millions to nowhere Earlier this month the Port of Tacoma canceled plans to develop the Blair-Hylebos Peninsula and to build a terminal for NYK Line. It was a complex project that grew more so and eventually crashed as the recession hammered the shipping industry. The Tokyo-based shipping line is still coming to Tacoma, but will use an existing terminal.

From nearly the beginning, the project – started in 2007 – was fraught with problems, including cost estimates that ballooned from an initial $800 million to nearly $1.2 billion and a construction schedule that was virtually impossible to meet.

When Port Chief Tim Farrell sold the port commission on the project, his estimate didn’t include the money or time it would take to clean up a well-known toxic site that sat in the way of development. And the estimate didn’t account for relocating power to the new terminal, something Farrell later said he should have known about.

Farrell and the commissioners knew by last October that the project as originally pitched was too expensive and couldn’t be finished by the July 2012 due date. A state study commissioned by the port had confirmed that.

They discussed at times whether to break the lease with NYK. Instead, they chose to forge ahead, continuing to plan for the project – at a cost of $2 million a month – before ultimately pulling the plug in February.

Total spending on the abandoned Blair Development reached $190 million.

Missteps in the process caused tension among port staff members and helped erode the relationship between the commissioners and Farrell, who now is talking with his bosses about “a transition in leadership” at the port.

A LONGTIME GOAL

The port’s plans to remake the Blair-Hylebos Peninsula into container terminals for shipping lines go back nearly two decades. By 2005, the timing for such a development was right.

“The market was white hot,” Farrell said in a recent interview. “It was the time to make things happen if you were going to make things happen. We struck while the iron was hot.”

Manufacturing in China was exploding. Ports were seeing record-high import volumes. Rival ports in Southern California were congested. Shipping companies were looking for new places to expand.

The Port of Tacoma was positioned perfectly. It had been methodically buying property on the Blair Waterway and beyond in preparation – spending more than $110 million between 2005 and 2007 on 1,000 acres of land, three times more than the agency spent in the previous decade.

When it came time to craft the deal that would spur the development of much of the peninsula, port officials said they were able to pick NYK from a cadre of potential customers.

Commissioners approved the lease in July 2007. They and the port leadership celebrated the deal and touted its benefits to the community.

The construction alone would generate thousands of jobs. The new terminal would create hundreds of jobs onsite and contribute to thousands of jobs in the state and county, according to port news releases. The business would bring in millions of dollars in state and local tax revenue.

AN AMBITIOUS PLAN

The project was enormous – both in cost and size – and needed to be done quickly.

The lease between NYK and the port promised the shipping line would have its terminal by July 2012 – the month after NYK’s contract to use a terminal at the Port of Seattle expires. The arrangement included the caveat that if the new terminal wasn’t done, the port would provide the shipping line with another space to use.

The port spent about three years building its last project, the $210 million, 171-acre Pierce County Terminal. It planned to remake most of the Blair Peninsula – including constructing two terminals – in five years.

“Everybody said we had plenty of time, but nobody realized the magnitude of this project,” said Bob Stromberg, a port employee and senior project manager of what was called the Blair-Hylebos Peninsula Redevelopment Program.

To build the NYK Terminal, the port first needed to move the Totem Ocean Trailer Express terminal up the waterway. Then it could construct the 168-acre NYK facility and build a system of roads and rails – essentially remaking the peninsula from Highway 509 – to support it.

The project was complicated by the fact that the port didn’t own 140 acres of property it needed for the development. The port had started to buy – and in some cases condemn – the land of two dozen owners a few months before signing the NYK lease.

The timeline was going to be tight.

Design documents from July 2007 recommended an accelerated construction schedule to finish the NYK terminal by 2012.

ROUGH ESTIMATES

The initial cost estimates were optimistic – and pretty rough. They would haunt the port commission and come back to bite Farrell.

The port’s first projections from summer 2007 placed the total project cost at about $800 million.

Farrell has said repeatedly that the lease accounted for “unknown unknowns” by providing that the shipping line share in the cost of building its terminal. The port initially would fund the whole thing. Then NYK would eventually pay for everything inside the fence of its terminal and a portion of the road and rail infrastructure. The port would shoulder the cost of the rest of infrastructure.

Weeks after the deal was announced, the commissioners and Farrell said the port could comfortably afford the project.

“We wouldn’t be doing this if we didn’t think we could take on the debt and get a rate of return so that we can expand and move forward,” Commissioner Dick Marzano said in August 2007.

As a safeguard, the port’s own policy requires its profits to cover its annual debt service twice. Farrell said then that the port could stay above its debt standard ratio of two until 2011, at which point the ratio might hover right below the standard for a few years.

He, too, was unconcerned.

“It’s our discipline internally,” Farrell said the same August. “The (bond) rating agencies love it. They see it as very conservative.”

ENVIRONMENTAL PROBLEMS

The Blair project offices are a pair of one-story buildings down the street from the former Emerald Queen Casino. By fall 2007, they were jammed with dozens of people working on the development.

