The Port of Chicago’s shipping berths and docks are crumbling, its piers outdated and underused, and large swaths of prime land sit vacant.
Nearly every long-term contract it has with tenants is vastly undervalued, and it has lost money in 10 of the past 11 years, in part because of alleged mismanagement, sloppy accounting and lack of oversight.
It employs just six people who are largely unable to make necessary repairs or adequately market the property to attract new customers.
Despite sitting on two prime parcels next to Lake Michigan, its location in the nation’s third-largest city and having ready access to the largest rail hub in North America, the Port of Chicago has floundered and been treated like an afterthought for decades.
The Illinois International Port District “has fallen behind in its competitiveness, and we’re very interested in revitalizing its place in the Great Lakes,” said Rich Montgomery, vice president of development for the Broe Group.
Broe is the privately held Denver-based transportation and real estate company selected to take over the port’s operations.
The Port of Chicago, Montgomery said in an interview last week, represents a “tremendous untapped opportunity.”
In part, that might be because the port has been so poorly run, at least according to a scathing 155-page audit of the port released last week. In the report, the state auditor general detailed instances of widespread mismanagement, slipshod or nonexistent record-keeping, issuance of no-bid contracts for sizable purchases and generally poor supervision by the Illinois International Port District.
The Port District’s relatively new chairman, Michael Forde, appointed by Chicago Mayor Rahm Emanuel, requested the audit, knowing it was likely to be critical.
“As the audit points out, the previous port board favored patronage over performance, and wasteful spending over profit,” said Emanuel spokeswoman Sarah Hamilton. “That is no way to run a business and certainly no way to run and maintain a vital economic engine.”
Many recommendations listed in the audit have been put in place by the new leadership at the port, Hamilton said.
Broe, which has operated a railroad at the port for 20 years, has experience running marine terminals and has international connections in transportation. If it gets the keys to the port and makes a sizable investment to upgrade facilities, it could turn a handsome profit in the years ahead, maritime experts say.
And though the Illinois International Port District, an agency run by appointees of the Chicago mayor and Illinois governor, stands to receive only a small percentage of that profit, handing over operation of the port for 62 years might be worth the risk for the economic spinoff and jobs it could create, experts say.
Because the chronically underfunded Port District doesn’t have the financial resources to make much-needed investments to the property, its options are limited.
Without a deep-pocketed partner willing to pour hundreds of millions of dollars into infrastructure and marketing, the Port of Chicago has little hope of reaching its potential, experts say.
Still, the Port District must ensure it gets a fair deal, one that recognizes its potential to be the busiest inland port in the United States, said Jerry Bridges, former executive director of port authorities in Virginia and Oakland, Calif.
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“If they structure the deal properly, this could be very beneficial to the port and the city by creating an influx of infrastructure development that will create new jobs, tax revenue and attract more private investment to the area,” said Bridges, who heads Virginia Beach, Va.-based maritime consulting firm Bridges Group International.
“But in a lot of these deals, especially those signed in the early 2000s, the public entities left a lot of money on the table, and (port officials) must be careful to ask for everything they want,” he said.
Neither the Port District nor the Broe Group will reveal substantive details of its bid to take over the port, and many questions remain unanswered.
The plan calls for creating up to 1,000 jobs.
And a preliminary agreement calls for Broe to invest at least $100 million and perhaps as much as a half-billion dollars over the next decade to modernize the port and attract new business.
Broe would retain 90 cents of every dollar in new revenue generated by port operations, with the remainder going to the Port District. Broe would also pay the agency $1 million a year.
The money would be used to pay down the district’s $30 million debt and its $5 million pension liability, according to the district.
“We’re going to need enough money to pay down debts and cover our obligations going forward,” Forde said.
But, he said, “Our message to the marketplace … was we’re not in this for the money. This is not about maximizing payment to the Port District. This is about capital investment and job creation.”
Port’s properties
The Port District has two primary maritime properties: a 190-acre parcel called Iroquois Landing at the confluence of Lake Michigan and the Calumet River on the city’s Far South Side, and a larger parcel 6 miles up the Calumet River surrounding Lake Calumet.
The district also owns a 36-hole golf facility where operations were outsourced to a private firm at the beginning of the year.
Together, the properties sit on 1,500 acres, making it the nation’s largest inland general cargo port.
The Port of Chicago, like most Great Lakes ports, is a landlord port, meaning it doesn’t operate cargo-handling activities. Instead, the district owns the property and leases parcels to companies that run cargo terminals.
Its primary function is to create, maintain and improve waterfront land that it leases. Earnings from lease payments, rent on storage space and dock fees are meant to be reinvested in facilities so it can lure more tenants.
Shippers have access to the Atlantic Ocean through shipping channels that wind through the Great Lakes and exit the St. Lawrence River. They can also access the Gulf of Mexico on a circuitous route using various small waterways and the Mississippi River.
