The Economics

By looking at the commercial and financial considerations the research shows that there are significant issues with the business case for T2. The projections for future growth appear to be highly inflated. The assumptions of effective capacity of existing West Coast container terminals and the potential for their expansion are not correctly portrayed. There are significant rail issues. There are huge potential risks for the financing of the project. If built it would have the dubious distinction of being one of the most expensive port projects in the world.

Market Projections

PMV Consistently Overestimates Demand to Justify T2

When PMV first contemplated the T2 project back in 2007, they forecast that Vancouver container throughput would hit a massive 6 million TEU (Twenty Foot Equivalent Units) by 2020. However, based on mid 2015 figures1, the annual handling in the port will only be about 3.05 million TEU (and that is with significant diversions in 2015 of US container traffic to Vancouver area ports due to US labour issues).

This repeated over-estimation of future volume forecasts is not limited to the 2007 bid for T2. When PMV was seeking approval for Deltaport’s 3rd Berth Project, they forecast that throughput would reach 4.3 million TEU by 2015, whereas it will likely only just surpass 3 million TEU this year. And since PMV started reconsidering the T2 project, back in 2011, they have issued four separate forecasts each of which has failed to come close to actual throughput development. A 2011 study by Worley Parsons overestimated 2015 throughputs by almost 500,000 TEU, and even the latest June 2014 study by Ocean Shipping Consultants (OSC) will likely be wrong by over 100,000 TEU just one year later in 2015.

On average, the forecasts prepared on behalf of PMV over the past 4 years will have overestimated 2015 container throughput by a massive 250,000 TEU, or almost 10%.2 The chart below clearly shows PMV’s repeated pattern of over-estimated demand in Vancouver:

T2 TEU chart

Why is it then that the container forecasts consistently exceed the actual performance?
Issues with the forecast include:

PMV appears to underestimate the potential of Prince Rupert’s port:

  • The 2014 Ocean Shipping Consultants (OSC) study forecast that Pacific Gateway volumes would reach 6 million TEU by 2025 and that Vancouver would handle 5 million TEU of that, leaving Prince Rupert with just 1 million TEU of throughput in 2025
    With Prince Rupert3 on track to handle about 800,000 TEU in 2015 (based on May YTD statistics), with its Phase-II North expansion definitely available by 2017, and with the Phase-II South expansion likely complete by about 2021 or 2022, it will have at least a 2 million TEU capacity.

What appear to be overly optimistic GDP growth figures for Canada are used (+2.51% in 2015, for example, versus 1.1% in the latest Bank of Canada forecast), together with factoring in high Chinese growth assumptions (7.5% in 2015, versus Goldman Sachs recent estimate of 6.8%) that then generate higher container volume forecasts in the short term, which then get compounded in future years growth projections. The GDP / throughput multiplier of 1.7 times GDP is also optimistic given that there is little conversion of break-bulk to containers still to occur.

PMV focuses on very strong container growth forecasts over the coming 5 years (2015-2020), including “rail additions”, in order to increase the base volumes and justify the need for T2. OSC projected growth of over 6% in 2014 (the actual was 3.1%) and growth exceeding 5% every year up to 2020. Although the Vancouver Compound Annual Growth Rate (CAGR) has been about 6.6% since 2000, this included a period of rapid growth in containerization and trade with China, which has now slowed dramatically. For the period 2006-2015 the CAGR has been a much lower 3.7%.

PMV’s Assumptions on Effective Capacity are Questionable

PMV introduces a term described as “effective capacity” (defined as 85% of actual capacity) as a maximum operating basis for terminals. For example, in a market with 5 million TEU of capacity, this assumption of “effective capacity” serves to artificially improve the demand-supply scenario by about 750,000 TEU. Is this a means to demonstrate that T2 is not creating excess capacity?

Current operating conditions in Vancouver, Prince Rupert and many other terminals around the world do not support the assumption of an 85% effective capacity. For example Prince Rupert is operating at close to 95% utilization, despite being in the middle of a major expansion project.

In a real-world environment where terminals are able to achieve virtually 100% capacity utilization (as opposed to the 85% used by PMV and OSC), the 2014 OSC forecast shows that 2023 throughput would be about 4.5 million TEU against capacity of about 7 million TEU (or just 64% capacity utilization). PMV has announced intentions to phase in T2 capacity deployment, which would help reduce this massive over-capacity, but also not considered is that OSC’s traffic forecasts appear to be optimistic, so actual throughputs closer to 4.0 million TEU in 2023 are more likely.

