Privatization in its broadest sense is the transfer of assets or services from the politicized and tax-supported sector of the economy to the entrepreneurial and competitive markets of the private sector. There are many types: asset sales, outsourcing, vouchers, and the elimination of government subsidies to a particular business or agency. The key to each is less government bureaucracy and more private-sector initiative. Privatization is an idea that should be examined with respect to the Detroit/Wayne County Port Authority.
Established in 1978, the D/WCPA is a nonprofit, government-supported operation that promotes and plans shipping transportation involving Detroit and the surrounding area. The Authority does not own, nor does it operate, commercial terminals. After twenty years and many waves of taxpayer subsidies, the D/WCPA may be charting a new course toward dangerous waters. But privatization could offer the Authority—and taxpayers—a life preserver.
Of the 41 commercial deep-water ports in Michigan, several are owned by utility companies, two are owned by local governments, and one, the port of Ontonogan, is owned by the federal government and leased by the county. The D/WCPA is the only port that receives a direct transfer of funds from the state of Michigan.
According to the D/WCPA proposed budget for fiscal year 1997-1998, subsidies from the state treasury account for $301,900 of the Authority’s operating revenue—more than is contributed by either the city of Detroit ($300,000) or Wayne County ($200,950), which benefit most from the Authority’s existence. Other projected revenue totals $256,546 and is received from the Greater Detroit Foreign Trade Zone, rent from tenants in the office building owned by the authority, and a sum derived from "reserves." A whopping 58% of the D/WCPA’s $1,059,386 budget is gobbled up by the combined salary and benefits of the Authority’s seven employees.
The nonprofit D/WCPA is looking to create an independent "revenue stream" through control of several docks that it would lease to the private sector. It would obtain the land needed for these new docks by using existing government property. In a November, 1996 Detroit News article Rod Scott, vice president of Nicholson Terminal & Dock responded to such a notion by saying, "’What are they trying to accomplish?" There is no shortage of facilities, there is no service that is not being performed.’" In an April, 1998 interview with Michigan Privatization Report, Mr. Scott added, "As for marketing, Nicholson Terminal & Dock, like other terminal owners, does its own marketing. I personally spend 150 days a year in Europe and Asia marketing our services and establishing relationships. The Authority simply does not have the skill to properly market our services."
Some have the D/WCPA’s sights set higher than on just the purchase of a few docks. Former state representative and current head of the D/WCPA John Jamian recently suggested that the Authority should do more than "be in the terminal business solely." Said Jamian, "In Cleveland, the port authority helped fund the Rock and Roll Hall of Fame and the new football stadium. We want to explore the same opportunities along the Detroit River."
A whopping 58% of the D/WCPA’s $1,059,386 budget is gobbled up by the combined salary and benefits of the Authority’s seven employees.
Additionally, officials have expressed a desire to have the D/WCPA get involved in intermodal transportation—where freight is interchanged between waterborne, rail, and truck modes. But some observers argue that this is largely unnecessary in the city of Detroit. The majority of freight that gets unloaded in Detroit by ship is "bulk" freight—sand, gravel, and cement-type products. It is the rare container (which is how most nonbulk ship and train freight travels) that makes it to Detroit largely because most container ships are too big to travel through the St. Lawrence Seaway. (Containers are large four-sided crates that hold products from boxed detergent to electronic goods and automobile parts.)
Jamian believes, however, that aggressively pursuing the state-based freight business would lead to an increase in container traffic that would make the intermodal terminal more attractive to business—whether in the form of exports or imports. Much of the container traffic entering and exiting Michigan now does so by flat bed truck and is transferred to trains in Ohio, Illinois, or Canada. Jamian believes that having the containers leave Michigan by ship or train may be beneficial to Michigan commerce.
The question is, at what cost? Michigan business now transports most of its goods without the involvement of the D/WCPA. Even if Ohio, Illinois, or Canada are using their tax dollars to subsidize the transportation of Michigan goods to distant locations, but why should Michigan citizens pay taxes to distort the shipping decisions of private firms? The market is in the best position to determine when and where an intermodal terminal is needed. Railroads should continue to pay for and operate their own facilities.
