MarEx 18

March 2007

Hawaii Superferry Green Marine: Reducing Stack Emissions PortVision: Watching the Bottom Line TWIC Cometh: Are You Ready?

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CONTENTS

February 2007 Tony Munoz Editor-in-Chief tonymunoz@maritime-executive.com

Joseph A. Keefe Managing Editor jkeefe@maritime-executive.com

Evan Naylor Art Director evan@maritime-executive.com

John J. O’Connell, Jr. Senior Copy Editor harvardjo@maritime-executive.com

Brett Keil Senior Vice President Sales & Marketing bkeil@maritime-executive.com

Elizabeth Cash Sales Administrator Elizabeth@maritime-executive.com Published by TM Marketing Group, LLC

EDITORIAL: Innovation

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EXECUTIVE ACHIEVEMENT: Kenny Rogers, President, Seabulk Towing, Inc. 3

by Tony Munoz

WASHINGTON INSIDER by Joan Bondareff and Duncan Smith

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THE GREENING OF MARINE POWER: New Ideas Creating Clean Energy

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CASE STUDY: J.F. LEHMAN & COMPANY and the HAWAII SUPERFERRY

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EXECUTIVE INTERVIEW: JOHN F. LEHMAN Chairman, J.F. Lehman & Company

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TWIC IS HERE: Are You Ready?

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NEW TECHNOLOGY USES AIS SIGNALS: Watching the Bottom Line Closely

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by Joseph Keefe

by Joseph Keefe

by Joseph Keefe

by Craig Thomas

by Joseph Keefe

The Maritime Executive, LLC (ISSN 1096-2751) 3200 S. Andrews Avenue, Ste. 207 Fort Lauderdale, FL 33316 Telephone: (866) 884-9034

HAWAII SUPERFERRY The Maritime Executive 1

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case study: J.F. Lehman & Company

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EDITORIAL INNOVATION

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Joseph Keefe Managing Editor

Distribution of The Maritime Executive: Markets Served: Shipbuilders and repairers

15% Naval architects, lawyers, consultants, and insurers

58%

Ship owners, operators, managers, charterers, and brokers

13% 7%

Marine equipment manufacturers

5% 2%

Government

Other

International Circulation: Canada

19% 36%

Western Europe

16%

Asia

14% Scandinavia

7% South & Central America

5% 3% Eastern Europe Other (Africa, Australia, Misc. Island Nations)

Domestic Circulation: Other East Coast

2% 26%

28%

West Coast

29%

15%

Gulf Coast

Midwest

here’s a notion out there that the maritime world is resistant to change. I personally don’t take very much stock in this way of thinking. A great deal of change has been thrust upon the marine transportation industry over the past two decades and, though there have been more than a few bumps in the road, shippers and their chosen carriers have met every challenge with remarkable efficiency. The cumulative effect of ISM, OPA 90, ISPS, SOLAS, STCW, TWIC and the six other acronyms I can’t seem to remember has nevertheless been decidedly profound.

These changes have also produced more than a few startling innovations, some of which will change the maritime world forever, and inevitably for the better.

Taking things a step further, and at the risk of sounding somewhat provincial, the pervasive foreign attitude that innovation cannot emanate from this side of the pond is just dead wrong. It is a feeling which infects so many sectors of our core businesses, whether they be shipbuilding, the introduction of new technologies, or even the application of sound business practices. In this issue of The Maritime Executive, you’ll read about any number of new products and initiatives, including one brought about by onerous government regulations and another borne from and using a security / safety regulation to develop what appears to be a highly effective business tool. Both of these groundbreaking products are home-grown.

At the heart of this issue of MarEx, we have taken a different tack on the subject of the passenger vessel industry. One company’s effort to transform a way of life through the use of an internationally-tested, but domestically unknown business model is on the cusp of becoming a reality in Hawaii. This diverse and successful private equity firm is bringing its own brand of innovation to the American maritime markets. But I’m not going to steal its thunder; the business case study and executive interview in this edition puts these concepts into sharp focus.

Beyond innovations and sound business practices, there’s plenty of good reason for more optimism. MARAD’s Sean Connaughton has embarked upon a course of developing a genuine “American Marine Highway” from the ashes of the broken promises of short-sea shipping. His new plans also include finding berths for American mariners on the LNG vessels that call at U.S. ports. Numerous MarEx readers have advised me in no uncertain terms that there is plenty of American expertise to run those ships when the time comes. The determination of the American LNG mariners who safely and flawlessly manned thousands of LNG voyages – and bitterly remember losing those vessels to the reflagging – should not be discounted. Today, if those same LNG ships were being considered for reflagging, we might see a different outcome. But don’t take my word for it; just ask the good folks at DP World.

It is a global economy and the world really is flat. Larry Rigdon, the Chairman & CEO of Rigdon Marine, is running one of the most modern fleet of offshore support vessels in the world and under U.S. flag. He initially used Congressionally authorized foreign capital initiatives to finance the deal. Aker Shipyard in Philadelphia and other domestic shipbuilders are using modular parts imported from Korea and other places to build Jones Act tonnage right here in America. At the same time, the former Secretary of the Navy, John F. Lehman, thinks that America can compete in the global arena if given a level playing field; any in any number of niche shipbuilding sectors. Where others only talk about it, he put his money where his mouth is when he bought Atlantic Marine Holding Company. There is a place for America in the world’s maritime markets; at sea, ashore and in research and development roles. The next time you think about innovation, think again.

Managing Editor Joseph Keefe can be contacted at jkeefe@maritime-executive.com with

comments, input and questions on this editorial or any other piece in this magazine. The Maritime Executive welcomes your participation in our editorial content.

MarEx

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The Maritime Executive

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EXECUTIVEACHIEVEMENT

Kenny Rogers President Seabulk Towing, inc.

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n the era of the Oil Pollution Act of 1990, “best-achievable technology” was the environmental mantra for oilspill prevention. During the “great tugboat debates” of San Francisco Bay, its Harbor Safety Committee measured tugboat bollard pull and tested tractor tugs and twin-screw boats under various tanker escort scenarios. Tethering a tractor to a laden tanker, which could maneuver into the hydrodynamic mode as a braking device, was touted by environmentalists and various propulsion manufacturers as the panacea for best-achievable technology for safe tanker escorts.

While conventional boat operators adamantly protested that their boats could also be tethered to a transiting tanker, tanker operators seemed to prefer tractor tugs for escorting duties due to their hull configurations in braking, maneuverable agility, and the ability to work within tightly confined docks.

As the oil industry anxiously watched the heated debates in the Bay Area, the oil-man imagined being ripped to shreds on a witness stand by a U.S. attorney for hiring a less-expensive conventional boat while a “magic potion” tractor tug sat at a dock after one of his ships carrying Alaskan crude lost steerage and hit a bridge, spilling oil, which was now polluting the Farallon Islands 17 miles outside the Golden Gate Bridge. Being locked in the horns of an environmental dilemma of this magnitude could absolutely make grown men weep and

shudder at the mere thought of it. Consequently, tractors won the day for tanker escorts without one governmental entity proclaiming their superiority for the job.

Also during this period, Hvide Marine, a Fort Lauderdale-headquartered tug operator, built the tug Broward, which is a traditional tractor, and a harbor docking tractor proclaimed as the “Ship Docking Module.”

The “SDMTM,” as the vessel is known, was “road tested” in Maritime Executive Magazine’s Summer Edition in 1998 and was named Best Harbor Tug of the Year.

Unfortunately, Hvide Marine went into bankruptcy. The reorganized company was then re-named Seabulk International, and the tugboats operated under the new name of Seabulk Towing. Enter Kenny Rogers, a seasoned mariner known for his shore-side management skills, to become the towing division’s president. Rogers immediately began looking for ways to increase revenue and market share, but the constraints of reorganization were limiting in terms of expansion and capital investment.

However, it didn’t take Rogers long to understand that he was sitting on a gem of a harbor docking vessel.

The SDMTM was receiving high marks from harbor pilots, masters and vessel operators due to its agility and power.

Additionally, Rogers began reviewing the labor costs for the boat and noted the vessel could be easily handled by just an operator and a deck hand.

After reviewing the architectural drawings and building costs for the vessel, Rogers knew that there was no other

vessel like this in the world, and through sheer tenacity and respect for this uniquely designed ship he began marketing a patent-licensing agreement to other tug operators. Almost immediately, a Spanish operator voiced interest in the SDMTM and an agreement to build four of these vessels was consummated. Soon, a number of other international tug companies began inquiring about the SDMTM, and now there is a buzz in the industry about this powerful marvel from South Florida.

MarEx finally caught up with the hard-charging Kenny Rogers to discuss the success of the Ship Docking Module, which is capturing the attention of operators around the world who are interested in building next-generation tractor tugs.

MarEx: The SDMTM has been a well-recognized tractor technology in the southeastern United States for almost a decade.

How do you explain the recent enthusiasm about the boat’s technological abilities?

Rogers: There has always been a tremendous amount of interest in the SDMTM. However, over the past few years there has been a spike in interest, and I think it’s because a lot of foreign ship masters have witnessed the boat’s maneuverability and are now sharing their experience with their peers.

We have been using the SDMTM in our fleet for over eight years now. The Tampa Bay pilots and Port Everglades pilots really appreciate how agile the boat operates in very tight quarters. The tug can truly provide full thrust in any direction in an instant and can move swiftly along a ship’s hull from bow to stern without The Maritime Executive 3

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ever changing its directional position.

MarEx: How did the first patent-licensing agreement take place?

Rogers: Well, that took place about three years ago in conversations with Reyser, a Spanish tug operator. They were quite interested in the design of the vessel and wanted Seabulk Towing to patent-license the vessel to them for their own use in many of the ports where they operate in Spain.

During the period of our final negotiations, Reyser had pointed out to us that they had done extensive testing on a number of tractor tug designs and discovered that the SDMTM was far superior in every facet of harbor operations. The endorsement by a European operator was an important milestone because we have always felt the Europeans were global leaders in tractor tug design and technology. This was monumental in every sense of the word, and we began to revisit the merits of licensing and marketing the SDMTM technology around the world.

MarEx: Would you sell the patentlicensing agreement to domestic tug companies?

Rogers: Well, in general the domestic tug market is in complete chaos regarding new construction and tug designs. The design of the SDMTM has an advantage in terms of building costs and operational efficiencies. Of course, she cannot work offshore or rescue the Space Shuttle, but at the end of the day the boat works competently in docking and undocking huge commercial ships in tight quarters and under adverse conditions safely.

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There are many designs of tugs in the marketplace being pushed around to operators, and the operation of these boats is clearly expensive. The advantages of the SDMTM boats are their economical operations and low building costs. So the answer to your question is “yes.” We would patent-license the SDMTM to any domestic operator that desired next-generation technology at a reasonable cost.

MarEx: You mentioned that Reyser had done a pretty extensive analysis of available tractor designs. What do you think was the ultimate selling point for them in terms of innovative technologies?

I mean, isn’t a tractor tug a tractor tug in its fundamental functionality?

Rogers: First, let me say that the SDMTM is not a multi-platform vessel.

This is a single-purpose platform vessel dedicated to docking and undocking ships, which also adds to the economy of operation of the vessel.

Reyser was looking for a stable platform for docking and undocking operations in Barcelona. In fact, two SDMTM tugs are currently working there.

The company has discovered that the boats are much more economical than they ever expected and their technologies are far superior to anything else operating in the marketplace. And now they have now ordered two more copies.

MarEx: Like they say in Missouri, showing is better than telling, right?

Rogers: Of course. As a general statement, the simplicity of the construction, the economics of operating, the reduced need for crew due to the high technology,

the efficiency of the bollard pull in all directions, and the ability to operate in tight narrow areas certainly added to Reyser’s excitement about the SDMTM. MarEx: You have mentioned that the domestic tug market is in chaos.

