Blocked port deal has hurt foreign investors, DP World lawyer says
The fallout from Dubai Ports World's unsuccessful attempt to purchase five container terminals and other cargo-handling operations in the United States last year is impacting U.S. interests and global investors in subtle, and unseen ways, according to the lawyer who tried to help the Dubai-government owned port operator win approval for the deal.
The brouhaha over alleged security vulnerabilities stemming from an Arab government leasing port terminal space to load and unload cargo vessels forced the state-owned company to sell the U.S. portion of the business it acquired last March from British ports operator P&O. DP World promised to divest to an American company. In December, it announced that the buyer would be insurance and financial services giant AIG.
The injection of politics into what many considered a routine business transaction has made international investors nervous, and contributed to a climate of economic nationalism in other parts of the world, Thomas Crocker, a partner at Alston & Bird LLP, told an audience at an American Bar Association conference on homeland security law last month.
'The result has been a chilling effect on foreign direct investment in general and the transportation and supply chain areas in particular,' Crocker said.
Many foreign investors in non-critical industries are applying for national security clearances just to be safe, he noted.
'There has been a 50 percent increase in CFIUS filings since the DP World incident, many of them defensive in nature,' Crocker said, referring to the Committee on Foreign Investment in the United States.
The interagency group reviews foreign acquisitions of U.S. businesses to make sure they do not threaten U.S. security. It typically focuses on sales of defense contractors and sole-source industries. The DP World case was one of the first involving transportation infrastructure. As part of the process, the Department of Homeland Security negotiated two side agreements committing DP World to continue participating in the Container Security Initiative for scanning selected U.S.-bound cargo at foreign ports, and the Customs-Trade Partnership Against Terrorism, aimed at improving private sector cargo controls.
The use of national security criteria to block cross-border investments is spreading. Russia is threatening to restrict investment in 39 specific sectors and France is doing the same in 11 key economic sectors. Meanwhile Chinese officials in recent months have signaled a desire to throttle back foreign investment to protect domestic companies from takeovers.
'Therefore, what we do has effects on what others do abroad,' Crocker said, 'in this case, with direct negative consequences for U.S. investors.'
The politicization of the CFIUS process creates uncertainty for investors because it calls into question the finality of the review, the DP World lawyer added. Previously, CFIUS cases were subject to re-examination if the applicants lied or misrepresented facts to the government. The inclusion of the side agreements in the DP World case set a precedent in which government approval is now conditional. The merger of French communications firm Alcatel and Lucent Technologies in November spelled out that the government could reopen its investigation and rescind approval if the company (now Alcatel-Lucent) doesn't maintain national security protections, he said.
'Transactions can remain in jeopardy because of concerns raised by Congress, the media, or even state and local officials,' Crocker said.
The DP World incident spurred more than a dozen legislative initiatives to reform the CFIUS process, none of which advanced to a final vote last year. Among the congressional complaints was that:
* Security questions surrounding the deal should have automatically triggered a longer investigation than the normal 30-day staff review.
* The administration was more interested in promoting open trade policy than national security.
* Congress should have been briefed prior to approval.
* The process is too secretive.
* The Exon-Florio law that established the CFIUS process was too vague about what constituted a national security threat requiring a review.
The CFIUS process was created with the Cold War, not terrorism, in mind, and therefore attacks on the cargo distribution system did not factor in the equation.
In fact, few foreign acquisitions have led to full, 45-day investigations. From 1988 to 2005, CFIUS only opened investigations into 25 of 1,604 transactions it reviewed, and only one deal was blocked.
Bills are pending in both houses of Congress that, among other things, expressly place critical infrastructure under the definition of national security, replace the Treasury Department as the lead agency coordinating CFIUS reviews, and expand the circumstances that would automatically trigger an extended investigation by top officials.
Many business groups oppose the broader Senate bill, which includes economic security, health and public safety as criteria that should be considered as part of the approval process. Bills in both houses also would formally give Congress more of a consultative role, which critics argue would further politicize any final decisions.
Industry officials testified last year that increased consultations and public disclosure could also dampen investor interest in the United States because of potential leaks of confidential information.
The House Committee on Financial Services is scheduled to hold a hearing Feb. 7 on shortcomings in the CFIUS process.
The demise of the DP World acquisition was also a lost opportunity to improve U.S. homeland security, Crocker said.
DP World offered to install at its own cost automated non-intrusive container inspection and radiation detection machines at all 51 ports in which it operates. The integrated systems, which cost at least $2.6 million apiece, were deployed by two Hong Kong terminals on a test basis two years ago. Congress mandated DHS run a pilot test to scan large numbers of containers at three foreign ports this year after learning about the Hong Kong initiative during hearings on DP World and port security vulnerabilities. The pilot project will try to determine how to use the data collected by the systems because the machines in Hong Kong simply demonstrated the ability to capture sensor readings as trucks drove through an entry gate, with no follow-up analysis of the images by port or customs officials searching for smuggled materials.
Under CSI, foreign customs authorities in some ports conduct selective scans of containers at the request of their U.S. counterparts and radiation detection machines are not used yet in every CSI port.
'The proposal would have set a new standard for security and given the United States 100 percent scanning at least in DP World ports,' Crocker said. 'What we have today, thanks to Congress' killing of the deal, falls far short of this.'
Crocker listed three DP World priorities for securing the maritime cargo system:
* Governments should consult with each other and industry to develop global standards for port and supply chain security (which is being done under the auspices of the World Customs Organization and the International Maritime Organization).
* Governments and port terminal operators need to reach agreement on a universal approach to imaging and radiation screening.
* The world's governments need to agree on standards for the collection and transmission of vital security data.