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Harvard Business School 2-894-029 Rev. October 17, 1996 Copyright © 1994 James K. Sebenius. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means–electronic, mechanical, photocopying, recording, or otherwise–without permission. 1 Deeport: General Information and Confidential Instructions to the Federal DCR Negotiator This case consists of two parts. The information in Part I is identical for all parties while the information in Part II is confidential to your role only. Part I: General Information for All Interested Parties A newly formed national consortium, Deeport, is interested in building and operating a deepwater port off the coast of the state of Seaborne. The consortium’s members, mostly drawn from a variety of commercial enterprises, expect to participate in the financing, construction, and operation of the port. Deeport has already engaged in some preliminary planning and design work, but cannot proceed without a license issued by the Federal Licensing Agency (FLA). The Project The deepwater port proposed by Deeport would be the first of its kind on the East Coast. It would be located in Seaborne at the estuary of the Banksedge River. Like the European seaport, Rotterdam, it would accommodate a new generation of large cargo ships and super-tankers–ships considered to be especially cost-effective in transporting raw materials and goods. The deepwater port would be based on an artificial island of roughly nine square miles created with fill from the dredging of the access channel. The island would be connected to the shore by a network of highways, railroads, and pipelines. On-shore, an Air-Sea Cargo Center (ASCC) would be developed, along with connections to existing highways, railroads and pipelines. Substantial infrastructure would be needed to accommodate an intermodal freight terminal of this sort. Most of the industrial plant and ancillary facilities would be located on the island. While certain components of the port could be operational as early as five years after construction begins, the port’s full development might not be completed until 20 years later. The projected cost of the port would be roughly $4 billion (in inflation-adjusted dollars). 894-029 Deeport: General Information and Confidential Instructions to the Federal DCR Negotiator 2 The Parties Deeport is excited about the prospect of a deepwater port on the East Coast. It believes such a port could generate substantial profits within 10 years after operations begin. (Deeport bases its projections on an independent study by Transport Associates, Inc., which concluded that such a port could be economically viable under several possible scenarios.) In addition, Deeport believes the local, regional, and national economies could benefit from a port which would dramatically reduce the transport costs of imports and exports. Several other parties, however, have an interest in the deepwater port as well. Each would like to exert some influence over the terms of Deeport’s application for a license. Five of the most powerful parties are described below: The Environmental League: This coalition of environmental interest groups is generally opposed to any “development” of coastal areas, especially development which might threaten fragile ecosystems, add to air and water pollution, increase waste disposal problems, and increase health and safety risks. The league is worried that Deeport’s proposed port would seriously damage the environment in Seaborne and destroy the Banksedge River ecology. Local Federation of Labor Unions (The Union): The Union is generally pleased that new development is being considered for Seaborne. It anticipates the creation of hundreds of new jobs in both the short run and long run. It will argue strongly, however, that these jobs should be reserved for local union members. (This local federation is affiliated with the National Federation of Labor Unions.) Other Ports in the Region: The four other ports in the region–one is in Seaborne, the others are not–are not pleased with Deeport’s proposal. They expect to lose a substantial amount of business to the new port if it is constructed. They are extremely skeptical of Deeport’s claim that all regional ports will share in the economic benefits generated by the new port. Federal Department of Coastal Resources (DCR): This Cabinet level agency created during the Reagan administration has a dual mandate: (1) to help realize the economic potential of the nation’s coastal resources and (2) to preserve the environmental integrity of the nation’s coastal areas. The DCR would like to see a deepwater port established somewhere on the East Coast and has the resources and authority to subsidize such a port if it so chooses. Governor Sherwood (of Seaborne): Governor Sherwood is in her second gubernatorial term and is eager to promote development in her state. She is sensitive, however, to the needs of organized labor, a powerful political constituency, and is therefore anxious to see that unions share in the benefits of the port. Seaborne’s constitution permits a maximum of three consecutive four- year terms for the Governor. The Licensing Process Deeport submitted an application just one month ago for FLA review. While aware of the other parties’ interests in its proposal, Deeport expected little difficulty in the licensing phase of this project. The FLA, however, has recently been criticized