Is that because conventional boats seem always to be built by a particular operator for some particular region?

And with tractors being the norm on the U.S. West Coast, what future do tractors have on the Gulf and East Coasts?

Rogers: I believe that tractors are more suitable for the Eastern Seaboard because of the more varied type of traffic. In the U.S., tractors were being designed and built to meet the escort requirements along the West Coast due to regulatory requirements.

Along the East Coast, tractors have been built because of preference by operators. As things progress in the future, I think that the SDMTM could meet the needs of operators docking commercial ships of all sizes and magnitudes on the East Coast.

MarEx: Good point. Container ships are becoming absolutely monolithic in terms of TEU capacity and sheer girth.

Do you foresee the SDMTM managing 10,000 TEU vessels in the future?

Rogers: Again, we’re back to the economics of its operational abilities.

Tug operators have always been confronted by ship operators negotiating rates over technological nuances of boats. It’s just a fact of life.

The SDMTM can provide docking companies a streamlined base of economics while providing next-generation services. The SDMTM can offer operators a competitive advantage in competitive markets. Every port has its confined areas and narrow channels. The SDMTM was especially designed for Port Everglades due to those exact issues.

As the hulls of ships have gotten larger, the space to operate near and about them has gotten tighter. The SDMTM has proven again and again to pilots and masters that it is a unique technology of the future. Furthermore, it has proven to Reyser and our company the value of its economy of operation.

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WASHINGTON INSIDER

Washington Insider

First 100 Hours and Beyond: Impact on the Maritime Industry

By Joan bondareff and Duncan smith With a mandate from last November’s election, the Democrats have taken over the leadership of both the House and Senate and changed the direction of Congress on a plethora of issues. Within the “first 100 hours,” the Democrats in the House, with some Republican support, passed six bills ranging from raising the minimum wage to repealing tax benefits for the oil and gas industry.

Democrats take over the chairmanship of all the committees in both chambers with considerable influence over their agendas, while previously powerful Republicans move into the role of Ranking Members, or senior leadership positions on the Republican side of the aisle. It’s natural to ask: What impact will this change have on the maritime industry? We attempt to answer this question below.

New Leadership of Key Congressional Committees

Unfortunately, the days where one committee focused on the maritime industry, a la the former House Merchant Marine and Fisheries Committee – of which the authors are both staff alumni – appear to be over. In the House of Representatives, jurisdiction over the industry is still divided between several committees, including Transportation and Infrastructure, Homeland Security, Armed Services, and Natural Resources. Congressman Jim Oberstar (D-MN), a known supporter of the Coast Guard and maritime industry, assumed responsibility for the Transportation Com6

The Maritime Executive

mittee as Chairman, and Congressman John Mica (R-FL), with considerable expertise in the aviation and cruise industry, is the Ranking Member. Port security is a top priority for Chairman Oberstar.

Congressman Bennie Thompson (D-MS) is the new chair of the Homeland Security (HLS) Committee, and Congressman Peter King (R-NY) is the Ranking Member. A focus of the HLS Committee will also be on port and maritime security issues. The Armed Services Committee has jurisdiction over shipbuilding and related matters under the jurisdiction of the Maritime Administration. A seasoned member of the House, Congressman Ike Skelton (D-MO), takes over as chair, while newly announced presidential candidate, Congressman Duncan Hunter (R-CA), moves to the Ranking Member position. Finally, Congressman Nick Rahall (D-WV) is Chair of the renamed Natural Resources Committee, and Congressman Don Young (RAK) is his Ranking Member. Congressman Young is well known for his strong support of the maritime and fishing industries.

The principal Senate Committee of jurisdiction remains the Senate Commerce, Science and Transportation Committee. There, long-time supporters of the maritime industry are the newly designated leaders. Senator Daniel Inouye (D-HI) is the new Chair, and Senator Ted Stevens (R-AK) is the Ranking Member.

Port security work also falls within the bailiwick of the Senate Homeland Security and Government Reform Committee. In

a role swap, the HLS Committee is now chaired by Senator Joe Lieberman (I–CT) with Senator Susan Collins (R-ME) as the Ranking Member. Finally, on the Senate side, Senator Barbara Boxer (D-CA) is the new Chair of the Senate Environment and Public Works (EPW) Committee with Senator James Inhofe (R-OK) as the Ranking Member. Senate EPW is responsible for the Water Resources Development Act, fondly known as WRDA, where all water infrastructure projects related to waterways are considered.

Hot Topics for the 110th Congress

Port and Aviation Security The House, as part of the “first 100 hours” package, passed H.R. 1, entitled “Implementing the 9/11 Commission Recommendations Act of 2007.” H.R. 1 contains important provisions affecting the maritime and aviation industries. For example, the bill contains requirements that 100% of all cargo transported in ship containers and on passenger aircraft bound for the United States must be inspected. This is a remaining loophole from the Aviation and Transportation Security Act of 2001 (Pub. L.107-71).

A critical requirement of H.R. 1 is that, in five years, all containers entering the United States must be scanned with equipment approved by the Secretary of the Department of Homeland Security (DHS), and each container must be secured with a seal that meets DHS stan-

We expect greater Congressional oversight of ongoing DHS programs that affect the maritime industry. These programs include the Transportation Worker Identification Card (TWIC) program, the Secure Freight Initiative, the Container Security Initiative (CSI), and the recently-enacted enhancements to the Customs Trade Partnership Against Terrorism (C-TPAT) program. dards. The requirements for 100% inspection of air and maritime cargo have been controversial in the past. The shipping industry argues that the technology does not exist to conduct 100% scanning in a cost-efficient and effective manner and wants to await the results of a pilot project underway in three overseas ports to test scanning technology of the type now in use in Hong Kong. The Bush Administration has also objected to this provision, but has not threatened a veto. Instead, we expect the Administration to work with the Senate on additional changes to H.R. 1.

There is no identified funding mechanism to implement the new requirements

of H.R. 1. However, Senator Joe Biden (D-DE), now Chair of the Senate Foreign Relations Committee, has proposed the creation of a $53.3 billion HLS Trust Fund to fund 100% scanning of all air and sea containers with funding delivered by a partial rollback of the tax cuts enacted in 2001 and 2003. Last year, Congressman Oberstar proposed a one-time, $50 per container fee to pay for 100% scanning.

According to some press reports, the Democratic House leadership is looking to industry and overseas ports to pick up these additional charges. As a practical matter, it will be left to the Appropriations Committees in both chambers to decide

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how much to allocate to port and maritime security when they consider the FY 2008 budget for DHS. The FY 2007 budget for port security grants was only $210 million.

Other HLS Initiatives and Congressional Oversight We expect greater Congressional oversight of ongoing DHS programs that affect the maritime industry. These programs include the Transportation Worker Identification Card (TWIC) program, the Secure Freight Initiative, the Container Security Initiative (CSI), and the recently-enacted enhancements to the Customs Trade Partnership Against Terrorism (C-TPAT) program.

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WASHINGTON INSIDER

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WASHINGTON INSIDER

There already has been increased attention to this initiative because of recent problems with the delivery of the new National Security Cutter class of ships and calls for increased Coast Guard oversight of existing contractors. Similarly, there is much congressional oversight of the program to build the Littoral Combat Ship, which is the responsibility of the Department of the Navy.

Coast Guard Authorization and Water Resources Development Act Two bills not completed in the 109th Congress which are certainly apt to resurface in the 110th Congress are the Coast Guard Authorization bill – a perennial favorite for authorizing maritime projects – and WRDA. Chairman Boxer of Senate EPW and Chairman Oberstar of the Transportation Committee have pledged to work together to resolve the differences that prevented passage of last year’s WRDA bill and address the pent-up frustration to move forward with much needed infrastructure projects for improving the nation’s waterways.

Summary and Forecast

Given the leadership of the key committees above, we expect the attention to maritime industry issues to remain at the same level as in past years; however, greater attention and consequently perhaps more funding will be provided to those issues that are related to maritime and homeland security. We also project that the Coast Guard Authorization and WRDA bills will be completed this year providing the opportunity and mechanisms for much needed change in programs to address maritime issues. These legislative vehicles bear close watching as Congress and the Administration engage on maritime initiatives. Finally, we predict that a Remaining FY 2007 Budget Work version of H.R. 1 will make it into law and FY 2008 Budget Forecast and it will contain consensus provisions Littoral Combat Ship Although Congress completed work on the FY to address highlighted Congressional Congress last year enacted the “green 2007 budget for DHS and the Department of concerns in the maritime sector. lane” initiative, a mechanism to expedite Defense, it only passed a Continuing ResoluAbout the authors: clearance of containers from trusted tion (CR) for all other agencies. This means Ms. Bondareff is of Counshippers, as part of its comprehensive that no new programs for such agencies as sel to Blank Rome, LLP, SAFE Port Act (Pub. L. 109-347). DHS is the Maritime Administration can be started where she specializes in asking for private sector participation in without further authorization and funding. maritime law and governthe development of two plans authorized The leaders of the Appropriations Comment relations. Ms. Bondby the SAFE Port Act: the strategic plan mittees, Senator Robert Byrd (D-WV) and areff is the former Chief for international supply chain security, Congressman Dave Obey (D-WI), announced Counsel of the Maritime Administration. and the plan for resumption of trade that they would simply extend the CR until in the event of a significant terrorist the end of FY 2007, but would consider Duncan Smith is a disruption of trade at a U.S. seaport. In additional funding for some new programs. partner in Blank Rome addition, new TWIC rules to implement House and Senate passage of the CR are LLP and a Senior Principal the first phase of the TWIC program were underway as this article goes to press. in Blank Rome Governjust announced (see www.dhs.gov).

The President has just announced his FY ment Relations LLC, Another area for increased oversight is 2008 budget in February, which will give a where he engages in a likely to be the Coast Guard’s Deepwater better idea what the Administration proposes broad-based legislative and administraProgram. There already has been increased for maritime programs. One alert – DHS will attention to this initiative because of not fight a separate line item for port security tive practice. Mr. Smith is the former recent problems with the delivery of grants. The Administration has also proposed Republican Chief Counsel of the House the new National Security Cutter class a significant increase for coastal and marine Merchant Marine and Fisheries Committee and a former law specialist in the Coast of ships and calls for increased Coast conservation efforts in FY 2008. The exact Guard’s Office of the Judge Advocate GenGuard oversight of existing contractors. impact and nature of the Administration’s eral. After 36 years of service, Mr. Smith Similarly, there is much congressional proposals and what they mean for maritime recently retired from the U.S. Coast Guard oversight of the program to build the programs will unfold in the congressional Littoral Combat Ship, which is the respon- debates over the beginning months of 2007. Reserve in the grade of Rear Admiral. sibility of the Department of the Navy.

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The Maritime Executive

Well into the first quarter of 2007, the ports of Los Angeles and Long Beach continue to set new records for general commerce, throughput of TEUs and a host of other cargo volume benchmarks. Not coincidentally, and also increasing at a similar pace, is the pressure from a wide array of external sources for ports and the ships which call at their docks to improve their environmental standards. As a result, measurable improvements in the environmental performance of many marine platforms have been realized. Perhaps more exciting, however, is the level of innovation being created by the demand for cleaner air. Marine operators are now discovering that there’s more than one way to get to the Promised Land.

The Maritime Executive 11

Wittmar’s U.S. patent covers an invention that provides a method and apparatus for providing temporary electric power to both stationary and moveable locations. Its system, unlike that currently being installed at POLA, is modular, portable and generates electricity over a wide range of voltages and frequencies.

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The Maritime Executive

…POLA told MarEx that “The barge works very well for China Shipping. We would not use this for cruise vessels,… we are requesting container customers to place transformers (if required) and cable management systems on board.”

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The Maritime Executive

The brownouts …of summers past are still fresh in the memory of local residents. When and if they happen again, the wisdom of using a fixed, shoredependent system will come under intense scrutiny.

