Saturday, October 27, 2012
Romney’s Big Navy Guru Made Millions From Building Ships
By David Axe October 23, 2012
...one of Romney’s most important advisers on Navy issues, a man who oversaw a massive naval expansion for Pres. Ronald Reagan, there’s more at stake than U.S. national security. John Lehman, an investment banker and former secretary of the Navy, has strong and complex personal financial ties to the naval shipbuilding industry...
Lehman invested in a government-backed “Superferry” in Hawaii — a business that ultimately failed, but not before boosting the standing of Austal USA, an Alabama shipbuilder that constructed the ferry service’s ships. Austal USA’s rising fortunes in turn benefited international defense giant BAE Systems, which then bought up shipyards owned by Lehman in order to work more closely with Austal USA.
...But Ryan Sibley — an editor at the Washington, D.C.-based watchdog Sunlight Foundation who has closely tracked the former Navy Secretary’s investments — says that ”Lehman’s involvement with the Superferry shows that he is no stranger to using personal connections to influence costly decisions.”
...Lehman was the chairman of Hawaii Superferry, a transportation startup based in Honolulu that briefly provided passenger service between the Hawaiian islands of Oahu and Maui. It relied on a new type of fast catamaran ferry built by Austal USA, a shipbuilder in Alabama specializing in speedy aluminum vessels.
Founded in 2003, Hawaii Superferry secured a $136-million loan from the Maritime Administration, a federal agency that oversees sea transportation. Lehman’s own equity firm, the controlling private investor, put $85 million into company. Hawaii Superferry also benefited from $40 million in port enhancements paid for by the state of Hawaii.
The ferry company bought two ships from Austal USA, each more than 300 feet in length and capable of carrying hundreds of passengers plus their cars at speeds in excess of 30 knots. The vessels cost $105 million apiece.
The first ferry entered service in mid-2007. But with low ticket prices and soft demand, the service was a money-loser. The company was also mired in controversy over the environmental impact of its facilities. In 2009 Hawaii Superferry declared bankruptcy. Lehman reportedly lost his entire $85 million investment, and says his total losses were much, much greater than that.
“The two Hawaii Superferrys that we built — on time, and on budget — were operated in commercial service, with no government customers,” Lehman tells Danger Room. “We were put out of service by the chicanery of the State Supreme Court and we lost over $300 million.”
But in another regard, the ferry was a smashing success. Austal USA, which builds aluminum warships for the Navy, was angling to build military versions of the Hawaii ferries to meet a new Pentagon requirement for fast transports called Joint High-Speed Vessels, or JHSVs. “Building the Superferry was very helpful in demonstrating that we can build these ships,” said Bill Pfister, Austal USA’s vice president for external affairs.
Out of direct public view, Superferry officials touted their ship’s military potential. Superferry’s pitch to the Hawaiian Public Utilities Commission included a slide claiming the ferry could haul the Stryker vehicles belonging to a Hawaii-based brigade. The company paid a lobbying firm $70,000 to try to convince the Navy to add the ferry to a program that assigns military transportation jobs to civilian vessels.
In late 2008, the Navy tapped Austal USA to build 10 military versions of the Hawaii ferry for $1.6 billion. Some critics have questioned whether Superferry was intended all along to serve as a proof-of-concept — admittedly, a money-losing one — for a much more valuable military program. “The fact that the Superferry was already in the water, proving its seaworthiness while the JHSV contract was being considered, suggests that it may have always been intended as a prototype or demo model for the larger deal,” Koohan Paik and Jerry Mander, who penned a book about the ferry controversy, wrote in The Nation.
Superferry president Thomas Fargo, also a J.F. Lehman & Co. board member, denied the claim. “We always get the question, ‘Was this designed as a military operation?’” he told The New York Times. “That’s absolutely not true.”
