Wave of change
Should Virginia privatize its port? APM Terminals and two others submit operator bids
- August 31, 2012
After three decades steering the Port of Virginia, Virginia International Terminals (VIT) believes its record speaks for itself, but the private, state-sanctioned company suddenly finds itself fighting to keep its job.
The battle to run the third-largest port on the East Coast took off with rapid speed in April. That’s when global shipping giant APM Terminals Inc. submitted an unsolicited bid under the state’s Public-Private Transportation Act to operate all the Port of Virginia’s facilities in Hampton Roads, as well as the Virginia Inland Port in Front Royal. As part of the deal — valued at $3.9 billion — APM also would transfer ownership of its $540 million high-tech Portsmouth facility to the state.
In response, others were invited to file bids to manage the port. Two more companies submitted proposals by an Aug. 13 deadline. They are Carlyle Infrastructure Partners, a division of The Carlyle Group, a Washington, D.C., private equity firm, and RREEF America LLC, a division of RREEF Infrastructure, which is a subsidiary of Deutsche Bank AG. At press time, state Transportation Secretary Sean Connaughton declined to disclose the scope of the bids because his staff was reviewing them to see if they met submission criteria.
For the first time in its long history, VIT also was asked by Connaughton to submit its volume and revenue projections.
Ultimately, the Virginia Port Authority board will vote on any new agreement since it would contract with the current or new operator. This would come after seeing detailed proposals and is a big decision as the port recovers from a drop in business and prepares for an influx of massive ships when an expanded Panama Canal comes on line in 2014.
One of Virginia’s top economic engines, the port pumps huge amounts of revenue into state and local coffers. A 2008 economic impact study by the College of William and Mary’s Mason School of Business estimated that the port contributes $41 billion in revenue to the state and $1.2 billion in state and local taxes, while 345,000 jobs are connected to port activities.
Upheaval, however, has been percolating at the port since the global recession hit in 2008. A year later, Chicago-based Centerpoint Properties Trust submitted an unsolicited proposal to run the port for 60 years. That was followed by competing bids from The Carlyle Group and a partnership involving Carrix Inc. and Goldman Sachs. The state ultimately rejected all three proposals, opting instead to add to its stable of cargo facilities by leasing rival APM’s state-of-the-art Portsmouth terminal for 20 years. The $1.2 billion contract put all of Hampton Roads cargo container terminals under one banner, uniting the region against East Coast competitors.
Still, as world markets gradually climbed out of the recession, container volumes at the Port of Virginia did not rebound with the same speed as other East Coast ports. In response, Gov. Bob McDonnell last year replaced 10 of the 11 members on the Port Authority’s Board of Commissioners in hopes that new faces could help the port regain its economic luster.
APM, which wants to sign a 48-year lease to operate the port, hopes the new board will decide it can do a better job running things. Should that happen, the Port of Virginia would become the first major container port in North America run exclusively by a lone, private, global terminal operator. The decision to move forward with a single proposal could be made by year’s end, with an agreement in place in early 2013.
With 62 terminals worldwide, APM has deep pockets, courtesy of its status as an affiliate of Danish conglomerate A.P. Moller-Maersk Group. The firm already manages one terminal at the Port of New York/New Jersey and one at the Port of Los Angeles. (Different companies manage the other terminals at those ports.)
APM officials say the company’s financial resources, along with its global knowledge, experience and management expertise are just what the port needs to grow and attract new business. “We felt this is the way to provide for growth and a competitive edge,” says Eric Sisco, president of APM Terminals Americas. “We believe in the Port of Virginia and together with the Virginia Port Authority and the commonwealth, we can grow the port.”
Not so fast, counters VIT President and CEO Joe Dorto. He argues that his firm has efficiently operated the port for three decades, with cargo tonnage growing steadily. “We have a proven track record of success.” Dorto points out that in the four months leading up to this past June, VIT’s volume outpaced all other East Coast ports. June, in fact, was the port’s busiest on record for container volumes, handling 168,430 more TEUs (twenty-foot equivalent units) than the same month last year, an 11.2 percent increase. The port also noted an uptick for the fiscal year that ended June 30, compared with the previous year. Rail containers increased by 14.9 percent, while noncontainerized break-bulk cargo was up 20.3 percent and vehicle volumes rose 42.7 percent. “If you look at Virginia’s true competitors, Charleston, S.C., and Baltimore, Virginia has done very well,” Dorto says.
