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     It is virtually impossible for a viable public port authority to be totally proactive since there are too many major factors that affect its future that cannot be controlled or even anticipated by the port staff. Conversely, it is also virtually impossible for a viable public port authority to be totally reactive since the time window between decision and implementation often exceeds that of the window of opportunity.
     For a public port authority to maintain longterm viability, it must be dynamic! Dynamic in the sense that it must constantly review the facilities it owns, the services it offers, and the source of the revenues it generates. This review will determine how well the port is adhering to its mission and accomplishing its goals and objectives as set out in the port's strategic plan.
     Today, a major management challenge for any viable port is prioritizing goals and maintaining a policy that ensures clear focus on the highest priority goals. Prioritizing is crucial for long-term viability. Prioritizing of capital projects should be high on the list of any public port authority.
     This paper provides an overview of the decision-making processes used by public port authorities in evaluating new capital projects and insight into processes for determining the desirability of expanding, contracting, or terminating present facilities/services.
     The cooperation and support of the American Association of Port Authorities (AAPA), especially the AAPA Finance Committee, and a multitude of public port authorities in Canada and the United States in this Washington Sea Grant funded research project are gratefully acknowledged.

The Process

     For a port the biggest capital investment nightmare is the rogue project. This is a project that was approved without sufficient review and has seemingly taken on a life of its own, a self-fulfilling prophecy that gobbles up resources at an alarming rate and, when finally completed, generates little or no appreciable net income. These rogue port projects can be avoided!
     Often the most important Board/Commission decisions are involved with the authorization of capital projects. Authorization of a capital project poses a number of challenges for both the Board/ Commission and the staff. The various "go/no go" project decisions should be addressed using a logical decision-making process. However, quite often because of a lack of appreciation for the decision-making process and the analytical tools available, or the presence of some significant noneconomic motivation for the project, this logical analysis does not occur.
     There is a process for determining these "go/ no go" capital project decisions. By following this process, a public port authority will improve its chances that only capital projects that enhance port viability will eventually be approved. Using this process will not guarantee 100 percent success, but it should differentiate the solid opportunities from the latent disasters.
     The capital project decision-making process is made up of three phases: the acceptance phase, the capital budgeting phase, and the implementation phase.

Acceptance Phase

     The initial step in the acceptance phase is to define the project itself and determine that it is consistent with the port's mission. It is entirely possible that the current mission statement may need to be changed to accommodate the new project. If this is necessary, such a change should be made by the Board/Commission only after significant reflection/study.
     A port's mission statement is a product of the strategic planning process. It identifies the underlying design, aim, or thrust of an organization. In effect, the mission statement identifies the core businesses that the port will undertake.
     If a proposed project is not consistent with the mission statement, then it may be necessary to reevaluate the mission statement as well as the port's goals and objectives that determine the accomplishment of the mission statement.
     The second, and related, step in this phase is risk evaluation and the determination of a target return on investment for the proposed project. This is necessary since it is unrealistic to require the same rate of return on all projects.
     Proposed projects should also be analyzed to determine and quantify the risks associated with them. This analysis requires that there be a clear understanding of the project, its functions, and the potential for its profitable operation. To accomplish this step, it is necessary to look at project feasibility.
     If the proposed project expands an existing facility or service, there is a very limited risk undertaken since the port is already familiar with the facility function or service. If the project requires the port to take on a new facility or service associated with, or complementary to, an existing one (e.g., adding an intennodal transfer area to an existing container tenninal or a computerized system to facilitate customs clearance and/or cargo tracking), there is an assumption of some additional risk, but the risk is well appreciated because the port has experience with the basic activity. However, when the proposed project requires the port to take on a new facility or service that is totally unrelated to any current port function, there is the potential for the port to undertake a significant assumption of risk, a level of risk that may well be so extensive that it could create a financial burden for the port- even a burden that might affect the financial stability of the port itself. Thus, in those situations in which a port departs from its current core businesses, it is absolutely necessary to quantify the risks that are being undertaken.
     It is important to recognize that a very substantial risk may be undertaken by committing to projects that are on the periphery of current core businesses (e.g., container port building a grain terminal).
     If the proposed project involves additional risk, the port must determine the level of risk and recognize that the return on investment or ROI must reflect the level of risk undertaken. Thus a project that is an expansion of a current facility or service would be acceptable if it produces the ROI set out in the Board/Commission financial policy for new projects. Conversely, a proposed project that is outside of the current core businesses of the port and is determined to carry a substantial risk must demand a higher ROI.
     The target ROI as set by the Board/Commission must reflect the risk level of the project, or the port subsidizes the project and creates a potential financial time bomb. Public port authorities are economic engines for their regional economies, but ports that ignore risk in determining project ROI targets tend to destabilize their regional economies rather than provide stability for them. The acceptance phase of the capital project decision process is used to (1) define the proposed project, (2) determine that it is consistent with the port's mission and goals, (3) determine the level of risk associated with the project, and (4) set a target ROI for the project.

