Countdown to controversy: Dubai Ports World

How did the Dubai Ports World controversy develop? 

These notes cover the review process from October 17, when Dubai Ports World and P&O notified the Committee on Foreign Investment in the U.S. of their intended deal, to their request for a new 45 day investigation on February 27.

The deal

Stories about the Dubai Ports World takeover bid were common at the end of October (Lowery - see chronology below).  Here's a story by Saeed Shah: Bidding war for P&O as Dubai Ports World launches takeover  (The Independent, Oct 31).   The purchase was publically announced on November 29.  Here's the Reuters' story: Dubai Ports to buy P&O for $5.7 bln (Michael Smith and Dayan Candappa, via boston.com).  Ben White described the deal for the Washington Post after the controversy began: Uproar Surprised Dubai Firm (Feb 24). The Reuters story doesn't mention the U.S. port assets.

Forbes provides a profile of Dubai Ports World: Dubai Ports' Decade Of Growth (March 2)

Wikipedia has an article on P&O: Peninsular and Oriental Steam Navigation Company .  Here is the P&O Ports web site: P&O Ports .  Here is a map from the site showing the North American  ports where they have operations, and provide other services: P&O Ports North America.   A click on each port shows the details of P&O operations there.

A UPI story by Pamela Hess:

P&O is the parent company of P&O Ports North America, which leases terminals for the import and export and loading and unloading and security of cargo in 21 ports, 11 on the East Coast, ranging from Portland, Maine to Miami, Florida, and 10 on the Gulf Coast, from Gulfport, Miss., to Corpus Christi, Texas, according to the company's Web site. (Feb 24)

Here is a story from Hampton Roads, describing P&O stevedoring activity there: Foreign companies abound at Hampton Roads ports (Gregory Richards, Virginia-Pilot, Feb 23).

Should the deal proceed, the reach of Dubai Ports World would be much smaller in Hampton Roads than in six other U.S. cities, including Baltimore, Miami and New York, where the company would operate cargo terminals. In this port, it would become a half-owner of a large stevedoring firm, CP&O LLC, which loads and unloads ships.

By the way, this is a nicely done story.  It's theme (which it illustrates in detail):

"The whole maritime industry is a collection of international transactions from the point of origin to the point of destination," said J.J. "Jeff" Keever, deputy executive director of the Virginia Port Authority, which owns Hampton Roads' three marine terminals.

One of the big uncertainties during the entire debate, concerns the number of ports affected by the acquisition.  The most common number mentioned has been six.   However, the P&O Ports North America web site indicates that it has operations at 21 ports. 

James Hamilton and "Movie Guy" explored the implications of the information on the P&O web site on Monday, February 27: Homeland Security's curious "fact sheet" .  Movie Guy has ascertained that the Dubai Ports World acquisition involves the transfer of operations at many more ports than indicated on Homeland Security and Customs web sites.  Hamilton explored implications of Movie Guy's conclusions.  In a follow post on March 8, Hamilton noted that, after more than a week, Homeland Security hadn't corrected the errors on its web site:  Still no correction from Homeland Security .

Paul McLeary reports on this issue for CRJ Online: How a Wrong Number Became a Fact. O'Leary tries to figure out how the number "six" became so important (instead of "5" - New York and New Jersey are actually one port - and instead of "21").   I'd also like to draw your attention to the blog California Conservative .  By February 14, they were studying the P&O website and were that there were more than six: U.S. Port Security: Should The Fox Guard The Hen House? .

The Washington Post has published a useful chart on the port security system, detailing the roles played by various parties: How Cargo Travels Through the Shipping System .

In 2005, P&O Ports North America was in legal fight with its partner in Miami terminal operations.  This had important implications for our story.  It comes up below.

The CFIUS review

The Dubai Ports World review was conducted by the Committee on Foreign Investments in the United States (CFIUS). 

CFIUS was established by Presidential Executive Order 11858  in 1975.   The Committee's original purpose was to monitor, and make recommendations about, foreign direct and portfolio investments in the United States.

The Exon-Florio Act of 1988 sought to provide for review of foreign investments in such a way that national security and open investment objectives would be balanced.  The CFIUS page in the Treasury web site describes the Exon-Florio law, and the procedures for implementing it through CFIUS: Committee on Foreign Investments in the United States (CFIUS).   Clay Lowery, the Assistant Secretary for International Affairs for Treasury, also provided a description of the CFIUS conduct of the Exon-Florio process, in testimony before the House Armed Services Committee.

Following passage of the Exon-Florio legislation in 1988, the President delegated his responsibilities under the act to CFIUS, in Executive Order 12661.   The regulations governing the CFIUS review of foreign investments are at 31 CFR 800 .

Agencies represented on the CFIUS:

• Treasury: ("The Secretary of the Treasury is the Chair of CFIUS, and the Treasury's Office of International Investment (in the Office of the Assistant Secretary for International Affairs) serves as the Staff Chair of CFIUS."  );  "...At the Treasury Department, which chairs the panel, the highest-ranking official to know about the deal before the furor began to erupt over the weekend of Feb. 11-12 was Clay Lowery, the recently appointed assistant secretary for international affairs, a former career staffer at the Treasury and at the National Security Council." (Jim VandeHei and Paul Blustein, Washington Post, Bush's Response To the Ports Deal Faulted as Tardy , Feb 26)
• State: (the State Department is represented on CFIUS  by "the Bureau of Economic and Business Affairs). The point of contact for the Committee is the State Department's Office of Investment Affairs. The Office Director is Wesley Scholz. The State Department official who attends the Committee meetings depends on the level of issues being discussed.")  Note that my sources are describing two separate agencies here (BEBA and OIA)
• Defense: lead office is Defense Technology Security Administration (GAO, 2005)
• Justice: lead office is Criminal Division (GAO, 2005)
• Commerce: lead office is International Trade Administration (GAO, 2005)
• Homeland Security: lead office is Information Analysis and Infrastructure Protection (GAO, 2005); (United States Coast Guard and Customs Service are in this Department); "At the Department of Homeland Security, it was Stewart A. Baker, the assistant secretary for policy, who acknowledged that he was caught flat-footed by the controversy: "I concluded, once we had the assurances we needed [about the security issues], that this was a relatively noncontroversial decision," he said in an interview. "So I didn't brief" either DHS Secretary Michael Chertoff or Deputy Secretary Michael P. Jackson. " (Jim VandeHei and Paul Blustein, Washington Post, Bush's Response To the Ports Deal Faulted as Tardy , Feb 26)
• Office of Management and Budget:
• Council of Economic Advisors:
• United States Trade Representative:
• Office of Science and Technology Policy:  (Executive Office of the President, I assume they would have participated through their "Homeland and National Security Division)
• National Security Council:
• National Economic Council:
• Other agencies as appropriate: (in this case, the Departments of Transportation and Energy participated - Lowery) 

Here is a schematic view of the CFIUS process, from the 2005 GAO study (click on it to make it legible):

CFIUS has been busy.  Lowery notes that:

Since the enactment of Exon-Florio in 1988, CFIUS has reviewed 1,604 foreign acquisitions of companies for potential national security concerns.  In most of these reviews, CFIUS agencies have either identified no specific risks to national security created by the transactions or risks have been addressed during the review period. However, to date 25 cases have gone through investigation, twelve of which reached the President's desk for decision.  In eleven of those, the President took no action, leaving the parties to the proposed acquisitions free to proceed. In one case, the President ordered the foreign acquirer to divest all its interest in the U.S. company.  In another case that did not go to the President, the foreign acquirer undertook a voluntary divestiture. Of those 25 investigations, seven have been undertaken since 2001 with one going to the President for decision.  However, these statistics do not reflect the instances where CFIUS agencies implemented security measures that obviated the need for an investigation or where, in response to dialogue with CFIUS agencies, parties to a transaction either voluntarily restructured the transaction to address national security concerns or withdrew from the transaction altogether.

Note that, while it conducts a lot of reviews, it doesn't do many investigations.

In 2005, Ronald Lee, an attorney with Arnold and Porter in D.C., discussed the CFIUS process in an article in The M & A Lawyer: The Dog Doesn’t Bark: CFIUS, the National Security Guard Dog With Teeth .    Lee was deeply involved with security issues in the Clinton administration.

He predicted this much accurately:

Expect the unexpected. CFIUS’s handling of a notified transaction may proceed quietly and routinely and end in 30 days or less. On the other hand, the involvement of Congressional leaders and foreign governments, media attention, or the emergence of additional national security concerns—particularly just as CFIUS’ review appears to be nearing a resolution—may pose a continuing gauntlet of challenges.

Lee is writing for other lawyers and corporate executives who may find themselves involved in the process. In 2005, he saw the CFIUS review process as a meaningful one, but doesn't provide many details to support the assertion.

Exon-Florio and the CFIUS process have been the subject of several studies by the Government Accountability Office (GAO - formerly the Government Accounting Office).  In 1995, the GAO produced: Foreign Invesment.  Implementation of Exon-Florio and relatedamendments .   The GAO saw problems in 2002 (Defense Trade: Mitigating National Security Concerns under Exon-Florio Could Be Improved, GAO-02-736, September 12, 2002 )

The Committee's process for implementing Exon-Florio contains the following weaknesses that may have limited effectiveness: (1) the Committee has not established interim protections before allowing withdrawal when concerns were raised and the acquisition had already been completed (2) agreements between the Committee and companies contained nonspecific language that may make them difficult to implement and (3) agreements did not specify responsibility for overseeing implementation and contained few provisions to assist in monitoring compliance.

GAO looked at the process again in 2005, Enhancements to the Implementation of Exon-Florio Could Strengthen the Law's Effectiveness,  and found problems.  These were described by the reports authors before the Senate Banking Committee last October: A Review of the CFIUS Process for Implementing the Exon-Florio Amendment .  A couple of issues may be pertinent in this case.

First, committee members differ over what constitutes a threat to national security:

Lack of agreement among Committee members on what defines a threat to national security and what criteria should be used to initiate an investigation may be limiting the Committee’s analyses of proposed and completed foreign acquisitions. From 1997 through 2004, the Committee received a total of 470 notices of proposed or completed acquisitions, yet it initiated only 8 investigations.

Some Committee member agencies, including Treasury, apply a more traditional and narrow definition of what constitutes a threat to national security—that is, (1) the U.S. company possesses export-controlled technologies or items; (2) the company has classified contracts and critical technologies; or (3) there is specific derogatory intelligence on the foreign company. Other members, including the departments of Defense and Justice, argue that acquisitions should be analyzed in broader terms.  According to officials from these departments, vulnerabilities can result from foreign control of critical infrastructure, such as control of or access
to information traveling on networks. Vulnerabilities can also result from foreign control of critical inputs to defense systems or a decrease in the number of innovative small businesses researching and developing new defense-related technologies.

While these vulnerabilities may not pose an immediate threat to national security, they may create the potential for longer term harm to U.S.  national security interests by reducing U.S. technological leadership indefense systems. For example, in reviewing a 2001 acquisition of a U.S.  company, the departments of Defense and Commerce raised several concerns about foreign ownership of sensitive but unclassified technology, including the possibility of this sensitive technology being transferred to countries of concern or losing U.S. government access to the technology.  However, Treasury argued that these concerns were not national security concerns because they did not involve classified contracts, the foreign company’s country of origin was a U.S. ally, or there was no specific
negative intelligence about the company’s actions in the United States.