PMV Has Accelerated T2 Timelines Despite Slower Than Projected Growth

In 2007 when PMV first promoted the T2 project, they projected average annual growth of about 7.5% per annum, with a resultant growth of throughput from 2.3 million TEU in 2007 to 6 million TEU in 2020; it was envisaged that T2 would be delivered to the market by about 2018 (9 year development timeframe) in order to meet that projected demand of 6 million TEU in 2020.

In the intervening period between 2008 and 2014, the actual throughput growth rate (CAGR) in Vancouver has been just 2.6%, far below the 7.5% originally envisaged by PMV. Such a low growth rate would naturally suggest that the need for T2 would be deferred for decades, if not forever. And yet, PMV is planning to have T2 delivered to the market by 2023, in spite of the fact that the port’s container growth forecasts have been more than double the actual container growth since 2007.

And whereas PMV originally envisaged that T2 would commence operations when throughput was reaching 6 million TEU (during the 2007 tender process), PMV now plans to introduce T2 in 2023 when even OSC’s optimistic forecasts suggest that volumes will be less than 4.5 million TEU.

There appears to be no explanation as to:
• Why, whereas previously T2 was forecast to be required when volumes approached 6 million TEU, PMV now claims that T2 should be delivered to market when volumes will be only 4.5 million TEU, despite significantly lower observed growth rates.
• Why additional capacity created by Deltaport’s Terminal Road and Rail Improvement Project (DTTRIP) and the proposed Centerm expansion (over 1 million TEU additions in total) has not deferred the need for T2, but instead advanced that requirement to when throughput is projected to be just 4.5 million TEU. Intuitive logic would suggest that the trigger for T2 should actually have increased to closer to 7 million TEU.
• Why the rapid market acceptance, throughput growth, and planned multiple expansion phases of Prince Rupert (that will likely have more than 2 million TEU of capacity before 2023) has not further reduced the need for T2.

Given the questionable economic rationale for the T2 project, why is it then that PMV is continuing to promote the T2 project? Is there a concern that Prince Rupert is capturing a share of container traffic that might otherwise have been handled in Vancouver? Why is PMV continuing to ignore the reality that Prince Rupert, coupled with the Vancouver terminal expansions, provide sufficient capacity to satisfy Canada’s trading needs without ever building T2?

Rail Issues

CN / CP Rail Capacity in Southern British Colombia

Recent years have repeatedly demonstrated the constraints facing rail capacity in the Southern BC corridor from Vancouver through the Rockies. In this region, CN and CP already collaborate to run eastbound trains on one railway’s line and westbound trains
on the other railway’s line in order to maximize utilization levels, and yet congestion is a perennial problem. While congestion is often caused by natural factors such as adverse winter weather, at many times this congestion has simply been due to excess
demand for rail service.

Until the recent downturn in oil markets, movements of oil by rail had grown exponentially, and resulted in squeezing out of both grain and container movements. While the government intervened in terms of grain movements, little was done to ensure adequate capacity for container handling.

The T2 project, with its projected 2.5 million TEU of additional capacity, would create additional rail demand for about 2 million TEU of additional rail volumes (for cargoes moving both to Eastern Canada and the US), given that a large percentage of the incremental traffic would have to come from US traffic. Ignoring peaking factors and assuming 800 TEU per train, it would imply a need for an additional 7 trains per day (3-4 in each direction) just to accommodate T2. After considering peaking factors and the fact that not all trains will move fully loaded, it is likely that T2 would generate an additional 4-5 trains per day in each direction. Where are the PMV studies to show that there will be sufficient rail capacity to handle this demand without causing the entire rail network to collapse? Can CN and CP railways handle this additional capacity?

T2 Only Needed for US Rail Movements

2015 will be a milestone year for Canada’s west coast ports of Vancouver and Prince Rupert, with US rail volumes expected to surpass 1 million TEU, which equates to over 25% of total West Coast container volumes. While Prince Rupert’s exponential growth
can be attributed to its high levels of efficiency, uncongested rail line, and strong support from CN, much of this US rail growth in Vancouver has been related to the 2014 / 2015 labour unrest in the main USWC ports of LA / LB, Oakland and Seattle-Tacoma. Seattle-Tacoma handled 3.4 million TEUs in 2014. Their proposed improvements, to be completed by 2020, will increase capacity to 6 million TEUs. Hence there will be more than enough capacity in the Pacific Northwest for years to come and no justification for the T2 project that is almost entirely dependent on poaching more U.S. bound cargo.

