PROJECT SUMMARY
To meet the growing demand for cruise ship capacity and to rapidly capitalize on the economic benefits to local and state economy and tax base - calculated at $10 million in direct economic impact on the Galveston community and $15 million in indirect impact per year-round operation of one cruise ship - the Port of Galveston formed a PPP with Royal Caribbean, Carnival and CH2M HILL in 2002 to expand cruise ship service and facilities. This was the first time a PPP was used for a port project in Texas. The formation of the PPP involved creating a "third party" legal entity to hold the cruise line contracts and the lease with the Port (and would allow operating profits to be held by the Port for future investment in other expansion projects), as well as providing a fixed-price contract with bridge loan terms to allow fast-track construction until a bond could be issued by the Port. The private sector provided up-front investment in exchange for commercial terms regarding return on its investment. The public sector conserved its capital funds, while receiving increased revenues from growth in related employment and commercial revenues, and strengthening its ties with the business community. To our knowledge, the contract, financing structure, and partnering concepts used to deliver the project was unique in the U.S. cruise market. Design-build delivery was used on the projects, totaling $14 million (projects completed to date), to provide singular responsibility for administration, design/construction quality, time savings, and early knowledge of guaranteed construction costs for bonding.

From Old Warehouse to New Terminal
On September 9, 2002, the Port approved a cruise terminal agreement with Royal Caribbean and Carnival. On September 19, 2002, CH2M HILL was contracted to upgrade a dilapidated warehouse, modify 100 feet of wharf facilities, and construct access/circulation roads for passenger pickup and drop-off to accommodate new service for Royal Caribbean's Splendour of the Seas - scheduled to arrive just seven weeks later. Not only was this the first time the Port has used design-build procurement for such a project, but there was an initial lack of project scope and definition, so the Port had some skepticism that the team could or would perform the first phase of this work within the negotiated budget of $3 million without a flood of change orders. In actuality, the design-build team performed the originally anticipated scope, plus $100,000 of new scope, within budget and was able to share over $100,000 in cost saving with the Port. Taking a fast-track approach to design required transforming a drab, neglected warehouse into a clean, colorful passenger terminal that provided for quick, efficient flow of people and baggage, as well as facilities for security and cruise operations. The new terminal added 80,000 sq. ft. to Galveston's cruise complex, and the extended wharf facilities completed a 2,000-ft.-long berth capable of handling two cruise ships at once. By November 8, the wharf facilities and roadway improvements were complete and the building was available for beneficial use. The ship, arriving with 1,600 passengers, docked in Galveston on November 11. The partnership among the skilled local craftspersons, the Port, Royal Caribbean, and the design-build team successfully met the challenge.

Bringing Down the Headhouse
Phase 2 of the development project, completed in August 2004, involved imploding a 236-foot-high headhouse - the second tallest building on Galveston Island - and demolishing numerous reinforced-concrete silos to make room for the Port's expansion program. Among the challenges facing the team were removing and abating nearly 500 windows containing asbestos and meeting an aggressive completion schedule, having started in June and needing to finish by the end of September. The silos, as well as old railcar unloading facilities and offices, were brought down using the more traditional approach of wrecking balls and earthmoving equipment. There were three banks of silos, with each bank containing approximately 16 concrete silos 175 feet high. The estimated 120,000 tons of concrete rubble from the 1930s-era grain elevator complex was crushed on-site and used to fill for expansion projects. Nearly 100 percent of the debris, including more than 5,000 tons of reinforcing steel, was reused or recycled. In addition, the team completed the demolition for $1 million less than the next lowest bid.

Expanding Inside and Out
On the $9-million revamp and expansion of Terminal No. 1, completed in November 2003, the team expanded the existing dock, and designed and constructed other facility projects to increase efficiency and enhance passenger comfort and safety. The team renovated and upgraded the interior facilities to double the amount of usable space for passengers and cruise operations, including adding a new main waiting area, VIP check-in/waiting area, ticket counters, a three-level raised corridor accessing a new passenger loading bridge, fire exit stairways, sprinkler and alarm systems, and security facilities, as well as installing a $2 million "rolling bridge," that allows passengers to board through an enclosed passageway, similar to an airline jetway, while protecting them from the elements. All of the expansion projects are planned to accommodate larger cruise ships in the future, with capacities up to 3,500 passengers.

The success of the PPP has helped the Port continue its phenomenal growth, accrue benefits to the local and state economy, and take a leadership position in the cruise industry. "Galveston is the talk of the industry," Port Director Steve Cernak said. "We received comments from industry partners (at the 2004 Seatrade Cruise Shipping Convention) that Galveston is the new hot cruise port and one to model new cruise development after. We have invested over $32 million upgrading, renovating and enhancing our cruise facilities and we believe that all of the hard work and effort has paid off for the port and the city."