Second, the GAO authors saw an institutional reluctance to open investigations (in addition to the standard review process):

Committee members also disagree on the criteria that should be applied to determine whether a proposed or completed acquisition should be investigated. While Exon-Florio provides that the “President or the President’s designee may make an investigation to determine the effects on national security” of acquisitions that could result in foreign control of a U.S. company, it does not provide specific guidance for the appropriate criteria for initiating an investigation of an acquisition.14 Currently, Treasury, as Committee Chair, applies essentially the same criteria established in the law for the President to suspend or prohibit atransaction, or order divestiture: (1) there is credible evidence that the foreign controlling interest may take action to threaten national security and (2) no laws other than the International Emergency Economic Powers Act are appropriate or adequate to protect national security.   However, the Defense, Justice, and Homeland Security departments have argued that applying these criteria at this point in the process is inappropriate because the purpose of an investigation is to determine whether or not a credible threat exists. Notes from a policy-level discussion of one particular case further corroborated these differing views.

Here's a somewhat briefer fact sheet on the CFIUS process from the Organization for International Investment: Fact Sheet.  Committee on Foreign Investment in the United States (CFIUS) .  Here's a journal article on CFIUS: New Objectives for CFIUS: Foreign Ownership, Critical Infrastructure, and Communications Interception

The CFIUS review of the P&O acquisition began informally on October 17, and ended formally on January 17.  The whole process lasted significantly longer than the 30 days of formal review.  Meaningful activity took place during the informal portion of the review, between October 17 and December 16.

This page, part of the CFIUS site, describes the history of the Dubai Ports World investigation: CFIUS and the Protection of the National Security in the Dubai Ports World Bid for Port Operations.  Clay Lowery (mentioned above) also described the history of the review in his testimony before the House Armed Services Committee (granted, Lowery has an incentive to point out that the CFIUS review didn't cut corners).

A brief chronology:

• Oct 17: "Although the formal review period commences when CFIUS receives a complete filing, there is often an informal review that begins in advance. Parties to a transaction may contact CFIUS before a filing in order to identify potential issues and seek guidance on information the parties to the transaction could provide to assist CFIUS' review. This type of informal consultation between CFIUS and transaction parties enables both to address potential issues earlier in the review process. The pre-filing consultation allows the parties to answer many of CFIUS' questions in the formal filing and allows for a more comprehensive filing. In some cases, CFIUS members negotiate security agreements before a filing is made. In addition, the pre-filing consultation may lead the parties to conclude that a transaction will not pass CFIUS review, in which case they may restructure their transaction to address national security issues or abandon it entirely."  Lawyers for DP World and P&O informally approached Treasury Department staff to discuss the preliminary stages of the transaction." (Lowery testimony)
• Oct 30: "beginning on October 30, dozens of news articles were published regarding this transaction, well before CFIUS officially initiated, much less concluded its review." (Lowery)  It's not clear to me right now if these stories made much mention of U.S. assets.  The Reuters story cited at the start of this post did not.
• Oct 31: P&O and DPW meet with DHS and DOJ staff "to review the transactions and security issues" (Lowery testimony)
• Nov 2: "the U. S. Intelligence Community provides input to all CFIUS reviews. The Intelligence Community Acquisition Risk Center (CARC), now under the office of the Director of National Intelligence (DNI), provides threat assessments on the foreign acquirers. CFIUS will request a threat assessment report from CARC as early as possible in the review process. In order to facilitate reviews, CFIUS may request these reports before the parties to the transaction have made their formal filing. "  "On November 2, Treasury staff requested a CARC intelligence assessment from the Office of the DNI. Treasury received this assessment on December 5, and it was circulated to CFIUS staff. " (Lowery)
• Nov 29: companies publicly announce their plans
• Dec 5: CARC assessment received (see bulleted point for Nov 2)
• Dec 6: "On December 6, staff from CFIUS agencies with the addition of staff from the Departments of Transportation and Energy met with company officials to review the transaction and to request additional information." (Lowery)
• Dec 13: reported date of USCG memo released on February 27 (info not on CFIUS web site)
• Dec 16: "On December 16, after two months of informal interaction, the companies officially filed their formal notice with Treasury, which circulated the filing to all CFIUS departments and agencies and also to the Departments of Energy and Transportation because of their statutory responsibilities and experience with DP World."  "During the initial 30-day review, each CFIUS member agency conducts its own internal analysis of the national security implications of the notified transaction.... " (Lowery)
• Dec 17 to Jan 17: "During the review period, there are frequent contacts between CFIUS and the parties to the transaction. The transaction parties respond to information requests and provide briefings to CFIUS members in order to clarify issues and supplement filing materials. Although the CFIUS agencies may meet collectively with the parties as an interagency group, meetings also often occur between the parties and the agency or agencies that have a specific interest in the transaction. Typically, certain members of CFIUS will identify a concern early in the review and then assume the lead role in examining the issue and providing views and recommendations on whether the concern can be addressed. For example, if there are military contracts, the Department of Defense would lead the CFIUS review and recommend a course of action.  Depending on the facts of a particular case, CFIUS agencies that have identified specific risks that a transaction could pose to the national security may, separately or through CFIUS auspices, develop appropriate mechanisms to address those risks when other existing laws and regulations alone are not adequate or appropriate to protect the national security. Agreements implementing security measures vary in scope and purpose, and are negotiated on a case by case basis to address the particular concerns raised by an individual transaction... CFIUS operates by consensus among its members. A decision not to undertake an investigation is made only if the members agree that the transaction creates no national security concerns, or any identified national security concerns have been addressed to the satisfaction of all CFIUS agencies. The daily operation of CFIUS is conducted by professional staff at each agency. Each agency sends the filing to multiple groups in its agency depending on the issues involved in the filing. CFIUS staff report to the policy level, which is the Assistant Secretary level. A decision can be elevated to the Deputy Secretary level and on to the Cabinet officials, if necessary." (Lowery)
• Jan 6: "During the 30-day review period, members of the CFIUS staff were in contact with one another and the companies. As part of this process, DHS negotiated an assurances letter that addressed port security concerns. The final assurances letter was circulated to the committee on January 6 for its review..." (Lowery)
• Jan 11??:  23rd day after notification - normal date by which CFIUS "guidelines require member agencies to inform the Committee of concerns..." (GAO, 2005)
• Jan 17: "If within the initial 30-day period there is consensus that the transaction does not raise national security concerns or any national security concerns have been addressed, Treasury, on behalf of CFIUS, writes to the parties notifying them of that determination. This concludes the CFIUS review of the acquisition.  If one or more members of CFIUS believe that national security concerns remain unresolved, then CFIUS conducts  a 45-day investigation. The additional 45 days enables CFIUS and the parties to obtain additional information from the parties, conduct additional internal analysis, and continue addressing outstanding concerns. Upon completion of a 45-day investigation, CFIUS must provide a report to the President stating its recommendation. If CFIUS is unable to reach a unanimous recommendation, the Secretary of the Treasury, as Chairman, must submit a CFIUS report to the President setting forth the differing views and presenting the issues for decision. The President has up to15 days to announce his decision on the case and inform Congress of his determination." (Lowery)  However, in this instance CFIUS reached concensus that there were no national security concerns that has not been adequately addressed, and gave its approval to proceed
• Feb 17:  P&O acqusition originally scheduled for discussion at regularly scheduled quarterly briefing for Congress (Jim VandeHei and Paul Blustein, Washington Post, Bush's Response To the Ports Deal Faulted as Tardy (Washington Post, Feb 26).

