Best not biggest

With CenterPoint, Carlyle and Goldman at its wharfs, the Virginia Port Authority has no shortage of willing partners for its assets

Among American ports, the Virginia Port Authority (VPA) has never stood out as a bashful institution. “Biggest. Deepest. Newest. Best” declares its website, inviting the reader to “come discover more reasons why The Port of Virginia is the superior choice”.

Port of Virginia:
plenty of willing

On 27 July, two investors decided to take the port up on its offer. On that day, the VPA received two more business proposals for the operation of its four existing port terminals and the development of a new terminal in Craney Island.

The proposals, from private equity firm The Carlyle Group and Goldman Sachs Infrastructure Partners-backed marine terminal operator Carrix, joined an existing plan submitted by Chicago-based industrial real estate manager CenterPoint Properties in March. CenterPoint’s unsolicited approached had set off a 120-day period for competing submissions, by the end of which Carlyle and Goldman waded into the competition pool.

This level of interest undoubtedly has the VPA feeling good. After all, there’s a lot of money at stake.

In its opening gambit, CenterPoint had proposed a 60-year concession for an upfront cash payment of $500 million and a profit share ranging from 5 percent to 30 percent based on specified return hurdles. Including other benefits, such as annual payments to the port authority and foregoing state subsidies, the proposal estimated a total economic benefit of at least $8.9 billion to Virginia, or $3.5 billion in today’s dollars.

Carlyle said it would be willing to pay the port between $500 million and $700 million up front for a 60-year or longer concession, with profit sharing ranging from 15 percent to 40 percent based on specified return hurdles.

Carrix-Goldman took a different approach. They argued in their proposal that in the current economic conditions, “this is not necessarily the optimal time” for a privatisation of the port’s facilities. Instead, they proposed a 30-year operating agreement with Carrix, which would partner with the state-owned port operator, Virginia International Terminals, to improve the port’s operating cashflows. Carrix would provide $250 million upfront in return for a share of the port’s operating cashflow. Goldman, meanwhile, would gain the coveted role of becoming a financial adviser to the VPA. Together, Carrix and Goldman assert the net present value of their proposal is at least half a billion more than CenterPoint’s proposal when evaluated on a 60-year time horizon.

So it’s game on for the VPA, which now has to make a decision whether to invite the bidders to submit detailed bid.

In evaluating the preliminary proposal, the authority is likely to be looking for “best” rather than “biggest” to meet its goals: jobs, economic stimulus and some shared development of the new Craney Island terminal, which is estimated to cost $1.2 billion in phase one alone.

Fortunately all three preliminary offers reflect a clear understanding on the part of the suitors that only a genuine partnership with shared economics will succeed. This is good news, because as the recent wave of failed privatisations in the US  suggests, a highest-bidder-wins-all approach won’t sail in Virginia.