by the press and by several Members of Congress for failing to consider the “broader public interest” in its previous licensing Deeport: General Information and Confidential Instructions to the Federal DCR Negotiator 894-029 3 determinations. Consequently, the FLA is now very sensitive to the level of political support surrounding each application it reviews. In this case, the FLA will not approve Deeport’s application unless it is clear that there is substantial support for the project. It has therefore decided that it will approve Deeport’s proposal only if Deeport can muster the support of at least four other parties. The FLA would prefer to see all five parties support a Deeport application, but will grant a license even if only four lend their support. Thus, two parties, together, can exercise veto power over the project. In addition, Deeport itself can effectively veto any proposal in this negotiation (since no other party is capable of initiating the development). Finally, if it refuses financial support to the project, the Federal DCR can also effectively veto any project that requires a federal loan or loan guarantee. The Negotiation Deeport has already submitted a license application to the FLA which proposes the following resolution of the five issues (to be discussed in more detail below): • a heavy industry mix • compliance with environmental laws • a $3 billion loan from the DCR • no special preference for union workers • no compensation payments to other ports. Deeport is free to submit changes to its proposal at any time during the licensing review process, but it is anxious to have its application approved as is. In an attempt to muster support for its current proposal, Deeport has invited all the key parties to a meeting at the Ritz-Carlton. Its stated objective for the meeting is to seek a “negotiated agreement” among all parties to ensure unanimous support for its proposal. (Of course, Deeport needs the support of only four of the other parties in order to secure a license. No project, however, can go forward without Deeport’s support. The Fed DCR must be one of these four or five supporters if the proposal is to include a federal loan; in other words, the non-DCR parties cannot successfully “vote themselves a loan” if Fed DCR does not support such an agreement.) Mechanics of the negotiation. All five parties have agreed to attend the meeting, and are seated at the negotiating table with Deeport.Each party has seen a copy of Deeport’s current FLA application. The discussions may progress in any direction, but Deeport will be searching for a proposal that will win enough votes for FLA approval. Anyone can suggest alternative proposals, but Deeport’s concurrence is needed for any proposal to be adopted. Although all parties have agreed to attend the meeting, they need not meet as a group throughout the negotiating session. Parties can opt to walk away from the discussion if they so desire. In addition, they are free to meet privately in smaller groups at any time. Three required voting rounds are scheduled for the meeting. The first will take place 15 minutes after the meeting begins, the second after 40 minutes of discussion, and the third after 1 1/4 hours of discussion. At each of these scheduled votes, Deeport must put before the group a full 894-029 Deeport: General Information and Confidential Instructions to the Federal DCR Negotiator 4 package proposal addressing all the issues. Note that the required votes are not issue-by-issue, but on a single Deeport-proposed package. Additional votes may be taken at any point during the meeting, but the three scheduled voting rounds must take place. (If a project receives sufficient votes for FLA approval in the first or second voting round, however, the parties may choose to forgo subsequent voting rounds.) Apart from these required votes, informal (but binding) votes can be called by any party. Apart from Deeport’s obligation to propose packages for the three scheduled votes (and the parties’ obligations to cast votes), the choice of negotiating and voting processes is entirely up to the participants as a group. (Given the short time frame for the negotiations, some care in time and process planning may be useful.) Once a proposal encompassing all the issues is passed in required or other voting rounds (i.e., it receives supporting votes from at least four of the five other parties, in addition to having the support of Deeport), the votes are binding and parties cannot renege on their promise of support.1 The parties remain free, however, to explore possible “improvements” in the agreement which either benefit the supporting parties or entice the non-supporting party to vote for the agreement. But proposed improvements must be unanimously supported by the parties to the original agreement; otherwise the original agreement stands. Negotiations must stop at the end of the meeting. If no agreement is reached (i.e., if no proposal receives at least four votes plus the support of Deeport), the FLA will reject Deeport’s application for a license. The Issues Preliminary discussions have taken place between Deeport and representatives of the five key parties. As a result of these conversations, Deeport has identified five issues which seem to be of concern to all or some of the parties. A general description of the issues is provided below; the individual concerns of the parties are summarized separately in