Whatever the reasons, a number of things are clear:
• Given that Canada’s economic growth has been stalled for much of the past 12 months, the 2015 YTD growth in PMV’s container handling is virtually all accounted for by US Rail volumes
• At the port’s last AGM, Robin Silvester, President and CEO of PMV, claimed
“Canada’s trade is growing … Our job, as a port authority, is to respond to that growing demand and make sure the port is ready to handle it.”
o In fact, most of the growth at PMV (and Prince Rupert) has been due to increased share of US rail volumes – 1-2% domestic economic growth will NEVER justify the proposed 2.5 million TEU of new capacity at T2
o PMV has failed to provide any updated breakdowns of US Rail traffic. Would this show that T2 is purely required to handle US volumes?

Even based on 2015 statistics, Canada’s West Coast gateway ports (Vancouver and Prince Rupert) have about 1.5 million TEU of spare capacity to handle Canada’s trade requirements today (over 1 million TEU of US Rail, plus spare capacity in the existing
terminals in Vancouver and Prince Rupert). Prince Rupert Phase-II North will add up to 800,000 TEU of new capacity, while expansion projects in Vancouver will add a further 1 million TEU by 2020 at latest. All told, there will be 3.3 million TEU of available West
Coast capacity by 2020 (ignoring growth between now and 2020). T2’s 2.5 million TEU of capacity simply is not required to meet “Canada’s growing trade”. It can only be justified based on funneling US Rail traffic through Vancouver, despite the fact that US West Coast ports are upgrading so that they can handle these US containers.

The demand-supply analysis below clearly demonstrates this point; in 2023, the year that PMV claims that T2 will be required to handle Canada’s growing trade, it is estimated that there will be over 3.2 million TEU of spare capacity to handle Canada’s domestic trade (without considering T2) once US Rail volumes are excluded.

West Coast Rail Traffic

Extrapolating demand for Canadian container handling at 3% (a reasonable growth estimate), the same analysis clearly demonstrates that T2 would not be required until 2046 (a full 30 years from now). In that intervening period, a host of structural or market changes (increased productivity of existing terminals, other expansion projects, new ports in Northern BC etc.) could further delay or negate the requirement for T2.

PMV claims on their website that “Our mandate is to facilitate Canada’s trade objectives, ensuring goods are moved safely, while protecting the environment and considering local communities.” It would appear that the T2 project fails to meet any of the key points of their own mandate:
• T2 is clearly not required to “facilitate Canada’s trade objectives”, unless Canada’s objective is to be a major gateway for US containers;
• T2 not only doesn’t protect the environment, but may wreak significant environmental damage on Roberts Bank; and
• T2 is opposed by the local communities, due to environmental concerns and the intrusive increase in road and rail congestion, as well as the light, noise and air pollution effects.

The catastrophic environmental damage that T2 may wreak on the fragile Roberts Bank environment is unjustifiable even to handle Canadian trade growth given the capacity alternatives that exist at Prince Rupert. However, when considering that the Pacific
Gateway would need to handle 2-3 million TEU of US Rail traffic in order for T2 to even possibly be commercially viable (virtually the same capacity as T2), inflicting this type of environmental harm on Roberts Bank simply to handle more US Rail cargo would be an absolute travesty.

PMV Admits 0% Growth in Canadian Traffic Through Vancouver

In a recent media statement by Robin Silvester, President and CEO of PMV, he admitted that in 2015, 25% of total Vancouver container movements will be for US Rail traffic. (see http://business.financialpost.com/news/port-metro-vancouver-expects-toretain-
business-following-u-s-ports-labour-dispute)
Based on annualized volume (Jul YTD) of 3.06M TEU, this would imply US Rail volumes of 765,000 TEU and Canadian volumes of 2.295M TEU. By comparison, the 2014 OSC Market Study4 prepared for PMV indicates that Vancouver handled 2.344M TEU of
Canadian traffic back in 2008. Between 2008 and 2015, there has been ZERO GROWTH in Canadian container traffic through Vancouver (that growth has gone to Prince Rupert), and yet Mr. Silvester claims that 2.5 million TEU of new capacity is needed to handle Canadian container growth at Vancouver.