Regardless, the Hawaii ferries themselves did become military assets. In 2010 the Maritime Administration sued to take over the two ships in order to recoup some of its $150 million investment. The administration later sold both ferries to the U.S. Navy for a total of $70 million.
At first glance it’s not clear how Lehman could have benefited from his money-losing investment in Hawaii Superferry. The answer lies in another of the former Navy secretary’s investments: the Atlantic Marine family of shipyards. In 2006, Lehman purchased the shipyards in Alabama, Mississippi, Florida, Boston and Philadelphia for a reported $170 million. In 2009, the federal government awarded three of the yards $2.7 million in stimulus grants for improvements.
In 2010 international defense giant BAE Systems, which handles ship repairs among other specialties, acquired the Florida, Mississippi and Alabama yards for $352 million — ringing up an estimated $180 million profit for Lehman that more than makes up for his “failed” investment in Hawaii Superferry. Lehman held onto the remaining two yards in Philadelphia and Boston. Recently both have received lucrative ship-repair contracts from the Navy. They could receive even more such contracts if the sailing branch were to grow at a faster pace, as Lehman intends.
Today the Alabama yard, which is adjacent to Austal USA’s own facilities, plays a critical role in military programs on which Austal USA and BAE Systems collaborate. “We launch both their JHSV and [Littoral Combat Ship] vessels with our dry docks; we also support Austal with warranty repairs, if requested,” BAE Systems spokesperson Stephanie Moncada tells Danger Room. Austal USA did not respond to an e-mail requesting comment on the company’s relationship with BAE.
In addition, Austal USA does work on aluminum structures as part of BAE Systems’ ship-repair contracts with the Navy. Being in such close proximity to each other makes BAE Systems and Austal USA’s collaboration possible, or at least more efficient.
Even before the acquisition of the Alabama yard, BAE Systems enjoyed close ties with Austal USA, namely in providing guns and radios for the Littoral Combat Ships Austal USA builds for the Navy. That made BAE Systems an obvious prospective buyer for Lehman’s yards — the Alabama one in particular.
But Lehman’s investments in the partially taxpayer-funded Hawaii Superferry reportedly helped Austal score the military transport deal, thus improving the business case for a closer partnership between Austal USA and BAE Systems. That partnership is being facilitated by BAE Systems’ Alabama shipyard, purchased at a 100-percent markup from Lehman.
To put it plainly, Lehman’s investment in the failed, government-backed Superferry boosted Austal USA, whose rising fortunes also benefited BAE Systems, which in turn bought up Lehman’s shipyards — improved by stimulus funds — in order to work more closely with Austal USA. That roundtrip deal helped earn Lehman’s firm a reported $180 million profit. In that sense, Lehman in fact more than doubled his $85 million investment in Hawaii Superferry, with a big assist from the taxpayers.
“While I don’t know how typical Lehman’s conduct is, his involvement with the Hawaii Superferry suggests his expertise lays in the strategic deployment of taxpayer resources for personal gain,” Sibley, the watchdog, tells Danger Room.
Lehman calls the allegation “kind of amusing. We have never owned a shipyard that builds Navy ships. We have owned four shipyards that repair, not build commercial ships and Navy ships. The Navy business made up about 15 to 20% of the repairs. We still own two of those four, having sold the other two to BAE.”
Ultimately BAE Systems, whose shipyard purchases added significantly to Lehman’s already substantial personal worth, stands to earn potentially tens if not hundreds of millions from the ships specified in Lehman’s naval buildup scheme. Each LCS costs around $500 million; the Navy plans to acquire at least 55 of the ships. As Romney’s naval adviser, Lehman specifically promised to continue the program, and mentioned possibly adding more combat gear to the vessels — gear that could be built by BAE Systems.
...Perhaps none of this will have an influence on a Romney Pentagon. Perhaps the campaign’s talk of a massive naval buildup will fade as budget realities set in. But if a Romney administration does embark in such an enormous increase in military shipbuilding, it’s worth noting that one of the brains behind the expansion has profited rather handsomely by encouraging the Navy to build.