their confidential instructions. Issue #1: Industry Mix The deepwater port itself is only part of the development Deeport has planned. With the construction of the port will come a variety of industries seeking access to the port. These industries will either lease or purchase land, both on the artificial island and on-shore. The bulk of Deeport’s revenues associated with the new port will flow from these real estate ventures. Deeport has initially requested complete freedom in developing the port lands. This means that it could develop (or encourage) any type of industry or plant, including oil refineries, steel mills, or a resource recovery plant. The environmentalists, however, have argued that limits should be placed on the industry mix allowed in the area: they are asking that only relatively “light” and “clean” industries, such as certain high-tech production plants, be allowed. As a result of this controversy, three options have surfaced in the discussions between Deeport and the environmentalists. 1To be binding, a vote must be on a "package" which addresses all of the issues. Deeport: General Information and Confidential Instructions to the Federal DCR Negotiator 894-029 5 1. Light–would be limited to only “clean” light industries such as high-tech production industries; “dirty” plants would be excluded. 2. Medium–would exclude the “most dirty” heavy industries, but would allow a limited number of plants including food processing plants. 3. Primarily heavy–no industry would be excluded, but the mix would probably be dominated by oil refineries, petrochemical plants, steel production plants, and a resource recovery plant; these are the industries which would benefit most from construction of a deepwater port. Air pollution, water pollution, and waste disposal would vary with the industry mix selected. But, regardless of the “industry mix” in the project, all industries would conform to existing federal and state pollution regulations. Issue #2: Ecological Impact If the present Deeport plan is enacted, the dredging of the access channel, the creation of the island, and general construction activity at the port could disrupt existing “ecologically delicate” areas both on and off shore. Damage would most likely include the alteration of nesting habitats, a reduction in natural tidal flushing, the destruction of wetlands, land erosion, adverse effects on existing fisheries, and subsurface geological disruption (caused by drilling and dredging). Deeport admits that the new deepwater port could cause some damage to the ecological setting, but also claims that such damage would be within the limits defined by federal and state regulations. Environmentalists, however, counter that the damage would be excessive, and that Deeport has no right to disrupt the area. In light of these arguments, three outcomes are possible. 1. Compliance with legal standards for environmental protection: This would involve unremedied disruption to the ecological balance. Fish and animal nesting habitats would be altered (or effectively destroyed), valuable wetlands would disappear, water temperatures and currents would change, and certain types of aquatic flora and fauna would be destroyed. All this would take place within Federal and State impact mitigation guidelines. 2. Maintenance and repair of the ecology, beyond compliance: This would involve special precautions to divert construction and dredging activity (where possible) away from the most ecologically delicate areas. In addition, it would include the relocation or recreation of habitats destroyed by unavoidable dredging and construction. 3. Improvement of the ecological setting beyond maintenance and repair: Like the previous option, this would include special efforts to by-pass delicate areas during construction and dredging. But it would also include a variety of other affirmative efforts to improve the local environment. Environmentalists propose on-going fisheries management and wildlife protection programs, the creation of new and larger protected wetland areas, an active anti-erosion program, and the construction and operation of a small waste treatment facility to treat effluents flowing into the estuary from the Banksedge River. 894-029 Deeport: General Information and Confidential Instructions to the Federal DCR Negotiator 6 Issue #3: Employment Rules Construction and operation of the deepwater port is expected to generate hundreds of new jobs in the community in both the short run and the long run. These jobs can be distributed among potential employees in one of four ways. 1. Unlimited union preference: Jobs would be reserved for local union workers, where appropriate. This would enable local union members to claim as large a share of the new jobs as possible. 2. Union Quota of 2:1: Limited preference could be given to union members where the ratio of unionto non-union workers would not fall below 2 to 1. 3. Union Quota of 1:1: The ratio of union to non-union workers would not be less than 1 to 1. 