Reason Foundation

http://reason.org
http://reason.org/news/show/detailing-foreign-management-o-1

Reason Foundation

Detailing Foreign Management of U.S. Infrastructure

Numerous U.S. ports, airports, roads, water facilities already run by foreign businesses

Leonard Gilroy and Adam Summers
March 15, 2006

The recent Dubai Ports controversy launched a firestorm over what kinds of infrastructure critical to national security should be privately operated, particularly by foreign firms. A recent USA Today/CNN/Gallup poll showed that around 66 percent of Americans opposed the proposed transfer of six major U.S. port operations to Dubai Ports World, a United Arab Emirates firm, viewing the deal as a national security threat.

It is interesting how foreign involvement in international ocean-borne shipping has generated so much hostility, given that we have long since come to rely on products made by foreign companies that much more directly affect our health and daily lives. Every day, Americans drive foreign cars, drink water distributed by foreign-owned water systems, strap our children into foreign-made car seats, and take medicines made by companies from around the world.

Presumably, most people's fears regarding the port controversy are based on two prevalent myths: (1) there is a greater risk of a security breach when American infrastructure assets are owned by foreigners, and (2) under such a scenario, foreign companies are responsible for the security of critical assets.

However, what was often lost in the ports debate was that the Dubai firm was not "buying" the port facilities themselves; they would have simply leased certain terminals at the ports and provided management and logistics services. The ownership of the ports would have remained in domestic hands. In addition, foreign firms are subject to the same legal and regulatory security requirements as any domestic firm or public agency. In the ports deal, the U.S. Coast Guard and the U.S. Bureau of Customs and Border Protection—not Dubai—would have had the primary responsibility for port security.

Setting aside the hyperbole and fears generated during the ports debate, the controversy presents an opportunity to provide a sense of perspective on the foreign management of domestic infrastructure and related national security concerns.

Reality Check: Foreign Firms Already Manage Critical Infrastructure

Many of the critical infrastructure assets that Americans rely on in their everyday lives—including such important assets as airports, highways, and water systems—are managed by private, foreign companies.

Consider the example of Indiana, in America's heartland. Every day, citizens in Indianapolis drink and brush their teeth with tap water provided through the nation's largest public-private water partnership with a domestic subsidiary of a French-owned company, Veolia. Thousands of Hoosiers catch flights at Indianapolis International Airport, an airport entirely managed by a subsidiary of a British company, BAA plc. And families traveling through northern Indiana may choose to drive on the Indiana Toll Road, which may soon be leased to a consortium that includes Spanish and Australian firms.

Indiana is not unique. Here's some perspective on the foreign operation of infrastructure assets and related security issues throughout the U.S.

Protectionist Legislation Introduced

Amid the Dubai Ports hysteria, politicians lined up to take advantage of public fears by introducing a flurry of protectionist bills. The "National Defense Critical Infrastructure Protection Act of 2006" (H.R. 4881), introduced by Rep. Duncan Hunter (R-CA), chairman of the House Armed Services Committee, is one such piece of legislation. The bill would prevent non-U.S. companies from owning, managing, or operating any system or asset that is included in a list of critical infrastructure to be prepared by the Departments of Defense and Homeland Security.

Exceptions may be made if certain officers and directors are American citizens and have been "approved" by the government, a majority of the company's shares are owned by Americans, and other requisite hoops have been jumped through. Moreover, the aforementioned critical infrastructure list would include "any system or asset, whether physical or virtual, that is so vital to the United States that the incapacity or destruction of such system or asset would have a debilitating effect on national security, on national economic security, on national public health or safety, or on any combination of those matters." In other words, the government would have the power to prohibit foreign ownership of pretty much anything it wants.

Free Trade, or Protectionism Debunked

There have been a number of attempted justifications for trade protectionism through the years. Most have focused on the myth that trade impoverishes one party or the other. Of course, free trade enriches both parties to the transaction, or else we would all grow our own food, build our own cars, and make our own computers from scratch. The most recent attack, thrown about in the wake of the Dubai Ports deal, is that it can threaten national security. Desperate cries of "national security" have robbed Americans of many other rights and liberties already.