The Maritime Executive 15

“We’re committed to getting a certain percentage of our power from renewable energy, like windmills, for example.”

At some point, the port hopes to bring the total amount of energy derived from renewable energies to 50%…

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The Maritime Executive

RIGDON MARINE: THINKING FORWARD INTO THE NEXT GENERATION OF OFFSHORE MARINE SERVICES.

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A Maritim for Adding Value Maritime Executive Readers: Meet J.F. Lehman & Company Well past the middle of the first decade in this new millennium, the world of marine transportation and associated maritime business finds itself in arguably the most robust period of prosperity and expansion since the United States starting launching a ship-per-day during World War II. Ships are being built all over the world to answer the projected demand for LNG and, here at home, coastwise product tankers, and a new generation of brown-water vessels is being produced in surprisingly large numbers. Hand-in-hand with all of this is an unprecedented number of innovations emanating from a wide range of maritime entrepreneurs. It is, quite simply, a very good time to be in business for all things “maritime.”

As the high price of crude oil fattens the bottom lines of oil companies everywhere, the continued strong demand for fossil fuel energy also beckons energy producers to find new sources of supply. Money is literally pouring into the business of exploration, and the essential maritime component of that surge has become a willing partner and grateful beneficiary. And despite the most difficult regulatory environment imaginable, everyone, so it seems, is making money and lots of it.

The smart money says that the current trends and situations (opportunities?) can’t last forever; the inevitable downswing will hit the industry eventually. The maritime world has traditionally been one of the business sectors most vulnerable to the vagaries of the market, and the next retreat from today’s heady atmosphere will likely be especially painful. In the meantime, there is money to be made, and there is no end to the different market categories that are taking advantage of it. Some firms, however, are concentrating on much more than the bottom line. J.F. Lehman & Company, a leading middle-market private equity firm, is one of them.

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Case Study: J.F. Lehman & Co. HAWAII SUPERFERRY

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case study: J.F. Lehman & Company

J

.F. Lehman & Company (JFL) was founded in 1992 by its namesake, John F. Lehman, the former Secretary of the Navy. The firm focuses exclusively on the marine, aerospace and defense sectors. With offices in New York, Washington and London, JFL has, until now, largely gone about its business in a quiet fashion, while making a sizable splash in the areas where it felt that its combined expertise could make a difference. In a short period of time, JFL has completed 10 investments in 13 companies with an aggregate transaction value of about $1.3 billion.

And while the money is certainly important to JFL and its institutional investors, it only represents a part of the story.

John Lehman is quick to let you know that, while he may be one of the founding partners of JFL and today serves as managing partner, he’s only one cog in the wheel, which includes a high-octane mix of savvy executives.

All of these individuals have worked with Lehman before, most notably Tig Tig Krekel Krekel, who has extensive experience running companies in the aerospace, defense and maritime industries.

Another key player is George Sawyer, who served as assistant secretary for shipbuilding during Lehman’s tenure at the Pentagon. The others, now numbering nine in all, bring their own unique skills to the table and form the George Sawyer basis for every decision made at JFL, for every project.

Adding Value = Added Profits Twenty-five years ago, when the private equity markets began to heat up, the basis for most of it was financial engineering. Often it involved buying and breaking conglomerates, and selling the pieces for more than the whole. Market timing and doing the things that Wall Street likes to see and hear were, for many of these LBO firms, the basis for making money. A familiar line in Thomas Wolfe’s bestselling book, Bonfire of the Vanities comes to mind. In the book, Sherman’s investment employment is roughly described as “taking little bits of nothing and creates money out of them.” And in the early 1980s, the adage “Wall Street loves layoffs” had real meaning.

That sort of “one-way, money first” practices can no longer work in today’s private equity markets, says John Lehman. They are especially out of place in an industry where the acronyms ISM, OPA 90, SOLAS, ISPS, TWIC and a raft of others are now a part of daily life. If you are a maritime executive and you don’t know what any of the foregoing regulations entail, then it’s probably time to take a step back and figure out how soon your firm is likely to fail.

At the heart of the JFL business model is the effort to add 20

The Maritime Executive

“We never buy a company without first having a clear idea of how we can grow it by adding value.” The JFL concept of “adding value” is probably what sets it apart from many other similar entities. It is clearly value to each and every firm in the JFL portfolio. Lehman maintains that the only way to make money now is to pay a good price for a good company – and then make it better.

The JFL business template, developed by the JFL management team, is applied to each and every investment that JFL considers. The model begins, as any well-considered business investment should, with quantifiable due-diligence benchmarks. At JFL, these benchmarks include legal, accounting, customers and markets, and examination of the potential acquisition’s technology, just to name a few. Says Lehman, “We never buy a company without first having a clear idea of how we can grow it by adding value.” The JFL concept of “adding value” is probably what sets it apart from many other similar entities.

It is clearly the foundation for the firm’s success. Lehman continues, “I can say with satisfaction that every company we’ve ever acquired is a better company now than when we acquired it.”

The JFL Way: Many Different Companies, Identical Business Models Lehman defines adding value with a broad stroke. Running contrary to the well-established Wall Street tenet of reducing costs by laying people off, JFL usually adds

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case study: J.F. Lehman & Company

the foundation for the firm’s success. Lehman continues, “I can say with satisfaction that every company we’ve ever acquired is a better company now than when we acquired it.” employees and increases base compensation to employees, from top-to-bottom. In the JFL business model, then, adding value is synonymous with growing the company.

Usually, this means adding jobs – it might mean the adjustment of the employee mix in a given department; but in most cases, the headcount will go up. Managers are encouraged to invest in the firm, and equity incentives for everyone are based strictly on performance. The CEO at a JFL-controlled entity, then, is in a terrific position to make a lot of money – or none at all beyond his base compensation package.

More and more, private institutions, pension funds and foundations are shifting money away from publicly traded companies and looking to the private equity sector. The reasons why are many and, while it is convenient to blame the gradual shifting of funds to dissatisfaction with bloated, runaway CEO compensation that is in no way tied to company performance, the real reason may simply rest in the desire to invest in an entity which has to benchmark its performance every day.

JFL is, simply put, a “buy-out” firm. A typical JFL acquisition involves 33% JFL money with the balance of the investment financed by others. While the venture capital spectrum of the private equity world extends all the way

from seed money for nascent start-ups to growth capital for existing businesses, JFL acquires only those firms that it has identified as being already profitable and with real growth potential. Racal Acoustics (RAL) is one of those companies, and while Racal’s core businesses take MarEx a bit off the maritime path, this particular success story is one worth exploring.

Setting the Bar: The Racal Model RAL was an established supplier of personal military communications equipment that could trace its roots back to the early 20th century. The company’s core business and products involved protecting the hearing and enhancing the battlefield effectiveness of ground, air and naval military personnel. JFL was attracted to the opportunity based on the firm’s long-standing brand identity and leading global market share, established positions on key, long-life cycle strategic armored vehicle programs, a large installed base generating long support lives and upgrade opportunities, close customer relationships, manufacturing practices subject to strict qualification, and regulatory requirements including MILSPECs and export controls.

After identifying the strong earning visibility of RAL and the potential for further growth, JFL acquired a majorThe Maritime Executive 21

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case study: J.F. Lehman & Company

ity stake in March of 2004. Less than two years later, JFL had exited this investment, leaving behind a substantially better performer with a larger market share. While the financial aspects of this deal remain largely proprietary, the investment represents one of the best examples of the JFL business model, achieved in a substantially shorter time frame than is usually necessary for this type of turnaround and expansion. By substantially increasing free cash flow, a 50% reduction of net acquisition debt was achieved in the first year, and the goals of the JFL five-year plan were realized in the second year of the investment period. How they accomplished this is perhaps easily understood, but less easily executed.

As is the case with virtually all of JFL’s acquisitions, RAL was a solid business with superior technology.

Immediately and in partnership with a newly configured management team, JFL sponsored the execution of three primary strategies. First, driving cross-functional operating improvements, JFL initiated a comprehensive supply chain management strategy, instituted lean manufacturing processes, and streamlined RAL’s production capabilities.

RAL achieved significant year-over-year improvements in all customer and operational metrics while reducing headcount. Specifically, the following operating and financial initiatives were achieved:

n Meaningful reductions in lead times on highest volume

products; n A substantial increase in average inventory turns; n Measurable gains in manufacturing efficiency; n Substantial improvements in both supplier and cus-

tomer on-time delivery performance and, as a result: n Substantial improvements in customer on-time pay-

ments were realized, and n Improved profitability.

Reinvigorating the core competencies of the business was the second key to this success story. JFL recognized RAL’s outstanding technology and growth potential and immediately worked with management to focus the business on developing new products applicable to its changing market. This involved establishing a tight feedback loop between the sales and engineering departments, substantially increasing research and development spending, and materially increasing the sales staff. During the investment period, RAL developed or introduced five new products including the world’s first digital Active Noise Reduction military headset technology and a new field-line communications system (RA4800) that enabled secure digital and voice communications over a 10-kilometer area. These efforts substantially improved RAL’s order backlog and further cemented its position as a mar-

RAL was a solid business with superior technology. Immediately and in partnership with a newly configured management team, JFL sponsored the execution of three primary strategies. First, driving crossfunctional operating improvements, JFL initiated a comprehensive supply chain management strategy, instituted lean manufacturing processes, and streamlined RAL’s production capabilities.

RAL achieved significant year-over-year improvements 22

The Maritime Executive

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”

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case study: J.F. Lehman & Company

John Lehman is clearly passionate about the seemingly limitless potential for the Hawaii Superferry. He concedes that the start-up operation, while unproven in Hawaii, is anything but an unproven technology elsewhere in the world. Basing his market research in part on the Canary Islands model, Lehman points to the five superferries now employed there, all of them profitable. With the Hawaiian Islands remaining as the world’s last major archipelago without an inter-island ferry service…

ket leader in this field.

Finally, and no less important to the overall JFL effort, was to foster the penetration of the U.S. market. JFL and management immediately set to work to jump-start a strategy to enter the lucrative U.S. defense market. This involved establishing a wholly-owned U.S. subsidiary staffed by dedicated U.S. sales and marketing personnel. New products developed and designed specifically for the rapidly growing U.S. market allowed JFL to assist RAL in addressing more than a few very large new contract opportunities with U.S. defense customers. RAL’s credentials in the world’s largest defense market are now second-to-none.

Hawaii Superferry: Adding Value to JFL, Adding Value to Hawaii The much-heralded Hawaii Superferry represents somewhat of a diversion from the usual JFL acquisition. The sleek Superferry, launched only in January and currently receiving the final finishing touches in an Alabama Shipyard, hasn’t yet carried a single passenger, moved one vehicle or even arrived at its intended market location.

That John Lehman and his partners would take a chance on a still unproven Jones Act market adventure makes the story particularly exciting. Why the first inter-island ferry service for the Hawaiian Islands is a good bet for success is at the root of the JFL decision to invest. As is the case with any maritime investment, experience counts.

John Lehman is clearly passionate about the seemingly limitless potential for the Hawaii Superferry. He concedes that the start-up operation, while unproven in Hawaii, is anything but an unproven technology elsewhere in the world. Basing his market research in part on the Canary Islands model, Lehman points to the five superferries now employed there, all of them profitable. With the Hawaiian Islands remaining as the world’s last major archipelago without an inter-island ferry service, this underserved market is expected to embrace the arrival of the Hawaii Superferry service in the summer of 2007. JFL did its homework, as always, with this venture.

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The Maritime Executive

The JFL team diverged from the classic “JFL investment model” for this one, but in place of that strategy is Lehman’s enviable record of producing high-quality vessels, ontime and on-budget. Hawaii Superferry, says Lehman, will be no different. The construction of the second Superferry has already commenced, and the first vessel slid quietly into the water in January, on schedule for the July start-up in Hawaii. The sleek, 349-foot aluminum passenger-andvehicle ferry is now 95% complete, with only interior finish work and sea trials remaining before the vessel’s scheduled March delivery.