2015 Container Statistics

In the same statement, Mr. Silvester claimed that Canadian container volumes through Vancouver have been growing at 4%, but has failed to provide any other statistics to prove this. While Vancouver may have achieved 4% (or greater) growth in Canadian traffic prior to 2008, the combined effects of i) lower economic growth levels postcrisis , ii) limited additional conversion of break-bulk to containers, and iii) strong market acceptance for Prince Rupert have all conspired to drive the growth rate for Canadian containerized cargo (through Vancouver) down to ZERO PERCENT over the past seven years. In conclusion, there is simply no business case to require T2 to handle Canadian container traffic in Vancouver, particularly when the existing Vancouver terminals already have over 2 million TEU of spare capacity (between current spare capacity, planned expansions, and current US Rail movements).

T2 Only Needed for US Rail Movements

2015 will be a milestone year for Canada’s west coast ports of Vancouver and Prince Rupert, with US rail volumes expected to surpass 1 million TEU, which equates to over 25% of total West Coast container volumes. While Prince Rupert’s exponential growth can be attributed to its high levels of efficiency, uncongested rail line, and strong support from CN, much of this US rail growth in Vancouver has been related to the 2014 / 2015 labour unrest in the main USWC ports of LA / LB, Oakland and Seattle-Tacoma. Seattle-Tacoma handled 3.4 million TEUs in 2014. Their proposed improvements, to be completed by 2020, will increase capacity to 6 million TEUs. Hence there will be more than enough capacity in the Pacific Northwest for years to come and no justification for the T2 project that is almost entirely dependent on poaching more U.S. bound cargo.

Whatever the reasons, a number of things are clear:
• Given that Canada’s economic growth has been stalled for much of the past 12 months, the 2015 YTD growth in PMV’s container handling is virtually all accounted for by US Rail volumes
• At the port’s last AGM, Robin Silvester, President and CEO of PMV, claimed
“Canada’s trade is growing … Our job, as a port authority, is to respond to that growing demand and make sure the port is ready to handle it.”
o In fact, most of the growth at PMV (and Prince Rupert) has been due to increased share of US rail volumes – 1-2% domestic economic growth will NEVER justify the proposed 2.5 million TEU of new capacity at T2
o PMV has failed to provide any updated breakdowns of US Rail traffic. Would this show that T2 is purely required to handle US volumes?

Even based on 2015 statistics, Canada’s West Coast gateway ports (Vancouver and Prince Rupert) have about 1.5 million TEU of spare capacity to handle Canada’s trade requirements today (over 1 million TEU of US Rail, plus spare capacity in the existing
terminals in Vancouver and Prince Rupert). Prince Rupert Phase-II North will add up to 800,000 TEU of new capacity, while expansion projects in Vancouver will add a further 1 million TEU by 2020 at latest. All told, there will be 3.3 million TEU of available West
Coast capacity by 2020 (ignoring growth between now and 2020). T2’s 2.5 million TEU of capacity simply is not required to meet “Canada’s growing trade”. It can only be justified based on funneling US Rail traffic through Vancouver, despite the fact that US West Coast ports are upgrading so that they can handle these US containers.

The demand-supply analysis below clearly demonstrates this point; in 2023, the year that PMV claims that T2 will be required to handle Canada’s growing trade, it is estimated that there will be over 3.2 million TEU of spare capacity to handle Canada’s domestic trade (without considering T2) once US Rail volumes are excluded.

West Coast Rail Traffic

Extrapolating demand for Canadian container handling at 3% (a reasonable growth estimate), the same analysis clearly demonstrates that T2 would not be required until 2046 (a full 30 years from now). In that intervening period, a host of structural or market changes (increased productivity of existing terminals, other expansion projects, new ports in Northern BC etc.) could further delay or negate the requirement for T2.

PMV claims on their website that “Our mandate is to facilitate Canada’s trade objectives, ensuring goods are moved safely, while protecting the environment and considering local communities.” It would appear that the T2 project fails to meet any of the key points of their own mandate:
• T2 is clearly not required to “facilitate Canada’s trade objectives”, unless Canada’s objective is to be a major gateway for US containers;
• T2 not only doesn’t protect the environment, but may wreak significant environmental damage on Roberts Bank; and
• T2 is opposed by the local communities, due to environmental concerns and the intrusive increase in road and rail congestion, as well as the light, noise and air pollution effects.