Is free enterprise next?

The nationalism and protectionism at the heart of the discontent over the Dubai Ports deal is the same kind of thinking that leads people to conclude that the entire agricultural industry must be home-grown and that we must harvest our own food for national security. Despite significant protectionist barriers in the U.S. and elsewhere, Americans nonetheless are perfectly safe in eating food from all over the world, abundantly available in grocery stores and restaurants across the nation.

Competition, whether local or international, leads to a greater variety and quality of goods and services (thus increasing consumer choice) and lower prices for consumers. This competition should be embraced rather than stifled and micromanaged.

Of course, for politicians and government bureaucrats, it is not about economic efficiency or consumer welfare, it is about control. Politicians have an interest in perpetuating an "us-versus-them" attitude because it allows them to advance agendas and score political points.

The ubiquitous "them" is ever-changing, shifting with the fears and politics of the day. During the 1980s, it was the Japanese who were "taking over America" as Japanese companies made significant investments in the United States. In the late 1990s, China Ocean Shipping Co. (COSCO) wanted to build a $200 million container terminal at the Port of Long Beach until there was a public outcry and Congress passed a bill scuttling the plans. After a terminal at the port was later vacated by another tenant, however, Cosco was able to take it over and operate at Long Beach. More recently, there was similar hysteria when China National Offshore Oil Corp.'s subsidiary, CNOOC Ltd., made a bid to buy Unocal. Now that Arabs are the political boogeyman of the moment, the Dubai Ports deal has attracted the wrath of the powers that be.

The Dubai Ports Deal and the United Arab Emirates

Protectionist fears of the Dubai Ports World deal are even more ridiculous when one considers the nature of Dubai Ports and the U.A.E. Fears of Arab terrorists infiltrating U.A.E.-owned businesses to launch attacks on America are unfounded and borne out of fear and a lack of knowledge about the U.A.E. According to the Heritage Foundation's 2006 Index of Economic Freedom, the U.A.E. rates "mostly free," placing slightly below Mexico and Peru; slightly above Bolivia, Malaysia, and Thailand; and significantly higher than "mostly unfree" nations such as Russia, India, Turkey, Argentina, or "War on Terror" partner Pakistan.

Add to this the fact that, according to the State Department, "The U.A.E. has been a key partner in the war on terror after September 11, 2001." (Tellingly, the U.S. Navy has no qualms about using the U.A.E. port of Jebel Ali, also operated by Dubai Ports World, for warships such as the USS John F. Kennedy.) The point is that the U.A.E. is a relatively economically liberalized nation—and one of the most liberal, pro-Western states in general in the region�run by wealthy businessmen not intent on destroying relations with a significant trading partner.

Incentives Matter

Even if a foreign company was not from a nation on such good terms with the U.S. as the U.A.E., this does not mean there should be cause for alarm. Businesses exist to make money in exchange for the goods and services they provide. Allowing terrorists to compromise security and attack your customer base is simply not good business practice. If there is a possibility of such an occurrence, businesses have a strong incentive to do whatever is necessary to prevent it from happening.

This becomes a little more complicated when the business is not entirely private, but owned (in part or total) by a government. In the case of Dubai Ports World, the company still operates in a very competitive market and its efficiency has led to a history of growth and success. The successful completion of the purchase of P&O would have made it the third-largest port operator in the world, with 51 terminals in 30 countries. Thus, there should have been little, if any, cause for concern.

Conclusion

There has been a great deal of paranoia surrounding the Dubai Ports deal. Contrary to public fears, federal and local government agencies would still have been in charge of enforcing security measures; the company would merely operate certain terminals at the ports, not own the ports themselves; and the people operating the ports would be substantially the same. The vast majority of port terminals in America are already operated by foreign businesses.

Private companies, even foreign-owned companies, have successfully owned and operated numerous "critical infrastructure" systems and assets in the United States—from airports to highways to water and wastewater plants—for many years. The country has managed to survive, indeed thrive, under these arrangements because these companies have a strong interest in keeping their customers healthy and happy and maintaining their business.


Leonard Gilroy is Director of Government Reform

Adam Summers is Senior Policy Analyst


Print This