The D/WCPA appears to want a role similar to (or in concert with) the state’s Michigan Jobs Commission, which has been charged with "retaining" Michigan business that may leave for other states, or recruiting businesses that would move here from other states. The Mackinac Center has also been critical of the Michigan Jobs Commission for engaging in activities that the private sector should fund itself if the projects are genuinely necessary and viable.
The D/WCPA may have its mission expanded beyond control of its own docks. The Michigan Legislature and state Department of Transportation are looking at creating a train-specific intermodal terminal in Detroit, an intermodal terminal that one state consultant suggested could be managed by the D/WCPA.
The non-profit D/WCPA is looking to create and independent “revenue stream” through control of several docks that it would lease to the private sector.
If the state proceeds with developing a centralized intermodal terminal they will be looking to acquire Conrail property in Detroit that covers 220 acres and runs 2.5 miles in length. Preliminary financial work suggests that the cost of completing the project would run as high as $150 million. The money would probably be raised by some government entity by selling bonds.
The logic behind Detroit having a centralized intermodal terminal, where trading freight cars can be conducted with greater ease, is not clear. There is a benefit to centralized intermodal terminals if there is considerable "interline" freight, where containers are switched from railroad to railroad. This occurs frequently in Chicago which acts as a large hub for train freight. In Detroit that is not the case. There just aren’t many freight changes in Detroit because the city is usually a point of origin or destination.
Interestingly, without encouragement from the Authority, Representative Kwame Kilpatrick (Detroit) has introduced legislation that would increase the size and scope of the Authority’s budget and powers. The bill reads, in part, "The state shall provide 50% of the operating budget of the authority, to be included in the state transportation department budget which shall be subject to legislative approval." The bill also allows provides the D/WCPA with condemnation and taxing powers, which means that freight may be subject to a tax for the privilege of passing through Motown.
Any perceived benefit of expanding the D/WCPA (the ability to issue tax-free debt, for instance) does not justify diverting additional money raised from taxpayers across the state. It can be expected that if such an expansion were economically viable, private investors would step forward to fund it. In fact, after talking with John Jamian, the Authority’s director, this author believes that Jamian should start a for-profit port marketing business. His enthusiasm, connections, entrepreneurial skill and salesmanship would no-doubt make for a profitable enterprise.
Michigan has a history of failed government economic development programs. According to Burton Folsom, Jr., senior fellow in economic education at the Mackinac Center, "Michigan and other states have tried to promote internal improvement through subsidy schemes, they have failed miserably time and again."
Editor’s Note: For more on economic development, visit the Mackinac Center for Public Policy Web site at www.mackinac.org.
Most seaport property across the U.S. is owned by state and local governments, with port authorities operating as government manager. A 1990 report conducted by the American Association of Port Authorities showed that 30% of the 66 authorities surveyed were operating at a loss, while those that did make a profit were all too often subject to cash flow raids from the government body that created them.
Reason Foundation policy analysts David Haarmeyer and Peter Yorke suggest in their 1993 study Port Privatization: An International Perspective that American ports would benefit from the same competitive model being adopted around the globe. "Overseas, 36 governments are considering or are in the process of privatizing—through concessions or asset sales—some or all of their major shipping ports." Where privatization has been allowed to work, productivity gains at the commercially-owned ports are in the 50% to 60% range. Britain, for example, sold off 19 of its ports to private owners in 1982. Since then, each port has received needed capital upgrades and now handles more tonnage than ever, does so profitably, and pays taxes rather than consuming them through subsidies.
As the world moves away from government ownership and management of water shipping ports, some politicians in Detroit and Lansing are seeking larger subsidies and a greater role for the D/WCPA. Until evidence demonstrates the need for either, Michigan lawmakers should end state subsidies to the nonprofit Detroit-area Authority and let it sink or swim on its own merit. If there is a role for an institution of the D/WCPA’s nature, the private sector would surely fund it.
