Port of Galveston seeks private partners

GALVESTON — A year ago, something happened at the Virginia Port Authority that sent ripples across waterfronts everywhere.

Illinois-based CenterPoint Properties Trust, an industrial real estate company, made a $3.5 billion offer to take over operations of the state-run authority in a 60-year partnership.

Public-private partnerships are nothing new. The Port of Galveston has sought private partners since voters a decade ago shot down a merger of its public docks with the Port of Houston.

But the unsolicited bid by CenterPoint Properties Trust, a firm mostly owned by the California Public Retirement System, epitomized a growing infatuation among public pensions funds and private equity firms with the maritime freight sector.

“It caught everyone’s attention,” Galveston port Director Steve Cernak said.

In a move that could reshape the fortunes of Galveston’s docks, Cernak will ask the port’s governing board April 26 to hire the Bank of Montreal to seek such a private partner.

Port managers hope third-party investment will help them rebuild and modernize obsolete, dilapidated facilities and possibly lead to a two-berth container terminal on the port’s west end.

A successful deal also would help the landlord port, which makes money from leasing its facilities, erase about $60 million in debt.

Capturing Containers

Time is of the essence, officials said. The island port wants to position itself to capture increased container traffic expected when expansion of the Panama Canal is complete in 2014, Cernak said.

Freight economists across North America have forecast a shift in container traffic from West Coast ports to the Gulf of Mexico and Eastern Seaboard as a result of wider Panama Canal locks.

Without some kind of private investment, that new container business will be out of the port’s reach, Cernak said.

Some 35 U.S. ports are using private financing for large projects requiring substantial cash, according to reports. Terms of such agreements vary.

The Virginia Port Authority, which is entertaining several offers, wants to build a $2.4 billion terminal at Craney Island to accommodate cargo growth.

CenterPoint Properties’ proposal involves the acquisition of Virginia International Terminals Inc., which operates the state-owned marine terminals.

The proposal would include money for the development of Craney Island marine terminal, according to reports.

Meanwhile, the Carlyle Group, a Washington, D.C.-based private equity firm, is offering a similar proposal. Carlyle would pay as much as $700 million upfront and share profits for control of the Virginia authority’s operations for 60 years.

‘Coming To Terms’

The type of partnership the Port of Galveston could find itself in depends on suitors the Bank of Montreal brought to negotiations.

One scenario is a partnership similar to an agreement at the Port of Oakland, Cernak said.

In March last year, the Oakland port agreed to turn over operation of some of its terminals to a private investor, Ports of America, in exchange for $686 million over the life of a 50-year deal. Oakland got $60 million upfront, plus annual payments starting at $19.5 million.

The port had been getting $18.9 million a year in rent from berths, according to the San Francisco Business Times.

‘This Is New Territory’

A deal on the Galveston waterfront could include small parts of the port or nearly all operations. But the lucrative cruise ship business, which brings in about $5 million a year, would be off limits to third parties, Cernak said.

Such partnerships generally include long-term concessions with leases lasting decades. In any arrangement, the Port of Galveston always would own the land, Cernak said.

“It would mean the ceding of operations, not the ceding of the port,” he said.

The Wharves Board of Trustees, which governs the port, likely would continue some oversight, he said.

“This is new territory,” Cernak said. “It’s an evolving process.”

$500 Million Job

Modernizing and maintaining the public docks to attract new tenants would cost as much as $500 million, Cernak said. The port, which generated about $25 million in revenues last year, has neither spare cash for large investments, nor the appetite for risk. And unlike most public ports, it has no taxing authority through which to raise money for operations and capital improvements.

It’s not alone in other ways, though. Tough economic times have ports and governments everywhere struggling to invest in large infrastructure projects.

Private investment might be the only way ports can grow, said John Martin, president of Lancaster, Pa.-based Martin Associates, a consulting firm that has worked with ports across the country, including Galveston’s.

“It’s critical, because ports are very strapped for cash,” Martin said. “There’s a shortage of funding all over.”

Meanwhile, wary of investments that collapsed during the credit crisis, more private investors and pension funds are eyeing the nation’s ports and maritime freight sector for steady, predictable returns, said Leonard Gilroy, director of government reform at Los Angeles-based Reason Foundation, a nonprofit think tank that promotes privatization.

Paradigm Shift

Times are ripe for governments to give more control of seaports, airports and highways to private groups, Gilroy said.

But the trend is going to take some getting used to by U.S. residents, long resistant to turning management of public assets over to private firms, he said.

“It’s a paradigm shift; people didn’t grow up with that experience,” Gilroy said.

But other countries successfully have privatized public assets, he said. Most airports in Europe are products of private investment and management, he said.

But U.S. uneasiness with private investment in transportation sectors — particularly from foreign entities — helped scuttle negotiations between Galveston and Hong Kong-based Hutchison Port Holdings in 2006.

Earlier Attempts

Hutchison represented one of the island port’s first serious attempts to secure a private investor with deep pockets. But Hutchison got skittish after a political controversy involving Dubai’s state-owned DP World.

In March 2006, Britain’s High Court approved the $6.8 billion takeover by DP World of British shipping company Peninsular Steam Navigation, which had substantial operations at six U.S. ports. There was some outcry about a Middle Eastern country being involved in operations at U.S. ports.

Hutchison wasn’t affiliated with DP World, and island residents didn’t appear to have problems with the prospective partnership. But the controversy chilled negotiations.

Cernak said he’s obligated to pursue private investment.

“If you have an obligation to manage and run a port asset for the benefit of the community and you have the ability to use private investment and minimize downside risks while still meeting your mission statement, you have to look at it very carefully,” he said.