Originality
The Port of Galveston had an extraordinary opportunity to stimulate its economy and tax base by expanding its cruise operations and redeveloping existing port facilities. In mid-2002, CH2M HILL submitted a PPP proposal to the Port of Galveston for cruise terminal development. This was the first time that a PPP was used for a port project in Texas, and the first time that the Port used design-build project delivery. The proposal featured two innovative aspects: 1) creating a "third party" legal entity that would hold the cruise line contracts (Royal Caribbean International and Carnival Cruise Lines) and the lease with the Port and would allow operating profits to be held by the Port for future investment in other port infrastructure expansion projects; and 2) providing a fixed-price contract with bridge loan terms to allow fast-track construction until a bond could be formed and placed by the Port. The proposal was submitted in accordance with a pre-existing code, to ensure that the Port could move quickly. CH2M HILL initiated a legal review to ensure that the approach of forming a Texas corporation separate and apart from the Port of Galveston was legal and that accomplishing the development program using design-build was allowable. The firm then crafted bond guarantee language from the cruise lines and worked with the cruise lines to replace the guarantees with direct construction loans, the repayment of which would be credited against cruise line lease payments. To our knowledge, the contract, financing structure, and partnering concepts used to deliver the Galveston cruise terminal development were unique in the U.S. cruise market. The Port delivered the cruise facility on an extremely tight schedule at a fixed cost while meeting all of its objectives – which could only be achieved with a PPP model. This approach created an innovative cruise terminal financing "template" that has since been proposed and used elsewhere by CH2M HILL and the cruise lines.

Quality
Construction of the improvements enabled the Port to expand its cruise ship services by accommodating more and larger ships. The first project added capacity by converting a dilapidate warehouse into Cruise Terminal No. 2, a bright, efficient and secure facility. The second project doubled the size of usable interior space in Cruise Terminal No. 1 while improving the space. And the third completed project demolished old concrete silos, making room for additional facility expansion - while recycling/reusing almost 100% of the rubble and scrap metal.

Implementation
To meet the schedule and finance needs, short and long term financing has to be addressed quickly, and design-build delivery was chosen. Short-term cash to provide facilities for the first cruise ship was provided through negotiated bridge loans from Royal Caribbean and Carnival. Long-term financing for completing cruise facilities was provided through creation of the Galveston Port Facilities Corp., which could issue bonds paying interest exempt from federal income taxes. All debt was supported by carefully analyzed cash flows from cruise line contracts. At contract signing on Sept. 19, 2002, the arrival of the first cruise ship was already scheduled for Nov. 11 at Terminal No. 2 - which, at the time, was an abandoned warehouse with a leaky roof. The schedule for this Phase 1 work allowed only 49 calendar days to improve the dock, construct access and circulation roads, and convert the warehouse into a clean, comfortable, efficient and secure cruise terminal that would be the memorable start and finish of each passenger's cruise experience. The terminal was designed to enable 2,000 passengers to be processed with a high degree of customer satisfaction in 4 hours or less - the equivalent of under 7 seconds per passenger. The project was completed on schedule, despite 20 inches of rain during the 16-day period. The subsequent phase of work, also delivered successfully under a design-build contract, involved the $2-million demolition of massive concrete grain elevators. On that contract, as part of the PPP, CH2M HILL agreed to begin work and finance $1 million of demolition contractor payments o the work could proceed quickly without waiting for the Port's bond issue to go through. The demolition was accomplished for $1 million less than the next lowest bid.

Economics
Under the PPP model used, the public and private sectors worked together to fund and provide the needed facilities on time and within cost. The private sector provided up-front investment in exchange for commercial terms regarding return on its investment. The public sector conserved its capital funds, while receiving increased revenues from growth in related employment and commercial revenues, and strengthening its ties with the business community. Appreciable cost savings were realized through the PPP by providing the facility on time to start cruise and parking revenues flowing. In the $3-million Phase 1, the design-build team performed the originally anticipated scope, plus $100,000 of new scope, within budget and was able to share more than $100,000 of cost savings with the Port. Renovating and reusing an existing building and wharf infrastructure saved time and money while enabling revenues to be generated much sooner than if a new facility were designed and constructed. On a larger economic scale, cruise lines and their passengers and crews spent nearly $631 million on direct purchases in Texas in 2003, generating 9,767 jobs paying $425 million in income, benefiting from cruise industry activity, and 96% of the Texas cruise activity is attributed to Galveston. "Together we have passengers stay before or after their cruise," said Governor Rick Perry

Longevity of Successful Operation
The PPP's operation has continued successfully for more than 2 years, as is evidenced by its recently beginning its sixth major project. Operation of the facilities designed, constructed, improved and expanded by the PPP, and the increased number of sailings, has resulted in successfully serving hundreds of thousands of passengers, including the 1,000,000th passenger in May 2004. These projects contributed to a 200% increase in Galveston cruise passengers through the 2002-03 season and a 1,100% increase compared to 3 years ago. In the fall/winter cruise season of 2004-05, two additional lines will sail from Galveston – further indication of the ongoing success of the PPP.