Interview: PANYNJs Admiral Rick Larrabee

“It’s not like you can just find 400 acres and build another container terminal – land is scarce in the port.” Rear Admiral Richard “Rick” Larrabee, heading up the Port Commerce Department at the Port Authority of New York & New Jersey (PANYNJ), talks very much like a businessman with a keen eye for strategic planning.

At the busy port commerce offices in Manhattan’s Flatiron district, Rr Adm Larrabee talk exclusively to Port Strategy about a range of topics including a near $2bn Capital Plan for port improvements over the next 10 years, the new breed of infrastructure investors, and the “nuts and bolts” of deepening waterways and raising bridges to accommodate larger vessels.

Rr Adm Larrabee, who came to PANYNJ in 2000 after retiring from the US Coast Guard, oversees a large landlord port business with 2006 throughput exceeding 5m teu (an 8% rise over 2005). Dozens of container lines, serving ports throughout the world on all water routes, call at PANYNJ’s six container terminals.

At times, problems facing the port commerce department seem daunting: world trade is not standing still, particularly with the widened Panama Canal set to coming on stream in 2014 at the same time that the Kill Van Kull waterway and Newark Bay will be dredged to 50ft. Outside stakeholders, recognising the economic importance of the port, want a port that supports economic growth, but also want environmental stewardship and mitigation of severe congestion bedeviling the region’s streets and motorways. And the PANYNJ projects must pay their own way; they do not share in tax collections.

One “high class problem” came onto Rr Adm Larrabee’s radar around 2006 when yield oriented and pension investors discovered container terminals and other port related investments. The realisation was that this asset class offers growing cash flows over long terms, an ideal match for the funds’ financial contours. Within the space of a year, three of PANYNJ’s six major facilities saw their tenants’ businesses sold to financial buyers.

Rr Adm Larrabee tells PS: “Last fall <3Q 2006>, after seeing the investment community interest in this type of investment, we realised that we’d need to lay out a set of principals – so we could treat investor-buyers objectively and fairly.” Though all three deals are private (AIG assuming P&O Ports Port Newark Container Terminal, a Canadian pension fund acquiring New York Container Terminal from OOIL and a Deutsche Bank entity gaining control of the Maher Terminal in Port Elizabeth), each transaction entered the media spotlight as the negotiations got down to short strokes.

“Each of the agreements with tenants had extensive provisions allowing a lessee change of control,” says Rr AdmLarrabee, who enumerated three criteria spelt out by PANYNJ for evaluating infrastructure buyers. “First, are the potential new owners suitable? We did extensive due diligence to ascertain they had the financial resources, management commitment, and operational resources to properly operate the terminals. None of these companies had any history at all in our business, we needed to satisfy ourselves that they would make good judgments.”

Several times, in various contexts, during our hour-long session, Rr Adm Larrabee talks about increasing throughput through the port, stressing that “New York/New Jersey is a landlord port, but everything we do needs to be self supporting”. In the context of these three instances of investment funds, he says: “Each of these terminal operators will need to make improvements, and make investments that will increase capacity and improve productivity. We are not going to do it for them.”

Such considerations are in congruence with the second criterion detailed by Admiral Larrabee in evaluating the suitability of new terminal owners: “Are these new owners going to continue to operate these terminals consistently with the long term interests of this port? The terminals are valuable for us, and for them. We wanted to see evidence that they would continue to fund improvements with capital investments. That’s where some of the big numbers in the trade press, like $54m in one case, came from. We asked each one of the operators to commit themselves to invest what we felt were reasonable numbers going forward.”

The PANYNJ has been making, and continues making investments to grow its maritime business, a theme highlighted in Rr Adm Larrabee’s investment discussion. He tells PS: “And finally, the third criteria in our decisions on investors, which got labeled as the ‘Consent Fee’, was an acknowledgement of direct investment that we had made in the facilities. We wanted a certain percentage, one third, of those expenditures that we had made.” He stressed that indirect expenditures, such as those where PANYNJ splits the cost of channel deepening with the US Army Corps of Engineers, were not considered.

Explaining further, Rr Adm Larrabee adds: “An important part of the value earned by the Sellers, a premium over what they might otherwise have gotten, was due to public investment – improvements in the facilities made by this Agency .

“At the end of the day, we were able to tell our Board that we had satisfied the three criteria – then, we had three brand new owners. Going forward, we would expect all new investments to be made by that terminal operator. That’s not the model that some other big ports are using – resembling a triple net lease – but for us, that’s part of the attraction of this type of new investor. They can access money efficiently, and put it to work – from a strategic standpoint, that’s something we are interested in.”