Superferry: Romney’s Advisor Made Millions

From Wired Magazine

A bigger maritime force has the possibility of personally enriching one of the candidate’s top advisers. In fact, it already has.

Lehman is the founder and chairman of J.F. Lehman & Company, a private equity firm. He also sits on several corporate boards.

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.

When all was said and done, the roundtrip deal helped net Lehman’s firm a reported $180 million. And besides that, Lehman continues to own shipyards that do lucrative maintenance work for the Navy. Even leaving aside the intricate ferry-and-shipyard series of deals, Lehman still stands a decent chance of profiting from the naval buildup he is helping to plan…

…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.

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.

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.