Capital Budgeting Phase

     After successful completion of the acceptance phase of the capital project decision process, the proposed project now enters the capital budgeting phase of the process. The capital budget is a document that lists the capital projects that have been approved by the Board/Commission. Before any proposed project can be placed into the port's capital budget, the project must be subjected to a multitude of additional decision steps.
     Overseeing the capital budgeting phase of the process is usually the responsibility of a high level management committee or the executive director. The activities within the process are supervised and coordinated by a single individual for each major project or for a package of related projects.
     The function of this process activity supervisor is a key factor in ensuring that the proposed project is guided through the capital budgeting process. In effect, this supervisor is responsible for the review and analysis effort, including the coordination of staff and/or consultant studies relating to the proposed project. He/she acts as a catalyst ensuring that the necessary steps in the process are completed and as a conduit for all analysis/review findings and other information that concerns the proposed project.
     It is important to recognize that without this process activity supervisor, there is no single individual who controls the proposed project's analysis or who has a broad knowledge of the entire project. In effect, the absence of the process activity supervisor significantly increases the potential for creation of a rogue port capital project.
     Empirical evidence strongly suggests that the person who acts as the process supervisor/coordinator be a port staff member rather than a consultant.
     The capital budgeting phase of the process has three steps. The first step is an in-depth analysis of the proposed project/justification. The second step is the investment decision analysis, and the third step is the financing decision analysis.
     This first or justification step includes at least a project feasibility study, environmental and community impact analyses, and engineering studies. A verification of all data on the proposed project that was used as a basis for decisions in the acceptance phase should also be undertaken.
     A key document in the justification phase is the feasibility study. This study looks at the profitability of the proposed project once it has been constructed. It provides an opportunity to look at various income and expense factors that affect the proposed project. Often capital investment decisions are based solely on the proposed project's construction cost without any concern for the operating profit or loss that will be generated once it is up and running. The feasibility study looks at the income and expenses (operation and maintenance expenses), debt service, etc., of the proposed project. In effect, the feasibility study provides vital information on how the proposed project might affect the port's financial well-being once it is constructed.
     Concern for the feasibility of a proposed project's operation is especially necessary with projects that receive construction grants. Capital investment decisions are quite often influenced by the fact that a portion of the construction costs will be paid by a federal or state grant or by funds provided by private industry partners. It is imperative to remember that this is a construction grant and that once the project is constructed the port is fully responsible for its profit or loss.
     This first step in the capital budgeting phase will provide a data base for use in the next two steps.
     The second or investment decision step provides initial identification of capital requirements and sets out some initial procurement and development options. The results of the investment decision step indicate whether the project is a sound business decision, taking into account the future cash flows and risks as well as the initial capital investment required. This step requires a financial analysis of the proposed project. This step provides data for alternative option selection (size, scope, functions, etc.) as well as input into the third or financing decision step.
     It is during this second or investment decision step that significant analysis of project ROI (return on investment), NPV (net present value) and IRR (internal rate of return) is made. Each of these analysis techniques provides information that can help select development alternatives. In this step a reevaluation of the risk level of the project and the project feasibility is made.
     It is important that the activities in this investment decision step be vigorously controlled and continuously reviewed and challenged since these activities formulate the basis upon which the ultimate decision is made to include a project in the capital budget. Assuming the project has passed the investment decision step, the project is ready to be placed before the Board/Commission for formal approval and inclusion in the capital budget.
     The third or financing decision step of the capital budgeting phase involves the preparation of the Capital Project Evaluation Recap, which will be presented to the Board/Commission prior to any formal action to commit resources to the proposed project. Formal Board/Commission approval and inclusion of the project in the capital budget allow the port to proceed with detailed design, procurement/property acquisition, and construction.
     Projects should be placed on the capital budget ONLY after undergoing a comprehensive process with executive staff and Board/Commission level consensus on project need, timing, and cost. Economic, market, engineering, environmental as well as financial information provides the basis for this ultimate decision.

