Should S.C. Privatize Its Ports?

 

WHY DOES THE STATE OPERATE ITS OWN PORTS? GOOD QUESTION.

One of the major issues debated this legislative session has been the state’s infrastructure and the need for improvement. The debate however, has focused almost exclusively on South Carolina’s roads and has therefore neglected another area of South Carolina infrastructure long overdue for reform and improvement – ports. South Carolina ports are failing to meet their productive potential because the state insists on continuing to use an outdated form of governance and operation for its ports that has become increasingly rare throughout the rest of the country and even the world.

In fact, as The Nerve reported last year, South Carolina and Georgia are the only two states where ports are both publicly owned and largely publicly operated. The prevailing model of port operation in the U.S. today is the concession system by which state governments lease out the operation of a state-owned port to a private firm for a predetermined number of years  (usually a fairly long period such as 30 years). In other countries, for instance the U.K., privatization efforts have gone further with the complete sale of all assets of multiple ports.

Naturally the small amount of attention given to ports this legislative session, again as reported by The Nerve, came in the form of bills pushing new tax favors for cargo shipping businesses – this despite the fact that there is no evidence that already existing tax breaks help us to compete with other Southeastern states.

In any case, multiple reports and studies as well as case studies have found that privatizing port operations can increase both port efficiency as well as competitiveness. The reasons for this are intuitive. In a state or country where law guarantees that a public agency will operate ports, the motivation to create maximum efficiency and generate the most profit will be largely absent when compared to the motivations prevailing at a private firm.

For a public agency that is legally guaranteed to operate ports, poor performance will not lead to a transfer of ownership and loss of the enterprise. Private firms, on the other hand, must ensure that the ports they operate remain competitive and efficient lest the firm face both the loss of the port and broader losses that could harm their larger enterprise. Private firms that take over operations of a public port also often face performance or investment clauses in the concession agreements they must sign to assume control of operations. These clauses can stipulate a certain level of efficiency the firm must achieve and/or capital improvements the firm must finance at the port.

The financing of capital improvements is one of the biggest potential advantages that come from privatizing port operations. State agencies operating ports often lack the funding to finance capital improvements, and private firms are unlikely to put up funds for an enterprise in which they have no ownership stake. Yet if a private firm is leased the operations of the port, that firm will have the incentive and likely the financial resources to fund capital improvements to the port which will increase efficiency.

South Carolina’s intransigence on port operations has consequences. From 2008 to 2011 South Carolina’s largest port – the port of Charleston – has made minor up and down shifts while remaining ranked in the low thirties of U.S. ports. as ranked by Cargo Volume according to the American Association of Port Authorities. Over this same time period, Charleston has remained ranked an average of 17.25 places behind the Port of Savannah, the Charleston Port’s most immediate competitor. Another metric shows Charleston ranked nine places behind Savannah in terms of traffic of teu (twenty foot equivalent units aka cargo containers). Although the South Carolina legislature has set aside funds for deepening the Port of Charleston, the Port of Savannah is set to be deepened as well (due in part to South Carolina’s help) – meaning we can expect Charleston’s position relative to Savannah to remain about the same.

This lack of competitiveness is not inevitable, however. South Carolina can make its ports a more desirable destination by improving the efficiency of its ports through leveraging the skills and finances of the private sector. Allowing private firms to assume operational responsibility for South Carolina ports will improve efficiency and likely lead to the addition of new capital improvements. As an additional bonus, the state can use the funds generated from leasing out port operations to fund other needs, such as road maintenance.

In short: here’s one form of infrastructure improvement that will cost the state nothing and improve its economic prospects exponentially.

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