Uproar Surprised Dubai Firm

By Ben White
Washington Post Staff Writer
Friday, February 24, 2006

In the late 1990s, the government-owned company that would become Dubai Ports World was a relatively small domestic ports authority, managing ports in the United Arab Emirates city-state of Dubai.

Then it began buying terminals elsewhere in the Middle East, in India and in Europe.

In 2004, Dubai Ports World paid $1.15 billion for the global port assets of CSX Corp., which gave the company critical terminals in Asia and made it one of the 10 largest port terminal operators in the world.

Now its proposed $6.8 billion purchase of the 169-year-old Peninsular and Oriental Steam Navigation Co. of London (P&O), a vestige of the British Empire that operates ports in Baltimore, New York and other major U.S. cities, has touched off a huge political battle, vaulting the company outside the insular world of the global maritime industry. Dubai Ports World last night offered to delay part of the transaction, giving the White House more time to convince lawmakers that the deal does not present a security risk.

The rapid growth of Dubai Ports World mirrors the swift expansion of Dubai into a commercial power that is less and less dependent on oil wealth, which is modest by Persian Gulf standards. The glittering city-state has the Middle East's leading airline, Emirates, and has been snapping up other foreign assets, including the Essex House hotel in New York.

Dubai's leader, Mohammed bin Rashid al-Maktum, known as Sheik Mo, is the driving force behind the city's foreign investments and domestic building projects that include man-made islands shaped like palm trees, the world's tallest tower, an underwater hotel and a theme park to dwarf Disneyland.

Strategically located on the Persian Gulf, Dubai emerged in the late 1990s as a major port. So when the city began its ambitious economic growth campaign, becoming a global port operator made strategic sense. Now the company wants to expand into a new market, the United States, a massive importer of foreign-made goods.

Although the U.S. ports are causing the current ruckus, they are in fact only a small piece of P&O's business. But they are an important part of the deal because they would give Dubai Ports World a presence in a critical market where the company currently has no assets. "It's a strategic value. That's what's important," Chief Operating Officer Edward H. Bilkey said on CNN on Wednesday night.

Last night, in an offer coordinated with the White House, the company said it would not exercise control over U.S. port operations until further talks have been held between administration officials and lawmakers. The company said the rest of its transaction with P&O will move forward as planned.

"We need to understand the concerns of the people in the U.S. who are worried about this transaction and make sure that they are addressed to the benefit of all parties," Bilkey said in a statement. "Security is everybody's business."

The explosive fight over port security, direct investment in the United States by Arab countries and the secretive process by which the federal government reviews foreign purchases of potentially strategic domestic assets caught the company and others in the industry off guard. Dubai Ports World and P&O executives and maritime industry analysts had expected that the deal, first reported and discussed in October, would continue its smooth and anonymous path to completion on March 2.

"We did not expect this to happen. No one foresaw this in any way," said Michael Seymour, president of P&O's North American operations. "P&O and DP World thought we had gone through the regulatory process in considerable depth, both from an antitrust and a security perspective, and frankly, we thought we were there." One of the members of the review committee that approved the proposed purchase of the U.S. ports was Treasury Secretary John W. Snow, the former chairman of CSX. However, Snow left CSX in January 2003, almost two years before Dubai Ports World acquired the CSX port assets in December 2004.

Industry analysts said they anticipated the deal would spark some initial concern and merit a review by the Bush administration. But they said they thought it would go through with little trouble because Dubai Ports World is well-known and respected in the global port management industry, which is already dominated by non-U.S. companies and has no direct responsibility for port security.

"They have a sterling reputation," said Peter S. Shaerf, managing director of AMA Capital Partners LLC, a merchant banking firm that specializes in the maritime and transportation industries. "They have never done anything that would expose them in any way as a security risk. They run first-class ports."

Shaerf noted that while Dubai Ports World is owned by Dubai, many of its top executives, including Bilkey, come from the United States. Other top executives come from Britain, India and elsewhere. "All of them were at top companies" before joining Dubai Ports World, Shaerf said.

In an interview on CNN on Wednesday, Bilkey attempted to correct what he called a "complete misconception" by the public and politicians of what Dubai Ports World is and what it does.

"First of all, we're a commercial enterprise of the government of Dubai. The government of Dubai has nothing to do with us, basically," he said. "They're not involved in our daily operations. When we want to make investments, when we want to have a new project, we decide it on commercial terms. And we base it on financially sound operations. You know, DP World, even before this acquisition, was a very large operation, highly respected. And we have wonderful relations with global customers."

Operating port terminals requires a large initial investment but can quickly become profitable, analysts said. Operators make money by charging shipping companies to rent port equipment and by assessing handling and storage fees. Once they are purchased, port terminals are fairly inexpensive to run, so profit margins are high. Because it is very difficult and expensive to build new facilities, especially in Western nations that import heavily from Asia, companies in the terminal operation business grow mainly by acquisition.

Because it is owned by the Dubai government, Dubai Ports World does not disclose detailed financial information. On its Web site, the company says it has averaged better than 20 percent growth in the past three years. P&O discloses its financial information, and it is clear that Dubai Ports World is hoping to buy a profitable asset.

Not including a charge for restructuring its ferry business, P&O said it earned $327 million in 2004. Just $31.1 million of that came from ports in the Americas, indicating that the U.S. ports are only a small piece of Dubai Ports World's acquisition. P&O's Asian ports earned $162.4 million in 2004.

But analysts and other executives, who echoed Bilkey's comment on CNN, said the U.S. ports are critical because the shipping industry is consolidating, and big shippers want to deal with terminal operators that can handle shipments around the world. "All port operations are of a global nature," Seymour of P&O said. "The Americas may or may not be the most profitable at any given point in time, but you need to be in all the markets."

Dubai Ports World generally leaves its acquisitions untouched, keeping current management and workers in place. Seymour said operations at P&O's U.S. ports also would not change, something he said was made clear during the federal review process.

"DP World has given a clear understanding that they do not intend port management to change either at the corporate level or at any location. It is a black and white statement." He added that security at the ports would continue to be handled by local police, the Coast Guard and U.S. Customs. "The short answer is that absolutely nothing will change," he said.

In addition to other U.S. citizens, Dubai Ports World's leadership includes David Sanborn, President Bush's nominee to run the Transportation Department's Maritime Administration. Department of Transportation spokesman Brian Turmail said Sanborn, who is Dubai Ports World's head of European and Latin American operations, would not comment on the current fight, or any other matter, because the Senate has not voted on his nomination.

Turmail said Sanborn was selected for the maritime administrator's job because of expertise gained during 30 years in the industry. Turmail said Sanborn has been at Dubai Ports World less than 10 months and had no role in the company's negotiations to buy P&O. Turmail said Sanborn played a supporting role as the administration reviewed Dubai Ports World's proposed purchase of P&O. "As the process went through, he was asked questions about it," Turmail said.