Port Privatization Schizophrenia

I’m struggling to sort out this Daily Press editorial on port privatization in Virginia. It starts by saying don’t sell or lease the ports:

Virginia’s ports generate billions of dollars in income and hundreds of thousands of jobs across the state. They are too vital to the state’s prosperity to take chances with. For that reason, a new legislative study panel looking at the idea of privatizing port operations should take that extreme option ââ?¬â?? selling the ports ââ?¬â?? off the table. Likewise its cousin, a long-term lease of the ports, which include marine terminals in Norfolk, Newport News and Portsmouth.

But then it goes on to say that some privatization may be a good thing. For instance, privatizing port terminal operations (loading and unloading cargo ships):

And while government operations aren’t necessarily inefficient, private operations have more impetus to be efficient. It’s a matter of being accountable to shareholders, among other things. If a private operator tweaked the ports’ efficiency, that could have two happy outcomes: It could generate more income to fund port expansion plans, and it might strengthen Virginia’s standing in a business that’s very competitive.

That part makes sense. There’s a long-track record in successful privatized terminal operations. And as we saw when the Ontario Teachers Pension Fund took over the lease to operate a terminal on Staten Island, or when Deutsche Bank bought the firm running operations at NJ’s Port of Elizabeth and British Columbia’s Port of Prince Rupert, private equity investors are seeking opportunities to inject new capital to improve port facilities and make them more productive. Then the DP offers another suggestion:

Bringing in a private partner to help develop and run the huge expansion the Port Authority is planning at Craney Island. With the cost estimated at more than $2 billion, it will help to have another checkbook to draw on. A partnership might also bring in, or free up, some money to help with the huge cost of the infrastructure requirements, the roads, bridge, tunnels and rail to accommodate the additional traffic into and out of the port.

Another solid idea—in fact, the Port of New Orleans and Port of Corpus Christi are both looking to ink similar deals involving private financing. Here’s where things go south:

Developing a partnership has a lot of advantages over handing over the ports to private ownership or a long-term lease. Because the state’s goal in running them isn’t just to maximize the bottom line, which is what private business is all about. It’s about maximizing economic development for jobs and tax revenue, not just around the terminals but in all the industries and communities that are fed by port business.

Three fatal flaws to this analysis: 1) The DP apparently doesn’t understand that the only way you’d likely attract private equity investment for a $2 billion Carney Island facility, for example, is through a long-term concession (lease). Just as we’ve seen with toll roads, institutional investors such as pension funds and infrastructure investment funds are looking at port assets as a safe investment offering steady future returns over a long investment horizon (30+ years). This is particularly relevant with new, unproven greenfield facilities like Carney. Private investors that would pony up $2 billion at the start to build the facility would generally need decades to recoup that kind of investment through anticipated revenues, and a long-term concession is the mechanism for doing that. 2) The DP presents a false choice between companies looking out for the bottom line and pols looking out for loftier concerns. The reality is that a long-term lease is a contract—nothing more, nothing less. If there’s a public interest concern to be addressed, then you structure the contract to address it. Policymakers have the discretion—really more of an obligation—to structure any lease around a set of goals that it wants to achieve, design the initiative and the competition to achieve them, and then monitor the contract to make sure the goals are achieved. That’s the whole beauty of the performance-based concession contract—policymakers actually gain control rather than lose it. 3) The DP acknowledges that the “ports are the draw that is bringing warehouses and distribution centers ââ?¬â?? again, jobs and tax revenue ââ?¬â?? to Suffolk, Hampton and James City and Isle of Wight counties.” And earlier it said that privatizing terminal operations “could generate more income to fund port expansion plans, and it might strengthen Virginia’s standing in a business that’s very competitive.” So then why do they paradoxically suggest here that port-related economic development would somehow be threatened if the state weren’t running the ports? Which is it? Wouldn’t a successful rising tide (improved, more competitive ports) life all boats (economic development), regardless of whether the state’s at the helm? It seems to me that this editorial is the byproduct of a fundamental misunderstanding the emerging wave of private infrastructure financing. The editors just aren’t making the connection that the privatization tools they suggest taking off the table are precisely those that will get you closest to achieving the desired outcomes. These guys would be better off thinking of public-private partnerships as a spectrum of options. You have everything from simple operational contracts to full blown concessions and all points in between. Depending on the particular need, the choice sets will be different—different tools are appropriate for different jobs. The last thing you want to do is suggest that government hamstring itself by taking options off the table for no discernible, substantive purpose. Especially at a time when doing more with less requires having all viable options at your fingertips. More on ports privatization here. Reason’s Annual Privatization Report 2008 Reason’s Privatization Research and Commentary