With George Sawyer at his side, Lehman is leading JFL through the construction phase of the Superferry using the same strategies that he used to negotiate a three- aircraft-carrier “buy” as Secretary of the Navy. The concepts and benchmarks contained in those very innovative and very successful contracts are now being applied with Austal. The same “carrot and stick” approach used with JFL employees translates to a motivated shipyard effort, with incentives to perform. The same team that produced the first under-budget / on-time aircraft carrier in the history of the United States Navy is again building ships. The same guy who helped return $6 billion in cost under-runs to the United States Treasury during his tenure as Secretary of the Navy is probably a good bet to return a solid profit for his investors.

It won’t be long before JFL’s investors find out whether the gamble in Hawaii was a good one, but Lehman says that there is so much more to the story than just profits and losses. As he so eloquently describes in our Q&A segment of this issue, JFL’s investment was not made without extensive market research. What it found was that the local islanders desperately need and want this service.

July’s kickoff of Superferry service in Hawaii promises to change the lifestyle of Hawaiians forever, and for the better. Busses, private autos, repair and delivery trucks will roll on easily, and the mobility of the island’s residents will increase exponentially, and overnight.

The Superferry targets neither existing commercial businesses nor the tourist industry, and the new vessel doesn’t want bulk cargo and isn’t set up to receive it. The local traffic that it will support will do nothing but promote and help grow some of the long-abandoned economies of the islands and, in the end, this will likely increase commercial traffic for existing carriers.

The advent of the new service has not been without its detractors. The status-quo businesses and people who have

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case study: J.F. Lehman & Company

Hawaii Superferry has developed and provided a vessel that features a nontoxic, bottom-paint design specifically intended for Hawaii’s ocean conditions.

Beyond this, the ferry’s environmentally friendly engineering systems promise to eliminate the possibility of discharge of any liquid or solid waste into local waters. Austal’s experience with this type of design is deep… financial interests in the existing monopolies aren’t necessarily happy to see another carrier in the market. Another source of static has come largely from wealthy transplants from the mainland who don’t necessarily want local, lessaffluent residents to finally move freely among the islands.

This summer’s arrival of everyday Hawaiians onto a host of previously unreachable local destinations will provide ample notice that John Lehman intends to do just that, do it often and do it well.

Finally, there have been concerns expressed about the environmental impact of the Superferry on the local ecology. In response, Hawaii Superferry has developed and provided a vessel that features a non-toxic, bottom-paint design specifically intended for Hawaii’s ocean conditions. Beyond this, the ferry’s environmentally friendly engineering systems promise to eliminate the possibility of discharge of any liquid or solid waste into local waters.

Austal’s experience with this type of design is deep, its track-record enviable, and it is the world’s largest builder of fast ferries.

The first Hawaii Superferry promises to deliver leading-edge technology and designs not previously available in any U.S. market. The first ferry will link Honolulu with Maui and Kauai with a second vessel planned for 2009 to serve the Big Island. Designed to reach a speed of 35 knots between islands, the catamaran-style vessel is fitted to allow for the carriage of as many as 866 passengers and almost 300 passenger cars. The vessel’s payload can also be configured to carry up to 28 full-size trucks, giving new meaning to the Maritime Administration’s popular maritime buzzword, “shortsea shipping.”

Navy Roots: JFL’s Maritime Future This issue of MarEx will likely hit the street at about the same time J.F. Lehman & Company makes its next acqui26

The Maritime Executive

sition. Although there is unofficial talk of several other “marine” deals, the August acquisition of the Atlantic Marine shipyards in Jacksonville and Mobile may give the maritime community and investors a clue as to where the highly successful JFL group will go next.

Lehman touts the controlling interest in Atlantic Marine as “a tremendous opportunity for us to bring our experience – what we do – best practices, managing projects, to this business.” The JFL model is already at work in the shipyards where an investment of $10 million in infrastructure is underway, as well as a concerted effort to make the yards safer and attract new skilled workers.

Lehman knows that in order to compete and grow the shipyard business, he’ll have to hold onto his employees, and to do that he’ll need to improve working conditions and ramp up safety at what he calls “already the safest shipyards in America.” Continuing, he says, “If we have to give up some productivity to ensure that redundant safety policies are in place, then so be it.” As a general business policy, JFL conducts a safety audit at every company it acquires, and Atlantic Marine was no different.

You can see that John Lehman likes to be back in the shipyard business, and the prospect of making a lot of money doing it is only a part of the equation. He’s the same guy who fostered the concept of the 600-ship U.S. Navy and today worries about the continued decline of those assets. Spiraling costs in the defense procurement process also trouble him because, he says, “It is effectively disarming us.” The Coast Guard’s ongoing difficulties with its Deepwater modernization program are a prime example of that reality. One can’t help think that things might be different if Lehman were somehow still in charge of the process.

Lehman firmly believes that maintaining a robust commercial shipbuilding program is essential to keeping a Naval shipbuilding base. If he has anything to say about it, no doubt Atlantic Marine will someday garner a much bigger share of that market. Somehow, you get the idea that if it does, new efficiencies and innovations will be just a few of the positive sums of that equation. Along the way, J.F. Lehman & Company and their institutional investors might just make a few dollars as well.

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Executive Interview with

John F. Lehman

Chairman, J. F. Lehman & Company John F. Lehman is the Managing Partner of the private equity firm J.F. Lehman & Company. The former Secretary of the United States Navy (1981 – 1987) founded the firm in 1992, and J.F. Lehman has since completed 10 investments in 13 companies with an aggregate transaction value of about $1.3 billion. With offices in New York, Washington and London, J.F. Lehman is heavily involved in today’s maritime markets. The heritage of this world-class rowing champion and Naval officer perhaps gives MarEx readers a hint of why he remains close to the water and, more importantly, where he might go from here. We caught up with Dr. Lehman in January in his New York office. His candid remarks are laid out here for MarEx readers.

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MarEx: Sir, most people know you best as the ex-Secretary of the Navy, but at the end of the day you’ve done a lot of different things – much more than that. You were Secretary of the Navy – when? And this was the time, I think, when they were talking about the “600-ship” Navy?

JFL: I was Secretary from 1981 to 1987. First of all, that’s when we started talking about the 600-ship Navy. That was our program. And we developed it during the latter couple of years of the Carter Administration. The Carter Administration was a small-Navy administration – they didn’t believe in the need for a large Navy; and you will recall at the time that they were very much in the convergence theory pursuit with the Soviet Union, not the confrontation mode, and President Reagan fundamentally disagreed with the policy of appeasement.

So we had a bipartisan group led by Senator Scoop Jackson and Senator John Tower that put together a defense recovery program. The feeling was – I would say in a majority of Congress – that in the post-Vietnam era and particularly during the Carter Administration the morale and the capability of all of our armed services and especially the Navy was desperately low. There was double-digit inflation, going up to 18 percent, for years; pay was frozen, and most enlisted men in the Navy in 1979 were eligible for welfare and food stamps. And so it was a desperate time and there was a strong feeling, a bipartisan one, that we needed a major rebuilding of our military. President Reagan really adopted that program and it was well thoughtthrough and a balanced program for all the services. The Navy’s piece of this program was the “600-Ship-Navy.”

MarEx: Where did you get your start in government?

JFL: I started with Henry Kissinger in the Nixon Administration. I was one of Kissinger’s first staff members, working for Richard Allen, who was his deputy. I was with Kissinger throughout the entire eight years of the Nixon / Ford administrations at the White House and then at the State Department. Of course, at the time I was a reserve Naval officer and aviator, and so I was very actively involved with the Navy. I knew and felt very strongly about what was happening so when the Carter Administration came in, I left the government and had a consulting firm named Abington Corporation, based in London and Washington. I also worked, pro bono, helping George Bush run for President. When he dropped out, Dick Allen, who was the national security advisor to Governor Reagan, asked me to join their foreign policy defense group.

After Reagan won, I was put in charge along with David Apshire of the National Security Transition Team. Of course, by the time the election came we had this bipartisan-developed plan for rebuilding the Navy. And it was the “600-Ship-Navy” that was very well thought-through and based on a clear strategy for maritime superiority to balance Soviet land superiority.

I was sworn in on February 5th of 1981, which was just two weeks after the inauguration. So I was already confirmed and we had our program and I started testifying on it a week after that. We began to lay out what the maritime strategy was all about: 600 ships, 15 carriers, 100 attack subs and so forth. We had a very coherent program, and we knew how to explain why we needed it, how it was going to affect deterrence and help win the Cold War. MarEx: What was the basis for your Abington Consulting Group? What were you doing back then in terms of business before you came back on as Secretary of the Navy?

JFL: We were advisors to Boeing, Northrop, TRW and a number of other companies, mainly on business in Europe. Our partner was a guy named Allen Chalfont, Lord Chalfont in the U.K. We helped these companies put together projects within NATO. NATO was our real specialty. And our first big project, which we were given a great deal of credit for, was the NATO AWAC program. It had been hanging around for about ten years. We were able to negotiate the final solution for all fifteen nations to sign off on the configuration of the (NATO version of the) AWAC. And we also worked on the 767 / 757 consortium to help them work through all the issues with the U.K. government and NATO governments, including technology transfer issues.

MarEx: Is Abington still around?

JFL: Yes, it is. It’s in the U.K. and I sold my interest in it to Lord Chalfont before I came in as Navy Secretary.

MarEx: Would it be fair to say that your business experiences, then, are at least partially the basis for your business practices today?

JFL: Well, yes. It was very good exposure, but not at the “deck plate” level, but more at the basic business negotiation level of putting together a package that made economic sense for the customer and the producer. This is particularly true when you are dealing with committees of people rather than individuals. So that was an excellent experience for me, but during my six years as Secretary of the Navy I The Maritime Executive 29

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Executive interview

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Executive interview

I felt it was not appropriate for me to go work for a defense contractor.

I’d had too much authority over defense contractors in the past. And I think one of the problems that we’re seeing today is that all the restrictions on the revolving door have disappeared. probably spent 70% of my time on business issues and contract negotiations. That ship that you saw in our reception area is the Theodore Roosevelt. And the Theodore Roosevelt was the first contract that I had responsibility for.

It’s actually an interesting story because the ship had been in the budget in 1977 and (President) Carter vetoed the defense bill because he was opposed to aircraft carriers.

And so the next year the Jackson-Tower group organized an effort to have it added back into the budget and lined up enough votes to overturn the veto. CVN-71 was finally authorized over the President’s objection. When I came in, it was in the process of being negotiated – the contract – and when I was sworn in I stopped the negotiations. Then I had to work out with the Secretary of Defense and the President our shipbuilding package: to build the “600-ship” Navy.

Of course, my partner in this was George Sawyer, who was my Assistant Secretary for Shipbuilding – he was my key contract strategist and business manager for shipbuilding. We came up with a strategy to negotiate a contract with Newport News for two additional carriers to be added to the ROOSEVELT, for a three-aircraft-carrier buy – and get all the benefits of that. It was sole source – we negotiated a very innovative and very successful contract. There was a target price of about $3 billion and then there was a 50/50 share line above and below the target price. Simply put, if Newport News overran the $3 billion, then they had to pay fifty cents on the dollar of the cost for every dollar over the $3 billion until they hit a point of total assumption at 30 percent above the target, at which point they would pay 100% of every dollar over cost. Similarly, there was a share line under the target cost. So every dollar that was saved below the $3 billion price, they got fifty cents. As a result, that aircraft carrier is the first carrier in the history of the United States Navy that under-ran its budget.

We built five aircraft carriers on my watch and every one of them under-ran the budget because we gave them the incentive to do so. We had a real “carrot and stick”: They were allowed twelve percent profit on the overall cost of the $3 billion target, but then they really had an incentive to make more money by finding ways to save costs and get more efficient. It’s why in the six years that I was there we were able to return $6 billion in cost under-runs to the United States Treasury.

