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Maryland needs to slow or alter its Seagirt deal

Today's column is about Maryland's imminent deal to lease Baltimore's Seagirt container terminal for 50 years to a company owned by private equity fund. A 50-year lease is little different from an outright sale.

Private companies make profits in these "public-private partnerships" by minimizing the money they put in over time and maximizing the revenues. The longer the lease -- 50 years is a long, long time -- the bigger the possibilities. That's why it's important to correctly calculate the "present value" of the dollars everybody is committing and to make sure the rents Maryland collects keep up with inflation, which over half a century can do terrible things.

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First, the inflation. Ports America's lease payments will increase with the consumer price index each year -- but only up to 3.5 percent. As the column notes, that's substantially less than inflation over the past 50 years (4.1 percent) and very probably less than what inflation will be in the next half century. The only way the United States is going to get its $12 trillion in debt under control is to depreciate the dollar through inflation and pay back old, expensive borrowings with new, cheaper dollars.

Ports America would start paying Maryland annual rent of $3.2 million, and the inflation kicker starts at year 5. Say the state got the full, 3.5 percent raise every year. By 2060 the basic annual rent paid by whoever owns the lease then would be $15 million. But if inflation were much more, $15 million wouldn't be very impressive. Say average inflation were 6 percent. Then, thanks to 50 years of compounding, the real value of $3.2 million in 2060 would be $59 million. But Ports America would be making only $15 million in lease payments -- much less in real dollars than it pays now. So in nominal dollars Ports America's rent would go up only fivefold while what it could charge shippers could go up 18-fold. PA's profit-sharing deal with Maryland, in which it would pay the state $15 for every container over 500,000 a year, is also subject to the 3.5-percent inflation cap.

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So when Ports America talks about future dollars it will invest in Seagirt, it's important to correctly figure what that money is worth. Total dollars invested by Ports America over the term of the lease, including rents, maintenance and capital expense, could be as much as $1.8 billion. But since much of it will be spent years hence, it's actually worth a lot less in today's dollars. How much less? In its analysis the Maryland Port Administration has "discounted" Ports America's various contributions by between 6 percent and 9 percent, taking into account the time value of money, risk and so forth. MPA comes up with a present value for the $1.8 billion of $466 million.

But even this may exaggerate the value of Ports America's contribution. A better discount rate on public-private partnerships, given the risk, length of leases and other factors, is 10 percent or 12 percent, says James Koch, the economist and former president of Old Dominion University who is advising the Virginia General Assembly on its own ports deal. After applying that kind of factor, the promised money from Ports America looks even less impressive.

I understand why public-private partnerships are attractive to governors. They get big cash up front so they don't have to raise taxes or cut programs or sell as many bonds. But I'm afraid that in the fullness of time these deals are much better for the private partner than the public partner.

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