Both passageways are attractive to shippers because moving bulk cargoes that dominate the Great Lakes shipping lanes — petroleum products, grain, scrap metal, steel, sugar and other commodities — is cheaper over water than by railway or truck.
Yet the district has been unable to attract many shippers, largely because of outdated infrastructure and an anemic annual marketing budget of around $45,000.
Port-owned warehouses are run down, offering little more than shelter from rain or snow. The 3,000-foot dock wall at Iroquois Landing, a key component of the property’s ability to attract larger ships that ports covet, is more than 100 years old and requires more than $10 million in repairs, according to the district.
And much of the land on the east side of Lake Calumet has been rendered “outdated and antiquated” by changes in the shipping industry over the past 60 years, according to a 2012 study commissioned by the Port District.
The port has not had significant investment since 1981, according to the city.
“The whole asset has been, in a word, neglected,” said Forde, who was appointed in 2011 by Emanuel with a charge “to fix it, and fix it fast.”
As the port has deteriorated, cargo traffic has stagnated.
Shippers for years have sought alternatives to shipping goods through the Port of Chicago because of its poor infrastructure and lack of capacity, said Bridges, the port consultant.
“If they could find a way to improve that, there would be a lot more growth opportunities for cargo moving through that region,” he said.
In 2011, the Port of Chicago, which includes district property as well as privately operated terminals, moved 20.4 million tons of cargo, 83 percent of it domestic, according to the Army Corps of Engineers, which tracks and monitors cargo and vessel traffic.
In 2002, it also handled 20.4 million tons.
By contrast, the port of Duluth-Superior, which serves a much smaller population in northern Minnesota and northwestern Wisconsin, handled about twice as much cargo last year, making it the top Great Lakes port by volume, a spokeswoman said.
“It’s one of the top inland ports in the country,” Alex Yeros, vice president and managing director at Broe, said of the Duluth port. “They handle an unbelievable amount of freight up there. Why not Chicago, where you have all (large) railroads coming in and are able to connect East Coast, West Coast, Gulf Coast, Canada?
“The opportunities are tremendous.”
Golf course losses
Despite its potential, the Port District in 2011 logged just $4.6 million in revenue, excluding the Harborside International Golf Center operations. The port portion of the enterprise earned about $700,000, with all of that money going to subsidize losses at the golf course. In total, the operation posted a net loss of $383,000 for the year.
Last year, the district’s port operation posted a profit of $1.2 million on revenue of $4.6 million, according to the district’s unaudited financial data. Again, a sizable chunk of that went toward covering golf course losses.
Even after the golf course was handed over to the private operator, the port still would not be able to generate enough income to adequately invest in itself, maritime industry experts and port officials said. And with neither the city nor the state in a financial position to make significant investment in the operation, the district turned its focus to luring a private operator.
The Broe Group emerged from a list of several “very serious” bidders, Forde said. Port District officials were enticed with the firm’s promise to invest up to $500 million in the port to attract new tenants and spur economic development.
The agreement, which is still under negotiation, would be “transformational,” Forde said.
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While Broe officials declined to specify the company’s plans to boost the port’s revenue, they expressed confidence in attracting new industry, both domestic and international, with a focus on improving the volume of commodities moving through its terminals.
Yeros said Broe’s focus would be to attract new shippers and lure others from competing Great Lakes ports.
Broe’s investments likely will include improvements to the terminal facilities, including rehab work on docks, shipping berths and terminal access. It also could improve roads and expand rail access to portions of the property.
Final decisions will be driven by the needs of its customers, which the company would not name or categorize.
“There are a number of customers that we’ve had extensive conversations with that would like access to the Great Lakes through the rail system,” Yeros said.
Broe has operations in a host of other ports, including a rail terminal at the large seaport in Oakland, and ownership of a terminal on the Hudson Bay in far northern Manitoba that handles mostly grain.
Broe’s portcentric subsidiary, OmniTrax, has the reputation for being a deft operator and an aggressive competitor.
Bridges, the onetime top official at the Port of Oakland, said OmniTrax frustrated some shippers because it tightly controlled access to a rail terminal, giving preference to one major railroad with which it had a close relationship. That translated to some shippers waiting longer than expected to move their cargo off the terminal, he said.
At the Port of Churchill, the tiny grain-focused terminal in the Arctic Circle, OmniTrax played a role in persuading the Canadian government to provide subsidies to shippers to use its far northern port to transport grain, said Marc Gagnon, director of government affairs and regulatory compliance at Fednav Ltd., a Canadian shipping line.
Broe’s success in Chicago may depend on whether it will be able to wield the same clout and savvy to persuade shippers to use Chicago terminals to move their goods.
“We have a great track record of attracting industries, developing property, growing rail business and port business, diversifying and creating jobs and investment,” said Montgomery, the Broe vice president.
“I think you will see all of that play out on the Southeast Side.”
Twitter @peterfrost