Monday, August 5, 2013

Understanding and Critically Analyzing the Port Economy and Jaxport Channel Deepening

I prepared and distributed the item below at the public forum "To Dredge or Not To Dredge" organized by the St. Johns Riverkeeper on July 24th. It is designed to inform the public about the implications of a port economy for the city and region, and provide some critical analysis of the  current proposal to dredge and deepen the St Johns River to 47 feet at a total cost of at least $800 million.

 Understanding and Critically Analyzing the Port Economy and Jaxport Channel Deepening

The process of globalization over the past thirty years has entailed the offshoring of US manufacturing and the increasing separation of the point of production (e.g. Asia) from the point of consumption (the U.S.) for most of the mass consumer merchandise purchased in the United States. In order to maintain the profitability of goods produced/manufactured in low wage and less regulated nations far from consumer markets, the cost of moving the goods back to these consumer markets must be kept as low as possible. These two factors – the separation of production and consumption and the need to avoid losing that low-cost advantage in the transportation of the goods – have fueled the expansion of the logistics industry and the prominence of maritime ports (and container terminals). Therefore, one should understand that the primary objective of the intermodal logistics supply chain -- in which Jaxport is simply one of many nodes/gateways into the US market -- is to move the goods as quickly and cheaply as possible from the point of production to the point of consumption.  Two corollary points to keep in mind:
·      As long as transportation and logistics costs can be kept low, the advantage of shifting production offshore will be retained and there will be no economic incentive to produce these goods domestically.
·      If consumer goods were actually produced in the United States, the ports would be far less important.

The majority of cargo entering US ports is what is termed “discretionary cargo”. This means that shippers have the discretion to bring the cargo through almost any port in the United States because the cargo is not bound to any particular location. It can be moved to final destinations across the country using the intermodal transportation system (rail, truck). So, for example, most of the containerized cargo that enters through Jaxport is bound for destinations far beyond Jacksonville and north Florida. The port is not selected because goods will be consumed in Jacksonville nor because there are goods produced in Jacksonville that need the port for export purposes. Rather, ports are selected on the basis of the costs and the speed at which the goods can be moved to their final destination.

There are two important implications from the fact that most port cargo is discretionary. First, ports must compete with each other for the containerized cargo. There is little guaranteed cargo that must enter through any particular port. This places the shippers and carriers in the stronger bargaining position vis-à-vis the ports as all the ports compete with each other for their cargo business.  Second, many of the economic benefits associated with the cargo that moves through any port are felt far away from the port city/community because the cargo has no necessary relationship to the local economy. This contributes to the widely cited container port phenomenon -- costs tend to be geographically concentrated (infrastructure, pollution, maintenance, congestion) while the economic benefits are geographically dispersed.

Currently most of the cargo from East Asia that reaches US consumer markets is brought through the West coast ports of LA and Long Beach. It is then placed on rail in order to reach consumer markets in the mid-west and east coast. This is because the largest container vessels – post-Panamax – cannot fit through the Panama Canal. The widening of the canal, which is anticipated for completion in 2014, will allow these large container vessels to travel through the canal and therefore reach East coast ports (the ”all-water” route).   But the largest vessels can only use the port and reach their container terminals if the depth of the channels and harbors are close to 50 feet. Therefore, any East cost port with a channel draught less than 45 feet is seeking federal funds to deepen their channels.  The Jacksonville channel is currently 40 feet deep and Jaxport has requested a deepening to 47 feet.

