Public-Private Partnerships: If Not Now, When?

Let’s start by agreeing on the obvious: Ports are expensive to operate, maintain and expand. The first layer of expense is on the landside infrastructure. Then there’s the highway connections (“the golden first mile”) and rail connections. The third layer, navigation channels, berths and access channels, can be most expensive.

Ports need money — a lot of it — to survive, but need inevitably more to grow, and it has to come from somewhere. Some ports levy taxes directly on their citizens. Many have state support. All seek federal funding. Some have all three levels of funding and it never seems enough. The Christmas list of exciting expansion projects grows and grows, sometimes at the expense of the more mundane responsibilities like maintenance, which simply gets deferred.

Federal policy, or lack thereof, doesn’t help. The federal government doesn’t want to pick winners and losers through funding awards, but doesn’t want to leave such decisions entirely to the marketplace, either. The industry is left with program such as TIGER grants, awards made through complex formulas but always with a pinch of politics or policy thrown in.

There’s ruinous competition in the industry, sometimes between ports in the same state and certainly between ports in neighboring states, as they compete for the same cargo, gobbling money. The situation seems ripe for a public-private solution, market-based and subject to market forces, bringing in needed capital.

There’s been a string of abortive attempts — Galveston, Texas; Wilmington, Del.; and, perhaps the biggest and most visible of all, Hampton Roads, Va., not once but twice. One of note has succeeded: the Port of Baltimore.

So why haven’t public-private partnerships succeeded in becoming sources of much-needed funds for expansion of infrastructure in the U.S. port industry?

I first examined the concept with the aid of my legal background. My conclusion was that a prevalent form of public-private partnership was in essence a long-term lease, which shouldn’t present an obstacle in an industry in which long-term leases are commonplace. So, clearly there must be other impediments to public/private partnerships in a U.S. port industry so badly in need of additional funding sources. Here are a few:

  • Fear of Profits: There is a historical nonprofit philosophy of government-owned ports. User agreements haven’t been based on producing sufficient revenue to replace existing facilities, or build new additional ones, but on securing business, under the justification that this focus leads to economic activity and job creation. In essence, the worst deal wins as ports weaken their economic autonomy. So, in essence, ports may have made themselves unattractive partners.
  • Fear of Loss of Control: Governments fear that loss of control over rates could create monopoly situations, and fear loss of control over marketing means private companies may not target the same customers or markets as the government would. And the private operator could sacrifice economic activity for profits, which would be an unacceptable outcome in the utilization of government resources.
  • Fear of Loss of Government: A wise port authority colleague of mine once said, “Our job is to create jobs, but no one says they have to work here.” This is a philosophy not necessarily embraced by government bureaucracies that can be bulky and self-perpetuating.
  • Fear of Failure: Privatization is a radical move. If the status quo is serviceable, it’s more acceptable (easier) to attempt to fix it than to abandon it. The concern is that if privatization goes bad, the fix isn’t so simple, first full of political second-guessing and litigation, then of starting over in a competitive industry in which time always seems to be of the essence.
  • Fear of Image: “Profit” can be a bad word when used at public ports, many of which seem to go out of their way to avoid them.  But, in the event there are profits, they should be plowed back into the facilities. A private company may not necessarily add value and simply divert profits to its ownership. In other words, the revenue pie does not grow and is simply divided in a way not benefiting “The Public.”

Obstacles to port privatepublic partnerships may be “The Sum of All Fears.”

So what has been successful? 

  • Partial Public-Private Partnerships: Under this scenario, not all the facilities are transferred to control of the private operator. Some are. Baltimore is a shining example of the success of this approach. No one ever suggested the concept was an all-or-nothing proposition. Some ports could commit one “product line” to a partnership to help fund less-developed operations in need of capital, for example.

  • Public-Public Partnerships: The state of Florida, with 15 deep-water ports, requires those ports to cost/share most projects that have elements of state funding. Some percentage of port revenues are a requirement for state funding grants. The partnership is between the state and the ports themselves. With the aggressive support of Gov. Rick Scott, and comfort developed among legislators with this structure in place, funding for Florida seaports has exceeded historical levels.

It’s interesting that even with the construction frenzy now enveloping U.S. ports with the expansion of the Panama Canal, and funding shortfalls seeminglyuniversal, the idea of public-private partnerships hasn’t become popular. It may be that funding shortfalls are overstated, that ports are indeed finding the money they need. It may be that the potential of the concept has philosophical limitations, for the reasons stated above. It may be that many ports have effectively painted themselves into a corner with long-term agreements and leases, so that they have nothing to offer to a private partner. And it may be that some of the likely private partners see themselves as better off sitting on the sidelines for now while ports scramble for money, knowing that in a competitive marketplace, deals will get better with time.

 J. Stanley “Stan” Payne is a principal of Summit Strategic Partners, a management and transportation consulting firm, and a former senior executive with the Canaveral Port Authority and the Virginia Port Authority. Contact him at stanpayne@cfl.rr.com.

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