4. No union preference (unrestricted hiring practices): Deeport would be free to hire whomever it chooses. In this scenario, most workers would probably be non-union workers, enabling Deeport to maintain the maximum degree of labor flexibility and to reduce expected wage costs. In addition, many of the new workers might be drawn from outside the state. Issue #4: Federal Loans The newly created federal Department of Coastal Resources (DCR) has a mandate to promote economic use of coastal areas while preserving the environmental integrity of these areas. It can provide a substantial loan (or guarantee private borrowing) to help cover the construction and operating costs of the port over the next 20 years. DCR is also interested in seeing the port developed, but has implied that there will be strings attached if it lends money for the project. Deeport estimates that the total cost of the project will be $4 billion. It has requested $3 billion in guaranteed loans, although three other options are possible. 1. No federal loan. 2. A $1 billion loan over the 20 year period. 3. A $2 billion loan over the next 20 years. 4. A $3 billion loan over the next 20 years. Issue #5: Compensation to Other Ports in the Region Deeport believes the new port will generate significant economic growth both in and outside the state. It contends that the entire regional economy will be improved by the port, and that the other four major ports on the Eastern seaboard will benefit from this growth as well. The other ports, however, expect to suffer a substantial loss of traffic once the new port begins operation. Based on a consultant’s in-depth analysis, they have estimated the present (discounted) value of their losses to be roughly $600 million. These four ports argue that they should be compensated for their prospective losses. In light of this conflict, five possible options are up for consideration. Deeport could provide: 1. $600 million (or 100% compensation) to the other ports. Deeport: General Information and Confidential Instructions to the Federal DCR Negotiator 894-029 7 2. $450 million (or 75% compensation) to the other ports. 3. $300 million (or 50% compensation) to the other ports. 4. $150 million (or 25% compensation) to the other ports. 5. No compensation. If any of the first four options is agreed, this money would be paid by Deeport to the other ports at the outset of the project. (In particular, Fed DCR cannot provide compensation to the other ports; any such payments must come from Deeport.) Though the ports would be free to spend this money as they wished, they could use these funds to make changes in their design which would enable them to serve more effectively as feeder ports for the new deepwater port. Part II: Confidential Instructions for the Federal DCR Negotiator Only Deeport’s recent application to build and operate a deepwater port in Seaborne is very intriguing. We are certainly interested in seeing a deepwater port finally developed on the East Coast. Unfortunately, some of our lower level staff appeared over-eager in initial discussions with Deeport and would have gladly committed our entire budget to this venture had my Deputy Secretary not stepped in! This meeting seems a perfect opportunity to test the strength of Deeport’s commitment to the project, and to wrangle some concessions in return for our funding. Given our dual mandate� to develop our nation’s coastal resources while preserving the environment�we will obviously seek some concessions from Deeport on environmental issues. But we have an interest in all five issues up for discussion today. Scoring. In order to help you plan your negotiating strategy, our policy shop has constructed a special 100-point “scoring” scheme to illustrate which negotiable outcomes are of greatest and least importance to us. Under this scheme, the most preferred set of outcomes is worth 100 points to us; the least preferred is worth zero. You can earn up to 100 points depending upon how each of the five issues is resolved. Dealing with real issues in terms of “points” may seem a bit artificial and awkward. But for the purposes of this negotiation, it enables us to combine our several interests�developing the coastline, appeasing our congressional oversight committee, retaining control over important projects, etc.� into a single “currency.” This, in turn, allows us to compare the gains and losses associated with different issues. In addition, using “points” allows us to compare the benefits (and costs) of a negotiated agreement with our alternatives to negotiated agreement. In this case, we would be willing to support any proposal worth at least 65 points to us. Any project worth fewer than 65 points would cost us some credibility, and would probably flounder for lack of economic and political support. (There are also several other projects we might elect to subsidize should we opt against funding this particular port.) Your task is to encourage construction of the port while minimizing our costs. Your success will be gauged by your point total; try to earn as many points as possible in this negotiation. This is not being greedy� it simply means that we want to further our legitimate interests as far as possible. We can support projects worth at least 65 points, but that is the bare minimum we can accept. If no agreement is reached, your score is 65 points. We certainly hope you will do much better. 