Three suitors compete to run the Port of Virginia
- August 27, 2009
It’s no secret Virginia has an economic gem on its Eastern Seaboard.
Blessed with a naturally deep harbor, the Port of Virginia has emerged as one of the leading ports on the East Coast. So it shouldn’t be a surprise that private businesses took notice of one of Virginia’s most lucrative assets.
Privatization of Virginia’s port operations has been brought up before. But this year the issue moved to the forefront after Illinois-based CenterPoint Properties Trust made an unsolicited $3.5 billion offer in March. Since then, two other bidders have come calling: The Carlyle Group and a partnership involving Carrix Inc. and Goldman Sachs.
“It reaffirms what those of us who have been involved with the port have been saying for a while now, which is that the Virginia port, for many reasons, has the opportunity to become the pre-eminent port on the East Coast,” says John Milliken, chairman of the Virginia Port Authority Board of Commissioners.
The bidders have been lining up despite a 25 percent drop in cargo volume in the past year and the first mass layoff in the port’s history. In July, Virginia International Terminals (VIT), the port’s operator, let go 90 workers, or about one-fifth of its work force. “It doesn’t affect our proposal in any way,” says Neil Doyle, executive vice president of infrastructure and transportation development for CenterPoint. “It’s a very emotional issue for VIT and the Virginia Port Authority … but I think that tough times force everyone to look at qualified alternatives.”
A deal could bring a flood of capital into Virginia’s aging transportation system and help build a fourth marine terminal at Craney Island in Portsmouth. Yet, it could also mean giving up control of the Port of Virginia — one of the commonwealth’s most important economic engines.
Ultimately, the state’s port and transportation officials will decide whether a private company can help the port meet its objectives. “There’s a fundamental question to be asked,” says Milliken. “And it’s easy to ask but difficult to answer. ‘What’s the purpose of the port, and do one or more of those proposals further that purpose?’”
The bidders and their proposals
The suitors represent a variety of backgrounds. Under all of the proposals, the companies would handle the port’s capital expenditures, VIT would continue to run the port, and the VPA would keep its core responsibilities, such as economic development initiatives, security and marketing. In addition, all three bidders say they could improve efficiencies and attract more business. The proposals, however, are conceptual at this state and could look vastly different after detailed negotiations with the state.
CenterPoint, the original bidder, says its bid could mean an additional $8.9 billion (or $3.5 billion in today’s dollars) for Virginia, its port cities and the VPA over the life of a 60-year agreement. Company officials say the deal would be a partnership. In exchange for rights to operate the port, CenterPoint would make an upfront payment, an annual payment and offer a share of profits to the VPA. CenterPoint also would handle all capital expenditures at port facilities. VIT would become a subsidiary of CenterPoint, but current staff would remain in place. “We looked at how our operations and our skills sets could be complementary, and then we built our proposed partnership around that,” says Doyle.
CenterPoint, based in Oak Brook, Ill., a Chicago suburb, is focused on industrial real estate development related to rail, road and port infrastructure. The company owns and manages more than 45 million square feet of industrial real estate in business parks and intermodal centers. CenterPoint was publicly traded until 2006, when it was bought by CalEast Global Logistics, a subsidiary of the California Public Employee Retirement System.
CenterPoint is building 5.8 million square feet of warehouse and distribution space on a 900-acre property in Suffolk. It plans to spend $350 million on the project, which will become one of the biggest warehousing and distribution centers in Hampton Roads.
Doyle asserts that port growth will rely on improved efficiencies, which CenterPoint says it can provide with its vast rail and intermodal assets. He expects the company’s Midwestern connections to increase container volume at the port. “We offer the opportunity for further inland penetration,” says Doyle. “The growth of most major ports in this country is via the inland demographics; otherwise each port would only be as big as its city.”
The Carlyle Group, a Washington, D.C.-based private equity giant, offers a proposal with a similar structure to CenterPoint’s. Carlyle would control the port’s operating rights for 60 years and own VIT. Its payments would include an upfront fee of $500 million to $700 million and profit sharing. The company also would handle all capital improvements. Carlyle’s proposal is vague on what some payments would be, saying further arrangements would be laid out in the detailed phase of the bidding process.
The Carlyle proposal assumes that some VPA operations will be taken over by VIT. At the end of the 60-year agreement, Virginia would still own the marine terminals, but VIT would remain under Carlyle.