If this chronology is correct, the actual review process took a lot longer than 30 days.  The companies were briefing law enforcement agencies at the end of October, and CFIUS actually requested the intelligence assessments at the start of November.

The CFIUS web site makes the following point about procedure:

Each of the CFIUS 12 members (departments and agencies) conducts its own internal analysis. In this case, the Departments of Transportation and Energy were also brought in to the CFIUS review to widen the scope and to add the expertise of those agencies reviewing the transaction.

So, in this case, although there were 12 agencies represented on CFIUS, 14 had a chance to comment.

Once a private company notifies CFIUS of its intentions, the review process begins:

Under Exon-Florio, after receiving notification of a proposed or completed acquisition, the Committee begins a 30-day review to determine whether the acquisition could pose a threat to national security.6 The Treasury Department, as Committee Chair, forwards the notification documentation to the lead office in each of the member agencies. Lead offices forward the information to other offices within their agency. For example, the Defense Technology Security Administration, the lead office for the Department of Defense, forwards notification to 12 other offices within the department.  These other offices may also forward the notification, as appropriate. In one case, the point-of-contact in the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, one of the initial 12 offices, forwarded the notification to four other offices within that organization. (GAO, 2005)

Jim VandeHei and Paul Blustein describe the review of the Dubai Ports World P&O acquisition in the Washington Post: Bush's Response To the Ports Deal Faulted as Tardy (WaPo, Feb 26)

The process began on Oct. 17, when representatives of the Dubai company informally approached the Treasury Department to disclose that they were planning to purchase the British firm, Peninsular and Oriental Steam Navigation Co., according to testimony by administration officials at a Senate hearing last week. Treasury officials directed them to consult with Homeland Security because of the port security question.

The executives of Dubai Ports World -- several of whom are American -- well understood that they might face extensive scrutiny.

"You don't have to do this, but I brought a small team here [from Dubai] to meet with the CFIUS agencies in early December," said Edward H. "Ted" Bilkey, the company's chief operating officer and former U.S. Navy officer. The idea was to give the panel plenty of time even before the company formally filed to start a standard 30-day review.

Homeland Security officials, especially in Customs and Border Protection, had high regard for the company, which is owned by the government of Dubai and operates terminals in 19 ports in Asia, Europe and South America. It was the first in the Middle East to participate in a post-Sept. 11 program in which Customs agents are posted overseas to screen containers before they are loaded onto U.S.-bound ships. U.S. intelligence agencies -- who were asked on Nov. 2 for any information they had on the company -- produced nothing "derogatory" about it, Baker said...

At the Pentagon, meanwhile, officials were well aware of the United Arab Emirates' checkered history in combating terrorism; it was the home of two of the Sept. 11 hijackers and home of the banking system through which some of the hijackers' money flowed. But far overshadowing those concerns were the country's current role as a key U.S. ally in the Persian Gulf region, said Deputy Defense Secretary Gordon R. England, who noted at last week's hearing that more U.S. Navy ships dock at UAE ports than any port outside the United States.

Accordingly, once Dubai Ports World had agreed to the conditions required by Homeland Security, none of the agencies on CFIUS objected to the transaction when the 30-day review was completed on Jan. 17. If even one agency had objected, the matter would have gone to a 45-day investigation -- which would have required a presidential decision at the end. Moreover, a single dissent would have meant bringing the matter before higher-ranking officials in each department.

