building the transshipment port and its free trade zone component will be more than $1 billion, the government determined that its participation would be limited to $360 million. This will be used in the acquisition and development of real estate and basic port equipment and machinery. The remaining $667 million investment will come from outside sources.

The Authority for the Financing of Infrastructure will be responsible for the financial management of the transshipment port. But Gov. Rossello has said he will propose legislation to create an independent entity to operate the project.

Frankel’s study suggests that sources of financing could vary, depending on the selection of the port’s operator. But the government has already stated it will retain ownership of the land, in terms not yet established but which could range from 25 to 30 years. Ownership would then revert to the government. The operator will finance, build, and own improvements made to the project, but these would also revert to the government at the end of its lease.

What the study most emphasizes is the need for operational freedom for the company chosen to operate this project. Though municipal, state, and federal regulatory laws will be enforceable, the operator must independently deal with individual port issues.

Although the site chosen spans the municipalities of Guayanilla and Peñuelas, the government anticipates the economic impact of such a project will be of such magnitude that it will extend across the southwestern part of Puerto Rico, from Lajas to Juana Diaz, and even all of Puerto Rico.

Project directors Rovira and Cordero are puzzled by petty criticism on whether the port will be on one or another municipality and clearly balk at the suggestion that political considerations may have played a part in site selection.

"We are very mindful that the benefits and the burdens of such a large project cannot be limited to one or two towns just because the port will sit between Guayanilla and Peñuelas. Our intent is to make sure a mechanism is established so that all municipalities in the region share proportionately in the benefits, as well as the burdens that this project’s development will bring," said Rovira.

"The bigger picture tells us that this project won’t just benefit Guayanilla and Peñuelas. The considerations that we are looking into in order to do justice to the region pertaining fiscal matters affect the entire region, from Lajas to Juana Diaz, perhaps even farther. For instance, resources such as hotels, transportation system, banking and financial resources will surely come into play, especially in Ponce where the most developed infrastructure is available. The Mercedita airport, for example, will have a new life. But the demand on other towns’ resources will also grow as the project nears commencement," concluded Rovira.

This Caribbean Business article appears courtesy of Casiano Communications.
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