Carlyle is one of the world’s biggest private equity firms with more than $84.5 billion under management. It has more than 600 corporate and real estate investments worldwide, including many in Virginia. Last year, the company purchased a majority stake of the U.S. government business of McLean-based Booz Allen Hamilton. Carlyle was part of an investment team that purchased Kinder Morgan, which operates a coal terminal in Newport News.
The company submitted its port offer through a $1.15 billion infrastructure fund, which invests primarily in the U.S. and Canada. The fund’s priorities have been in North America’s freight transportation system, including the purchase of ITS Technologies and Logistics, an intermodal terminal operator. “Carlyle is prepared to deploy its resources and utilize its worldwide network to attract additional customers to the commonwealth, including importers, exporters, manufacturers and distribution centers,” the company said in its proposal.
The third suitor, Seattle-based Carrix Inc., is the largest private rail and marine terminal operator in the world. It owns SSA Marine, which has operations in more than 125 ports. It has East Coast operations at terminals in North Carolina, South Carolina, Georgia and Florida.
Carrix’s proposal is different from the other two. It offers the port the choice of entering a 30-year operations agreement with Carrix or a financial re-engineering arrangement with Goldman Sachs, the New York investment banker, or doing both.
Under an operations agreement, Carrix would share duties with VIT rather than own it. VPA would receive $250 million initially and an estimated $2.4 billion over the life of the agreement. “We are confident that Carrix’s experience and expertise in operating port terminals around the world, including application of Carrix’s information technology, will help VPA and VIT create real operational improvements and value,” Carrix asserts in its proposal.
Carrix would audit VIT’s operations and work to improve operating cash flow. VIT would receive the first $25 million of operating cash flow each year. Above that level, Carrix would get a share of the money. Carrix would handle the port’s capital expenditures, but it would share investments with VIT in the development of Craney Island.
The proposal would allow VPA to consider privatizing port operations at a later time. “We believe privatizing the VPA today would result in a valuation that understates the true potential of the assets,” Carrix said in its proposal.
Any decision on the proposals could take months or years. Now that the proposals have been released, Transportation Secretary Pierce Homer will create an independent review panel made up of at least one VPA board member and affected parties. After considering comments from the public, affected localities, and financial and legal advisers, the panel would recommend whether any of the proposals should be considered by the VPA’s Board of Commissioners.
The board would review the proposals and the panel’s recommendations, and decide whether to request detailed proposals from any of the proposers.
The VPA board, staff and consultants would decide whether to enter into negotiations with a bidder. VPA staff would work with the Office of the Attorney General during negotiations. The VPA Board of Commissioners would execute a contract.
The legislature would have no say in any deal. That concerns Del. Harry R. Purkey, R-Virginia Beach. During the 2008 legislative session, well before CenterPoint submitted its bid, Purkey formed the Joint Subcommittee Studying Public-Private Partnerships Related to Seaports in Virginia.
As the popularity of public-private deals rose around the country, Purkey assumed Virginia eventually would get an offer. “The main reason I created the committee was to preserve the ownership of this incredible asset for the citizens of Virginia while trying to ensure the most effective, competitive method of operations possible,” he says.
A public-private partnership could be a tough sell right now. The state is grappling with spotty performance, billing disputes and delays in its $2.3 billion, 10-year contract with Northrop Grumman to manage information technology. Two legislative panels are investigating the deal. “The purpose of our study from the very beginning was to slow the train down and take a very detailed look at this and make certain that the state of Virginia does not make the same mistakes it did previously,” says Purkey.
Partnerships are common
The Port of Virginia isn’t the only one being courted by private suitors. In fact, local, state and federal agencies look increasingly to the private sector to build large-scale projects.
Public-private agreements already are in place at about 35 ports in the U.S. But the structure of these deals varies, says Manju Chandrasekhar, vice president of economic and business solutions for Halcrow Inc., a global consulting firm that specializes in infrastructure development.
The Maryland Port Authority offers one model. It has financed much of the construction of its terminals but has service contracts with companies to manage port operations. On the other hand, deals at other ports, such as the Port of New York and New Jersey and The Port of Los Angeles, represent the most common public-private agreements. In these cases, the port authority finances and builds major infrastructure, but private companies finance equipment and operate the ports under long-term agreements.