But instead, the matter stayed with assistant secretary-level officials, who told the company the transaction could go forward. Treasury officials planned to inform congressional leaders at a regularly scheduled quarterly meeting on Feb. 17. By then, however, the Associated Press had already reported a statement from the firm trumpeting its approval...

"We've learned from this that we have to make a more affirmative effort to give Congress the input they need to exercise their oversight function," said Deputy Treasury Secretary Robert M. Kimmitt. "Even in cases where security work is done diligently and professionally, we need to make sure broader considerations are taken into account."

In this instance, CFIUS investigation was assisted by the Intelligence Community Acquisition Risk Center (U.S. intelligence agencies backed Dubai Ports World deal , Walter Pincus, Washington Post, Feb 25):

Reviews by U.S. intelligence agencies supported Dubai Ports World's purchase of the British company running terminals at six U.S. seaports, and the assessments were made available to the Treasury Department-run interagency committee that approved the deal, according to senior administration officials.          

The intelligence studies were coordinated by the Intelligence Community Acquisition Risk Center, a new group under the office of Director of National Intelligence John Negroponte, said one official. The center normally does broad threat analyses of foreign commercial entities that seek to do business with U.S. intelligence agencies.

On December 13, the USCG memo produced a memo (U.S. Coast Guard Intelligence Concerns Over How DP World’s Proposed Purchase of P&O Could Affect U.S. Port Security) detailing the security issues it had identified.  A very short part of this memo was eventually released to the public by Senator Olympia Snowe of R-Maine on February 27.  (Weisman, "Coast Guard Saw 'Intelligence Gaps" on Ports" Washington Post, Feb 28).  I expect this is one of the agency memos prepared in response to the November 2 request for intelligence assessments.

Weisman quotes the memo:

"There are many intelligence gaps, concerning the potential for DPW or P&O assets to support terrorist operations, that preclude" the completion of a thorough threat assessment of the merger.

"The breadth of the intelligence gaps also infer potential unknown threats against a large number of potential vulnerabilities," says the document, released by the Senate Homeland Security and Governmental Affairs Committee.

The memo points to intelligence gaps in the areas of (a) operations, (b) personnel, and (c) foreign influence.  Only a short segment of a much longer memo (the bulleted point "U")  has been released.  The released text is here: U.S. Coast Guard Intelligence Concerns  Over How DP World’s Proposed Purchase  of P&O Could Affect U.S. Port Security .  The Coast Guard has noted  that the memo concluded: “that DP World's acquisition of P&O, in and of itself, does not pose a significant threat to U.S. assets in [continental United States] ports.”

Did the formal investigation pass over some steps that would normally have been taken:

Normally, such a company will be checked out by CFIUS for any "derogatory" information before being allowed to invest in a sensitive U.S. business, Baker said. In this case, the Homeland Security Department already knew the company well, he said.

"We have a relationship with this company because they have been a participant in some of our cargo and port security measures," Baker said. "Remember, our interest in port security extends well beyond the United States. If we discover weapons of mass destruction inside a U.S. port, we've already lost. So we do a lot of screening abroad, and our general experience with this company has been positive."  (Paul Blustein, "Some in Congress Object to Arab Port Operator ", Washington Post, Feb 17; Baker is Stewart Baker, assistant secretary for policy at the Department of Homeland Security)

CFIUS approved the deal after getting assurances from DP World that certain conditions would be met. 

Even so, the department had enough qualms to insist on a number of legally binding conditions for approving the deal -- a frequent CFIUS practice. The company pledged to maintain its participation in the Customs program, "and they agreed to open their books, and give us access to records, without any formal legal process," Baker said.

The department also wanted to ensure that the personnel at the U.S. terminals to be taken over by the company would remain almost entirely American. So it extracted a pledge that the company intended to keep the current management of U.S. operations in place.  (Jim VandeHei and Paul Blustein, Washington Post: Bush's Response To the Ports Deal Faulted as Tardy, Feb 26)

After the controversy broke out, Fred Bergsten, a former CFIUS chair, suggested one condition  he felt would be appropriate:

...the administration should obtain and make public immediately a letter of assurance from the government of the United Arab Emirates committing itself to avoid any involvement in the business operations of Dubai Ports World and to take all steps necessary to guard against security problems. Both the government and the company have proclaimed that Dubai Ports would act solely as a commercial entity, and the company has pledged its full participation in all U.S. security programs, so it should be routine to obtain such a letter. Any violation of these commitments, by the UAE government or the company itself, would subject the company to cancellation of its approval to operate in the United States and thus force its immediate divestiture, presumably at a fire-sale price. We obtained a similar statement from the French government in 1979 to resolve concerns about the acquisition of American Motors by Renault, which was then partially government-owned. (C. Fred Bergsten, "Avoiding Another Dubai", Washington Post, Feb 28)

As noted, CFIUS approved the deal on January 17. (Weisman above).

CFIUS ended the review after a 30 day review.  It did not proceed to an additional 45 day review, seen by many as required by statute for firms owned by governments.  The length of the review as of the 17th (effectively beginning in late October or early November 2005) apparently was a factor:

The extra 45-day investigation wasn't necessary, Baker said, because the company approached CFIUS in late November, when it decided to bid for Peninsular and Oriental. So the committee had "at least a few weeks longer" than the standard 30 days to look into the ramifications of the takeover, he said. (Paul Blustein, "Some in Congress Object to Arab Port Operator ", Washington Post, Feb 17; Baker is Stewart Baker, assistant secretary for policy at the Department of Homeland Security)

The CFIUS web site points to the statute:

Amendments. Section 837(a) of the National Defense Authorization Act for Fiscal Year 1993, called the "Byrd Amendment," amended Section 721 of the Defense Production Act (the "Exon-Florio provision"). It requires an investigation in cases   where:

o the acquirer is controlled by or acting on behalf  of a foreign government; and

o the acquisition "could result in control of a person engaged in interstate commerce in the U.S. that could affect the national security of the U.S."

