Emerging Market for Port Privatization Catching Policymaker Interest

Today it’s South Carolina, but you can expect to see more stories like this in coming months and years. According to the Charleston Regional Business Journal, South Carolina State Senator Glenn McConnell has asked the State Ports Authority (SPA) to study the possibility of turning over some or all of the port’s terminal operations to private sector investor-operators:

Those closely involved in the maritime community wonder what’s driving McConnell and whether this suggests growing support for reconsidering South Carolina’s port model. The past few years have been hard on the SPA. Although it has not released final import-export numbers for the fiscal year that ended June 30, the authority expects to post a volume drop of about 10% over the previous year. Imports are down nationally, the weakening U.S. economy to blame, but the Port of Charleston’s business decline in the early part of this year was “more severe than the national average,” Groseclose told the legislative oversight committee. Further, after years of ranking as the third-busiest East Coast port and besting the Port of Savannah, its chief rival, Charleston has slipped behind both Virginia and Georgia into the No. 4 slot. “Obviously the port authority is against it, so we have a real political fight, but the winds are changing just because of pure economics,” said Laddie Howard, attorney and lobbyist for International Longshoremen’s Association Local 1422, which has long fought for a privatization business model and represents about 820 dock workers. Two other local ILA chapters, 1422A and 1771, represent mechanics and clerks and checkers.

While unusual in some areas of public policy, it should come as no surprise that some local unions are advocating the privatization of ports. Just as we’ve seen with several recent toll road privatization initiatives across the country, unions recognize that increasing the pools of money available for infrastructure and bringing in private sector operational and management expertise simply increases the size of the pie for everyone.

Ken Riley, president of the local ILA chapter, said he hopes the discussion is not clouded by the issue of unionization. That always bubbles up in this conversation, but economics should remain central to the debate, Riley said. Private companies that operate ports in other states have years of experience running terminals around the globe, he said, giving them an expansive network from which to obtain business. The SPA is clearly struggling, he said, judging from its business decline. “I believe this is the last frontier and the last opportunity to get it right and to bring in and attract prime capital to get back in the game,” Riley said.

He’s right. Like toll roads and airports, there is a robust history of international experience with port privatization and privately-financed port expansion. However, in the U.S. most major ports are still owned by governments, and most major improvements and expansion of physical port capacity and their intermodal connectors are financed by taxpayers through local bond issues. And like highway and air transportation, U.S. ports have become increasingly congested and are likely to require significant capacity expansion to handle projected future demand, so the looming investment needs are significant. Reason’s Annual Privatization Report 2008 includes an overview of the emerging U.S. market for public-private partnerships in port infrastructure by transportation expert and Innovation Briefs editor Ken Orski. Orski writes:

A relatively new trend that may profoundly affect the future of port expansion is the growing willingness of private equity markets to invest in port facilities. For example, last February, the AIG Global Investment Group bought long-term leases to the Port of Newark terminal. The investment division of Deutsche Bank has bought Maher Terminals, the company that runs operations at the Port of Elizabeth in New Jersey and the Port of Prince Rupert in British Columbia. And the Ontario Teachers Pension Fund has taken over the lease from a shipping conglomerate to operate a terminal on Staten Island, N.Y. In each case, the private investors may be expected to inject new capital to improve the facilities and make them more productive. Even larger initiatives are in the making. The Port of New Orleans is inviting the private sector to participate in a two-billion dollar program of facilities expansion including a new container terminal and a new cruise ship terminal. The Port of Portland or is reviewing the qualifications of 10 potential private bidders for its container terminal, the first long-term concession of an existing U.S. seaport facility. The Port of Corpus Christi is proposing to build new terminal facilities with the help of private capital. And the Commonwealth of Virginia has established a commission to consider privatizing the public Virginia Port Authority. Just as in the case of toll roads, the global capital markets have come to recognize that ports are a sound investment. Institutional investors with long-term investment horizons, such as pension funds, look upon these assets as a safe investment that offers future returns comparable to those from fixed income and real estate. A growing scarcity of deep water port capacity and environmental obstacles to building new “greenfield” ports have enhanced the value of existing port facilities and raised expectations of a higher return on invested capital. Additionally, experts predict that the widening of the Panama Canal, which will accommodate larger (8000+ TEU) vessels, may lead to a dramatic growth of Gulf Coast and Atlantic ports and enhance their profitability thus making them attractive targets for private investment.

For more on public-private partnerships in seaports, see the “Emerging Issues” section of Reason’s Annual Privatization Report 2008. Reason’s full body of transportation policy research and commentary is here.