VIT is touting those gains, along with its volume and revenue projections, as it lays out a case to remain port operator. Connaughton believes the competitive process will be constructive. “VIT has operated the port for 30 years without any competitive bidding,” he notes. “We’ll actually look at VIT and consider which may be a better proposal for the state. We want to see what their plan is and their budget for doing it.”
Connaughton will vet the bids and make recommendations to the governor and the board. He planned to brief the Virginia Port Authority Board on the bids on Aug. 22. He is especially interested in bidders’ plans to return the port to prerecession levels, as well as expand on those figures. “It’s a different market from what it was several years ago,” he acknowledges. “We’re really looking to see how we can get the port to return to a growth mode and be in a better competitive position.” APM’s proposal, he adds, lays out a vision of stronger cargo growth, honed in part by the company’s experience operating other terminals.
As work continues on widening the Panama Canal, rivalries among East Coast ports are growing as they improve their harbors and terminals to prepare for the larger container traffic coming through the canal. As the only deep-water port on the East Coast, Virginia already is prepared to accommodate the larger container ships. Nonetheless, officials realize the port cannot rely on its deep channels alone and must do more to attract new customers. “Our job is to make sure we are efficient and provide cost-effective service to our users,” says Michael Quillen. The former chairman of Bristol-based coal producer Alpha Natural Resources chairs the Port Authority Board of Commissioners and was the only member McDonnell kept on the board. “Our goal is for Virginia ports to continue to grow, be recognized and generate economic opportunities for the commonwealth.”
But that takes money — and lots of it — as the state looks to maximize the advantages surrounding its deep-water port. APM, with its global resources, has pledged to invest hundreds of millions of dollars in capital to expand the port. “That adds value to the port community and the commonwealth,” says APM’s Sisco. “All of us who are stakeholders with Virginia ports understand the need for us to win that competition.”
Valued at $3.2 billion to $3.9 billion in today’s dollars, APM’s proposal would ultimately be worth $9 billion. The offer includes up to $1.3 billion in upfront cash and monthly payments to the state, revenue sharing that could reach $600 million and as much as $830 million in capital investments. The deal also would transfer ownership of APM’s terminal in Portsmouth to the state, erasing annual payments the Port Authority now makes to lease the terminal, which range from $40 million to $70 million.
APM would pay hundreds of millions of dollars during the 48-year lease not only to the commonwealth but also to the municipalities where terminals are located. The largest single taxpayer in Portsmouth, APM already pays upward of $4 million annually in real property taxes.
If the terminal is leased to the state, the property would become tax exempt though Sisco stresses that APM would still pay personal property taxes. Plus, the company plans to invest $300 million to build and equip the second phase of its Portsmouth terminal. Those allowances, however, were not enough to placate Portsmouth’s City Council, which passed a resolution in July asking the state to delay action on any port agreement until the consequences for Portsmouth, the state and the region are completely understood.
Portsmouth undoubtedly is wary of losing tax dollars from one of its top industries. When APM opened the Portsmouth terminal five years ago, it was the largest private investment ever made in the state. Touted as the most efficient container facility on the East Coast, it is the most technologically advanced and the largest private ocean container terminal in the Americas. Despite those features, the terminal initially operated well under capacity. “The port authority entered 10-year contracts with shipping lines over the years,” explains Wayne K. Talley, director of Old Dominion University’s International Maritime Ports and Logistics Management Institute. “When APM opened its own terminal, they realized the difficulty getting other shipping lines to come into the terminal because of those contracts. APM wasn’t able to compete with the Port of Virginia in a meaningful way.”
When APM leased its Portsmouth terminal to the state, however, the agreement stipulated that the company must approve any plan that would put an agency not associated with the state in charge of its facility. That provision, explains Connaughton, is related to APM’s proprietary software. “APM is a completely networked terminal,” he notes. “It’s dramatically more efficient than anything the state has. That enables it to run with a much lower percentage of people.” He adds that the third-party provision will be evaluated as the bids are considered. “We’ll have to see if any proposers out there want that terminal.”
Other concerns also have surfaced, mainly from shipping lines and trade groups. In letters to state and port officials, executives of several shipping lines contend that letting APM run the port would create a monopoly. After all, they note, APM is an affiliate of Maersk Line, the world’s largest shipping agency and the competitor to major shipping lines that come into the Port of Virginia.