Weekly meetings – with what project manager Stromberg called the “key people” – counted at least 40 in attendance. The port hired consulting companies to do the bulk of the work and provide temporary staff members for the project.

Cost estimates began to climb as the planning progressed.

Though the port knew environmental work would be necessary, the first projections didn’t include money for cleaning up properties, Farrell said.

“That was intentional,” he said. “It had to do with the fact that we had some idea, but not exact ideas.”

The port’s development plans included well-known contaminated properties. The main hurdle was the former Occidental Chemical site, which sat in the way of the new TOTE terminal.

The federal Environmental Protection Agency and the state Department of Ecology have been working to clean up the 32-acre site and surrounding land and water – including some owned by the port – for years. Still, the work was nowhere near complete.

The port wanted to develop the property long before the EPA and the Ecology Department expected to be finished with the cleanup.

Early design documents for the Blair developments make note of the OxyChem site and cleanup work there.

Farrell said the port wanted to work with OxyChem and the EPA to see whether the cleanup schedule could be speeded up. The proposed construction on the site would accomplish much of what was needed, he said.

But as the EPA saw it, the port didn’t do its homework.

“I think it’s just generally acknowledged that identifying contaminated sites, knowing how long they will take to clean and what orders they are under is an integral part of business planning. It’s what’s referred to as due diligence,” said Jonathan Williams, EPA project manager for the Hylebos cleanup.

The OxyChem property and surrounding area is one of the most contaminated sites in the Commencement Bay Superfund cleanup, according to the EPA. The company manufactured chlorine gas, caustic soda and chlorinated solvents. The latter two spilled onto and beyond its property and into the water.

The EPA learned about the port’s scheduled development in The News Tribune in May 2007. The agency and the state ecology department relayed their concerns to the port’s environmental staff members via a teleconference in June.

They convened another meeting on July 26, 2007, the same day port commissioners approved the lease with NYK.

As far as the environmental agencies were concerned, it accomplished little. The port’s planning continued.

Lori Cohen, an EPA associate director, wrote the port in November, expressing the agency’s frustration.

“EPA and Ecology are disappointed that the effort we took in June and July of 2007 to alert the Port of Tacoma about our concerns with the timing of the Occidental Site response actions and proposed Port of Tacoma commercial development plans have not been addressed,” she stated.

The environmental agencies had not decided on a remedy for how to do the rest of the OxyChem cleanup. Cohen noted in her letter that it would be premature for the port to proceed with engineering and architecture work before that decision was made.

The port and the agencies didn’t agree on the issue until this past May, Williams said, when port staff members told the EPA and the ecology department that the development plans had changed and the port no longer had a conflict with the cleanup schedule.

ROAD AND RAIL

Farrell said that though the environmental costs were more than expected, they weren’t the largest problem the port faced. The road and rail infrastructure is where the estimates really went off track.

A port planning document from June 2007 – a month before the NYK lease was signed – puts the infrastructure costs at $269 million. Farrell told The News Tribune two months later that infrastructure related to the NYK terminal would cost $81 million.

Both numbers proved inadequate in the long run.

By March 2008, the port’s team of consultants was getting a better handle on how much it would cost to build the roads, train tracks, rail yards, overpasses and underpasses to support the shipping terminals.

Estimates spiked to $499 million.

Getting electricity to the terminals was a big part of the problem. Initial estimates assumed that because the peninsula housed previous industrial companies – including the Kaiser Aluminum smelter – that the electrical capacity the new terminals needed was available.

It was. But everything needed to deliver the power was in the wrong spot.

“What we didn’t see was that the cost of getting that power to where it needed to be – as opposed to where it was – was significantly high, much higher than we anticipated,” Farrell said recently.

COMMISSIONERS SHOCKED

NYK made additional requests for what they wanted for their terminal. Under the lease they would end up paying for most of the expense.

The company’s wish list combined with the increases in infrastructure and environmental work pushed cost estimates to nearly $1.2 billion – almost 50 percent higher than the port’s original projections.

The cost of NYK’s terminal alone went from an estimated $335 million to $439 million.

Peter Keller, NYK’s chief operating officer, said last week that it’s typical for estimated costs to climb as the design progresses.

But the increases shocked the port’s commissioners. After learning the new, higher cost estimates, they honed in on the project’s budget. They requested that the staff provide them with regular reviews and updates on costs as the project progressed.

But they continued to support the endeavor with their votes.

In fact, commissioners approved funding and staff requests for projects related to the development more than 20 times from May 2007 through June 2009. Nearly all the votes were unanimous.

“There was an awareness … that costs were coming in much higher, but the vision of the port was and has been the development of the waterway. So we looked at the work we were doing as useful for the entire Blair,” Commission President Clare Petrich said.

When Farrell’s performance review rolled around in October 2008, his bosses denied him a raise – in part because of the development’s sketchy first estimates.

In a recent interview, Commissioner Connie Bacon said that she and her colleagues should have asked more questions and raised more red flags.

“Certain elements of the lease arrangement in my opinion were incomplete and we made a decision based on incomplete information,” she said.