MarEx: It’s a great story. But how does what you were doing back then compare to today’s defense procurement practices?

For example, many of the contracts being negotiated today are so-called “cost-plus” deals. Talk a little, if you can, about 30

The Maritime Executive

the differences between the deals negotiated on your watch to what is being negotiated today.

JFL: First of all I would say that, today, defense procurement in general is more out of control than at any time in our history. The costs of everything are just out of control.

When we’re paying $2 billion for what was supposed to be a $400 million LPD – a simple amphibious ship that is a hollow piece of steel which lets the LCACS go ashore – well, that’s almost as much as a nuclear carrier cost in my day. And the reason is that there’s effectively no one in charge. The “reforms” of Goldwater-Nichols in effect took away line accountability in the services. And so everything is done by committee and nobody is in charge of any one program – it’s all the bureaucracy and everything is back to sole source. There are many cost overruns of high-double digits. Effectively, it is disarming us.

MarEx: What’s the composition of today’s Navy?

JFL: It’s in the 270s – and heading for 150. The CNO has an objective of around 320 ships, but the reality of it is that last year we built five ships. And these ships have about a thirty-year life, and in fact they’ve been retiring them a lot earlier than that. So we’re disarming and it’s not just the Navy – it’s across the board. The process has lost all connection with common sense.

Compare that to how we’re building the first Superferry: It’s the first of its class in this shipyard – in fact, in this country. George Sawyer, who built the the 600-ship Navy, is overseeing the construction using the same kind of contract that we used to build all of our ships (with under-runs).

And guess what? It’s on-schedule and on-cost.

MarEx: That’s a great analogy – transferring the Navy contracts to this particular effort.

JFL: Well, actually it’s a little bit stricter now, but the principle is the same. And we have a contractor who has not yet been ruined by the government procurement practices – yet. It’s an interesting question as to whether they’ll be able to resist because if you look at our ship being built at Austal, we have one person full-time there, working for Hawaii Superferry. Next, the LCS 150 feet away is being built and the Navy has 12 people on the floor and a total of twenty overseeing it, and it’s roughly the same-size ship. And both being built to ABS quality standards. And so there’s no reason for that difference. It’s not as if one’s MILSPEC and the other is not.

MarEx: That’s an unusual thing for a Navy ship to be built to ABS standards, is it not?

JFL: In fact, that LCS is the first Navy ship to be built to

We only acquire companies that are profitable and have real growth potential. These are established companies with proven technologies and / or intellectual property. Then – we grow them.

ABS standards.

MarEx: Okay. Let’s come back a little, to J.F. Lehman & Company, and talk about how you got your start. Lead the readers, if you would, on how you got to where you are today.

JFL: When I left the Navy, I felt it was not appropriate for me to go work for a defense contractor. I’d had too much authority over defense contractors in the past. And I think one of the problems that we’re seeing today is that all the restrictions on the revolving door have disappeared.

So everyone goes straight from the Pentagon to a defense contractor.

So I wanted to leave Washington. I love Washington, but it would have been pretty hard for me to make a living without becoming involved with defense contractors, so I decided to try my hand at Wall Street. I felt that the skills that I had – basic business skills and negotiating experience – would be well put to use. So I went to work for Paine Webber.

I worked at Paine Webber in corporate finance for three years and then set up J.F. Lehman & Company with the purpose of trying to do what we did in the Navy by applying the same kinds of disciplines and good business practices. We used lean manufacturing and ISO 9000 tools and those sorts of quality controls, TQM and supply chain management. We employed real discipline in change orders.

We applied these principles in acquiring businesses engaged in aerospace and marine and then built value for investors.

MarEx: You got started in 1992. It’s clear that you’ve applied much of the same business and negotiating skills to J.F. Lehman that you used in the Navy. Can you talk about why you acquired each of the different pieces that make up today’s portfolio – whether that be defense or maritime – why you would sell one versus keeping another, and how that mix is arrived at?

JFL: Sure. First of all, you shouldn’t get the impression that this is only my effort, because this is genuinely a team effort. That is really the key to success in this business. You can’t have one boss and a lot of employees. I knew enough from my experiences in Washington that I had a pretty good idea of what I didn’t know.

We started the company with three founding partners.

Among them was George Sawyer, formerly Assistant Secretary for Shipbuilding and before that Vice President for Operations for Bechtel, and before that an Executive Vice President at General Dynamics. He’s a real hands-on engineer and a tough executive. He had the operational experience that I didn’t have.

The other partner was Don Glickman, who was a former

partner at Lehman Brothers and in corporate finance for First Chicago. His whole career, to this point, had been in finance and on Wall Street. He had an Army background, so all of our backgrounds were complementary of one another.

MarEx: So, operations, finance and in your case, negotiations?

JFL: Not exactly, My overall skill sets and experience are much broader than that. My abilities reach across the board to provide overview and to see that people are working on the right things. Today, negotiating is a very small part of that picture. The process of tearing apart a balance sheet, P/L statement and the like are another thing altogether. I can understand it, but I really need someone to pull it apart and run models, do sensitivity analyses, and really dig into the contract, calculate the expected costs of “completes,” and understand the profitability or lack thereof of each potential deal.

Our management experience is both broad and deep.

Take Tig Krekel, the lead director at both Hawaii Superferry and Atlantic Marine, for example. A Naval Academy graduate – he’s been CEO of companies from $3 million in size to $4 billion in size and, most recently, the CEO of Boeing Space Systems. You’ll find that sort of depth in every office along this corridor, so it truly is a partnership. It’s really satisfying for me to be part of a team where nobody is the prima donna. I’m the Managing Partner, but if I’m away, any one of my partners can step in and handle any transaction that’s going on. Every one of the top four partners knows what is going on in the portfolios of every one of our companies. You hear people talking the talk of teamwork at a lot of places, but this is a true partnership at J.F. Lehman.

MarEx: You are described on your Web site as a private equity firm with an aggregate value of $1.4 billion. Tell us what the difference is between what’s going on at J.F. Lehman and say the typical venture capital firms that are so common today?

JFL: That’s a good question because the private equity world has been growing steadily as a percentage of capital markets in the United Sates and, indeed, in the world. And there are good reasons for this. It’s a very efficient market, of which venture capital is one important segment. That is where a firm invests capital in start-up companies that have new technology and new core-competence. Then they take them, support them and fund them until they make a profit. Once they break into the black, they sell them or they take them public or sell them to a strategic buyer or LBO firm. And venture capital stretches all the way from seed The Maritime Executive 31

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Executive interview

…there are really two questions in there…how do we investigate and what do we examine when we are looking at a company? The other side of this is building the business strategy, plan or model. Once we have decided that we can add value to a company, this aspect of the plan is unique to each and every company. money to growth capital – that’s the venture spectrum.

We’re the next step in the chain. We’re a “buy-out” firm.

We only acquire companies that are profitable and have real growth potential. These are established companies with proven technologies and / or intellectual property. Then – we grow them. When we acquire a company, we generally do it using one-third of our money and about twothirds debt, so about a 2-to-1 debt-to-equity ratio. Before we close on a deal, we have a well thought-through business plan; a first-ninety-days plan, a six-month plan, and similar benchmarks at regular intervals throughout the life of our planned ownership.

We never buy a company without first having a clear idea of how we can grow it by adding value. The length of time which we own a firm depends on how long it takes for us to execute that strategy. Some companies we have successfully executed in a little over a year.

We had a company that we sold last year called Racal Acoustics and we totally re-engineered that company. It’s a little British company with great technologies. They’d never tried to penetrate the American market because Bose had the monopoly on the American market. The first thing we did was to completely reorganize the plant and manufacturing, brought in lean manufacturing and Six-Sigma Light and a supply chain manager. In this way, we completely transformed the way they do business by putting very tight tracking on their cash flow and then helped them market in Europe and the United States. In this case, we were so successful in re-engineering the company and taking them into new markets that we were making the amount of money in the first year that we had targeted in the fifth year. So we’d done what we could, executed our strategy and put it up for sale, and made a significant return for our investment.

MarEx: Is there is a benchmark plan for each and every one of these transactions or is the plan typically unique to each deal. Take our readers through your business processes.

JFL: Well, there are really two questions in there. The first is “How do we do our due diligence?” That is to say, how do we investigate and what do we examine when we are looking at a company? We have a set template that involves legal due diligence, accounting due diligence, customer due diligence, market due diligence and technology due diligence. It’s a long checklist, and actually applying that template to an individual company is different in every case.

And it is very thorough.

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The other side of this is building the business strategy, plan or model. Once we have decided that we can add value to a company, this aspect of the plan is unique to each and every company. For example, building the Hawaii Superferry business plan is a totally different business plan than the one necessary for Atlantic Marine. We have owned twelve major companies. Every single business plan was different, because it was unique to the industry and the technologies of that particular company.

This brings up another important point: When the private equity market, the LBO world, started and really got serious maybe twenty-five years ago, for the first ten years a lot of it was based on just financial engineering. It involved sometimes buying and breaking conglomerates and selling the pieces for more than the whole, buying low and selling high, riding the market, that sort of thing. Today, it’s very different. You can’t consistently make money for your investors without adding value to the company.

The reason that private equity is now growing so much is that now it is an industry of value-adders, rather than financial engineers. Because the only way you make money now – and you have to pay a good price for a good company – is to make it a better company, bringing to it the things that it needs to greatly increase its sales, its productivity and profitability. This is why specialized firms are increasingly the most successful firms in this industry. And I can say that with some satisfaction, because every company that we have ever acquired is now a better company than it was when we acquired it. In many cases, a dramatically better company.

Even those few companies that we’ve had that were not very successful for our investors nevertheless were still better companies when we sold them. That’s why we’re all still in it – we love the business. It’s very satisfying. We don’t make money by laying people off and cutting things down. We have in nearly every case added employees and increased the pay and compensation to everybody, from top to bottom.

If you look at Sperry, we put in place for even the lowest paid employee compensation incentives which were far better than they had before. We never cut benefits. We believe in motivating the people, from the floor-sweeper up to the CEO, to align their interests with our interests. As for the managers, we require them to invest with us. We treat them as partners, not employees, keeping their skin in the game.

We made six multi-millionaires at Sperry because they

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They have to dismantle their outrigger canoes, put them on special pallets, take them down to the docks and then have them shipped by barge to the other island …Now they’ll be able to put their canoe on the roof of their car or SUV – with no extra charge… performed. Their incentives were aligned with ours. They had equity incentives and option plans, and so Sperry was very successful as an investment for us because we re-engineered and made it a new company. And the guys who led that from the management side made a lot of money.

It’s very different than the public sector where CEOs make huge amounts of money whether they succeed or fail.

This is not the case in private equity. We pay competitive and comparable cash salaries and bonuses to what is found in a public company; but if the company doesn’t grow and make money for the shareholders, then management gets no money above and beyond the usual salary. And that’s why more and more institutions and pension funds have shifted away from public companies to private companies.

Because what we do as private equity investors is build value and focus management on growing the company and making money and expanding – which in turn creates more jobs. It’s a much better and simpler formula than what the motivations are in public companies.

MarEx: So, sort of the antithesis of “Wall Street loves layoffs?”

JFL: Absolutely. We’re 180 degrees out from that model.

We only make money if we can grow a company. But Hawaii Superferry is, in many ways, very different than many of the other companies we’ve invested in.

MarEx: And this is probably a good place for us to shift gears and really talk about the Superferry. In many ways, this is a start-up company as opposed to so many other deals that you’ve done.

JFL: Sure. Hawaii Superferry is different in many ways from a classic LBO in that it is a new project. It’s not a venture capital start-up in the classic definition because it is a proven technology, a proven market and a clear existing service. We’re not rolling out a new product here – these super ferries have been in existence and in operation all over the world. They just haven’t been in operation in the United States, until very recently.