The catastrophic environmental damage that T2 may wreak on the fragile Roberts Bank environment is unjustifiable even to handle Canadian trade growth given the capacity alternatives that exist at Prince Rupert. However, when considering that the Pacific Gateway would need to handle 2-3 million TEU of US Rail traffic in order for T2 to even possibly be commercially viable (virtually the same capacity as T2), inflicting this type of environmental harm on Roberts Bank simply to handle more US Rail cargo would be an absolute travesty.

Alternative Capacity Creation

Existing PMV Terminals Have Cheaper Capacity Expansion Opportunities

When Deltaport added its third berth it increased its capacity to 2.1 million TEUs, according to Transport Canada’s Pacific Coast Container Terminal Competitiveness Study, 2008. Now Global Container Terminals’ (GCT) DTTRIP project at Deltaport, to be
completed imminently, will add about 600,000 TEU of capacity at an estimated cost of  C$250 million, or $417 per TEU of capacity created. This will increase Deltaport’s total capacity to between 2.4 and 2.7 million TEU. The project is being achieved without any land reclamation or berth extensions, and together with the currently ongoing expansion at Prince Rupert, will handle market growth for many years to come.

GCT’s other terminal in Vancouver, Vanterm, also has medium-term expansion capability. Although today it is constrained on both sides by other terminals, there are plans over the medium term (i.e. mid 2020s) to expand this facility, although details
have not yet been released to the market.

Finally, PMV has announced plans to expand DP World’s Centerm facility in cooperation with the operator. The expansion would potentially increase capacity to about 1.3 million TEU, again at a much lower cost per TEU than the proposed T2 facility (similar
to the DTTRIP cost). Furthermore, if Centerm can replicate Vanterm’s high (92%+) utilization level, Centerm could add about 150,000 TEU of effective capacity to the market without any additional investment.

These projects and efficiency improvements will add combined capacity of about 1.25 million TEU of capacity in Vancouver alone over the next 3-5 years, with an average cost of far less than $500 per TEU.

Prince Rupert P-II South is Cheaper, Quicker to Market and Not Locally Opposed

In addition to the 750,000 TEU Phase-II North expansion already underway, Prince Rupert’s Fairview Terminal has the capability to add a 3rd berth at significantly lower cost and in a much quicker timeframe than PMV’s T2 project. This 3rd berth, which would increase Prince Rupert’s capacity to about 2.5 million TEU, has already been environmentally permitted, and the new operator is likely to start the planning process within the next 3-6 months.

With a construction period of just 2-3 years, and a cost (on a per TEU of capacity basis) that is a fraction of PMV’s T2 project, this further capacity will be delivered to the market well before T2 could ever be built, will be able to compete for market share much more effectively (given the much lower development costs), and is strongly supported by the local community because it does not have the same potential negative environmental impacts as T2.

Prince Rupert has Even More Cheap Capacity for the Future

Prince Rupert Port Authority (PRPA) has announced plans to develop another terminal at Kaien Island for handling break-bulk traffic expected to be generated by large-scale projects in the energy sector in BC and Alberta over the next 5-10 years. The site would have over 1,000 meters of berth and 95 hectares of storage area, with drafts alongside of at least 20 meters.

While it is not clear whether this terminal will be developed in the short term, its longterm development plan (15-20 years) would inevitably involve converting some or all of it to handle containers once the major demand for energy-sector project cargo has been satisfied. A terminal of this size could add a further approximate 2.5 million TEU of capacity to the West Coast Canada market. While the cost of developing this terminal is not yet known, it will inevitably cost less (both in dollar terms and environmental impact) than the T2 project proposed by PMV.

Cheaper, Long-Term Potential Capacity In Vancouver

Whilst in no way supporting more container terminal facilities on the Fraser River,should there ever be a requirement in the long term future, (if demand were ever to materialize over the next 30-50 years), then there are better and much less destructive alternatives than T2, which has the potential for damaging the fragile ecological systems at Roberts Bank, For example PMV themselves have identified potential plans to develop the Fraser Richmond site that is currently used for nonmarine container activities. This site has on-dock rail connectivity, nearby highway, about 1,300 meters of waterfront for berth development, and over 100 acres of land area. A facility of this size could probably handle close to 2 million TEU and would almost certainly cost less than $1 billion to develop (less than $500 per TEU of capacity).