The Army Corp Jacksonville Harbor Deepening Study -- which has recommended dredging the St. Johns River to a particular depth (45 feet) and has approved the “Local Preferred Plan” of 47 feet -- is purportedly based on a cost-benefit analysis. However, one must be aware that the only costs factored into the calculation are financial costs associated with the deepening project and the only benefits are the savings in transportation costs as a consequence of larger vessels having access to the port terminals. Transportation cost saving accrues primarily to shippers and carriers.   There is no necessary or automatic relationship between the reduction in transportation costs and economic benefits to the city or region. The Army Corp report provides no calculations of the broader economic benefits to the Jacksonville community and NE Florida region resulting from the project. Also absent is any calculation of the non-project costs such as additional necessary infrastructure (roads), pollution (water and air), ongoing maintenance (retaining the channel depth), and general congestion (traffic from trucks moving containers).  In short, public interest considerations are entirely ignored in the cost-benefit equation used by the Army Corp.
In addition to a reduction in transportation costs, shippers and carriers benefit from these projects in another important way. While shippers and carriers do not necessarily need more than one deep-water port on the East coast through which to move their discretionary cargo, it would be to their great advantage to have every port capable of receiving the largest vessels. This would severely weaken the bargaining position of any single port, increase the competition between ports, maximize shipper/carrier flexibility, and allow shipper/carriers to engage in “port arbitrage” playing one port against another for the best terms and concessions.

Jaxport and other proponents of port expansion and dredging/deepening have repeatedly emphasized jobs and job creation as a primary benefit of the port.  As noted above this is not a factor included in the technical analysis conducted by the Army Corp in recommending, and approving, the deepening of the St Johns River to 45 and 47 feet, respectively.  However, the report does make reference to “Regional Economic Benefits” but this topic consumes a meager one page of a 338 page report. On this single page the all-important matter of jobs is addressed. This is the only place in the entire report that makes reference to what Jaxport officials claim is the best reason to support the port expansion project.  

The report states the following: “The increased traffic with deepening at JAXPORT is expected to provide RED [regional economic development] benefits as follows: Create 22,748 for the 45 foot NED [national economic development] plan or 34,508 for the 47 foot LPP [local preferred plan] new private sector port jobs in Jacksonville” 

As noted, these numbers are not based on an independent analysis conducted by the Army Corp. Rather the Army Corp relies on numbers produced by Martin Associates, a port consulting firm hired by Jaxport. More specifically, these numbers are taken from a table included in a Powerpoint presentation to Jaxport by Martin Associates.  As stated and presented above, these figures are a gross misrepresentation of the data included in the tables. They would suggest that the deepening to 45 feet will generate 22,748 new private sector port jobs while the deepening to 47 feet will generate 34,508 new private sector port jobs. But, in fact, the accurate figures based on the Martin Associates data are 841 and 5587, respectively. This colossal discrepancy between the reported and actual numbers is due to either inexcusable unprofessional carelessness or deliberate deception.
Further, the Army Corp use chooses estimates for 2035 rather than 2020. Obviously, the shorter time frame would represent a more credible estimate than the highly uncertain 22-year projection. Again, the only possible explanation is that the 2035 figures would communicate a more significant, though highly exaggerated, employment gain designed to convince the public of the wisdom of the project.
Finally, the job numbers provided by Martin Associates that are cited in the Army Corp report have not been subjected to any peer review or independent assessment as to their validity. As it turns out, there is no information available on the procedures used by Martin Associates that would allow one to evaluate the economic impact methodology.  Therefore, even the “corrected” figures of 841 and 5587 jobs could be highly questionable or based on questionable assumptions. But thus far no one has seen any report providing the techniques used to derive these estimates.  Again, under such conditions, why would the Army Corp accept these figures and include them in a section under Regional Economic Benefits?
As it turns out, the pattern of misrepresentation on the economic impact of the port has been an ongoing practice by both Jaxport, and those promoting port expansions.  Ever since Martin Associates completed an economic impact study in 2009, port proponents have claimed that the port supports 65,000 jobs.  This number is not manufactured. It is, in fact, included in the economic impact study but it includes not just direct jobs, induced jobs, and indirect jobs but also what are called “related jobs”. The related jobs should not be included and the Martin Associates study even includes the following admonition: “It is to be further emphasized that when the impact models are used for planning purposes, related jobs should not be used to measure the economic benefits of a particular project. Related jobs are not estimated with the same degree of defensibility as direct, induced and indirect jobs. Therefore, only these three types of job impacts should be used in evaluating port investments.” 
But Jaxport has consistently included the related jobs in its claims about the economic impact of the port, as have others who champion the port such as the Mayor of Jacksonville. One reason Jaxport has probably been reluctant to remove related jobs is that they account for wholly 66% or 42,647 of the 65,000 total. The number that should have been used is 22,353. (Again, I hesitate to label this the “correct” figure because there is good reason to believe that these job numbers, as calculated by Martin Associates, are based on assumptions that may inflate their level)  
In addition to the number of jobs generated by the port and port expansion, there is also the question of the quality of jobs that are generated by the port. An analysis of the Bureau of Labor Statistics’ Occupational Employment Statistics (OES) for occupations most closely associated with the port logistics sector allow some assessment on this question. For the 18 occupational categories most closely associated with the logistics industry there is wide variation in compensation levels ranging from high mean annual incomes of $83,101 for Ship Engineers and $74,320 for Captains, Mates, and Pilots of Water Vessels to a low of $20,000 for Packer and Packagers.  Overall, for all workers in these 18 logistics occupations the mean income is $30,393.If we look at the single occupational position -- Laborers and Freight, Stock, and Material Movers -- that accounts for the greatest proportion of jobs in the logistics sector (22%), mean income is $26,290.

