Commentary: Virginia avoids Siren’s call to privatize port
The March 26 rejection by the Virginia Port Authority Board of Commissioners of private overtures to run all four marine terminals under its control, as well as the inland port in Front Royal, makes sense for the state and for the time being ends a heated political debate surrounding the port’s future.
The board, after almost a year-long process, instead decided to restructure the port authority and the state-owned operating company, Virginia International Terminals. The unsolicited offers from APM Terminals and a consortium led by JP Morgan Chase were tempting — up to $3.1 billion to $3.9 billion of net present value in cash, taxes, annual payments and new infrastructure — but the board agreed with the General Assembly’s watchdog agency that the Port of Virginia could generate better returns for Virginia by remaining under direct state management. The auditors project the port will become profitable again in the next one to two years.
The decision drew almost universal cheers from the trade community in Norfolk, which expressed its relative happiness with the port’s growth and customer service over the years as well as fear that an APMT monopoly would favor sister company Maersk Line over other vessel companies and limit the use of local cargo and support services in the name of efficiency. There was also concern that APMT could help Maersk divert discretionary cargo to help meet volume guarantees in other ports.
Legislative auditors noted in a January report that the Port of Virginia enjoyed high crane productivity, had strengthened its competitiveness by securing long-term contracts from shipping lines, and had capacity to handle future growth.
There was a disconnect all along between the apparent momentum toward granting a multi-decade port concession and efforts underway to correct the VPA’s problems and make the state’s commercial gateway to the world more efficient and transparent. The VPA board had already spent several months intensely reviewing Port of Virginia’s operations when APMT made its unprecedented offer to take over the entire multi-terminal port and was in the process of developing a new structure to reduce costs and run the port more like a business. State lawmakers also strongly opposed any deal and passed legislation to enable the VPA to eliminate redundancy while also increasing its power to act as an economic development agency. They prohibited any sale or lease of the port until a comprehensive study of port competitiveness and operations was conducted and prohibited the state or VPA from considering any future unsolicited bids for the port.
It seemed odd that state officials wouldn’t give one of their economic crown jewels a chance to correct course before outsourcing operations.
To be fair, the bids from private terminal operators put pressure on the VPA and its supporters to follow through with overdue changes that otherwise might have been disregarded. In that regard, the public-private partnership process served a useful purpose. The process also brought attention to the large compensation package for former VIT CEO Joe Dorto, whose base pay was almost 50 percent higher than any other port director in the United States and who received huge bonuses despite operating losses in recent years.
Republican Gov. Bob McDonnell’s instinct was to outsource port operations. He and Sean Connaughton, his secretary of transportation, have been proponents of privatization and tolling new and existing highways to help pay infrastructure upgrades. Since Virginia law allows unsolicited offers for state assets they were required to give them full due diligence, but the process was rushed and public slights about the Port of Virginia’s poor performance in recent years suggested a tilt towards throwing out the existing arrangement in favor of industry experts that supposedly could generate more revenue for the state. And the criticism of the port’s financial difficulties was overblown. The global recession skewed normal cargo activity for three years and VIT revenues were used to cover the expenses of the port authority in addition to port operations. Claims that the state had to help subsidize the port missed the fact that the funds came from the Commonwealth Transportation Board and were for capital investments, not operations.
One of the factors that made the VPA’s performance appear worse than it was during the recession compared to other East Coast ports was that APMT opened a private terminal in Portsmouth that sucked most of the cargo delivered by Evergreen and Maersk away from the VIT terminals. Now, the APMT facility is under the VPA umbrella through a 20-year lease.
McDonnell would have been hard pressed to overturn the VPA’s decision given the widespread opposition and because in 2011 he dismissed all but one of the previous board members in favor of hand-picked replacements with more purported business savvy to oversee the port.
Now, the port authority has to come through on its promise. McDonnell endorsed the VPA board’s decision, but his approval was conditional on making Virginia International Terminals more accountable to the VPA, eliminating duplicative management structures and providing a detailed plan for meeting cargo volume, revenue and cost-reduction projections.
The first order of business is finding a new executive director to lead the VPA. Rodney Oliver has been heading the port on a temporary basis since early last fall when the board parted ways with former chief Jerry Bridges.
In the end, the state-appointed VPA board made the right call. The Port of Virginia has become one of the premier container ports in the nation. There were underlying problems with the governance structure that inhibited the port from maximizing its potential, but once there was a willingness to address them it would have been premature to hand over a major economic engine to a company beholden to its shareholders without first seeing if the fixes worked.
The state legislature didn’t rule out future public-private partnerships, but if considered they will be on the state’s terms and timetable so that the facts can be calmly reviewed.
In November, Virginians will vote for a new governor and in June 2014 the terms of three VPA board members expire. It will be interesting to see if a new governor embraces the current vision for the port. (Eric Kulisch)
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