Monday, May 14, 2012
Monday, March 19, 2012
Four More LCSs Contracted
Bypassing the DoD's DefenseLink system, the Navy announced yesterday the exercise of options on its contracts with the two LCS contractors covering the next four ships, LCS 9 through 12. Read the announcement here. The table below shows the current status of the program. March 17, 2012.
Monday, March 19, 2012
Seaward Services (SSI), a HMS Global Maritime (HMSGM) company based in New Albany, Indiana, is pleased to announce that it has been awarded a contract through Military Sealift Command (MSC) to operate and convert the former Hawaii Superferry vessels HSV Alakai and Huakai for MSC...
The contract is anticipated to extend to last for one year and will end with the delivery of the vessel to Naha, Okinawa, Japan, where it will provide services to the 3rd Marine Expeditionary Force...
Monday, September 19, 2011
The U.S. Maritime Administration, which put the two vessels up for sale on an “as is, where is” basis in late June, has received four bids.
They were due by 5 p.m. July 20.
The administration is “working expeditiously with bidders and other interested parties in evaluating its options, with a goal of maximizing the government’s return from these vessels,” according to a spokeswoman.
The June 20 sale notice in the Federal Register made it clear the ferries would not be given away.
The administration reserved “the right to reject any and all bids and to seek additional bids from the bidders and any other interested parties.”
The plan was to sell the ferries together – they would be sold separately only if they could be sold at the same time, according to the notice.
Also required: cash sale or owner-procured financing, plus a $500,000 non-refundable deposit for each ferry.
The administration took possession of the ferries in July 2009 after a bankruptcy judge ruled that the owner – Hawaii Superferry Inc. – could abandon them to lenders, owed nearly $159 million. The administration, which guaranteed the loans, moved them to Norfolk. -- Robert McCabe
Thursday, August 11, 2011
Taxpayers Stuck With Unsold Ferries in Default
August 10, 2011 by kyle
Bloomberg published an article about the wasteful Maritime Administration (MARAD) loan guarantee program, which became the reluctant owner of two high-speed ferry ships after the Hawaii Superferry went bankrupt in 2009:
Two passenger ferries sit at a dock in Norfolk, Virginia, waiting for someone to take them off the government’s hands.
The U.S. Maritime Administration has taken bids for them in an attempt to recover some of the $138 million in taxpayer money paid to cover defaults on loans it guaranteed for the owners, Hawaii Superferry Inc. The company sought bankruptcy protection and defaulted in 2009.
The unwanted ferries are reminders of the defaults and oversight problems reported as recently as December in the so- called Title XI program as vessel owners have won $798 million in new loan guarantees this year, the most since 2001. As it considers two applications for an additional $712 million in guarantees, the maritime agency is trying to recover what it can on $311 million paid out to cover six defaults since 2008.
After protests and legal challenges disrupted Hawaii Superferry operations, the Hawai’i Supreme Court finally ruled that the special legislation retroactively exempting the Superferry from the state’s environmental review laws was illegal. However, it was the company’s arrogance and collusion with state officials to circumvent the environmental review process that doomed the venture from the start. As the article points out, even down to the rationale for the MARAD loan guarantee program, the Superferry project was driven by politics and special interests:
The program’s bipartisan supporters, such as former Senator Trent Lott, a MississippiRepublican, and Democratic Senator Daniel Inouye of Hawaii, credit Title XI with creating jobs and supporting national defense and the U.S. commercial fleet. The U.S. fleet shrank from 17 percent of the world’s oceangoing merchant ships in 1960 to less than 1 percent in 2008, according to the Bureau of Transportation Statistics.
Five guarantees approved since President Barack Obama took office in 2009 will create 8,000 jobs, maritime agency Administrator David Matsuda said in an e-mail.