One lesson to take from the analysis of these OES data is that the lion share of employment opportunities in the logistics industry involves work carried out in and around warehouses/distribution centers. Warehouse/distribution center-related occupational positions account for 61% of logistics employment. The mean income for workers in this large segment of the logistics labor market is $25,460.  Median hourly wage levels range from a low of $8.94 (for Packers and Packagers) to a high of $13.78 (Industrial Truck and Tractor Operators).

The one area of the logistics labor market that does provide higher paying jobs and that also stands to grow in numbers alongside the expansion of warehousing/distribution centers is first-line supervisors/managers.  These employees manage and supervise warehouse/distribution center workers. The mean income for workers in these positions is $49,788; but these jobs account for only 4.1% of total jobs in this sector. 

Overall, the occupational data suggest that the logistics industry -- while perhaps generating new and expanding regional employment opportunities and potential avenues of upward mobility for some low-skilled workers -- is not an engine of high-wage job growth and is unlikely to contribute significantly to raising the region’s per capita income.

Points about job numbers above should caution one to a common pattern reported in the research literature on “megaprojects” (large scale infrastructure and public works projects that require significant infusions of taxpayer funds).  The dredging and deepening of the St Johns River channel, at an estimated cost of $800 million, qualifies as such a project. Therefore, we should expect that those who seek government approval as well as public support for the project will employ the following proven formula (based on work of Bent Flyvbjerg):

(underestimated costs) + (overestimated revenues) + (undervalued environmental impacts) + (overvalued economic development effects) = (PROJECT APPROVAL)

Citizens should reserve a high measure of healthy skepticism regarding any claims made by private and public officials promoting the port, or by local business interests that stand to gain directly from publicly funded and approved megaprojects.

A final point to consider as Jacksonville seeks federal and local funds to support a potentially $1 billion project is whether it will have the expected payoff in catapulting Jaxport to the top tier of East coast ports. One can think of this as a highly speculative investment. This is especially the case given the fact that there are other East coast ports (most notably Miami, Savannah, Charleston, Norfolk, and NY/NJ) vying for the same position and the same cargo.   Each of these ports is already receiving more cargo than Jacksonville, two (Norfolk and NY/J) already have channels of 50 feet, and the port in closest proximity (Savannah, less than 150 miles away) is far ahead of Jacksonville in progress toward channel deepening to 47 feet.

Further, it remains unclear exactly how much cargo will actually be rerouted to the East coast after the widening of the Panama Canal. Therefore, some of the logical questions are: how many deep-water ports does the East coast need? How many can be economically sustained based on a finite amount of cargo? Is it a responsible use of federal funds to support every port mega infrastructure project requested by every East coast port? Will funding of redundant infrastructure projects result in a misallocation of scarce federal resources for ports operating far below full capacity? 

In the competitive frenzy among the ports for infrastructure investment, few of these questions have been answered. 

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