Project cargo overview 2015

The project cargo market is in the downward portion of a cycle, but the turn may be closer than many think. North America – New Blueprint Needed Norman Anderson, president of the CG-LA, a Washington-DC based “infrastructure” consultancy group, is a man with a plan. Anderson believes the United States needs a new blueprint to get things rolling after years of critical infrastructure projects being stuck in the Beltway’s bureaucratic quagmire. To this end, Anderson’s group put together an intriguing glimpse into what could be a guide to re-shaping how projects get done in the US. CG-LA, which annually publishes their “North America Strategic 100 Project List”, unveiled a program entitled “Blueprint 2025.” In an extensive interview with the American Journal of Transportation, Anderson said, “While I’m optimistic, we [the US] are in a world of pain in terms of infrastructure. It takes way too long to develop projects…9 ½ years just for permitting.” According to Anderson, the problem is “while the CG-LA sees pent up demand, there’s no political will and not much political awareness” to get things going again. “Blueprint 2025-Innovation and Leadership is a initiative to design a robust infrastructure build for the next Administration and through the next two election cycles.” A key point as said by Anderson is the US must learn how to prioritize infrastructure projects going forward (see 100 North American projects list) as “the old priorities, don’t make it – all highways, all the time.” (Highways and bridges and Urban Mass Transit account for $31.6 billion and $46.1 billion in the Top 100). The concept behind the choice of the 100 projects is their “strategic” value to the nation. It is a holistic concept that will require more qualified people to administer the Plan and a radically new approach to funding. As Anderson points out the Obama administration may talk about infrastructure projects as if there is someone or an institution in place, but the reality is nothing more than empty halls.

Hypnotized by P3s Funding is really the elephant in the room, although as Anderson indicates, “like a plane, any single loss of the critical criteria results in catastrophic failure.” From Anderson’s perspective, the issue of funding the next generation of projects begins with learning how to evaluate and apply a regulatory process to US projects that is timely. A US project is like looking at light from a supernova: by the time you see the light, there’s a good chance it has already burned out. In the US it takes an average of nine and a half years for approvals and another five years for permitting. By the time building actually starts, “we’re using technology nobody wants,” Anderson noted in exasperation. Further, the length of time it takes to get infrastructure projects underway means that the “economy” for which the project was designed almost assuredly is not the “economy” the completed project will face. As Anderson says, “In 15 years, the global economy isn’t going to be anything like it is right now.” This has a direct bearing on putting dollars into projects. The day and age of the Federal government funding 80% of the project bill is long gone. Added to this problem is the fact that most States are also strapped for cash and undertaking any major infrastructure project is beyond their individual means. This begs the question of where the rest of the funding will come from? In the past, industrial conglomerates might have supplied the cash necessary, but that hasn’t been the case since 2008. The knee-jerk answer now is Private-Public-Partnerships (P3s), but Anderson thinks we are a bit “hypnotized by the [P3s] misdirection.” “P3s accounted for 12% of the project funding in the UK [United Kingdom] in the best of days,” Anderson said. If the UK’s project funding from P3s (in the best of days) is that small, expecting a greater share in the US market is unrealistic. There is money to be had, if (and it is a big if) the regulatory processes and the political and public wherewithal are in place. First, there is money out there. According to Anderson’s off the top tally: Hedge funds have around $7 trillion in assets, Sovereign funds $8 trillion, Insurance $24 trillion, and Pensions $36 trillion. To this he adds the “Public” sector, which has $78 trillion in capital assets that can be privatized or turned into long-term leases. And as Anderson says, “if we build it, they will come.” This is more than enough for funding well into the future. But there are a few important caveats. Private money is willing to go long-term in “virtuous assets”, but there needs to be a predictable return and also a steady stream of projects to invest in. At the present that isn’t the case. Finding the “virtuous assets” to invest in is difficult. There are notable exceptions. The Ontario Teachers Pension Fund (OTPF), for example, has taken on a number of project-oriented investments, some through project savvy investment bankers like the Australian-based Macquarie Group. It’s not unusual to see the “expertise” side coming from the private capital part of the investment equation. Turning the “Public” sector into cash and moving it into “strategic” projects