The program has survived elimination attempts because supporters in Congress “logroll” to keep funding it, said Chris Edwards, director of tax policy studies at theCato Institute. “Some of these ships are built in their districts, and they’ll fight to the death for it,” Edwards said in an interview. His Washington-based group advocates reducing government spending and lower taxes.
Politics drove decisions to give guarantees to some companies that eventually defaulted, Clayton Cook, the maritime agency’s general counsel from 1970 through 1973, said in an interview.
He cited American Classic Voyages Co., chaired by billionaire real-estate investor Sam Zell, which received a $1.1 billion guarantee for two cruise ships under the banner of Project America. Five subsidiaries of the company accounted for $330 million of the $490 million that defaults cost the government from 1993 through 2002.
Inouye sponsored a provision in a defense bill called the U.S. Flag Cruise Ship Pilot Project, he said at a hearing in 1999. The project gave American Classic Voyages exclusive rights to operate cruise ships in Hawaii, the company said in a Securities and Exchange Commission filing in 2000. The ships were to be built at Ingalls Shipbuilding in Pascagoula, Mississippi, Lott’s hometown. Lott declined to be interviewed.
American Classic Voyages filed for Chapter 11 bankruptcy in October 2001. The default cost taxpayers $187 million, according to the maritime agency.
“The project, while proceeding with considerable difficulty, including delays and increased costs in construction, ultimately became a victim, like many other industries, of the September 11 attack on our nation,” Inouye said in a floor speech in 2003.
Inouye didn’t respond to a question about the default, saying in an e-mail that “loan-guarantee programs are one of the many ways that government can partner with the private sector to create jobs and expand the economy.”
Hawaii Superferry, chaired by former Navy Secretary John Lehman, spent up to $20,000 a year lobbying Congress, the maritime agency, the Environmental Protection Agency and other agencies on Title XI and “vessel financing issues” between 2004 and 2006, according to federal lobbying disclosures. The loan guarantees helped the firm finance the ferry purchases from shipbuilder Austal USA, based in Mobile, Alabama.
The Superferry’s default occurred because a Hawaii court ruled the state shouldn’t have let the company skip an environmental impact study, said William Schubert, maritime administrator from December 2001 to February 2005. “The people of Hawaii wanted the service, and when it went to the state Supreme Court it pretty much put an end to the program,” Schubert said in a phone interview.
The quote from Schubert is incorrect on a few ponts. Activists figured out early on that the Superferry business model was unprofitable. As Austal USA, the shipbuilder, pointed out to the Hawaii Superferry executives in the beginning, the ships on order were too large for the Hawai’i market. But they did meet military specifications, which in the end, paid off for Austal, who leveraged the Hawaii Superferry as a proof of concept to win a contract to supply Joint High Speed Vessels to the military. Some people from some islands may have wanted the Superferry. But many strongly opposed the project as another threat to the environment and sustainability. And Hawaii taxpayers were left holding the bag for $40 million in state harbor improvements that were never recovered from the company.
Monday, June 20, 2011
DEPARTMENT OF TRANSPORTATION
Offer for Public Sale of Two High Speed Vessels
AGENCY: Maritime Administration (MARAD),
SUMMARY: MARAD is offering for public sale, on an ``as is, where is''
basis, two fast ferry vessels, ALAKAI, Official Number 1182234, and
DATES: Bids may be submitted on or before 5 p.m. July 20, 2011.
FOR FURTHER INFORMATION CONTACT: David Heller, Office
SUPPLEMENTARY INFORMATION: The Maritime Administration
All bids must contain specific information on the offer price, details of
The successful bidder will be required to submit a $500,000 deposit
approved by the Maritime Administrator. The successful bid will be
By Order of the Maritime Administrator.
Dated: June 14, 2011.
Acting Secretary, Maritime Administration.
[FR Doc. 2011-15147 Filed 6-17-11; 8:45 am]
BILLING CODE 4910-81-P