Petrich said she didn’t know or expect that the environmental costs would increase that much. She said she first heard about the problems with the Occidental Chemical site not from port staff members, but from people she knew at the state ecology department. Commissioner Don Johnson was elected midway through the project and wasn’t on the board that approved the lease. He said the final cost estimates drastically changed the benefits of the project.

“It destroyed returns on investments for the port,” Johnson said.

STAFF TENSION

In the spring and summer of 2008, the global economy was beginning to tank. Container volumes at the Port of Tacoma were down 7 percent from the previous year to 1.9 million.

Farrell said the design and planning work for the Blair project moved ahead, with an increased focus on validating the new, higher cost estimates.

That the port’s leadership continued to push for the 2012 deadline frustrated many of those who worked on the project. Some staff members voiced concerns about the schedule and budget to the higher-ups.

Stromberg, senior project manager, acknowledged the tension.

“What was being said was that this was going to be difficult,” he said recently. “It was going to be extremely difficult to deliver on time and on budget.”

Farrell heard the concerns.

“As long as we were continuing to proceed down that path of an agreement there was going to be that tension because we wanted to deliver this, but it was clear that there were significant challenges to doing that,” he said.

NIGHTMARES COME TRUE – AND THEN WAIT

The challenges only increased.

By late summer 2008, Farrell and the port’s project leaders wanted a third party to confirm the project’s cost estimates. The port hired the state Department of Transportation to do a study for $200,000. The work spanned two months and was done by October 2008.

“It confirmed our worst nightmares,” Stromberg said. “But at least we knew our nightmares were true.”

The study showed the project’s higher estimated costs likely were right – it would probably cost more than $1 billion to build the development.

It also showed little chance of finishing construction on NYK’s terminal by 2012 – which was when the shipping line needed it. Finishing the terminal by August 2015 was more likely.

Farrell and some of the commissioners said following the study they discussed whether the port should – or could – break its contract with NYK. The project was burning through money, costing the port about $2 million per month – some months less, and few much more.

Bacon said, “Some people say we should have gone to NYK and said we just can’t do this. In essence, we told each other that, but the lease was still there and the discussion was ‘what should we do?’ ”

Meanwhile, the recession was in full swing. Shipping rates were falling. It began to seem unlikely NYK would want to build a terminal in such an economy, but the company hadn’t said so to the port.

Farrell stuck by the contract – citing its requirement to make a good-faith effort to deliver the terminal by 2012. Planning pushed forward with a focus on changing the project’s scope and trying to cut costs.

“We were acting on knowledge that it wasn’t going to be what we set out to do – but we were obligated to find a solution,” he said.

Knowing that completing the terminal on time wasn’t possible, the port chief and his staff also started to consider other places at the port to accommodate NYK.

Farrell said the port couldn’t unilaterally pull out of the lease – it needed to be a joint decision with NYK, which was highly involved in the planning and aware of the cost estimates.

Bacon described it a different way.

“It was waiting to see who would blink first,” she said.

MONEY SPENT

The project finally ground to a halt in February 2009.

The economy had gone from bad to worse. The port’s container volumes and revenues were down and layoffs were pending.

NYK officially said it didn’t want to proceed with its terminal.

Keller said he sat down with Farrell around the first quarter of 2009, when “it became evident and obvious that we weren’t able to build this.” The shipping line since has laid off hundreds of people and laid up hundreds of ships.

“Current projections would indicate that we are going to be into at least 2017, 2018 or 2020 before we get back to the need to even think of more facilities,” Keller said.

The departure of Maersk – one of the port’s oldest customers – to Seattle created what Bacon termed “a golden opportunity,” providing a place for NYK ships to land without the port having to build the company anything new.

By then the port had already spent $190 million:

 • $146 million to acquire the property and demolish vacant buildings.

 • $35 million on design and planning.

 • $6 million on environmental cleanup and permitting.

 • $3 million in staff resources to support the development.

Commissioners voted to cancel the lease with NYK at the start of this month.

They and Farrell said the property remains a good investment. The port will build something on it someday and lease much of it until then. But how much of the money spent on planning and design ends up wasted is unknown. NYK and the port are still figuring out who will pay for $11 million of the $35 million of that work.

A RELATIVE ‘WIN’

Farrell characterized the new deal as a “win,” noting NYK is still coming to Tacoma and neither the port nor the shipping line had to invest more money to make it happen.

But for many who worked on the project, it feels like a failure.

Stromberg remains disappointed.

“This was going to be a capstone of career and I was going to deliver this wonderful project and be able to do the ribbon- cutting and it ain’t going to happen,” he said.

Immediately after commissioners approved canceling the lease, Farrell scheduled a meeting with them to talk about his future and “a transition in leadership.”

They plan to continue that conversation Monday.

He and the port’s staff members have learned a lot in the past two years, Farrell said, though he acknowledges the agency wasn’t ready – in terms of experience and skill – to tackle such a development.

“It would be ideal if we could be exactly where we wanted to be when the market was ready to just blossom,” Farrell said. “I would say that we weren’t where we wanted to be.”

Kelly Kearsley: 253-597-8573

kelly.kearsley@thenewstribune.com