In Ports Deal, Voice of Reason Says 'Insulation'

It's not often that someone like me gets to be the voice of reason. But the Dubai-U.S. ports uproar is one of those rare occasions when I can propose a simple solution to a messy politicized problem that would save face for everyone.

Because foreign companies, like Dubai Ports World, frequently buy corporations that own sensitive U.S. businesses, Washington has evolved a legal and regulatory apparatus that deals with this kind of national security problem all the time.

It's easy. You let the buyer own the whole company -- but you don't let it control the strategically important business. That part is insulated from the rest of the acquired company and is controlled by a separate board of directors with impeccable national-security credentials. The new owner gets the financial benefits of ownership but can't exercise any control over the sensitive stuff.

I couldn't find a comprehensive list of deals under which control was separated from ownership, but people I talked to last week provided numerous examples. They include IBM's sale of its PC business to Lenovo, a publicly traded Chinese company (whose biggest shareholder is an arm of the Chinese government); the sale of Silicon Valley Group to ASM Lithography, a Dutch firm; the sale of bankrupt Global Crossing's assets to a subsidiary of Temasek, which is owned by the government of Singapore; and the sale of the Westinghouse nuclear engineering and construction business to British Nuclear Fuels Ltd., which is owned by the British government.

See? Even the British government, our country's closest ally, agreed to separate control from ownership of some U.S. assets that it bought. (Toshiba recently made a deal to buy those businesses, which will require another security review.)

And while I may be the voice of reason (if only briefly), I'm not a naif. Let's face it. All foreign owners aren't the same. A company owned by the government of Dubai (or any government, for that matter) really isn't the same as a publicly traded British company that has no significant ownership or control by its government.

State-controlled businesses are far more likely to have political agendas. Would BP have sacrificed profits to score political points in the United States by offering discounted heating oil to select customers the way Citgo, owned by the Venezuelan government, did? Would BP have cut off natural gas shipments to Ukraine to help the Russian government exert political leverage, as government-controlled Gazprom did? I doubt it.

This brings us to Dubai Ports World and its purchase of London-based Peninsular and Orient Steam Navigation (P&O), whose businesses famously include operations at six U.S. ports, among them facilities in New York and New Jersey.

According to Robin Byde, a securities analyst with HSBC in London, the U.S. business accounted for 7 percent of P&O's revenue last year and 8.8 percent of its operating profits. This makes the U.S. facilities a relatively small piece of the company. So it's not unreasonable to have Dubai Ports World stick that business into an owned-but-not-controlled subsidiary.

"Why they didn't do this in Dubai Ports, I have no idea," says Todd Malan, chief executive of the Organization for International Investment, a Washington-based trade group for foreign investors. Me neither.

Dubai might have avoided this whole problem had it decided from the get-go to give up control of the port operations in the United States. I'm not saying there is or isn't a security risk letting Dubai Ports World run the facilities. I just don't know. But I do know that if it voluntarily gives up control, then Dubai would greatly reduce its risk of suffering economic, political or military retribution from the United States should a future terrorist strike here be traceable to a screw-up at one of the ports.

So let's set up an insulation agreement that lets the government of Dubai own the U.S. ports business but not control it. That would be good for Americans who worry about security, it would avoid spooking foreign investors even more than we already have, and it would even be good for Dubai.

That's my constructive thought for the week. Next time around, I'll revert to being my normal self.

Correction: Toyota (U.S.) does indeed have a pension plan, contrary to what I wrote last week. It's a "defined contribution" plan, under which Toyota's only obligation is to contribute a certain amount of money, which a spokesman said averages about 6.5 percent of workers' pay. Toyota's pension plan cost it about $50 a car last year, by my math, while General Motors' plan cost it about $700 a car. I talked to Toyota when I was researching that column, but somehow didn't grasp what Toyota was trying to tell me. My bad.

Hallee Berg in Newsweek's London bureau contributed reporting for this column. Sloan is Newsweek's Wall Street editor. His e-mail issloan@panix.com.