Whilst we also strongly believe there is no business case to require the construction of another terminal on the Fraser River, in order to meet long-term Canadian demand for container handling, the presence of this potential terminal clearly demonstrates that there are other alternatives.

Project Structure and Risks

Questionable Concession Fees for T2

Assuming over $2 billion to be spent between PMV (approx. $300 million for approvals) and the Infrastructure Developer (ID) on the project, the concession fees that the Terminal Operator will have to pay to PMV would appear to be questionable from a financial perspective.

If we assume, conservatively, a $1.5 billion investment by the ID at a simple return of 7%, this would require annual payments to the ID of $105 million. PMV requires a minimum return of 10% on any investments they make, which would imply that PMV would seek further payments (either concession fees or a share of wharfage) amounting to about $30 million per annum, for total annual concession fees of about $135 million. These fees will almost certainly have to be structured as a fixed fee, particularly in respect of amounts to satisfy the ID’s payments. Fees would obviously be subject to inflation escalation.

With initial start-up volumes of about 1 million TEUs, that would equate to a fee of at least $135 per TEU, against current revenue levels of about $250 to $300 per TEU in the market. The Terminal Operator (TO), who would separately be making an investment of about $500 million to $1 billion in the facility, would be required to share close to 50% of gross revenues with PMV as concession fees. These levels of concession fees are questionable in any business environment, perhaps more so with one with high investment and operating costs.

Even at full utilization, and ignoring inflation in fees, the TO would be paying close to $60 per TEU (over $100 per box) in concession fees to PMV, or about 25% of revenues. Of course, these calculations assume that the sudden influx of new capacity into the market would not have an adverse impact on revenue levels.

Labour Market Disruptions

T2, if ever developed, would likely be the first partially or fully automated container terminal in Canada, and would cause a massive disruption in what has been (for the past years) a very calm labour environment on the Canadian West Coast, free of the type of disputes that have plagued the US West Coast ports.

Given that in the early stages, most of T2’s volume might simply be cannibalization from existing PMV terminals, the introduction of T2 would effectively result in a transfer of container handling from more labour intensive, non-automated terminals, with resultant job losses.

When containerization first appeared on the Canadian waterfront over a half century ago, the unions demanded (and secured) increased pension contributions to compensate for the job losses on the waterfront that would inevitably result from the conversion from break-bulk to container handling of cargoes. Today, the terminal operators are still burdened with those extra costs. Will the Terminal Operator at T2 have to face similar demands from the unions as a cost of implementing an automated system at T2?

Risky Project Structure with an Unreliable Intermediary

The proposed structure, with the Terminal Operator paying significant fixed concession fees to PMV (of over $100 million per annum) and then PMV paying a portion of those fees to the Infrastructure Developer as a lease for availability of the infrastructure
appears to introduce substantial risks, including:
• The ID will be required to commit to investing well over $1 billion in an infrastructure project without any certainty that the Terminal Operator will actually perform:
o Is there a risk that the successful bidder will withdraw from the project after being selected as the preferred bidder? In the previous attempt to tender this project, the successful bidder withdrew from the project after being selected as the preferred bidder.
o The list of global operators that have withdrawn from projects after successfully bidding / winning a project is extensive, and includes projects in Greece (Thessaloniki), Ecuador (Manta and Posorja), India (JNPT), United States (Virginia and Port Everglades), Netherlands (Amsterdam), and the UK (Port Yarmouth). Could this happen at T2?
o No amount of performance bonds, etc. can protect the ID from this risk. Can PMV back-stop the risk by guaranteeing payments to the ID?
• The annual payments from PMV to the ID will approximately equal or exceed PMV’s entire annual profitability. Can PMV guarantee payments to the ID?
• If demand for container traffic does not meet PMV’s projections and the TO abandons the project, there are virtually no other possible uses for the terminal (and certainly none that would justify the massive investment made in the site).

Inadequate Environmental Permitting

In their filings before the CEAA in 2015, PMV has sought to limit the scope of the Environmental Assessment to the areas directly under the “care and control of Port Metro Vancouver”. In seeking this limitation, PMV would be excused from evaluating the environmental impacts of the project on i) waterways used by ships to approach T2, ii) impacts on the Fraser Delta outside of the actual project site, iii) road traffic in the surrounding communities, or iv) rail movements throughout the lower BC mainland.

