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Port could have made better decisions, report says

Updated: September 7, 2012 - 2:15 pm

Posted: September 7, 2012

By Bill Cresenzo

While the Port of Virginia is recovering from the hit it took from the recession, past decisions have kept it from reaching its full potential, according to a report from an Old Dominion University economist.

James Koch, president emeritus of the university, drafted the report at the request of Sean Connaughton, Virginia's secretary of transportation, whose office is in the midst of deciding whether one of three private firms should take over the port's operations from Virginia International Terminals.

In the report, Koch says APM Terminals, The Carlyle Group and RREEF Real Estate have made good offers, but the port has room to negotiate better terms.

The Port of Virginia is the third busiest on the East Coast. However, Gov. Bob McDonnell isn't pleased with its performance. Last year, he replaced all but one of the Virginia Port Authority's board members.

"All of its current challenges can't be attributed to the recession," Koch says in the report. "Some of the port's challenges relate to past strategic decisions made by the port and generous public infrastructure investments made by competitor states and more rapid regional economic development in regions serviced by our competitors."

So far this year, cargo tonnage is up 8.4 percent over the same period last year. Tonnage peaked in 2008, when 17.8 million tons of cargo passed through the port. TEUs, or 20-foot equivalent units, are up 7.97 percent to 1.175 million so far. TEUs peaked in 2007, when 2.12 million units moved through.

The report says Savannah is the second-busiest East Coast port because it has concentrated on attracting the distribution centers that make use of the port.

"Among the strategic decisions made by our port has been its relative focus on shipping lines rather than producers and distributors," Koch's report says.

"We have signed agreements with many shipping lines. Savannah, on the other hand, has focused more on producers and distributors and boasts about twice as many big-box distributor warehousing operations with the likes of Wal-Mart, Costco, etc. Retrospectively, their strategy has worked better than ours."

Georgia made major infrastructure investments to its ports and has offered better incentives than Virginia.

On the upside, the Port of Virginia is deep and "it will be 2018 at least before ports such as Savannah and NY/NJ will come close to matching us," the report says.

The Carlyle Group said its deal is worth more than $2 billion. APM said its deal is worth $3.9 billion. RREEF said its deal could be worth up to $4.66 billion including an upfront payment of $400 million and $10 million per year for police, barge service and administrative services at the port, and $1.3 billion in tax and capital expenditures.

"My analysis suggests that there is room for the Commonwealth to negotiate a more attractive arrangement if it decides to accept one of the management proposals in front of it now," Koch wrote.

The report says that the proposals are attractive because they offer upfront cash flows for the next 48 years, which could allow the commonwealth to retire the VPA debt and build infrastructure.

APM's proposal would allow for $2 billion in capital investments, worth $600 million in today's dollars.

RREEF would make investments worth $900 million in today's dollars.

"I am not yet aware of any Carlyle commitment in this area," Koch said.

Connaughton's office will make a decision by November and one of the groups could take over the port's operations by next year., but the city of Newport News is the latest of several groups, including shipping lines, to express its concerns about the ramifications of letting one of the groups run the port.

In a letter to McDonnell, Newport News Mayor McKinley L. Price said even though the Newport News Marine Terminal is the Port of Virginia's main break-bulk terminal, the city does not receive any tax payments to offset the wear and tear on city roads or the loss of tax revenues that private ownership brings.

The mayor said even though taxes on the terminal total more than $900,000, the city of Newport News receives only about $125,000 to cover fire and EMS services.

The city of Portsmouth says that it could lose up to $7 million in tax revenue, if, as proposed, a private company takes over the operations of the APM Terminal, which the port authority now leases. nib