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The Port of Galveston
by David Stanowski
21 November 2008


Abstract:
There is a lot of talk about what we need to do to "save Galveston" in the wake of Hurricane Ike. Ideas like casino gambling and port-of-call have been floated, and they certainly deserve consideration and discussion, however, our best hope may already be right under our noses!

Without the Port, the City of Galveston would not exist! The Port created a great city, and its decline sapped the local economy of much of its vitality. The health of the Port, and the performance of the City's economy are directly linked. This fact can not be over stated.

The performance of the City's most valuable asset has been anemic for many years. If the Port could be revitalized, it would give the local economy a major boost. Making this happen could actually be rather easy!

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Introduction:
The Founding Fathers did not establish this city to build beach houses and condos; they had something much more profitable in mind! If no natural deep-water harbor had existed, no port would have been established, and there would have been little or no reason for 19th-Century Texans to inhabit this large sandbar. In those days, only the rich had second homes, and they did not build them where they could be washed away by hurricanes.

It is possible that a ferry service may have started to the Island, after WWII, as folks began to cultivate a desire for fishing shacks and, eventually, beach houses. If history had taken this course, this island might now be covered with nothing but beach houses.

Thank God for the Port!

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In 1940, the City of Galveston obtained ownership of the Port from private interests. This report will examine the City's stewardship and management of its most precious asset. The study begins in 1984, the year of the Port's all-time high in cargo handled, and ends in 2006, the most recent year with complete data: 


Annual Profit:
Profits from the Port have improved since their low in 1986, but they have not been very healthy over this 23 year period.

Port of Galveston Annual Profit
Source: Galveston Wharves Board


The cumulative profit graph bottoms in 1994, but even after the improvement of the last few years, the Port still shows a $4,503,076 loss over the period of the study.

Port of Galveston Cummulative Profit
Source: Galveston Wharves Board


Year Profit or Loss
1984 <$147,905>
1985 <$4,172,724>
1986 <$5,503,134>
1987 <$3,739,705>
1988 $245,064
1989 <$1,273,439>
1990 <$2,441,533>
1991 <$957,868>
1992 <$1,093,610>
1993 $350,556
1994 <$2,135,891>
1995 $110,795
1996 $1,319,961
1997 $1,606,649
1998 $1,764,414
1999 $4,324,256
2000 $2,281,010
2001 $285,236
2002 $2,310,708
2003 <$469,006>
2004 <$59,786>
2005 $1,617,081
2006 $1,275,795
xxx xxx
Total
1984 to 2006
<$4,503,076>
Source: Galveston Wharves Board

Notes:
The profit figures for 2003, 2004, 2005 and 2006 originally included capital grants from the federal government that were removed for this study. When included they did not accurately reflect profits from operations.

The profit figure for 2006 originally included a legal settlement that was removed for this study. When included it did not accurately reflect profits from operations.

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How much should the Port be earning?
This is a very complex and subjective question, so there are many possible ways to try to answer it. This report will use a very conservative, and objective method to calculate what the City could earn by investing the value of the Port's assets in a risk-free TBill.

The Wharves Board's annual valuation of the Port was used as the amount of cash that could be invested in a 1-year TBill. Over the 23-year period, doing this would have earned $54,209,748 in interest, as shown below.

Port of Galveston Cummulative Interest Earned

Comparing the process of investing in TBills versus operating the Port produces the difference in results shown below.


Port of Galveston Cummulative Interest Earned versus Cummulative Profit

Date Interest
Rate
Total Port Assets Interest Earned
1984 10.02% $54,615,823 $5,472,505
1985 9.19% $50,000,000 $4,595,000
1986 7.63% $45,523,405 $3,473,436
1987 5.97% $40,875,296 $2,440,255
1988 7.15% $41,010,103 $2,932,222
1989 9.17% $39,601,499 $3,631,457
1990 7.82% $37,323,552 $2,918,702
1991 6.78% $36,801,527 $2,495,143
1992 4.14% $36,007,916 $1,490,727
1993 3.62% $36,658,472 $1.327,037
1994 3.63% $34,884,582 $1,266,310
1995 7.24% $34,995,377 $2,533,665
1996 5.18% $36,315,338 $1,881,134
1997 5.55% $37,179,300 $2,063,451
1998 5.52% $38,948,713 $2,149,969
1999 4.59% $43,272,969 $1,986,229
2000 6.03% $45,553,979 $2,746,905
2001 4.89% $45,839,215 $2,241,538
2002 2.24% $48,149,923 $1,078,558
2003 1.38% $48,381,785 $667,669
2004 1.29% $49,617,344 $640,064
2005 2.82% $52,099,314 $1,469,201
2006 4.37% $61,981,020 $2,708,571
xxx xxx xxx xxx
Total
1984 to
2006
$54,209,750
In other words, if the Wharves Board had been able to take the total asset value of the Port each year, from 1984 to 2006, turn it into cash, and invested it in a risk-free 1-year TBill; the total earnings to the residents of the City would have been $54,209,748! When the same assets were operated as a port, the Port LOST $4,503,076! This means that the City received $58,712,826 less from the Port than if its assets were invested in TBills!

Generally, if a business can't earn two or three times the risk-free rate of return, it is not considered worthwhile taking the risk to operate that enterprise. Using this rule of thumb, it could be argued that the Port should have earned between $100 and $150 million during the period in question!  



What happened?
The backbone of any port operation is cargo handling. During this period, the amount of ocean-going cargo handled around the world grew tremendously, but cargo handling in Galveston was in decline. In fact, the amount of cargo handled peaked in 1984!

