The Virginia Port Authority Board of Commissioners unanimously voted Tuesday to restructure the state-owned operating company, Virginia International Terminals, instead of outsourcing cargo and vessel-handling operations at the Port of Virginia to private terminal management firms, the VPA said in a statement.
But the issue of whether to give operating rights at the port to a private company will not be fully settled until Virginia Gov. Bob McDonnell weighs in.
State officials spent almost a year evaluating two competing bids to manage and invest in the port for almost five decades. APM Terminals made an unsolicited offer to consolidate operations under its umbrella for about $3.1 billion to $3.9 billion in cash, taxes, annual payments and new infrastructure. A consortium of JP Morgan Chase, Maher Terminals and Spanish port operator Noatum bid about $3.1 billion to retain control over the port complex.
The VPA said the two bids undervalued the current port assets and its revenue potential, the same reasoning Secretary of Transportation Sean Connaughton gave in September 2010 for rejecting three unsolicited proposals from real estate developers and investors to operate three container terminals in the port
McDonnell threw out the previous board in mid-2011 and replaced it with handpicked members after expressing dissatisfaction with the Port of Virginia's performance in attracting container cargo compared to competitors like the Port of Savannah and turning a profit. The unsolicited bid encouraged by the state's Public Private Partnership Act was made by APMT in the midst of an extensive review by the board on how to reduce costs and operate the port more like a business than simply an economic development arm of the government. Concurrent with the bid-review process, state and port officials continued developing structural and leadership reforms, some of which are mandated by recent legislation. The reforms address criticisms that Virginia International Terminals, as a quasi-governmental state corporation with its own center of power did not always answer to the VPA. VIT, for example, will no longer have its own board of directors.
“We are transforming the Port of Virginia to meet a changing and increasingly competitive environment,” Board Chairman William Fralin said in a statement. “We will move forward as a stronger, leaner organization that is better-positioned to serve the ocean carriers and port customers, attract cargo to Virginia and be more accountable to Virginia taxpayers."
The board will convert Virginia International Terminals from a non-stock corporation to a single-member Virginia limited liability corporation under more direct control of the VPA. The new structure will eliminate duplication, such as having dual marketing departments, and increase efficiency, the VPA statement said. The decision means that ownership of APMT's private terminal in Portsmouth, which the VPA is leasing through 2030, will remain with APMT. The terminal operator had offered to transfer ownership of the $550 million facility to the state as part of its offer to operate the port for 48 years.
The board will begin the process of recruiting a permanent executive director and chief commercial officer and expects to have hired new leadership by the fall. The VPA has been managed by Interim Executive Director Rodney Oliver since Jerry Bridges stepped down in September.
“Moving forward, it is imperative that we empower and hold accountable a strong leadership team that can successfully continue our drive toward greater efficiency and reduced costs,” Fralin said. “We want leadership who can deliver premiere port service and sustained cargo and economic growth to Virginia.”
The board will also overhaul its strategic plan to determine ways to ensure the port remains competitive over the long-term. The strategic plan will focus on advancing major capital improvements, reducing debt levels and attracting new distribution centers and manufacturers to help drive increased cargo and economic development across the state, the VPA said.
The board agreed with opponents that the port was too valuable an asset to relinquish and improving the public sector operator would provide greater benefits to the state. Fralin told reporters after the meeting, a video of which is posted on YouTube
by the Virginian-Pilot
newspaper, that after evaluating the proposals on how to increase business "we felt ultimately that the upside of this port is such that we can do that and better operating ourselves. We feel like we are really positioned to really take off here."
Part of the renewed optimism stems from a 9.8 percent increase in container volume at the Port of Virginia in 2012 to 2.1 million TEUs, the second-best throughput in the port's history and the fastest growth rate last year among ports on the East Coast. Volume was only 22,479 TEUs off its high in 2007 before the recession. During the first two months of the year, which are typically slower months for ocean cargo, volume is up 5.4 percent, according to the VPA.
In making its determination, the board said it took into account a number of factors, including:
- The state could generate greater cash flow by using a public sector operator with a new business model than by accepting the deals from APMT and Virginia Port Partners.
- Virginia International Terminals could generate comparable revenues and cargo volumes as a private concession.
- Virginia International Terminals has the ability to generate sufficient revenue over time to allow the VPA to service its existing debt and fund the capital expenditures described in the VPA’s updated 2040 master plan.
- While the private proposals present an opportunity for the VPA to acquire APMT’s marine terminal in Portsmouth, the VPA already has control of this facility until 2030 through a lease between the VPA and APMT.
- Cargo volumes at the Port of Virginia are beginning to show improvement following several years of slow growth. Calendar year 2012 was the port’s second best year on record in terms of cargo volume and the port is off to a strong start in 2013. Given the port’s improving market outlook, the Board does not believe it is beneficial to implement a concession at this time.
"Given the port’s natural and infrastructure advantages and position on the East Coast, combined with the future prospects of significant changes in shipping trends as a result of the Panama Canal Expansion, the increased use of the Suez Canal, and the move to substantially larger cargo vessels, now is not the optimal time to concession operations at the Port of Virginia," the board said.
The vote came as a relief to most local officials, port users and cargo interests in the Norfolk area who worried that a private operator's focus on the bottom line would not always be compatible with the state's interest of growing jobs and the economy or with competitors that rely on the port. Service providers expressed concern that APMT, in particular, might favor some companies over others and jeopardize their business.
"We were pleased by the action taken by the VPA board. We're relieved that this process is behind us. And we look forward to getting our port moving ahead," Arthur Moye Jr., executive vice president of the Virginia Maritime Association, said when contacted by phone in his office.
"I think this whole process has not been healthy for our port from the standpoint of port customers and potential port customers having the uncertainty about who would operate the port and have an effect on their business here," he said.
But the fight to keep a familiar business model may not be over. There have not been any indications that Gov. McDonnell intends to override the VPA board, but administration officials have argued that the final decision rests with the governor despite an opinion from Attorney General Kenneth Cuccinelli that the VPA is the responsible authority on privatization. They have characterized the VPA's role as one of making a recommendation to the governor.
"In the coming days, the Secretary of Transportation and I intend to review the letters and materials sent to me by VPA Chairman Fralin regarding the board's action. After that review is completed, I will issue a statement regarding my position on the board's actions," McDonnell said in a statement Tuesday afternoon.
"I appointed a board with the experience and ability to review and make an independent assessment of the merits of the pending proposals. The board has now made that assessment. I created a new board with one mission: make the port operate more efficiently and profitably, and make it the best on the East Coast.
"The board has completed significant operational and management improvements in the port in recent months. The Secretary of Transportation has worked closely with the board to enable them the flexibility, information, and support to improve business operations, enhance marketing and attract new investments. This as already resulted in increases in port volume. . . .
"We all share the goal of ensuring that taxpayers receive the best possible return on investment in Virginia's world-class port facilities, and that the Port of Virginia assumes its place among the top shipping facilities in the country," McDonnell said.
In a statement posted on APMT's Web site, John Crowley, senior vice president for APM Terminals Americas said the company "is disappointed with the decision of the VPA Board of Commissioners" and "will have no additional comment while the decision is reviewed under the Public-Private Transportation Act process."
Although the VPA is the ostensible decision-making body, the Secretary of Transportation and the state's Office of Transportation Public-Private Partnerships have been the lead bodies coordinating the entire process and primary points of contact for the private bidders. - Eric Kulisch