Judd at Think Progress says yes:  Administration Failed To Conduct Legally Required Investigation Before Approving UAE Port Deal  (Feb 22)  Sexias defends the legality of the action, but not necessarily the law: Breaking the Law Legally (Feb 24).  I don't believe either are lawyers. 

And neither am I.  The language does appear to be ambiguous.  Does it, "is it conceivable that it could have even the smallest effect?" or does it mean that, "after an preliminary review you make a determination that there won't have a meaningful or significant effect, you don't have to proceed further?" 

There may be an argument for the second reading on the basis of practicality, and the precedent created by the frequency of investigations in the past.  If there were significant disagreements during the CFIUS review, the second interpretation wouldn't govern in this case.  I wonder if there is any case law that addresses this ambiguity?

All Hell breaks loose

At this point, it's not clear if the CFIUS process succeeded in cost-effectively eliminating potential security threats.  Details of the review process are not public.  We don't know what issues were raised, or how they were resolved.

Clearly it was a political failure.  Congress and the public were not reassured that the ports deal would not create serious new security threats.  The CFIUS decision to terminate the process with the review, and not to go on to the 45 day investigation, was effectively overturned.  Given the hot-button issues involved, such as globalization and security from terrorist acts, it may not have been possible to guaruntee a political success on this issue.

At any rate, things began to spin out of control in mid-February.

Blog postings may provide an index of interest in the controversy.  Here's a summary of posting activity followed by Technorati (using its weakest level of screening).

I expect the increase is more meaningful than the subsequent declines, or at least that the increase and decrease mean different things.

Activity begins to pick-up on February 12, and rises rapidly from the 15th, peaking on Wednesday, Feb 22 then falling and leveling off from Saturday through the end of the month on Tuesday.

Neil King and Greg Hitt suggested that Eller & Co., a regional Florida port terminal operator, triggered the Doha Ports World controversy on behalf of one of its subsidiaries, which was embroiled in a legal controversy with P&O. ("Small Florida Firm Sowed Seed of Port Dispute," Wall Street Journal, Feb 28, page A3)

P&O operates terminals in Miami with its partner Continental Stevedoring & Terminals Inc.  Continental is owned by Eller & Co.

In 2005, the partners were falling out over "allegations that P&O were trying to increase control over Continental's portion of the port operations."  Eller and Continental thought that the Dubai Ports World takeover of P&O "endangered" their "operations in Miami."   They also saw national security implications.  Continental sued P&O to prevent the sale on February 17.

In addition to exploring legal options, Eller began to lobby in D.C. 

...Washington lobbyist Joe Muldoon said he decided to lead the effort because one Eller executive "is an old friend of my family."  Mr. Muldoon said he spent most of January researching the issue, and began making visits to Capitol Hill at the end of that month.  "I just wanted to educate folks," he said, and to warn lawmakers that this was a deal that "might just slip through the cracks."

undefined representatives also tried, without success, to provide input to the CFIUS process:

Mr. Kreitzer, of the law firm of Bilzin Sumberg, said he attempted to express concerns about the deal in early February with the U.S. Treasury Department, which heads the inter-agency Committee on Foreign Investment in the United States.  Because the agency operates secretly, he got nowhere there.  Then he and other Eller representatives took their concerns to Congress.

Moreover, the inter-agency review had been completed on January 17.  Two possibilities here, Kreitzer has mis-remembered the dates, he did try and lobby in early February and got nowhere because the formal review was over (perhaps he thought the review would move into the 45 day segment), or it helps his case with Congress to maintain that he tried to lobby in a timely way, and was stonewalled.

Among other key Congressman and Senators, Eller lobbied NY Senators Schumer and Clinton and NJ Congressman Bob Menendez.  "All three represent the Port of New York, which would be covered by the deal." 

Eller "was really the canary in the mineshaft for many people on the Hill and in the media," said Schumer spokesman Israel Klein.

Noel Sheppard of the conservative NewsBusters blog posts on a report of a February 11 AP story on the P&O acquisition by Ted Bridis: Salon’s Walter Shapiro Attributes Port Media Frenzy to the Associated Press (Feb 26).   

Senator Schumer had a press conference on the issue at least as early as February 13.  Here's some coverage the next day by the blog California Conservative  : U.S. Port Security: Should The Fox Guard The Hen House? .  This was a nice early post.  Conservative provided useful coverage of the P&O website and the range of its port management and stevedoring activities.

Jim VandeHei and Paul Blustein point to the roles of Schumer, and radio commentator Michael Savage, in getting the  DPW controversy going  ("Bush's Response to the Ports Deal Faulted as Tardy", Washington Post, Feb  26) 

Sen. Charles E. Schumer, an outspoken liberal Democrat from New York, two weeks ago began publicly denouncing a deal to let a Middle Eastern firm take over terminal operations at six U.S. seaports. From the other end of the political spectrum, even more outspoken conservative radio host Michael Savage was doing the same -- and recruiting Republican lawmakers to his cause...

It was on Feb. 13 that the Dubai Ports World deal -- after simmering unnoticed for months in the federal bureaucracy and the transportation trade press -- started to boil, as a result of Savage's blustery on-air alarms and an event by Schumer at the New York harbor with families who lost loved ones on Sept. 11, 2001.

...the furor began to erupt over the weekend of Feb. 11-12...