In a recent letter to Arthur W. Moye Jr., executive vice president of the Virginia Maritime Association, S.Y. Kim, managing director of Hanjin Shipping America LLC — the shipping line that accounts for the port’s largest volume of import and export cargo — wrote: “By allowing this concession to be held by one single, private, foreign entity we believe that you will be causing irreparable harm to the future of the Port of Virginia. This monopoly will clearly be an obstacle to transparency in port operations and competitive, market-based pricing.”
Although APM officials stress that the company would not exercise a monopoly over the port, some competitors have warned that they may take their business to other East Coast ports if APM is put in charge. ODU’s Talley, however, discounts fears of a monopoly. “APM wants to make as large a profit as they can get, so why would they discourage other lines from coming? That just doesn’t make sense.”
Protest from truckers
The Tidewater Motor Truck Association, which represents trucking companies that operate in and around the port, also has written in protest to the governor and port officials. The group insists that installing APM as port operator would close avenues to air disputes and reconcile problems. “APM’s master is a private company’s bottom line,” says Ed O’Callaghan, the association’s president. “If it makes sense to reduce terminal hours for labor practices or to save operating costs, they would make the decision accordingly.”
Sisco counters that APM maintains good relationships with labor in the 13 terminals it operates in the Americas. “Our role is to ensure efficiency and be user friendly, not just for the shipping companies and ocean carriers, but also for the trucking communities that come to our facilities.”
O’Callaghan believes that state officials cannot ignore those who oppose APM’s bid. “If you look at the amount of press and letters in opposition, you don’t see letters coming from companies saying they support the bid,” he adds. “If you look at the people opposing this, they are professionals, and this is their career.” Connaughton promises that officials will consider opponents’ misgivings as part of the decision-making process. “We appreciate our customers writing to us and will definitely take their concerns into consideration,” he says.
Some General Assembly members also have voiced concerns about the prospect of privatizing port operations, especially in such a short time frame. “I think it’s too aggressive a timeline for such a valuable asset,” says Delegate Chris Jones, a Suffolk Republican who sits on the House Appropriations Committee. “If, in fact, we make that type of change, every consideration should be given to the long-term impact of handing over the port to a private entity.”
Jones says his reservations are not based on the amount of money APM or other bidders promise the state, but on the effect of privatization on the state’s economy. “We could have a port that would be very busy with just a commercial line operating it, but not have as many other commercial lines coming into the port, which would have a negative impact.”
APM officials maintain that the company has a vested interest in ensuring the port’s continued success. “We’ve been very supportive of the Port of Virginia for many years,” Sisco says. “That’s where we wanted our marquee terminal in North America. We’ve very confident we can take Virginia to the next level and win that competition.”
Quillen says commissioners are open-minded about privatizing the port. “The initial financial metrics APM presented were interesting enough for us to pursue evaluation,” he notes. “When you look at a proposal like APM’s, the assumption is that it can make a huge difference in value.” He adds, though, that while APM’s bid covers capital improvements to the port, the day-to-day operations also need to be considered. “There’s marketing, economic development, distribution that still has to go on.”
Sisco says that if APM wins the bidding process, VIT employees will be welcome to continue working at the port — under the auspices of APM. “If APM runs the port, we expect and invite VIT employees to join APM.” The Port Authority also would have an oversight role in port operations. “The Virginia Port Authority would continue to have a role as representative of the commonwealth,” he adds. “We would be the tenant on the port who has operating responsibility to pay rents and make investments.”
Right now, the port is working at below capacity. “When that business comes back, our economy will be significantly enhanced,” Quillen says. He adds that the port, which recently received its initial first-call ship from China, is working to attract more. “We’re a locality that’s not normally the first-call or last-call port. That creates a disadvantage in our operating costs. We don’t get paid for moving containers around.”
Quillen notes, however, that Hampton Roads has the highest percentage of rail traffic of any East Coast port, despite the traffic gridlock that has long plagued the region. “Obviously we have a congested urban area, but where we’ve done very well is in rail haul.”
No matter who ends up running the port, Quillen believes the unsolicited bids are a compliment to the port’s viability. “A variety of emotions comes out of this process,” he says. “People see that the future of Hampton Roads, and Virginia’s ports are attractive enough that they are willing to come in and take over operations of the port.”
Of course, state and port officials could reject all proposals as they did in 2010. “That’s always a possibility,” Connaughton concedes. But, it’s safe to say that, no matter what happens, it won’t be business as usual at the Port of Virginia. “Regardless of the outcome of this procurement process,” the transportation secretary adds, “we are going to make fairly substantive changes with the current port to return it to competitiveness.”