APM's Case for Port Privatization

APM Terminal, PortsmouthPrivately 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.

by James A. Bacon

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's Portsmouth complex is a "one-of-a-kind operation in the Western 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 lease Virginia'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 a Panama Canal expansion 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's America operations, laid out their vision for the future of Virginia's maritime ports and why they think their proposal is the best one.

Poor port performance

"The Port of Virginia stands 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.

port utilizationVolume fell dramatically at all U.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," Crowley testified. "We are not. The truth is that cargo volumes at the Port of Virgina remain behind -- not ahead -- of past performance and clearly behind volumes at competing ports."

Why have Virginia'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," says Crowley. 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 in Portsmouth." VPA's Portsmouth terminal 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, says Crowley, Virginia has failed to keep pace with investment. "While Virginia was resting on the advantages of great port access, with channels and depth, other ports were putting money into deepening channels." Georgia also was encouraging business to invest in and around the Port of Savannah's terminals.

Virginia needs a similar model, says Crowley, 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 of Old Dominion University, offers a similar analysis. In an August presentation, he gave three reasons for Virginia'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, including Georgia, 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 the U.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 from Monrovia, Liberia, to Gothenburg, 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.

A new model

Privatization would be one way to describe APM Terminal's proposal to unify Virginia's ports, but that misses the larger point, says Crowley. It's about moving to a different business model.

Let the private sector do what it does best, raising capital to invest in expansion and efficiency, and let the public sector do what it does best, economic development. As operator of more than 60 terminals around the world, APM can draw upon top talent and best practices to increase efficiencies. Additionally, APM can tap its balance sheet to raise capital, which Virginia is hard-pressed to do.

For starters, Virginia International Terminals is bleeding cash. With operating revenue of $94 million, VIT pays $50 million in debt service, $38 million in rent for APM Terminals and $35 million in operating costs. The operating loss will amount to $29 million and $25 million in FY 2013. The financial picture gets increasingly bleak through 2030 when the APM lease expires. Says Crowley: When the lease expires, $1.2 in projected future cash flows will disappear.

In the face of weak financial performance, the VPA has not pursued any expansion option other than Craney Island. Built on land created by dredge fill, Craney Island would cost $2 billion to develop.

"The state does not have that kind of money," says Crowley. The commonwealth has maxxed out its long-term debt for now, and its ability to issue new debt in the future will be constrained. The state will not be able to borrow $2 billion for Craney Island without sacrificing debt capacity for other piorities such as roads, bridges, mass transit, higher education or mental health.

By contrast, APM Terminals will be able to expand port capacity by increasing throughput through existing terminals. Executing Phase 2 of APM's Portsmouth facility will cost roughly $300 million. The proposal also contemplates expanding capacity in the Norfolk terminals by employing the same kind of container-yard rationalization demonstrated in Portsmouth. All told, APM can accommodate the next five decades of growth for about one-third of the capital cost of developing Craney Island.

But the decision must be made soon, Crowley argues. While the ports are operating at 60% capacity today, Virginia needs to have its expansion plans in place by the time the ports reach 80% capacity. That provides enough slack in the system to continue to serve shippers during the construction phase. "You need to assure customers there's enough capacity for the future."

Even though Virginia ports are trending below their potential, Crowley is confident that growth is coming. Hampton Roads is one of only a few East Coast ports in a position to gain traffic from the widening of the Panama Canal. "It's not like a spigot will turn on," he explains. But Virginia ports should see incremental growth over several years. "Now is the time we need to decide about construction of new capacity."

A good deal, but it could be better

According to Koch's analysis, APM Terminals' proposal is "financially superior" to current VPA operations. How much superior depends upon the "discount rate" used to calculate the net present value of the cash thrown off by port operations. ("Net present value" values a dollar earned today more than a dollar earned 40 years from now on the grounds that today's dollar can be put to work and earn more money over the next four decades.) If the state discounts future incomes and costs at 5.0% annually, as APM has done, then the value of its offer to the commonwealth is $4.3 billion, significantly more than the $2.3 billion that the current enterprise is worth.

However, Koch said, the value of the ports to APM Terminals is $6.4 billion. Thus, while a deal with APM is more advantageous than sticking to the status quo, he added, "my analysis suggests that there is room for the commonwealth to negotiate a more attractive arrangement."

Koch did not try to calculate the value of economic development stimulated by the new model, which, in Crowley's vision, would allow the state to concentrate on "investing outside the gate": building logistics parks, warehouse distribution centers and other infrastructure to capture corporate logistical and industrial development.

Crowley disputes Koch's estimate of the deals' value to APM, arguing that the economics professor failed to deduce capital investment, concession payments and tax payments that represent cash out of AMPT's pocket.

Regardless, the McDonnell administration hopes to strike an economic development bonanza. Restructuring the port ownership is one part of the plan; building the U.S. 460 Connector, a $1.4 billion Interstate-quality highway between Suffolk and Petersburg, is the other. That highway would provide a south-of-the-James highway alternative to Interstate 64 for port traffic to reach the national interstate network. The state would fund the project through nearly $1.18 billion in state and Virginia Port Authority funds and $216 million in toll-backed bonds.

According to analysis conducted by Chmura Economics & Analytics, the 460 project would accelerate the development of two manufacturing mega-sites along the 460 corridor. If fully developed, the two mega-sites potentially could have an annual economic impact of $5.7 billion. Additionally, Chmura projected that increased port activities would amount to $1.4 billion.

The maritime community has favored instead a third crossing across the James River -- the so-called Patriot's Crossing. Crowley does not want to get into specifics about which project APM recommends. "Generically, we’re supportive of the commonwealth decisions to improve the infrastructure and flow of port traffic. [The U.S. 460 project] seems to be very compatible with what we're thinking about."

Crowley also refrains from criticizing the performance of the Virginia International Terminals and strategic vision of the Virginia Port Authority. "Our relationship with the VPA has been very good," he says. He sees APM's proposal as a "natural evolution" to a "higher model."

"Change is hard," he says. "We'll work through it."

=======================

This article was made possible by a sponsorship of the Piedmont Environmental Council.

 

Edit

Leave a Reply

Logged in as admin. Log out?

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>