• ITVI.USA
    15,285.540
    -94.080
    -0.6%
  • OTLT.USA
    2.776
    -0.010
    -0.4%
  • OTRI.USA
    21.450
    -0.050
    -0.2%
  • OTVI.USA
    15,256.620
    -93.130
    -0.6%
  • TSTOPVRPM.ATLPHL
    3.300
    -0.240
    -6.8%
  • TSTOPVRPM.CHIATL
    2.950
    -0.020
    -0.7%
  • TSTOPVRPM.DALLAX
    1.440
    0.000
    0%
  • TSTOPVRPM.LAXDAL
    3.310
    0.060
    1.8%
  • TSTOPVRPM.PHLCHI
    2.150
    0.020
    0.9%
  • TSTOPVRPM.LAXSEA
    3.950
    -0.100
    -2.5%
  • WAIT.USA
    126.000
    1.000
    0.8%
  • ITVI.USA
    15,285.540
    -94.080
    -0.6%
  • OTLT.USA
    2.776
    -0.010
    -0.4%
  • OTRI.USA
    21.450
    -0.050
    -0.2%
  • OTVI.USA
    15,256.620
    -93.130
    -0.6%
  • TSTOPVRPM.ATLPHL
    3.300
    -0.240
    -6.8%
  • TSTOPVRPM.CHIATL
    2.950
    -0.020
    -0.7%
  • TSTOPVRPM.DALLAX
    1.440
    0.000
    0%
  • TSTOPVRPM.LAXDAL
    3.310
    0.060
    1.8%
  • TSTOPVRPM.PHLCHI
    2.150
    0.020
    0.9%
  • TSTOPVRPM.LAXSEA
    3.950
    -0.100
    -2.5%
  • WAIT.USA
    126.000
    1.000
    0.8%
American Shipper

Strategic View: First principles

   With interest rates at their lowest levels in recorded history there is an abundance of capital seeking investment opportunities, particularly in freight movement infrastructure. It is not surprising that many previously studied, and postponed or rejected, investment ideas are re-surfacing. It is worth reconsidering potential opportunities from time to time because as the world population, economy and trade grows, the volume and pattern of freight movement changes. Sometimes new capacity is needed to alleviate congestion and, in some cases, additional infrastructure is required to support new trade routes. However, one has to be careful not to expend too much time and effort to learn what others have in the past. There are ways, described below, to avoid that.

Look For Previous Reports And Studies. Rarely do people have unique ideas. This is particularly evident in the large number of instances of periodic excess capacity that have occurred in almost every segment of the economy—mining, real estate, and ocean shipping, for example. Since that is often the case, when having a new idea it is helpful to look around to see who else thought of the same thing. Many studies are commissioned to analyze potential infrastructure investments. Usually, it is not hard to locate previous reports written about the analyses. Some of these reports are large enough to be used as a doorstopper, however, and many do not have to be read cover to cover. It suffices to scan the conclusions and the key drivers of those conclusions. After that, consider whether any of the drivers of the investment idea changed.
   Some of the key drivers of conclusions concern traffic restrictions, such as overhead clearance for large vehicles and vessels, navigation channel capacity, and cost and time to move freight to and from origins or destinations. If these have changed, or are likely to, it may be worth reviewing the investment opportunity.
   If a previous study cannot be located, ask why this opportunity hasn’t been studied or considered before? There are many experienced industry experts who don’t mind answering a question or two in this regard.

Apply Basic Financial Principles. It helps to start with the basics. What are the upfront development costs? What profit margin can be generated per volume unit? How much volume is needed to pay for the upfront costs within a reasonable amount of time once the operation is turnkey? If those levels look like a reach, then don’t expect it to be easy to obtain financing.

Be Careful With Assumptions About Competition. Cost is a key driver of freight movement decisions. For new infrastructure to attract volumes, it must be a lower cost option for at least some freight, regardless of freight growth projections. Cost includes both expenses for services like a truck delivery or unloading a ship, as well as the time to do so. Merchandise in transit is someone’s inventory, and therefore, a cost to them. 
   One of the least successful arguments for developing new capacity is that the alternative routes and infrastructure are going to run out of capacity. With all due respect to engineers and planners, it is well known that “capacity is best measured under the whip,” meaning that the actual capacity is never known until it’s put to the test. New technology, particularly automation, can dramatically increase throughput capacity. However, this doesn’t mean that capacity of the gateway region isn’t an issue. 
   Unlike concerns about capacity, congestion in a freight gateway or corridor can motivate cargo owners to pursue alternatives. Congestion increases inventory carrying time and costs.  
   There is also a lot of unseen potential competition. Much of the existing stock of infrastructure today was developed long ago when the global economy had a different structure and is in the process of being repurposed. Being unaware of such developments could result in disappointing freight volumes in the future.

Consider Regulatory Issues. Construction of almost anything requires permits and environmental reviews. This is not a trivial issue, since obtaining permits is often the main reason why it can take over a decade to go from drawing board to turnkey. Some projects have languished for decades despite having great business merit. This is one of the main reasons that freight infrastructure is often repurposed. Most industry experts are familiar with such requirements and can list the key ones, as well as the time and effort needed to clear these hurdles. 
   Most lenders require an independent review of the investment project by industry experts. These reviews usually include both commercial viability and technical feasibility analyses, as well as other documents concerning environmental impacts and permits. It can be very helpful to discuss an opportunity with a lender before expending time, effort and money pursuing a potential opportunity.

Review Financial Options. Most infrastructure investment projects involve a long duration between start of construction and when the first revenues from operations are received. During this time, many things can go wrong and construction costs can exceed initial estimates. It can be hard to get a loan longer than two years, or to extend a loan. However, there are many federal programs and agencies that can facilitate financing. It is worthwhile to learn a little about these programs.
   The caution about investment opportunities expressed here should not be misconstrued as a dim outlook for new opportunities. Domestic and international freight movement could be made more efficient, and there are plenty of potential investment projects that would accomplish that. However, they should be screened in a rational manner before fully engaging.

  Walter Kemmsies is managing director, economist and chief strategist for JLL Ports Airports and Global Infrastructure. He can be reached by email at Walter.Kemmsies@am.jll.com.

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