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Port Privatization: Virginia has Another Choice

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This spring, the Commonwealth will make an important decision on how to move forward with the public-private partnership proposals it has received to privatize The Port of Virginia. Virginia has two well-qualified port operators interested in bringing their expertise and capital to Virginia in return for full business and operational control of the port, as well as the long term rights to the future profits it generates.

However, Virginia may not need to fully relinquish its control in order to meet its objectives.

In town halls, General Assembly rooms and watering holes across the Commonwealth there is a healthy and vibrant debate occurring on which choice makes the most sense for Virginia. The Commonwealth has at least one additional option that isn’t being discussed. There is a solution that falls squarely between the “do nothing” alternative and the “full privatization” options currently being contemplated. And it is a solution that allows Virginia to retain complete control over the assets, operations and revenues of the Port of Virginia.

The Port of Virginia has the opportunity to partner with a private sector port operator, under a short term contract, solely to focus on improving the operations of the port. This separates the “expertise” from the “capital” components of the two proposals already received.

Rather than completely hand over operations to a third party, the Commonwealth would partner with a private sector firm that has extensive port operations experience. Together, they would draw upon their combined global best practices to deliver actionable steps to improve the efficiency and operations at the port. This relationship would be under a short term (5-year) contract structured to properly align the public and private sector interests.

This alignment of interests is critical and can be realized by financially incentivizing the private sector partner by a sharing in the increased operating profits as the port operations improve. The partner would be paid an annual base “fee” under this five year agreement. In addition, the Commonwealth and the partner would establish a baseline of current port operating profits. Insofar as the private sector partner’s suggestions result in improvements to the Port’s bottom line, there would be a profit sharing component for the partner. Ideally, this profit sharing percentage would be tiered so that the private sector’s profit sharing percentage increases as the operating profit levels increase. As the Commonwealth makes more money, so would the private sector partner.

The benefits of this partnership structure are multiple and accomplish many of the same objectives for the Commonwealth as a full privatization.

First, it allows the Commonwealth to be proactive in improving the operations of the port. The Port, the McDonnell administration and JLARC agree that while the port has achieved some impressive successes, there is still room for operational improvements. This option enhances the existing expertise of the Port with the global best practices that a private sector partner can bring.
Second, the partnership solution allows Virginia to retain complete control over one of its most important assets. Numerous reports and studies have sought to quantify just how impactful the Port of Virginia is to the state. Regardless of which report methodology you subscribe to, the Port of Virginia is a major economic and employment contributor to the Commonwealth.
This partnership solution allows Virginia to receive suggestions from its private sector partner, but have final say over whether they are implemented and to what degree. In essence, the Commonwealth retains “veto power” in implementing changes at the Port that might have unintended consequences in other regions of the state or components of the state economy. The benefits that the Port generates are too widespread and important for the Commonwealth not to have a seat at the table – preferably at the head – when changes are proposed.

Third, the Panama Canal, the Panama Canal, the Panama Canal. Did I mention the Panama Canal? In 2015, just two short years from now, the Panama Canal expansion should be complete, allowing dramatically larger cargo ships to cross the Panamanian isthmus and serve East Coast ports.

The expansion of the Panama Canal has the potential to bring with it a generational change in the way cargo reaches the East Coast. Currently, the Port of Virginia is the only East Coast facility with the infrastructure, channel depth and air draft to handle these huge vessels. It is ideally positioned to be THE major beneficiary of the canal expansion.

While there are certainly efficiency improvements to be made at the port to improve the processing required to load and unload one of these behemoth ships, there is also a tremendous amount of profit to be made from the canal expansion. It isn’t in the Commonwealth’s best interest to privatize those profits without first seeing just how large the impact will be.

Finally, this structure allows the Commonwealth time to realize the benefits of some of the important changes they have already enacted. As recently as this month, the Port of Virginia announced a major reorganization of their operations. These changes have the potential to significantly improve many of the concerns that the Commonwealth seeks to address through a privatization of the port. This solution would afford the Commonwealth a five year window to see the benefits of their re-organizational efforts, as well as the impending changes to the global supply chain.

What this solution does not accomplish is to provide the “capital” component for the port. The United States is fortunate to have an active municipal bond market and tax-exempt public capital will almost always be more cost efficient than comparable private sector capital.

In addition, the Port of Virginia is in the enviable position of having sufficient excess capacity to serve future growth. Other than potentially addressing current debt, the port does not have major near-term capital requirements. By focusing on improving the port operations in the near-term, the Commonwealth will be in a better financial position to issue its own, more cost efficient debt when it is time to do so.

As Virginia faces this once in a generation opportunity to improve the operations at the Port of Virginia, one of its most important assets, it is critical to consider ALL the potential options.

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