Port of Galveston Cummulative Interest Earned versus Cummulative Profit

One major component of Port cargo is grain. It is no surprise to see the decline here, too.

Port of Galveston Tons of Grain Handled
 
Much of the growth in ocean-going shipping was in containers. The Port totally missed this opportunity!

Port of Galveston Containers Handled
 
Looking at how Galveston compares to other U.S. ports shows that 2006 rankings put it at number 54 in the nation, and number 8 in the State of Texas! It is clear that Galveston is never going to surpass Houston to be number one in the state, again; but a move into the second or third slot would increase cargo handled by about nine times its current level! The port that used to be number one on the Gulf, west of New Orleans, now ranks behind Houston, Beaumont, Corpus Christi, Texas City, Freeport, Port Arthur and Port Lavaca, just in its own state!

Texas Ports Total Tons Handled
Houston 222,146,750
Beaumont 79,485,704
Corpus Christi 77,557478
Texas City 48,875,403
Freeport 32,146,579
Port Arthur 28,402,512
Port Lavaca 10,808,318
Galveston 9,357,250
Brownsville 5,308,706
Victoria 3,555,869
Source: U.S. Army Corps of Engineers,
Waterborne Commerce Statistics Center
American Association of Port Authorities

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Since 2000, the Port has focused on building its cruise business, which should help boost profitability, but without a major push to get the cargo business growing, can it generate a decent return on the City's most valuable asset? 

Ironically, since the move into the cruise business, the Port has been unable to meet or exceed the record profit that it made in 1999, the year before Galveston became a cruise port. 
The number of passengers using the Port this year is down about 25% versus 2007, according to preliminary reports, so the cruise business may already be slipping.

Press releases put out by the Port touting the cruise business always cite the benefit to the "Texas economy", rather than to the "Galveston economy", which makes it seem that much of the benefit from cruises, originating in Galveston, may be flowing to support businesses located off the Island.

In addition, the Port of Houston has just spent $81 million to build the Bayport Cruise Terminal which is going to be major competition to Galveston's cruise terminal. Galveston has a contract with Carnival the lasts through 2013, but with the amount of money that has been invested in Bayport, they will be forced to do "whatever it takes" to get cruise ships in there; including enticing business away from this City.

Port of Galveston Cruise Passengers

Conclusion:
It is difficult to know exactly why the Port has not met its earning potential over the last 23 years without doing a much more extensive study. It most likely has to do with the management strategy employed, a lack of capital to invest in port facilities, and the fact that it is being operated by a city government that may have a confused mission.

Government entities can not bring the same entrepreneurial approach to running a business that the private sector does, so they can not hope to maximize the return to their shareholders; which in this case is the citizens of Galveston.

Regardless of any deficiencies in management and/or mission confusion, the primary problem with the Port is probably the lack of capital to build the necessary facilities to dramatically boost revenues and profits. The City and the Wharves Board have either chosen not to, or have been unable to issue bonds to fund the maintenance and the needed expansion. For this reason, the solution appears to be to sell the Port to an owner that has the capital to allow the Port to meet its full potential.

However, it MUST be mandated that the Port has to be sold to someone who will operate it as a port. A healthy port will be an economic engine that can create high-paying jobs. Any attempts to sell off pieces of the Port for use as marinas, condos, restaurants, retail centers, or other such enterprises will cripple the Port even further, and will not create permanent high-paying jobs.

With a 2006 book value of about $62 million dollars, the City MIGHT be able to sell the Port for as much as two to three times that amount. A cash infusion of $100+ million could be the salvation of this city! The Port of Texas City is privately owned and it employs 5,000 people and pays $919 million each year in salaries!

Port of Texas City is Privately Owned

Port of Texas City Offers Interesting History


Many cities, and states are learning that it makes financial sense to sell or lease airports, tollways, toll bridges, and other pieces of their infrastructures to private companies. For example, a private company has offered the State of Pennsylvania $12.8 billion for a 75-year lease on the Pennsylvania Turnpike There could be potential advantages to leasing the Port, rather than selling it, but some method of private management and investment is essential!

A booming, privately owned port could revitalize the local economy, AND  actually pay a significant amount of property taxes to the City! Throughout most of the period studied, the Port only paid the City $160,000 in lieu of property taxes each year. In the last few years, this payment was raised to $180,000. In comparison, the privately-owned Port of Texas City pays $82 million per year in taxes, which means that the City of Galveston has lost untold millions of dollars in property taxes by owning the Port itself!!

Privatization is Giving the Edge to Indian Ports

Apparently, the City Council was aware of the under performance of the Port when it attempted to set up a merger with the Port of Houston in 2000. When the merger was put to a vote of the residents, it was defeated. It is certainly possible that the merger was not the right deal for the City, but it is time to re-open this discussion, and find a deal that will help the City to maximize the return on the Port.

Now that the case has been made that if the cash value of the Port had been invested in TBills, the City would have earned an additional $58 million, over the period in question, and that it could have collected an additional $50+ million in property taxes; does anyone need more evidence that it is time to move ahead with selling or leasing the Port? 

Galveston Rejects Houston Port Merger

Port Deal is Rejected as History Weighs In


Addendum:
In 2001, the Port of Vancouver admitted that was not achieving its maximum potential through government ownership by the Provence of British Columbia. Their 2001 Annual Report (BCR Marine) stated:

"The upcoming year will be one of great challenge and change at the BCR Group. In early spring 2002, the Company decided to offer BCR Marine for sale. While Marine is a strong business unit, it needs growth capital to move forward and the BCR Group cannot provide the funding."

P&O Ports bought BCR's container terminal in 2003 for $68 million. This private company has now become Ports America, and continues to acquire port properties around the world. 





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