Schumer said he sensed the public would be outraged if they knew about the deal and heard bipartisan objections. His Feb. 13 press event was sparsely attended because New York was consumed by a snowstorm and Washington by the Cheney accident. But two days later, after a flurry of private discussions between Schumer and key Republicans, Foley and Rep. John E. Sweeney (R-N.Y.) were pressing Treasury Secretary John W. Snow and Chertoff in public hearings for details on the deal.

The issue provided the Democrats with a valuable tool to attack the President ( The politics of national security.  Macho Moms and Deadbeat Dads  (The Economist, March 9):

“PRESIDENT BUSH wants to sell [six American ports] to the United Arab Emirates—a country that had diplomatic ties with the Taliban,” says Harold Ford, a bright young Democratic congressman from Tennessee. In a television ad promoting his bid for a Senate seat, he says that, unlike George Bush, he believes that “we shouldn't outsource our national security to anyone.”

At last, the Democrats have found a national-security issue they can agree to sound tough on. DP World, a firm owned by the Dubai government, is buying P&O, a British firm that operates six American ports. The public are outraged. Never mind that the UAE is an American ally, or that port security will remain in federal hands, or that a port-management firm has a financial interest in not blowing up the ports it manages. Some two-thirds of Americans oppose the deal.

For the Democrats, this is a great opportunity. For years, they have enjoyed a consistent advantage over Republicans on “mommy” issues, such as education and health care. But Republicans have trounced them on “daddy” issues, such as killing terrorists and defending the homeland. The Democrats have lost a lot of elections because they are easy to caricature as the party that thinks “there are no enemies, just friends whose grievances we haven't yet accommodated,” as Mark Steyn, a conservative columnist, once put it.

To turn this around, the Democrats need to sound both resolute and united. And the fortuitous thing about the Dubai ports deal is that it unites disparate strands of Democratic thought. Opposing the deal is not just about protecting American ports from Islamist terrorists. It also appeals to the party's protectionist wing—hence Mr Ford's use of that dog-whistle word “outsource”. And it appeals to those who see the Bush administration as a conspiracy to benefit rapacious corporations.

Democratic blogs are going wild about the fact that John Snow, Mr Bush's treasury secretary and also the chairman of the committee that approved the Dubai deal, used to be head of CSX, an American firm that sold its port operations to DP World in 2004. That was after Mr Snow had left CSX, and no one has managed to explain how he might have profited from approving the Dubai deal, but it sounds fishy, at least to those who have written off the Bush team as a bunch of crooks.

There are three further reasons why Democrats have seized on the ports issue. It gives them a soundbite—“Arab hands off our ports”—that even the dimmest voter can understand. (Such soundbites have traditionally been a Republican strong point.) It allows them to pander to racist voters with plausible deniability. (Again, this is usually Republican turf.) And it looks like an opportunity to defeat the hated Mr Bush, not least because Republicans are nearly as suspicious of the deal as Democrats are. On March 8th, a House panel dominated by Republicans voted 62-2 to block the DP World deal—even though Mr Bush has promised to veto any such attempt...

The Administration also got little support from Congressional Republicans (GOP Irritation At Bush Was Long Brewing , Jim VandeHei, Washington Post, March 17):

President Bush's troubles with congressional Republicans, which erupted during the backlash to the Dubai seaport deal, are rooted in policy frustrations and personal resentments that GOP lawmakers say stretch back to the opening days of the administration...

The White House figures it out

The White House was slow to respond.  Richard Wolffe and Holly Bailey describe the gradual process of realization: No Safe Harbor Here  (Newsweek, March 6).

It was talk radio's Michael Savage who first alerted the president's inner circle to the supposed Arab takeover of America's ports. One of Bush's closest aides tuned in to "The Savage Nation" just before Valentine's Day, to hear the shock jock's angry caricature of how a Dubai company was going to manage terminals at six major U.S. ports. In Savage terms, the country was simply handing over its security to an Arab country complicit in the 9/11 attacks. But the Bush aide knew nothing of the government's role in approving the deal and thought little more of the rant for another week. After all, there were other crises to fret over. Vice President Dick Cheney had just shot a man while hunting quail, and GOP senators were rebelling over legislation on the domestic eavesdropping program. Nobody—from the lower-level officials reviewing the deal to the White House aides handling Congress—saw the iceberg until it was too late...

...Peter King, the GOP chair of the House homeland security committee, called the White House to ask about the deal a few days after the AP story. A senior official told him not to worry, but conceded he didn't know about any investigation into the Dubai company. When King said he planned to go public, the White House official shrugged and said, "Go ahead." The next day, King teamed with Democratic Sen. Chuck Schumer to call for a halt to the sale. That was the same day that chief of staff Andy Card first briefed the president on the matter.

Bush was promoting his new policies on renewable energy near Denver on Tuesday morning when the crisis came to a head. Bill Frist and Dennis Hastert, the GOP leaders of the Senate and House, informed the White House they would oppose the deal. Bush ordered his staff to contact each cabinet secretary involved in reviewing the sale to make sure everyone stood by the decision. His aides finally got the cabinet's green light as they prepared to fly back to Washington. Reassured, Bush called reporters to his conference room aboard Air Force One, where he suggested that critics were indulging in anti-Arab prejudice and promised to veto any legislation blocking the deal. Senior Bush officials (many of whom have been reading Thomas Friedman's latest book, "The World Is Flat") worried that killing the deal would alienate trading partners and imperil the president's economic agenda.