MarEx: So let’s talk about due diligence in the case of Hawaii Superferry. What makes you and your partners think it’s going to work there when there’s been nothing, up until now, that would indicate that it would? There are airlines out there that are offering $12 round-trip, inter-island fares for the purpose of putting each other out of business – and perhaps to keep you out of the islands. Can you elaborate on your thought process?

JFL: Sure. Let’s talk about it. We did a lot of market research before committing to this. And a lot of talking to the small business people and we came away totally con34

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vinced that there was a great need that we could fill there.

And we’re not talking about the tourist industry. This is focused on the residents of the islands whose lifestyle is extremely cramped because they have no surface transportation between the islands. It’s a true island community because virtually every family has relatives on other islands.

It’s a very mobile resident population. They move for jobs; they go to cultural and sports events; and it’s very, very difficult for them to get around. They can’t take their cars or trucks.

A good example of this type of constriction is the very popular canoe events. If you’re a serious canoeist, you can’t take your canoes with you. They have to dismantle their outrigger canoes, put them on special pallets, take them down to the docks and then have them shipped by barge to the other island where the competition is. Once it gets there, the competitors have to wait for the canoe to be unloaded, taken off the pallet, reassembled and only then can they proceed to the competition. Now they’ll be able to put their canoe on the roof of their car or SUV – with no extra charge – and just $50 for their car. Three hours later, they’ll drive right off and go to the competition.

There are, at last count, 38 high school championships which take place on the Hawaiian islands. The ability of these teams to travel between the islands, the expense involved, as well as the hassle of traveling will very soon change completely. Before, most teams would have to spend the night on the island. Now, the bus will roll right onto the ferry and the teams can use the special conference areas to better manage the three-hour trip for any number of things, including training and sightseeing. And the sightseeing is spectacular. Once there, they can go to the game and then come back in time for dinner. This is going to transform the quality of life for the residents. No matter how low the airfares get in the islands, they’re not going to compete with us. And we’re not after the airline business.

For most of us, it is hard to understand what life is like on those islands. We take for granted the day-to-day mobility that they don’t have.

As far as the airlines are concerned, yes, there are $27 round-trip fares out there and one of the airlines has said that it is determined to put the other – the weakest – out of business. But everyone knows that these are temporary, predatory fares, just until they clear the market. And even that is a limited advantage because if you change your plans, your mind or want to take a later flight, the fares increase dramatically.

All of the abandoned farms, family farms, and local agriculture that have disappeared because there’s no inter-island transport are going to come back. It’s hard to imagine it, but this is one of the richest states in the union – three full growing seasons, and still they import 90% of their food.

MarEx: There are, of course, existing and entrenched transportation services in place in Hawaii today. Some might not be happy to see you arrive. Tell our readers how you plan to compete with these businesses and, in fact, co-exist?

JFL: Well, all of the analysis that we’ve done says that we are going to benefit the existing carriers. First of all, we’re not competing with bulk cargo. We don’t want bulk cargo.

In fact, we won’t let any cargo on board that is not accompanied. For instance, you can’t take on an eighteen wheeler without a driver. Whatever goes into that ferry has to be on wheels and has to have a driver. And with the arrival of the Superferry, there’s going to be a new coming alive of the local economy – not urban sprawl and development / condos and that sort of thing. All of the abandoned farms, family farms, and local agriculture that have disappeared because there’s no inter-island transport are going to come back. It’s hard to imagine it, but this is one of the richest states in the union – three full growing seasons, and still they import 90% of their food. They have no way to get the crops to central market, which is in Honolulu. Now the family farmer can load the crops, get them to the central market, and be home for dinner. We believe that it will totally rejuvenate agriculture in the out islands. Along the way it will help rejuvenate the family life and indigenous culture associated with these farms.

That’s what we’re targeting. We’re not trying to take anything away from Young Brothers and Matson. But, on the other hand, why should Hawaiians be dependent on the price of tomatoes in California? The possibilities are endless: cattle, livestock, etc. We think that 70% of our revenues – probably more – will come from the local businesses and families in Hawaii.

MarEx: You haven’t yet moved a single passenger or moved one truckload of freight. And at the end of the day most of the value that you will add will be on the island, not in the ferry itself. Where is the profit for your investors?

JFL: Well, we’ll add the value to the island, but this is an economic decision. This is an investment for us. We are investing as fiduciaries, not only our own money but our institution’s money. And we believe that it will be a very profitable enterprise, saving money and enriching lives of the local residents.

We have opposition on the island from just two camps: first, the existing status-quo people who have financial interests in some of the existing monopolies, and then the others who are transplants from the mainland who have their own Gulfstream aircraft and the like, and they effec-

tively want to “pull up the drawbridge” and keep the riffraff out. The Superferry is going to allow local residents to finally move freely between the islands.

MarEx: There’s obviously infrastructure in place out there.

But what kind of new infrastructure will you have to put into place to make these ferries run as smoothly and efficiently as is possible?

JFL: We’re building right now. There is infrastructure there now as well. It’s not yet complete, but we expect it to be complete by July. The state has authorized (appropriated) $40 million to make the modifications to the ports to enable the operation on all four islands. There is already a terminal built in Honolulu, ready to go. The system that we’re using is already in place – we did a lot of our due diligence out in the Canary Islands where they have five super ferries operating; it’s very similar in size, population, far out at sea, distance between the islands, and so forth.

They’ve got fifteen ferries and five super ferries and all of them profitably operated. We’ve been out there several times and patterned our operation in the ports over what they’ve learned by trial and error over the years. And that is a system of barges and ramps, rather than building huge new piers. We’re using the existing piers and there are specially-made barges, a floating dock, which will move with the tides, etc. The rest of the infrastructure will be paving and parking areas, gravel, reconfiguring some existing concrete areas. And when I say parking – what I really mean is “marshalling.” Because we’re trying to match what they do in the Canary Islands, which is so achieve a twenty-minute load and unload sequence.

MarEx: So we’re starting with one ferry and we’re on track for July 2007?

JFL: July is the goal. The ferry is on track, on-schedule and on budget and the ports are on track, on schedule and on budget.

MarEx: When you did your due diligence for this project, did you make any calculations regarding the total economic impact of the Superferry on the islands themselves?

JFL: We haven’t made any calculations of that. We do believe that it is going to generate the best kind of local economic activity - family farms and small businesses.

That’s really what our business model is based on. So we’re not going to create new factories and oil refineries or things like that. What it will do is recreate new communities of farmers that have disappeared over the years on the outer islands.

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...In fact, we’re obsessed by safety. We do a safety audit with every company that we acquire. Not only does this make good economic sense, but it is essential to the culture that you want to establish. ple, from Maui to Honolulu. It just doesn’t work for the small farmer. We’re going to bring ecologically-friendly economic activity to the islands. You look at our decks: We are optimized not for eighteen wheelers but for agricultural trucks, repair trucks and UPS trucks. We are going to literally transform the way of life on the outer islands because people won’t have to wait a week to get their satellite dish to get fixed. In the end, it’s going to take a lot of the hassle out of everyday life.

MarEx: Okay. Let’s shift gears a little bit, once more. We want to talk about Atlantic Marine before we finish up. This is a whole different ball of wax. How much of that do you own? You just finished buying that, right?

JFL: Yes. We closed the beginning of August. We own a controlling interest in Atlantic Marine. We control all of our investments. We do not make minority investments.

Every acquisition we make, we are the controlling shareholders, and we own virtually all but what management owns. This (Atlantic Marine) is a tremendous opportunity for us to bring our experience – what we do – best practices, managing projects, to this business.

And, as you know, Atlantic has two yards – one in Jacksonville and one in Mobile. It was founded about thirty years ago by George Gibbs. George is really a fine guy; I’ve known him for a long time. He did a lot of good work for us when I was SecNav and he’s built a culture in the company of very sound business practices and integrity.

That’s given us a great foundation for us to add our skill sets to, in order to grow the company from what he built.

We acquired an excellent company with good management teams, good workforces and good work ethic. There’s a great culture of work ethic there, but George had not done a whole lot of investing in recent years. And, particularly, after the hurricanes went through there, there was a lot of deferred maintenance. And so we saw a great opportunity to invest significantly to take advantage of the growth in the oil rig business, oil service boat business and the megayacht business – all of which are simply exploding.

MarEx:What’s the biggest ship – length and breadth you can handle today? And do you see yourself expanding to take on bigger projects?

JFL: First of all, we’re focused on some pretty big markets already. We regularly do big MSC ships, tankers, maritime pre-positioning ships and cruise ships, and we have several dry docks. We are also contemplating building or acquiring additional dry dock capacity because we have the space. We are in the process of investing about $10 million in new facilities, upgrading existing facilities, reconfiguring piers and we’ve cleared away some of the old equipment 36

The Maritime Executive

already. In fact, if you’d gone down there in July and then went back today, you’d see a huge difference.

George spent the money very well in those areas where he did invest – and he did invest in the business, although not too much recently. As a consequence, we’ve got a great base to do some sub-contracting, some new construction in Jacksonville. We do not intend to build the capability to be a prime shipbuilder in the sense of taking on a big ship and taking full responsibility for designing and building a ship. We don’t have engineering and design overhead to do that and we don’t intend to get into that. What we do have is the infrastructure and expertise to do major whole ship sections – bows and sterns – major refits across the board.

Let’s be clear: George Sawyer and I have built a lot of ships together and we know what it takes.

MarEx: Speaking of the high dollar construction of parts, bows and sterns, there’s the MTD lawsuit involving the Aker importation of Korean modular parts. All of the American shipyards have suffered in recent years because of the vertical integration of these foreign yards in Korea and other places. In those places, they can decide where to take their losses, whether it’s in the steel yard or the shipyard. Here’s the question: Do you think that you can compete with those foreign yards in terms of modular construction and that sort of thing?

JFL: Yes, I do. We obviously have sympathy for the different contenders and their points of view here. But we believe that we are proving that we can get the efficiency to begin to compete on a level playing field – if we’re able to get a level playing field. But the problem is trying to find a level playing field outside the United States because of the subsidies that you so rightly point out. They take the form of predatory pricing, hidden government subsidies and conglomerates in China, Korea and Japan where they can take the losses elsewhere and deliver a cheap ship.

MarEx:To be fair, American shipyards take their roots from steel, whether it be Bethlehem Steel, Bath, etc. Would it be fair to say that perhaps it will be in the modular construction phase of shipbuilding where you’ll be able to take advantage of things like the cost of transportation differentials in order to compete?

JFL: I am obviously a strong supporter of the Jones Act – it can certainly be improved. It can certainly be adjusted as time goes on, but as Secretary of the Navy I can’t imagine our ability to maintain a Navy without maintaining the commercial work in American shipyards. Because that’s where all the innovation came from. You can look at Austal as an excellent example. Austal has brought all sorts of new and innovative best practices to shipbuilding. We’ve been the beneficiary of this with our Superferry, and the Navy has been the beneficiary in their LCS. And that could

February 2007

Hawaii Superferry Green Marine: Reducing Stack Emissions

J.F. LEHMAN’S NEW HAWAII SUPERFERRY ROUTE

John F. Lehman

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Why is Your Competition Winning The Battle for New Customers?

Chances are it’s not your product or service that’s lacking. Or your people. You may have the best in the business. You may have the largest facility or be the first out of the gate with a great new idea. Your execution getting to market may be superb. In fact, in a pure business equation your company may look nearly perfect on paper. But something is still not right. We see it on a daily basis – good companies and good people working their tails off to grow their businesses. And yet, things are not clicking as well as they should and sales are not where they could be.

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The employees are our first priority. In some places, they say that our customers are our first priority. Well, that’s not the case with us.

