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.