“Shipping volumes at the container port have fallen far short of initial expectations that capacity would be fully taken up this year.”

B.C. port expansion delayed
Globe and Mail Update
December 19, 2008 at 6:24 AM EST

The port of Prince Rupert is delaying the expansion of its container terminal by at least 18 months, as the global recession and its own financing woes dash hopes of breaking ground on the $650-million project next year.

According to a confidential study commissioned by the federal government, a summary of which was obtained by The Globe and Mail, the port authority has hit the debt wall, with the decline in shipping volumes meaning it will breach federal requirements on its current loans of $22-million.

The port authority’s limited cash flow, and inability to borrow against its lands, means it cannot support an increased debt burden and will not be able to borrow the $200-million needed for its portion of the Phase 2 expansion, concludes PricewaterhouseCoopers. Prince Rupert has “little or no financial flexibility to move forward with plans for Phase 2 in the short term,” says the summary, written in August, before the full force of the economic crisis swept over the global shipping industry.

The head of the Prince Rupert Port Authority confirmed in an interview with The Globe yesterday that Phase 2 has been delayed, and will likely begin in late 2010 rather than the middle of next year.

But Don Krusel, the port authority’s president and chief executive officer, attributed the delay to global economic conditions, and the resulting blow to shipping volumes, rather than to the organization’s finances.

Shipping volumes at the container port have fallen far short of initial expectations that capacity would be fully taken up this year.

Instead, only about a third had been used as of the end of November, and traffic dipped from the month before. The volume of shipping to Prince Rupert in November, if maintained over a full year, would mean the container port would be running at about 60-per-cent capacity, Mr. Krusel said.

The container port may not reach the full capacity of its first phase until 2010, a consequence of the severe slowdown in transpacific shipping volumes. “You cannot push back against a tidal wave,” Mr. Krusel said.

The tidal wave appears to be gathering force. A Canadian Manufacturers & Exporters survey released yesterday indicates that 52 per cent of companies say their orders will likely fall between now and March,l 2009, and that more than one-third believe their inventory levels are too high. Both responses point to reduced demand for imported goods.

The decline has touched virtually every category of products shipped from Asia, including consumer goods and components used in North American manufacturing operations. But West Coast ports have seen particularly steep declines in categories of goods that don’t have to be delivered quickly.

The falloff in shipping volumes has demolished one of the key arguments for expansion at Prince Rupert – namely that other ports along the West Coast of North America were running at full capacity. “It was almost like a release valve,” Mr. Krusel said.

Now, Prince Rupert must win business on its competitive merits, rather than by default. Mr. Krusel said his port is faring better than rival operations further south.

The PricewaterhouseCoopers document, a confidential memorandum to former transport minister Lawrence Cannon, says Transport Canada believes the port authority should pursue an “incremental approach” to expansion rather than the Phase 2 strategy, which would quadruple the capacity of the container port.

The summary notes that the port authority had not, by August, formally requested an increase in its borrowing limit, and that port officials were still debating their preferred mix of equity, debt and private sector investment. It goes on to say that Chinese investors had expressed interest in developing a separate container terminal in the Prince Rupert area.

Discussions on how to finance Phase 2 are still going on, Mr. Krusel said, while declining to comment on the specifics of those talks. However, the PricewaterhouseCoopers summary lays out four alternatives to simply borrowing $200-million. These include: outright privatization of the port; creation of an entity that would function like an airport authority, and which could use its property to underpin new borrowing; creation of a self-financing subsidiary; and a public-private partnership.

Mr. Krusel said “all options” are being explored.

For the first phase of the container port, the port authority was not able to increase its borrowing limit; the project was eventually launched as a private-public partnership jointly funded by the port authority, Maher Terminals, Canadian National Railway Co., and the provincial and federal governments. Maher has the right of first refusal on Phase 2.

The study summary raises the question that Maher may not be expecting significant traffic increases and will pursue expansion elsewhere. Mr. Krusel, while not commenting directly on that point, said Maher is part of the ongoing discussions. Company officials did not return calls yesterday.