Certainly, externally, they are our first priority, but we are first and foremost focused on our people. not have happened without the Jones Act. Without the Jones Act, there would be no shipyard in Mobile building aluminum ships. So we’ve got to keep that infrastructure.

Forget about the price differential!

The innovation and the pressures that come out of commercial shipbuilding are essential to keeping a Naval shipbuilding base. If it was pure Navy bureaucracy running our shipyards, we’d be back in the 19th century. Bureaucracy does not innovate. Take a look at the way the Navy is supervising the building of the LCS and compare it to what we’re doing with the Superferry. We’re on cost and on budget – I hope the Navy is, too, but they’re doing it with twenty people and we’re doing it with one.

MarEx:What else can you tell us about Atlantic Marine?

JFL: What we’re doing is this: We’re investing. We’re bringing in the best safety expert in the country, Bill Shirley. And I’ll say he’s been very impressed with how good the safety culture already is, at both shipyards. He’s also been able to bring a whole new set of best practices that will make the yards even safer. We’re already twice as safe as the industry average in the United States. We can make it several times safer by employing the kinds of practices that we’ve used elsewhere and the kind of things Bill is going to be working with the CEO on. In fact, we’re obsessed by safety. We do a safety audit with every company that we acquire. Not only does this make good economic sense, but it is essential to the culture that you want to establish.

We’ve got a very fine CEO in Ron MacAleer, very innovative. And he’s really taken to the kinds of support we can bring, lean manufacturing, and supply-chain management.

It’s this type of management engineering, supply-chain management that has not penetrated the U.S. shipbuilding market – except in rare cases.

Basically, what we’ve done is taken what was a good culture and two good plants and we are really unleashing them by investing and bringing in the kind of management support that can greatly increase the capacity and throughput, without sacrificing quality. Talk to any one of the 400 repeat customers of Atlantic Marine: We’re known for quality and bidding honestly. There’s no bait and switch, get it in the yard and find a lot of additional work. That’s not the way we do business. It’s why we have 400 repeat customers. But now we can get that work done faster, using more efficiently the infrastructure that we’re building and that which was in place previously.

We have also been very successful in recruiting and training skilled workers and then holding on to them. This is

particularly true in the Gulf, where it has been somewhat of a gypsy profession where people tend to jump on I-10 and move to another place for an additional fifty cents per hour. We have a much more stable workforce. We’re building on that because we have to hold onto these people. The employees are our first priority. In some places, they say that our customers are our first priority. Well, that’s not the case with us. Certainly, externally, they are our first priority, but we are first and foremost focused on our people. At Atlantic Marine, if we have to give up some productivity to ensure that redundant safety policies are in place, then so be it.

MarEx: Without tipping your hand, and you’ve got a lot going on right now with Hawaii Superferry and Atlantic Marine – and all of it very exciting – what’s next for J.F. Lehman?

JFL: Our next acquisition, which should happen before the end of the first quarter, will be on the aerospace side.

And it’ll be a pretty exciting one. But we’re also working on several marine deals, so it’s an exciting time in the marine world because everybody knows that the curse of the marine world is its cyclicality and inevitably there will be a downturn. When that will happen, nobody really knows.

I am a firm believer that this is going to be a very long up-cycle, and whether we’re on the top of that up-cycle or not, I think that the marine industry is going to continue to grow for a considerably longer period because of the unleashing of what’s been happening in Asia. China has had more than 10% growth in its exports for more than ten years in a row. And this is why the shipping industry is continuing to grow and, sure, there will be over-capacity at some point, but I don’t think it’s on the horizon yet. Having said that, we’re not going to be getting into trying to time the market in the marine world.

Frankly, in businesses like “repair,” you’ll benefit by new construction downturns because people have to keep their ships operating longer and things like that. We’re in business to make money for our investors and you do that by doing the things you know have always worked. We intend to stay and grow and invest in those sectors of the maritime business that are less affected or at least somewhat counterbalanced by the downturns in the market. In other words, our investment strategy is not based on exiting a firm based on market timing. We’re configured to prosper in the downturn as well. We’re not over-leveraged and we never will be.

MarEx: You’ve been generous with your time. We appreciate your candor and insight. I know that our readers will, too.

Thank you, sir.

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TWIC

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TWIC is Here: The Real Story, Why and How to Cope The Maritime Community Addresses Yet Another New Regulatory Burden By Craig Thomas he advent of the much-ballyhooed Transportation

Worker Identification Credential (TWIC) is almost upon us. What this means for the maritime community depends on where you sit in the regulatory picture. The TWIC, which was supposed to make life easier and safer in the new millennium, may or may not accomplish that goal. For mariners, shipowners and others involved with the transport of ocean-borne cargo, TWIC represents just one more hurdle in the seemingly endless round of changes to the global maritime regulatory environment. Longshoremen, ship surveyors, pilots, port captains, truck drivers, service technicians, superintendents and an endless list of others now face compliance in the near future. At face value, TWIC is a problem only for the mariners and workers who will be forced to deal with it on the ground, in the industrial environment. In fact, nothing could be farther from the truth.

The Maritime Executive 41

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TWIC

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TWIC

The TWIC card, in its current form, is absolutely necessary according to the United States government. Following the September 11, 2001 terrorist attacks, the United States rightfully took the initiative of proposing an international approach to maritime security at the International Maritime Organization (IMO).

The day-to-day regulatory issues facing the maritime industry already include recently implemented requirements such as the Global Maritime Distress and Safety System (GMDSS), the Oil Pollution Act of 1990 (OPA 90), the International Safety Management Code (ISM), Standards of Training, Certification and Watchkeeping (STCW), International Ship and Port Facility Security Code (ISPS), MARPOL and SOLAS, to name just a few. If these formidable challenges were not enough in a competitive worldwide industry, the arrival of TWIC, which strays from the international protocols in SOLAS and the ISPS Code, will make ongoing compliance that much more difficult.

TWIC Takes Shape: Proposals, Policy and Protocol It is no secret that more than 95% of the ships calling at U.S. deepwater ports are foreign-flag. These ships operate under the security standards established by the ISPS Code as implemented by their flag state. Requiring U.S. vessels, mariners and workers to operate under unilaterally (READ: U.S.) implemented security procedures will arguably place them at a competitive disadvantage. But TWIC is here: The need for applying uniform standards to all ships, U.S. and foreign, should be transparent by now. In this edition, MarEx will explore the nuts-and-bolts of the TWIC program, how it came about, what might have been done differently and, most importantly, how to cope with just the latest potentially onerous regulation to be imposed on the maritime industry.

The TWIC card, in its current form, is absolutely necessary according to the United States government. Following the September 11, 2001 terrorist attacks, the United States rightfully took the initiative of proposing an international approach to maritime security at the International Maritime Organization (IMO). The results were amendments to the Safety of Life at Sea Convention (SOLAS) that adopted the ISPS Code and various resolutions stating principles to be observed in implementing the new international security regime. SOLAS and the ISPS Code, 42

The Maritime Executive

agreed to by the U.S., created treaty obligations that were to take precedence over national laws. The national maritime security regime in the United States is therefore based on the resultant ISPS Code and implemented through our Maritime Security Regulations.

The introduction of the TWIC program, however, signaled that America had once again headed down a different, unilateral path from that which the rest of the global maritime world would have preferred. At the same time, the International Labor Organization (ILO), at the request of the IMO, convened a conference to adopt a new international standard for a Seafarers’ Identity Document (SID). The SID is intended to be used in conjunction with the security regime envisioned in the ISPS Code, which was agreed to by the U.S. That standard is now contained in ILO convention C185 and is based on biometric identifiers using standards developed by the International Civil Aviation Organization (ICAO) for a Machine Readable Travel Document (MRTD). The international SID is intended to be complementary to the ISPS Code for controlling access to secure port areas. Under these separate regimes, foreign mariners / workers will have ILO C185 cards that aren’t readable in the U.S. and, conversely, U.S. mariners / workers will have TWIC cards that aren’t compatible with ILO C185 standards.

With these divergent, but similar systems in the background, the Department of Homeland Security (DHS) issued a Final Rule for the TWIC program in January 2007. DHS intends that TWIC will enhance port security by checking the background and identification of workers, including mariners, before they are granted unescorted access to secure areas of vessels and maritime facilities. The tamper-resistant and biometric (fingerprint) TWIC verifies the holder’s identity by linking that person’s claimed identity, which will include a digital photograph, name, fingerprint template of two fingers and a personal identification number, with a “Smart” Credential number. On its own merit, the card represents a potentially powerful tool.

Upon receipt of the TWIC, an individual will be eligible for unescorted access to secure areas such as regulated port facilities, vessels and Outer Continental Shelf (OCS) facilities. Under the terms of the new protocol, however, it is the owners and operators of ships and facilities who will determine which areas of their domain are considered “secure” and, more importantly, who is granted access to those areas. There is also nothing to prevent a business from requiring additional ID systems above and beyond the TWIC regime.

TWIC: Who Can Play? What Will You Pay? The new Rule, expected to impact more than 750,000 workers, is intended to allow industry, government and the public sufficient time to prepare for implementation of the TWIC program. The Rule goes into effect on March 26,

2007, and all Coast Guard-credentialed merchant mariners must possess a TWIC by September 25, 2008. But how is it going to work and what will the process entail? MarEx lays out the nuts and bolts of the program below: n Security Threat Assessment (Background Check) - TWIC applicants will undergo a comprehensive background and criminal history check. Disqualifying crimes include, but are not limited to, espionage, treason, murder, kidnapping, robbery and arson. The TSA promises to complete a security threat assessment within ten days if no adverse information is disclosed. n Approved Workers - Workers must be in the United States lawfully and authorized to work in the United States: namely, a citizen, lawful permanent resident, lawful nonimmigrant with unrestricted employment authorization, refugee with unrestricted employment authorization and/or alien granted asylum with unrestricted employment authorization. Therefore, a worker does not have to be a U.S. citizen. n Technology - The TWIC will be a “smart” card, similar in size to a credit card, containing the applicant’s information and biometrics (fingerprint template) on an integrated circuit chip. The card is supposed to support future technology applications for additional capabili-

ties. There is hope that TWIC can incorporate SID C185 standards in the future. n Use - Workers will present their cards to authorized personnel, who will compare the holder to their photo, inspect security features and evaluate the card for signs of tampering. The Coast Guard will verify TWIC cards when conducting vessel and facility inspections and through spot checks using hand-held readers to ensure credentials are valid. n New Hires - can work once they have applied for their TWIC and an initial name-based (name, date-of-birth, social security number, proper identification credential) check is completed. Additional guidance will be provided in a forthcoming NAVIC due out on March 26, 2007 to coincide with the expected roll-out date for TWIC enrollment. Angela McArdle, a Washington-based Coast Guard spokesperson, told MarEx in February, “We intend to issue the NVIC on that date. It will be available through the Coast Guard’s Homeport website, http:// homeport.uscg.mil.” n Escort Requirements - Escort requirements are wholly dependent on the specifics of each vessel or facility.

Again, additional guidance on these requirements should be published in the March 26, 2007 NVIC.