Many ports are turning to the private sector for help. The Maryland Port Authority hopes a company can help it compete for the increased East Coast container traffic expected when expansion of the Panama Canal is completed in 2014. The port recently selected two bidders to submit offers to operate the Port of Baltimore’s Seagirt Marine Terminal. The MPA wants to build a 50-foot berth in time for the Panama Canal’s completion.
Likewise, the Port of Oakland recently picked Ports America Outer Harbor Terminal to manage five berths of its outer harbor in a deal similar to CenterPoint’s. Under the agreement, Ports America will be responsible for port operations, capital improvements and the development of a container terminal on the site.
The Port of Oakland has used many lease agreements in the past, but this is its first long-term concession — a trend in port operations, says John Martin, president of Lancaster, Pa.-based Martin Associates, an economic consulting firm. Under this model, investors often partner with terminal operators and steamship lines to develop a long-term relationship with the port. These deals often include an upfront payment for the right to operate the port. “What it does is bring an infusion of private-sector capital into the port authorities so they don’t have to make the investments themselves,” says Martin.
Public-private partnerships seem to have worked for many ports, but that doesn’t mean that port authorities are any less efficient. “When you look at the West Coast, the steamship lines have been very successful at running ports in modern history,” says Martin. “On the East Coast, Maryland, Virginia, South Carolina and Georgia port authorities have all succeeded very well. I think it’s a matter of access to capital now.”
Could it work in Virginia?
Public-private partnerships seem to provide two major benefits to port authorities: efficiency and an infusion of capital. And one area where Virginia doesn’t shine is its cash-starved, aging transportation system.
Congestion in Hampton Roads has become so unbearable that Norfolk has restricted truck traffic on a major thoroughfare during peak hours. With the recession hammering revenue growth, Virginia can barely afford to maintain roads, much less build new projects. As a result, projects deemed necessary to ease the region’s traffic woes have been put on hold. For example, a third crossing between South Hampton Roads and the Peninsula — which could have a $4.5 billion-price tag — is little more than a dream.
In addition, the private bids come at a time when VPA plans to build a Portsmouth marine terminal, Craney Island, which would double its capacity. Port officials say the project is necessary to meet future demand. “It’s going to be a strong couple of years coming around 2015 after the Panama Canal expansion is completed,” says Joe Harris, spokesman for the VPA. “We can handle that capacity, but only to a point, and we’re going to need that first phase [completed.]”
Under all three proposals, the bidders want to invest jointly in the project. “In my opinion, it’s the largest single project to provide additional capacity that exists anywhere in this country,” says Doyle. “It is as much needed for projected future growth as it is necessary for future efficiencies.”
Beyond providing cash, private companies sometimes can improve a port’s operations. “Some of the benefits are that the procurement schedule is compressed, the private sector is always looking to reduce costs and has a culture of practices that generally result in an increase in revenues versus a decrease in costs,” says Chandrasekhar of Halcrow.
James Koch, a former president of Old Dominion University who now is an economics professor at the school, says another advantage is that private operators can often build projects for less money. In addition, their connections can attract new customers.
Koch says that, while these bids should be considered, the current proposals don’t provide enough details about expected revenues and expenses. To understand the proposals’ value, they have to be compared with the VPA’s projections, he says. “If they think they can lower costs and increase efficiency and increase volume of business over a period of time, I’d like to know what the port authority thinks it would do over a period of time,” says Koch. “If we’re going in favor of one of the operators, we ought to know what we’re giving up.”
Chandrasekhar says it is essential to fully understand the goals of both parties in these deals. “The success of public-private partnerships hinges on how well you define the objectives and how well you structure the sharing of responsibilities and risks.”
In fact, Virginia’s ports already operate under a unique structure. VIT is the nonprofit entity that runs the port — an arrangement that allows it to negotiate with unions. “In essence, it’s a quasi-private sector terminal anyway,” says Martin of Martin Associates. “The question is whether the public can operate the port better than the private sector.”
VIT has helped to make the Port of Virginia what it is today. It has locked up most of its business with 10-year contracts — a sign of confidence from its customers.
“There are half a dozen ways a private operator could make Virginia better off, but I’d hasten to point out that the VPA has a very good reputation around the rest of the U.S.,” says Koch. “As I go around and talk to port operators about the U.S. they think very highly of the VPA [and VIT].”
As state officials examine the companies’ proposals, they will have to ask themselves: Can someone, other than Virginia, make this gem shine brighter?