Skip to content

A Case for Port Privatization — Part I

Share this Story on Facebook, X, Text, LinkedIn, Gmail, Yahoo Mail, or Outlook

Privately owned APM Terminals provides Virginia’s ports something that the state cannot: super-efficient container yards and the ability to expand capacity without incurring $2 billion in debt.

It’s easy to get crane envy when you’re in the port business. The bigger and more modern the crane, the faster it can unload cargo containers from ships at dock. The hoists are huge, they’re painted bright colors and they are highly visible. But there’s more to creating a quick turn-around time in a port than installing the latest, greatest cranes. It is just as critical to sort the containers inside the terminal in order to load them expeditiously, whether onto trucks, trains or ships.

That’s a task at which APM Terminals excels. The patented processes that make APM’s Portsmouth facility hyper-efficient are invisible to the untrained eye — the container yard, where containers are stacked four and five high, looks much like that of any other port. What sets the yard apart is the way in which the computer-guided gantries re-stack the RFID-tagged containers so that the first to be loaded is the first to be accessed.

The company’sPortsmouthcomplex is a “one-of-a-kind operation in theWestern Hemisphere,” says John Crowley, senior vice president for law and regulatory affairs for APM Terminal’s America Region. “It’s so much more than the cranes. It’s the ability to handle a densified container yard.”

It is difficult to fully understand the controversy swirling around APM Terminals’ proposal to consolidate and leaseVirginia’s public and private ports without grasping the key role of that unsung workhorse of modern-day ports, the container yard.
In 2010 APM Terminals entered into a deal to lease its Portsmouth operation, completed three years before at a cost of $540 million, to the state. The VPA had long-term contracts that guaranteed a strong flow of business through its Portsmouth terminal but APM, slammed by the recession, was operating at 40% capacity. By absorbing APM into its system, Crowley explains, the port authority was able to shift much of its container traffic to the more efficient terminal — a win-win arrangement.

That lease lasts until 2030. Now, with the economy recovering and the prospect for a surge in container traffic from aPanama Canalexpansion scheduled for 2015, the Netherlands-based APM Terminals proposes a different arrangement: It wants to give its state-of-the-art terminal to the state, and then lease back the whole kit and kaboodle for 48 years.

Under that proposal, APM Terminals would pay fixed concession payments totaling between $1.1 billion and $1.3 billion (adjusted for net present value). The company would pay the state an additional $380-$600 million in revenue sharing contingent upon cargo growth, commit to making $650-$830 million in capital investments, and pay $300-$450 million in state and local taxes. All told, the company contends, the package has a net present value to Virginia and Hampton Roads localities of between $3.1 billion and $3.9 billion.

Upon receiving APM’s unsolicited proposal in April, the McDonnell administration sought alternatives. It received three: from Deutsche Bank/RREEF Intrastructure, Virginia International Terminals (the operating arm of the Virginia Port Authority) and the Carlyle Group, which has since withdrawn its offer. The Office of Public Private Partnerships, under the Secretary of Transportation, will evaluate the three remaining proposals.

Many members of the Hampton Roads maritime community are skeptical of the APM deal. What could a private owner do, they wonder, to stimulate growth and investment in the port that the state-owned Virginia Port Authority couldn’t? What efficiencies could APM Terminals bring to bear that would offset the private-sector need to generate a profit? And what assurances do Virginians have the APM Terminals, an affiliate of the Maersk shipping line and operator of 63 ports around the world, won’t shift cargo to other ports, if it proves advantageous to do so?

In an extended interview with Bacon’s Rebellion, John Crowley and Adam Beauchamp, the executive in charge of strategy and corporate development for APM’sAmericaoperations, laid out their vision for the future ofVirginia’s maritime ports and why they think their proposal is the best one.

Poor port performance
“ThePortofVirginiastands at a crossroads that demands immediate attention,” said Crowley in testimony two weeks ago to the state Senate Subcommittees on Transportation, Economic Development and Natural Resources. While Virginia ports enjoy the advantage of the deepest channels on the U.S. East Coast, that natural benefit is being eroded by competing ports — New York, Savannah and Charleston most notably — which are making significant capital improvements.

Volume fell dramatically at allU.S.ports during the 2007-2008 recession but it has been slower to rebound at Hampton Roads. Volume remains 2% below 2008 levels while New York/New Jersey has surged ahead. “We can’t be lulled into thinking we’re doing good enough,”Crowleytestified. “We are not. The truth is that cargo volumes at the Port of Virginia remain behind — not ahead — of past performance and clearly behind volumes at competing ports.”
Why haveVirginia’s ports fallen behind? That’s a delicate question for APM to answer without risk of alienating its partners at Virginia International Terminals (VIT). “It’s challenging for us to speculate from the outside,” saysCrowley. But he is willing to speak in general terms. While Hampton Roads enjoys great geographical access, he explains, “the commonwealth was struggling with an inefficient facility platform inPortsmouth.” VPA’sPortsmouthterminal had less depth along the dock and a less efficient geographic footprint for moving cargo around. “It has not modernized its ability to move containers.”
From a broader perspective, saysCrowley,Virginiahas failed to keep pace with investment. “WhileVirginiawas resting on the advantages of great port access, with channels and depth, other ports were putting money into deepening channels.”Georgiaalso was encouraging business to invest in and around thePortofSavannah’s terminals.
Virginianeeds a similar model, saysCrowley, in which the ports address infrastructure issues inside their terminals while the state focuses on the infrastructure on the outside — “bringing light industries and value-added businesses to the region that draw in more cargo. … If we establish the local economy, the manufacturing and value-added sites here, we’re building the anchor for cargo coming in.”
James V. Koch, an economist and former president ofOldDominionUniversity, offers a similar analysis. In an August presentation, he gave three reasons forVirginia’s faltering competitiveness.

  • Strategic positioning. While Virginia Port Authority signed agreements with shipping lines,Savannah worked on lining up producers and distributors. The result:Savannah has twice as many captive shippers in the form of Wal-Mart, Costco and other big-box distributors. “Retrospectively, their strategy has worked better than ours.”
  • Infrastructure investments. Other states, includingGeorgia, have invested more aggressively in infrastructure related to their ports. So many East Coast ports are deepening their harbors that Hampton Roads could lose its greatest competitive edge, its monopoly on 50-foot channels, by 2018.
  • Slower economic development. The Southeast region of theU.S. has grown more rapidly than the Mid-Atlantic. One reason is that other states have been more generous with incentives to attract business.

APM has successfully pursued the approach of tying cargo growth to logistical and industrial investment at locations fromMonrovia,Liberia, toGothenburg,Sweden, says Beauchamp. “Everybody has been saying that APM will push cargo to other markets and adversely favor competition in favor of their sister company.” The evidence, he says, suggests otherwise.
(This important analysis of the Port privatization will continue in the next issue of the Jefferson Policy Journal on November 29, 2012)

Email this author

Share this Story on Facebook, X, Text, LinkedIn, Gmail, Yahoo Mail, or Outlook

Join Our Email List

Sign me up for:
This field is for validation purposes and should be left unchanged.