requires an almost “cultural” overhaul of how business is done in Washington. It’s institutionally geared to doing the minimum based on election cycles. To take a generational approach, as Anderson does in his Blueprint 2025, requires a great leap in institutional faith. But there is as Anderson notes, a “huge pent up demand” that is a lure to project-builders, as long as there is reasonable return for all parties. Global Viewpoint - Cycling Like most global businesses, there is a cyclical nature to projects and in a downward cycle, the competition is fierce. Overall the project business is trending down as oil and gas is a weight on bottom lines. But due to the diverse nature of the project market, there nearly always is a sector or region up while another is down. Ed Bastian, Director Global Sales at BBC Chartering, (with 150 ships BBC has the world’s largest heavy lift fleets), relates, “The accident in Fukashima once again changed how the world viewed nuclear power. The industry has encountered some tough seas to sail. However, that being said, there are more nuclear building projects now than since the mid-1980s. Two thirds of these plants are being constructed in Asia. It is forecast that by 2030 power demand in China will eclipse that of Japan and the US combined. In the US, BBC Chartering is just wrapping up a contract to supply the four new reactors at the Vogtle (GA) and Summer (SC) nuclear plants.” Bastian also says there are 16 additional license applications under review but given the current glut of cheap fossil energy it is unlikely any additional nuclear projects will get underway in the US market in the foreseeable future. He points out that a gas-fired power plant costs about one fifth of a nuclear plant and can be constructed 2 years earlier. Bastian like many in the business believes the down portion of the cycle has to play itself out. He says, “2014 and 2015 definitely disappointed and did not meet analyst’s expectations. A big part of these poor results reflect a continued to be weakness in the mining sector and the significant drop in world oil prices. Therefore, as 2016 fast approaches we anticipate marginal growth in the project sector and perhaps waiting until 2017 and beyond to see any positive earning potential on the part of Heavy Lift operators.” The glut in the oil industry has put a damper on many projects. Gary Dale Cearley, Executive Director, of Bangkok-based XLProjects Network, says, “I have been hearing lots of negative conjecture lately from many project cargo agents in the market. Here in ASEAN the majority of complaints I have heard have had to do with the prices falling out of the petroleum sector. Only the very, very necessary work is getting done and other work is put on hold. There’s no beef in the stew - only bone. Some of the more skeptical folks think they won’t see a recovery until the end of 2016 to early 2017…. I think we will see movement sooner than my colleagues expect. Things always have a way of working their way out.” Bruce Cutillo General Manager for the Bangok-based WCA Projects network, said, “Australia has seen a substantial slowdown in project activity particularly from decreased mining, and in oil and gas business. Some Africa based members commented that Chinese projects are still coming, but somewhat slower than in the past. Power generation and other infrastructural projects are still moving in numerous emerging African countries.” But Cutillo noted, “Asia Pacific has also seen the O&G slowdown, but infrastructural power/hydro/rail projects are still active in Thailand, Laos, Vietnam, and Indonesia, and others. The Middle East is still a busy project place, with Saudi Arabia and Qatar quite active. Our Indian members appear busy, and Turkey also has a strong project market.” Based in Spain, Wolfgang Karau, director of the CEE (Cargo Equipment Experts Ltd) a global network for equipment owners, sees some new equipment investments that are being made now in anticipation of the market moving. Karau says, “First thing that comes to my mind is BNSF Logistics, who obviously gear up to get the movement of heavy and outsized cargo in the USA and Canada under control. They purchase equipment companies to move wind generation equipment [see Matt Miller article on page 2]. So, some spending into the future is going on over there [US]. Another example that jumps out on the rail side is the equipment owner/forwarder Tecniproject/Tecnitrans from Chile. They have the only workable, available Niclas SMPT and a 400-ton gantry crane in that country. And Steder Group in Djibouti and elsewhere are also delving into equipment and are getting orders from construction companies, manufacturers and EPCs. Recently, Steder also combined powers with Delta Maritime from Greece, both members to the WWPC [Worldwide Project Consortium-sister network to CEE], and founded StederDelta and now operates equipment in the Balkan. The business is still slow, could be more - but then again, who knows what tomorrow brings? Personally I do not believe in a return of the pre-2008 cargo flows - not for a while at least. I think we are in a 10 year cycle starting 2008, so we have a few years to wait until 2018.”