894-029 Deeport: General Information and Confidential Instructions to the Federal DCR Negotiator 8 Federal loan. This issue is obviously of paramount importance to us. Our preference would be to have at least some financial involvement in the project in order to retain a measure of control over its operation. Furthermore, if we support the port and it is successful, our institutional credibility will rise considerably. This is particularly important to our department at this time because we are so new. Similarly, the current administration would also like to claim credit for helping to establish the East Coast’s first deepwater port. Fortunately, we have complete control over federal money on projects of this nature. Thus, we can effectively veto any agreement we do not support which requires a federal loan to go forward; if a project could be purely privately funded, however, our opposition may not suffice to stop it. The deepwater port appears to be a worthwhile project warranting our support. Unfortunately, we do not have unlimited funds to bestow on this project, and so have assigned the following points to this issue: • $3 billion federal loan = 10 points • $2 billion federal loan = 26 points • $1 billion federal loan = 40 points • No loan = 0 points As indicated by the point distribution, we would definitely prefer some financial involvement to none. But our Congressional oversight committee is anxious to see significant private sector involvement in all projects we underwrite. Consequently, our first choice is to provide just $1 billion. While Deeport will have a somewhat difficult time raising $3 billion, it should not be impossible. (We think they already have almost $2 billion in potential commitments lined up.) Yet, while the $1 billion loan is our optimal outcome, it will take some fancy footwork to get Deeport to agree to such a low level of support. We will need to extricate ourselves from the previous, albeit tentative, commitment made by our junior staffers to provide $3 billion in support. In addition to the Seaborne deepwater port, there are several other projects being planned on both the East and West coasts, many involving improvements to existing ports. While we acknowledge the tremendous public benefits associated with a deepwater port on the East Coast, we would like to spread our money across as many worthwhileprojects as possible. Supporting these other projects would prove especially beneficial from a political perspective, because they would diversify our support across many congressional districts. Of course, providing too little funding for a project to succeed would not serve our interests in a “showcase” success story for which our support was indispensable. Ecological impact. In light of our dual mandate, we cannot accept a port which promises to do substantial damage to the environment. On the other hand, we do not want to burden Deeport with improving the environment if such improvement threatens the economic viability of the port. Trying to assist Deeport without alienating the environmentalists will prove extremely difficult, but we must make an effort not to tip the scales too far in either direction. We feel very strongly that the Banksedge River environment must be protected. It would be disastrous to the fishing and shellfish industries if Deeport were to build the port without regard to the environment; every effort must be made to persuade Deeport to minimize destruction of the natural environment. We believe it is possible to construct an economically viable port without wreaking havoc on the ecology of the region. We have, therefore, assigned the following points to this issue: Deeport: General Information and Confidential Instructions to the Federal DCR Negotiator 894-029 9 • compliance with laws and regulations = 0 points • maintain and repair = 20 points • improve = 25 points As you can see, we are not averse to improvements. We can, after all, win some political credibility if improvements take place. But we are far more concerned that Deeport at least agree to maintain and repair the setting. Improvements should be considered “icing on the cake.” Compensation to other ports. This is a tricky issue for us because the four other ports in the region are part of our newly-created constituency. In addition, we cannot risk alienating members of Congress who are from coastal areas other than Seaborne. We would, therefore, be somewhat reluctant to sign an agreement that specifically excludes these ports from consideration. On the other hand, we do not want to jeopardize the economic viability of the deepwater port by imposing huge compensation costs on it. Since this compensation would be paid “up front,” it could pose a substantial burden for the developer. If compensation is to be paid, responsibility for doing so is up to Deeport. Our agency cannot directly compensate the other ports or “earmark” any part of any loan we provide to Deeport for this purpose. (By the same token, we cannot forbid Deeport from using any of its funds for this purpose.) Overall, we prefer the compromise solutions to either of the two extremes. Our analysts suggest that, in fact, the other ports have over-estimated their projected losses. We think a fair solution would be compensation of roughly $300 million. While these other ports may lose some business, they will undoubtedly gain other business as feeder ports. The following points are assigned to the various compensation levels proposed: • $600 million = 4 points • $450 million = 8 points • $300 million = 15 points • $150 million = 12 points • No compensation = 0 points Industry mix. This issue is moderately important because of its impact on the environment. But while our mandate requires us to be sensitive to environmental concerns, we need not be overly sensitive. Here we think the environmentalists’ demands may be a bit extreme. While we agree that the “light,” all clean industry mix would create the least environmental damage, it would also unduly limit Deeport’s flexibility in securing commitments from industries interested in locating in the vicinity of the port. Deeport should be free to develop a reasonably diverse industry mix. Too narrow a mix would make the port extremely vulnerable to fluctuations in the economy. Moreover, “medium,” clean/dirty industries are much more likely to benefit from access to the port than light industries. Finally, we are not convinced of the legality of prohibiting certain industries from locating at the port. Clearly, companies which do not agree to abide by environmental laws can be excluded, but it is not clear that those which do meet the most stringent environmental standards can be legally banned. We have, therefore, assigned the following points to this issue: • heavy = 0 points • medium = 11 points • light = 5 points As you can see, we again prefer the compromise position to either of the two extremes. 894-029 Deeport: General Information and Confidential Instructions to the Federal DCR Negotiator 10 Employment distribution. Compared to the other issues in this negotiation, this is perhaps a minor issue to us. Nevertheless, we have some private qualms about tailoring a federally- subsidized project to help organized labor. Workers have not even been hired yet and already the unions are trying to become entrenched. We would be very upset if employment requirements destroyed the economic viability of the project. It must be borne in mind that publicly opposing the unions on ideological grounds is very risky. Nevertheless, you should feel free to lend your support on this issue to any allies whose interests coincide with our own. The following points are assigned to this issue: • unlimited union preference = 0 points • union quota of 2:1 = 2 points • union quota of 1:1 = 4 points • no union preference = 9 points Keeping the unions out of the port will enable Deeport to keep its wage costs reasonably low. It will also provide Deeport with an opportunity to experiment with labor-saving technologies which have historically been blocked by unions at other ports. We have attached a one-page scoring sheet which summarizes the points assigned to each issue. Do not take these points lightly. They reflect deeply felt and carefully analyzed interests. In negotiating, you should treat each and every point as if it represents millions of dollars of your money. Remember that the value of no-deal to us is 65 points. We are certain you can do much, much better. Do remember though that this information is CONFIDENTIAL! Do not physically show your scoring sheet to anyone. You may verbally convey some or all of your scoring information to any of the other parties, but do not let anyone actually see your scoring sheet. Good luck. I am confident that you will negotiate an extremely valuable agreement for us. General Information and Confidential Instructions to the Federal DCR Negotiator 894-029 11 FEDERAL/DCR WORKSHEET AND RESULTS Your Name: _______________________________ Your Pairing (Team) No.: ________________ Your participant no.: _________________________ Was an agreement reached? (circle): YES NO* If there was agreement, was suppor t for it unanimous? (circle): YES NO If support was not unanimous, who did NOT vote for it? (circle below) UNIONS ENVIRONMENTALISTS FED DCR GOVERNOR OTHER PORTS Issue/Option ........................................................Total 1st 2nd 3rd Final Points Vote Vote Vote Results Terms A. Industry Mix (Circle) 1. heavy ........................................................ 0 A1 (0) Points 2. medium ................................................... 11 A2 (11) 3. light ........................................................... 5 A3 (5) _______ B. Ecological Impact 1. compliance ............................................. 0 B1 (0) 2. maintain and repair ............................... 20 B2 (20) 3. improve ................................................. 25 B3 (25) _______ C. Employment Rules 1. unlimited union preference.................... 0 C1 (0) 2. union quota of 2:1 .................................. 2 C2 (2) 3. union quota of 1:1 .................................. 4 C3 (4) _______ 4. no union preference ............................... 9 C4 (9) D. Federal Loan 1. $3 billion .................................................. 10 D1 (10) 2. $2 billion .................................................. 26 D2 (26) 3. $1 billion .................................................. 40 D3 (40) _______ 4. no federal loan ....................................... 0 D4 (0) E. Compensation to other ports 1. $600 million ............................................ 4 E1 (4) 2. $450 million ............................................ 8 E2 (8) 3. $300 million ............................................ 15 E3 (15) ______ 4. $150 million ............................................ 12 E4 (12) 5. no compensation ................................... 0 E5 (0) TOTAL Final* Total _______ VOTING RECORD: (circle) PARTY First Vote Second Vote Third Vote Deeport Y N Y N Y N Union Y N Y N Y N Fed DCR Y N Y N Y N Environmentalists Y N Y N Y N Governor Y N Y N Y N Other Ports Y N Y N Y N Total __ __ __ __ __ __ *Minimum needed to vote for an agreement = 65. (This is your score if the negotiations fail and no agreement is reached.)
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