The Cat is docked at Ocean Gateway terminal in Portland on Aug. 1, 2017. Upgrades required by U.S. Customs and Border Protection would cost the city $6 million to $7 million, a city spokeswoman says. (Staff file photo by Shawn Patrick Ouellette/Portland Press Herald)

Portland officials will not invest millions of dollars demanded by the federal government to keep a Customs inspection operation at the city’s international ferry terminal — a decision that could end service between the city and Nova Scotia next year.

Customs agents currently work in temporary, inadequate facilities at the terminal. Agency officials said facility upgrades were part of reviving international ferry service four years ago. But those upgrades, which include building a new inspection building and adding other improvements, could cost Portland as much as $7 million, said Economic Development Director Greg Mitchell.

“We have been clear from Day One that we are not in a financial position to shoulder that expense,” Mitchell said in an interview Tuesday. The ferry’s unproven track record and questions about continued financial backing for the service from the provincial government made Portland officials reluctant to make the heavy investment Customs demanded, Mitchell added.

“This background of uncertain subsidies and operators doesn’t inspire confidence,” he said.

Portland officials plan a formal response to Customs with possible paths forward, including a smaller investment by the city or a passenger pre-clearance facility in Canada.

“We have been in open communication with them, have held meetings with them this fall,” Mitchell said. “We are in the process of working on a more formal response to their request.”

WAITING NO MORE

Customs agreed in 2014 to operate a two-year temporary screening facility at Portland’s Ocean Gateway when ferry service between Portland and Yarmouth, Nova Scotia, resumed after a four-year hiatus.

The temporary facility was intended to give Portland time to see if the ferry service would be financially viable. Prior to starting operations, the city invested $150,000 into Ocean Gateway terminal through a loan to Nova Star Cruises, which operated the ferry service at that time.

In August 2014, Customs told Mark Amundsen, CEO of Nova Star Cruises, that the agency agreed to work at the terminal temporarily with the understanding that Nova Star would build permanent inspection facilities. The agency asked for improvements costing almost $4.7 million, including a $2 million inspection building, radiation scanning devices, a license-plate reader, closed-circuit television and new inspection booths. Portland officials estimate Customs requirements would now cost as much as $7 million.

Customs extended its acceptance of the temporary facility for another two years in 2016, after the Nova Scotia government canceled its contract with Nova Star Cruises, which had not met its passenger projections despite more than $40 million in subsidies. The company filed for bankruptcy in 2016.

Prince Edward Island-based Bay Ferries, which operated the Portland ferry service until 2009, was hired to replace Nova Star with a high-speed ferry, The Cat.

But this summer, Customs’ patience appeared to have worn out. In a June 5 letter to City Manager Jon Jennings, Customs Area Port Director Keith Fleming said the agency would not provide inspection services after 2017 without a funded improvement plan.

“Despite our financial support and good faith efforts to work with the City Economic Development Director, over the last three years there has been no commitment or progress made toward bringing the existing facilities into compliance or an effort to build new facilities,” Fleming wrote.

Uncertainty over the ferry operators, different ships and the Nova Scotia government’s commitment to subsidize the service “did not allow the city to make any progress to make the multi-million dollars of investment to support the CBP request,” Mitchell said Tuesday.

An investment of that size is also out-of-scale for the ferry, especially when compared against the economic gains of increasing cruise ship traffic to Portland. In the last four years, cruise ships have paid $5.63 million in passenger fees to the city, compared with $672,250 from the Nova Scotia ferry, according to city records. Cruise ship passengers are not required to undergo the CBP screening in port.

“We are trying to maximize revenue, we are going with what is working from a business standpoint,” Mitchell said.

SEEKING SOLUTIONS

No immediate solution to the problem is apparent, but Portland Mayor Ethan Strimling said the city has met with officials in Yarmouth to discuss a facility there where passengers and vehicles could receive pre-clearance form U.S. Customs so they could disembark freely in Portland. Investing millions in a Customs house here, however, is out of the question, Strimling said.

“It makes a lot more sense to have pre-clearance up there,” Strimling said. “I think the international connection is a good connection, it is something I would like to see continue, but the price tag is too much.”

Bay Ferries carried 41,463 passengers in the season that ended Oct. 15, a 17 percent increase from 2016. The company said it expected to double the 35,500 passengers it had in 2016, but an engine blow-out in June forced it to run at much slower speeds and cancel a quarter of its sailing days during the busiest point in the season.

“In this business we face serious regulatory issues all the time,” said Bay Ferries CEO Mark MacDonald in an interview Tuesday. “When we face them, we take them very seriously. Usually we solve them in some fashion.”

“I really don’t want to speculate on how this is going to unfold,” MacDonald added.

Bay Ferries recently expressed interest in restarting service to Bar Harbor, using a redeveloped ferry terminal where it landed for 12 years until 2009, according to an October letter to the town from MacDonald. On Tuesday, MacDonald said interest in a different harbor was not directly related to Customs issues in Portland.

“We are not looking at Bar Harbor as a way to get around this problem, we are looking at the best, long-term sustainable solution for the ferry service,” MacDonald said.

Bay Ferries has a 10-year contract with the Nova Scotia provincial government and received $9.4 million in provincial subsidies on 2017.

In a response to emailed questions about the future of the government’s relationship with Bay Ferries, Nova Scotia Department of Transportation and Infrastructure Renewal spokesman Brian Taylor said Bay Ferries is an experienced operator that routinely navigates regulatory issues in the U.S. and Canada and was working to identify appropriate solutions to the Customs issue.

“Any possible solution will take into account the best interests of Nova Scotians,” Taylor said.

Peter McGuire can be reached at 791-6325 or at:

pmcguire@pressherald.com

Twitter: @PeteL_McGuire

This story will be updated.