This limitation that PMV has sought from CEAA appears to be unprecedented in terms of Environmental Assessments in Canada. For example, when the Northern Gateway project went through the same process, the review area extended from the proposed port facilities in Kitimat about 150 kilometers out to open water beyond the outer islands. Even if the CEAA ignores their own precedent and exempts PMV from the norms for these types of reviews, it is almost certain that such an environmental permitting process would fail to meet the requirements of the Equator Principles for financing a project that may well inflict such significant environmental damage on the area.

Investment Costs

T2 – The Most Expensive Port Project in the World?

PMV’s T2 project looks to have the dubious distinction of being one of the most expensive port projects ever contemplated in the world.

The T2 project is forecast to cost C$2.5 to C$3 billion (this estimate was prepared before the C$ declined precipitously in the past year), and would create about 2.5 million TEU of capacity. This massive greenfield investment would be spread over a period of 5-6 years, thereby introducing significant Interest During Construction costs during a period with no revenues. Even ignoring these factors plus the inevitable cost over-runs with a project of this magnitude, the gross cost could be over C$1,000 per TEU of capacity created.

Some recent indicative greenfield and brownfield (expansion) transactions include:
• APM Terminals
o $1.5 billion in a 3.5 million TEU facility in Tema, Ghana ($428 per TEU of capacity)
o $40 million in a 125,000 TEU expansion in Mobile, Alabama ($320 per TEU)
o $1.3 billion in a 2.1 million TEU facility in Abidjan, Ivory Coast ($620 per TEU)
• DP World
o $200 million in a 800,000 TEU facility in Mumbai, India ($250 per TEU)
o $850 million in a 4 million TEU facility in Jebel Ali, Dubai ($212 per TEU)
• ICTSI
o $600 million in a 1.2 million TEU expansion in Puerto Cortes, Honduras ($500 per TEU)

The question has to be asked – why would experienced global port operators / investors, that deploy their capital around the world based on the relative attractiveness of competing port investment opportunities, choose to invest in the T2 project?

T2 Investment Cost is Mis-Aligned with Recent Canadian & Australian Market Transactions

The DP World/Maher transaction for the Fairview Terminal has established a clear valuation benchmark for port projects in Western Canada. Under that transaction, DP World acquired the existing 800,000 TEU facility (plus the Phase-II works already underway that will expand capacity to about 1.6 million TEU) for consideration of C$580 million. Assuming about $200 million for the P-II expansion, the effective purchase price was $780 million to acquire about 1.6 million TEU of brownfield container capacity in Canada, or $488 per TEU of capacity.

At over $1,000 per TEU, T2 is more than double the cost that DP World paid for its investment in Prince Rupert, and with the added disadvantage of being a greenfield project with no revenues for the first 5-6 years. How will T2 be able to compete with existing Pacific Gateway terminals given this cost differential?

Another relevant market transaction is the Brookfield acquisition of Asciano in Australia. The Ports & Logistics business represented 19% of Asciano’s EBITDA, which would imply a valuation for that business line of about C$2.2 billion (19% of the $11.6 billion purchase price). Even ignoring the value of the logistics business, this $2.2 billion valuation for a business with 3.9 million TEU of existing capacity would imply a valuation of C$564 per TEU of capacity. If possible to account for the value of Asciano’s logistics business, the core container terminals would have been valued at less than C$500 per TEU, yet again less than half the cost of the proposed greenfield T2 project. Would an astute investor such as Brookfield then turn around and invest in a greenfield project such as T2 at double the cost of their recent Asciano purchase?

It is incomprehensible how any rational investor contemplating an entry into the Canadian container port market would have foregone the opportunity to outbid DP World in its offer for Prince Rupert that equated to about $500 per TEU for a low-risk brownfield project, and then instead pursue a greenfield T2 project in Vancouver at double the cost. Likewise, Brookfield’s recent Asciano transaction reconfirms this benchmark valuation of less than $500 per TEU for brownfield (not greenfield) capacity in developed markets.

Given that PMV is committing tens (if not hundreds) of millions of dollars to seek approvals for a project whose economic feasibility is questionable and whose prospects for success are doubtful at best, one has to wonder why PMV senior management continues to push T2. What is their rationale?