Implementation Phase

     The third or implementation phase may occ right after the proposed project gains a place in the port's capital budget or months (even years) after that time. The implementation phase is tl venue of the final go/no go decisions for the project.
     As soon as a project is placed in the capital budget, it must essentially compete for its place priority within the capital budget. From the moment a project is placed in the capital budget it is given a priority among the other projects. 1 list of positive project attributes for use in proje( prioritization is found in the Capital Budget Priority Criteria Checklist. These priorities are constantly being adjusted to reflect the port's current needs. Eventually this project may be tl number 1 priority project.
     As the initial step of this phase, a review of the project's justification may be appropriate. T depth of such a review is normally determined b the length of time between its being placed in th capital budget and the time it reaches number 1 priority status. This review is designed to uncover any major changes in the data that originally justified the project's being placed in the capital budget.
     Following a positive review, the project is placed in the current year's budget and eventually put out for bids.
     The second step in this phase is a final go/n( go project decision and the acceptance of construction bids. With construction bids in hand, a final determination of project feasibility and financial investment acceptability are made based on a construction cost as bid. If the results of this fin determination are positive, the winning construction bid is then accepted.
     The third step in the implementation phase monitoring construction change orders and/or co overruns to ensure that the project is constructed within the cost parameters established in the feasibility study. This step is essential because construction bid price is often just a part of the project's actual construction cost.
     The fourth and final step in the implementation phase, the post- audit, occurs after the project is up and running for a period of time. This step analyzes the validity of the assumptions and findings of the study effort in the capital budgeting phase. It addresses such questions as: Was the projected project cash flow on target and if n why not? The results of this step will allow the port to sharpen its decision-making process for future projects.

CAPITAL BUDGET PRIORITY CRITERIA CHECKLIST

     Prioritization of projects in the capital budget is a complex process. This listof positive attributes will assist in prioritizing projects.

• Project would preserve an existing capital facility, avoiding greater expense in future years.
• Project would result in significant savings in operating costs.
• Project would result in the purchase of land for future projects at favorable prices.
• Project would generate sufficient revenue to be essentially self-supporting in its operations
• Project would not duplicate other public and/or private services.
• Project would significantly reduce current and future operating and maintenance costs.
• Project would link other existing or planned improvements that will mutually benefit from the linkage and will improve port efficiency and ability to deliver service to customers.
• Project will make a significantly positive impact on the local economy and/or tax base.
• Project is required as a result of lease terms.
• Project results in enhanced productivity at same or lower operating costs.
• Project timing is critical; if the project is not acted upon at once, the opportunity will be irrevocably lost, or other major alternative actions would have to be initiated.
• Project is required to correct a building code violation and/or meet a federal or state standard.
• Project is required by an existing agreement with another agency.
• Project will correct a condition that currently results in a poor image for the port or an undesirable work environment for port employees or tenants.
• Project has a very high degree of citizen support.
• Project has few negative environmental impacts associated with its construction or subsequent use.
• Project is essential to provide for public or employee health or safety.
• Project is required to eliminate a hazard to personal health or safety.

Conclusions

     There is no single go/no go project decision! The capital investment decision process has three phases and each phase has several steps. Failure to pass any analyses, review, or decision point along the way can mean rejection of the proposed project.
     A key to authorizing projects that will enhance port viability is the willingness of the Board/Commission, executive director, and staff to follow faithfully the capital investment decision-making process.
     In an ideal world, there is unlimited time available to gather data, conduct studies, and weigh options. However, in the "real world," there are time constraints that preclude the port from addressing adequately or in sufficient detail each step in this process. Thus, it is important to recognize that if adequate time is not available, the reliability of the project decisions decreases and project risk increases.
     By following the process, a port should be able to differentiate between the solid opportunities and the latent disasters. Nothing can guarantee 100 percent success!

About the Authors

Thomas J. Dowd, FCIT, is a Sea Grant Port Industries Specialist and Affiliate Professor (Port! Marine Transportation Management) with the School of Marine Affairs at the University of Washington.

Candace Jonson, CPA, is Senior Director of Administrative Services and Port Auditor at the Port of Seattle. She is also Vice Chair of the AAPA Finance Committee.

Other titles in the Port Management Series:

Port Management Control System: A Simplified Decision-making Tool by Thomas J. Dowd WSG-AS 83-2

Container Terminal Leasing/Pricing Methods and Their Economic Effects by Thomas J. Dowd WSG-AS 84-2

Considering Strategic Planning for Your Port? by Thomas J. Dowd WSG-AS 87-3

Container Terminal Productivity: A Perspective by Thomas J. Dowd and Thomas M. Leschine WSG-AS 89-5

For information on ordering these publications and other marine-related ones, request a catalog from:

Washington Sea Grant
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Support for publication of this report was provided in part by grant number NA89AA-DSG022, project NFP- 7 (Marine Advisory Services) from the National Oceanic and Atmospheric Administration to the Washington Sea Grant Program.

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