From a Post story:

The next morning, White House Chief of Staff Andrew H. Card Jr., alerted to the controversy by a lower-level aide in his office, briefed Bush, but there was a general feeling inside the White House that the political storm would blow over. Now, officials are ruing that judgment, and the failure to consult more broadly.  (Jim VandeHei and Paul Blustein, Washington Post, Bush's Response To the Ports Deal Faulted as Tardy, Feb 26)

Part of the problem may have been simple fatigue:

Andrew H. Card Jr. wakes at 4:20 in the morning, shows up at the White House an hour or so later, convenes his senior staff at 7:30 and then proceeds to a blur of other meetings that do not let up until long after the sun sets. He gets home at 9 or 10 at night and sometimes fields phone calls until 11 p.m. Then he gets up and does it all over again.

Of all the reasons that President Bush is in trouble these days, not to be overlooked are inadequate REM cycles. Like chief of staff Card, many of the president's top aides have been by his side nonstop for more than five years, not including the first campaign, recount and transition. This is a White House, according to insiders, that is physically and emotionally exhausted, battered by scandal and drained by political setbacks.

"By the time you get to year six, there's never a break . . . and you get tired," said Ed Rollins, who served five years in President Ronald Reagan's White House. "There's always a crisis. It wears you down. This has been a White House that hasn't really had much change at all. There is a fatigue factor that builds up. You sometimes don't see the crisis approaching. You're not as on guard as you once were."...

To Rollins, the uproar over an Arab-owned firm taking over management of some American ports represents a classic example. Bush and his staff did not know about the arrangement approved by his administration, and after congressional Republicans revolted, issued an ineffective veto threat that only exacerbated the dispute, which climaxed with the collapse of the deal last week. "This White House would not have made this mistake two years ago," Rollins said...  ("Senior White House Staff May Be Wearing Down", Peter Baker, Washington Post, March 13)

A breathing space?

David Sanger reports on negotiations, late in the week of February 20, to find a way out: Dubai Expected to Ask for Review of Port Deal (New York Times, Feb 26):

After two days of behind-the-scenes negotiations with the Bush administration and Congress, the Dubai company seeking to manage terminals at six American ports is expected to announce by Monday a deal inviting the government to conduct a broad new review of security concerns, senior administration officials and a company adviser say.

If an agreement is completed, the state-owned company, Dubai Ports World, will "voluntarily" ask the Bush administration to pursue the lengthier, deeper investigation that Democrats and Republicans in Congress have been demanding since controversy over the transaction erupted at the beginning of the week.

The White House plans to portray the action as the company's own decision, giving administration officials a face-saving way of backing away from President Bush's repeated declarations in recent days that there is no security risk in having the port terminals operated by a company controlled by the emir of Dubai, part of the United Arab Emirates...

The goal was to try to delay, if not circumvent, a collision with Republican leaders who have been threatening to support some form of Congressional action next week, possibly including a bill to block the company from taking over.

Dubai Ports' purchase of the British company now running the terminals was approved by the Committee on Investment in the United States in mid-January. As recently as Friday, Mr. Bush's national security adviser, Stephen J. Hadley, emphasized that the process was complete. "There's nothing to reopen," he said.

But according to several people involved in the talks, even as Mr. Hadley was speaking, executives of Dubai Ports became convinced that their offer on Thursday to close the deal but to "segregate" the American operations until further briefings were conducted on Capitol Hill would not quiet the controversy.

A new review would essentially allow the government to do the kind of full 45-day assessment of the security implications that the administration argued all last week was unwarranted. Critics of the White House's handling of the situation said the law required the 45-day investigation because Dubai Ports is owned by a foreign state...

If a new investigation is conducted under the terms of a law passed by Congress 14 years ago, the results would be reported to Mr. Bush, who would make a final decision and report to Congress...

Because Mr. Bush has already declared his position on the issue, it is unclear how the administration could conduct a truly independent review. In statements on Tuesday, the president strongly suggested that anti-Arab bias lay behind the protests. The current operator is the Peninsula & Oriental Steam Navigation Company, which is British.

On Monday, Feb 27, Jonathan Weisman described this scenario coming to fruition (Port Deal To Have Broader Review, Washington Post):

The Bush administration said yesterday that it has accepted a proposal from a Dubai maritime company to conduct a 45-day review of the national security implications of the company's plans to take control of significant operations at six U.S. ports...

The announcement by Dubai Ports World, brokered by the White House and Senate Majority Leader Bill Frist (R-Tenn.)...

The deal was worked out over a series of meetings Friday among Frist, Bilkey, DP World lawyers, Cabinet secretaries and White House officials. Late Friday, Frist recommended to the government of the United Arab Emirates and to House Speaker J. Dennis Hastert (R-Ill.) that DP World request a security review and more clearly spell out how it intended to separate its U.S. operations from port management around the world.

DP World executives and their lawyers worked through the agreement all day Saturday, while GOP leaders in Congress and White House officials focused on the next political steps. Ueland said Frist is pleased with yesterday's company statement, indicating it comported with his expectations.

Revisions This note was originally posted on March 1.  It has been revised frequently since then.  Last revisions on March 13.

Comments

[Stormy]

So...What does DHS do with its fact sheet?

22 ports and well over 55 terminals, 60-odd by my last count.

Why has no member of the senate or the house asked about the scope of this deal?

Setting aside the issues of security, why has the White House, DHS, Congress, and the media not confronted the lie? Even those opposed have not done so.

Curious. P&O has not hidden the information. Nor has DP World. But everyone else has. Lou Dobbs mentioned 22 ports once; then did not correct Andrea when she said "Six." Why?

Oh... maybe you should look at the sukuk bond offering that is going to grease this deal. Who are the players here? Who has skin in this game. hmmmmmm Easy to find out.

This game goes far beyond a simple ports deal.