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The new Rule is intended to allow industry, government and the public sufficient time to prepare for implementation of the TWIC program. The Rule goes into effect on March 26, 2007, and all Coast Guard-credentialed merchant mariners must possess a TWIC by September 25, 2008. n Card Readers - Until card reader technology is tested

and a regulation issued in July of 2007 on the subject of access control, facility owners and operators will not be required to install TWIC readers for facility access. n Cost / Term of Validity - TWIC is expected to cost no less than $139 and no more than $159 and be valid for five years from the date of issue. Workers with current, comparable background checks, including a Merchant Mariner Document (MMD), will pay a discounted fee (as little as $107 and as much as $127). The actual fee will be established in a forthcoming (early 2007) Federal Register Notice. According to the federal government, TWIC user fees are intended to offset the entire cost of this program, including enrollment, threat assessments and appeals, card production, and TSA program and system costs. It remains to be seen as to what level of fee structure will eventually be required to support the TWIC bureaucracy. n Privacy and Information Security - The entire TWIC record, including all fingerprints, will be stored in a secure TSA system. TSA will not give the employer information gathered during the security threat assessment of an employee. Where TSA determines that an imminent threat exists and denies a worker a TWIC, TSA may notify the employer that the worker was denied a TWIC, but would not provide any additional information as to why the TWIC was denied. During enrollment, applicants will receive a privacy notice and consent form, by which they agree to provide personal information for the security threat assessment and credential. n Facilities - The requirement to hold a TWIC and to restrict access to secure areas of a facility or OCS facility will be effective only after the regulated party is notified by the DHS. These notifications will be published in the Federal Register and will require compliance as determined by the local Coast Guard Captain of the Port (COTP). A final schedule for implementation at specific ports has not yet been determined. Initially it was proposed that a staggered rollout from ten to eighteen months after the effective date of the Rule would 44

The Maritime Executive

occur. Additional TWIC deployments will increase and continue throughout the year at ports nationwide on a phased basis. n Enrollment Process - The TWIC rollout plan will be posted at www.tsa.gov/twic. The deployment schedule will comply with the requirements in the SAFE Port Act in order of port priority as published in the DHS Infrastructure Protection Program. The Coast Guard’s Angela McArdle provided clarification of those requirements: “The SAFE Ports Act requires implementation of the TWIC card at the top ten priority seaports by July 1, 2007, at the next forty priority ports by January 1, 2008, and at all other ports by January 1, 2009. It also requires DHS to process applications simultaneously for individuals needing both TWIC and Merchant Mariner documents. The Coast Guard and TSA are finalizing a schedule for implementation that will meet these requirements. That schedule will be published on the TSA website as soon as possible. Priority is determined based on port size, cargo volume, location, number of employees and other factors. We anticipate it will take eighteen months to enroll and issue credentials to all workers who will be required to obtain a TWIC.” Applicants are encouraged, but not required, to “preenroll” at the TSA website, http://www.tsa.gov/what_we_ do/layers/twic/index.shtm. Pre-enrollment is expected to reduce waiting time at the enrollment centers. Although applicants may schedule an appointment at an enrollment center, appointments are not required. At the enrollment center, pre-enrolled applicants must provide biometric information (a full set of fingerprints and have a digital photograph taken) and sign documents. Applicants who did not pre-enroll will also need to provide biographical information.

An applicant will be notified when their credential is available at the enrollment center. The applicant, again at their own expense, must return to the same enrollment center to pick up their TWIC. The card is valid for five years from the issue date. Interestingly enough, if a worker participated in the Prototype Phase of TWIC and received a credential in the past, they will still be required to reenroll in order to receive the fully operational TWIC card.

It is important to note that within the Final Rule is that TSA will begin issuing first generation TWIC cards at initial port deployment locations. These TWIC cards will not initially support contact-less biometric operations, but the TWIC cards will be functional with certain existing access control systems in use at ports today. Those particular TWIC cards, in theory, should be able to accept and be updated with new technologies.

Beyond the Terminal: Up the Gangway If it wasn’t difficult enough for mariners to go to sea already, the Coast Guard is also proposing an overhaul of

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…whilst the TWIC rulemaking process was well underway, it published a related proposed rule, “Consolidation of Merchant Mariner Qualification Credentials.” This proposed rule would consolidate the Coast Guard-issued Merchant Mariner’s Document (MMD), Merchant Mariner’s License (license), Certificate of Registry (COR) and International Convention on Standards of Training, Certification, and Watch-keeping for Seafarers (STCW) certificate into a single credential called the Merchant Mariner Credential (MMC).

Merchant Mariner Credentials. In May of 2006, whilst the TWIC rulemaking process was well underway, it published a related proposed rule, “Consolidation of Merchant Mariner Qualification Credentials.” This proposed rule would consolidate the Coast Guard-issued Merchant Mariner’s Document (MMD), Merchant Mariner’s License (license), Certificate of Registry (COR) and International Convention on Standards of Training, Certification, and Watchkeeping for Seafarers (STCW) certificate into a single credential called the Merchant Mariner Credential (MMC).

The Coast Guard has since provided a Supplemental Notice of Proposed Rulemaking (SNPRM), also entitled “Consolidation of Merchant Mariner Qualification Credentials,” to address comments received from the public and to extend the comment period. The MMC rulemaking is not expected to go into effect until the initial TWIC rollout is complete, but mariners must apply for a TWIC before an MMC, and the TWIC must be issued before an MMC can be issued.

Global Acceptance and Transparency: Not Yet a Done Deal As noted earlier, mariners and workers working abroad will most likely have to comply with the ILO C185 standards that will be incorporated internationally as part of the ISPS Code. But the United States has not signed onto the ILO C185 standard because of the State Department’s requirement that foreign mariners obtain individual visas rather than the prior practice of accepting an internationally recognized SID-C185 under a crew list visa. Angela 46

The Maritime Executive

McArdle confirms the Coast Guard’s position by stating that “At present, the SID cannot be used to meet the TWIC requirements because the U.S. has yet to ratify the convention. This is due mainly to visa-less entry requirements afforded to SID holders under the ILO 185.”

The actions of the United States, both concerning the visa issue and the issue of not enforcing the ISPS Code provisions on facility access, are arguably violations of its treaty obligations under the SOLAS Convention. It is unclear whether the TSA or Coast Guard took the ISPS Code, which regulates maritime and port security, into consideration when adopting this Final Rule. This may open the door for other countries to retaliate against the U.S. approach by not accepting the TWIC as an equivalent to the SID-C185 for access control.

Sadly, and in retrospect, the application of the ILO C185 International Standard into the TWIC would have provided a “one-stop-shop” for maritime security. As one mariner put it, “A good analogy for this anomaly is the U.S. and international cellular phone systems. U.S. cellular phones work only here, while international cellular phones work anywhere in the world except the U.S.” A similar, disjointed system could very well arise within the eventual implementation of the TWIC credential.

An Expanding Regulatory Landscape: Beyond TWIC The mariner who has successfully navigated the crocodileinfested waters of TWIC, MMD, MMC, ISPS and STCW may still lose a leg as he wades ashore. This is because, in the absence of any international or national card system, local standards are creeping onto the scene in an effort to control access at specific terminals and ports. Notably, the state of Florida is now requiring a mariner who calls at a port more than five times in ninety days to undergo a background check and obtain a local port identity card, good for one year at a cost of $85.

Congress clearly intended to have a national standard for identity documents covering transportation workers when they enacted the provisions for a national TWIC in the Maritime Transportation Security Act (MTSA) of 2002. In this case, the need for a federal protocol to supersede local standards should be transparent to even the casual observer. Unfortunately, this has turned out not be the case. Darrin Kayser of the TSA recently said, “State, local and private operators are not precluded from imposing requirements in addition to having the TWIC for unescorted access to secure areas. All entities are required to have a TWIC and cannot substitute their own credentials for the TWIC card.”

But local and state governments are not alone in their quest to create other, parallel security requirements. The DHS published an Advance Notice of Rulemaking for Chemical Facility Anti-Terrorism Standards (6 CFR Part

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TWIC

individual’s work environment. As with any new system, there are likely to be snafus along the way; hence those who opt to delay for legitimate and logical reasons could benefit from that decision.

The Final Rule, which is posted on the Transportation Security Administration (TSA) Web site www.tsa.gov/ twic, lays out the enrollment process, disqualifying crimes, usage procedures, fees and other requirements for workers, port owners and operators. More information on port security is available at the U.S. Coast Guard’s Homeport site, www/homeport.uscg.mil, by clicking on the “Maritime Security link.”

27) on December 28, 2006. In that proposal, the DHS concluded that federal pre-emption is necessary to obtain national uniformity in security regimes for chemical facilities. Why the U.S. Coast Guard doesn’t implement similar federal pre-emption requirements in the TWIC program is unclear.

The proposed Chemical Facility regulations also contain a system of risk-based tiering to determine the security regime required. Facilities would be placed in a tier according to their potential risk. The approach is a logical one.

In fact, Angela McArdle told MarEx, “The Coast Guard and the DHS Office of Infrastructure Protection have been working together since October of 2006 to identify areas where harmonization of 33 CFR Part 105 and 6 CFR Part 27 is needed. Additionally, they are developing policies that will ensure that overlaps in jurisdiction are addressed, and roles and responsibilities are clarified.” We can only hope so.

Unanswered Questions, Questionable Timing The overall concept of a universal TWIC and standardized security measures, as adopted in the ISPS Code, should be implemented. The Final Rule appears to have established sufficient time for across-the-board compliance, but there are essential details, including the coordination with international standards (SID-C185) and other forthcoming regulations (MMC), which are still unclear. And the list does not stop there.

The TWIC NVIC is due out on March 26, 2007, the same day that the Rule goes into effect, and should provide additional guidance. Providing the additional guidance in advance of publishing the Final Rule might have been a better way to go. This is especially true given the forthcoming implementation of the Merchant Mariner Credential (MMC). Arguably, the Coast Guard and DHS could have killed six birds (MMD, COR, License, STCW, TWIC and SID-C185) with just one stone.

The benefit to obtaining a TWIC should be measured against the absolute need for compliance as it relates to an 48

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What Can You Do? Stay Informed, Get Involved and Stay Ahead of the Curve Transportation executives must continue to stay abreast of all TWIC / MMD requirements and deadlines to ensure timely compliance. Time is money. Don’t risk the downtime for your operation by failing to comply. Stakeholders should monitor the previously noted Web sites and Coast Guard’s NVICs, particularly the March 26, 2007 NVIC on TWIC guidelines and implementation schedules.

It is possible that the NVIC process itself will offer some flexibility and opportunity to revise and improve the program, especially as experience is gained by those responsible for implementing the protocol. Comments can still be submitted on the Merchant Mariner’s Credential (MMC) until April 25, 2007 and the Chemical Facility Proposed Rules. Take these opportunities to comment on (a) the consolidation of all credentials into one universal card, and (b) incorporation of the Chemical Facility risk-based system into the maritime security regime. Only through input from the transportation community – and the executives who drive that business – will meaningful changes take place. TWIC is not coming. It’s here. Get on board, get involved, or get left behind.

(Captain) Craig Thomas is a graduate of SUNY Maritime College and an experienced mariner, culminating his seagoing career by sailing Master on deep-draft vessels with various marine operators. He came ashore in 1984 and served as Port Captain to a large refining and marketing corporation.

Later, he joined Mobil Oil Corporation and served successively as Port Captain, Marine Superintendent, Manager, Safety, Quality and Policy in London, and Marine Manager in Melbourne, Australia. Following the Exxon-Mobil merger, he provided service to Seariver, Inc. as Ship Group Coordinator in Benicia, CA. In 2001, he joined the Maritime Institute of Technology and Graduate Studies (MITAGS) in Maryland as Business Development Manager. In 2004, he moved to Switzerland as Vice President, Operations for Seabulk’s offshore West Africa fleet. Today, Captain Thomas is an independent marine consultant and a contributing writer to The Maritime Executive magazine.

MarEx

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Watching the Bottom Line Closely By

Joseph Keefe PortVision’s High-Tech Business Tool Brings Port Activities Into Sharper Focus eality Check At Sabine Pass, TX, the arrival of a nondescript crude oil tanker draws little fanfare. Literally hundreds of them arrive and depart annually, providing feedstock for the many refiners dotting the Sabine and Neches Rivers. Seven days later, it departs for destinations unknown. It was a long port call, preceded by a four-day stay at anchor awaiting berth. Six weeks after that, the demurrage bill forwarded by the vessel’s charterer – a middle-sized trading house – is found to be absolutely crippling to the bottom line of the receivers. Commencing from the time of Notice of Readiness until the vessel weighs anchor for the inbound transit, the bill totals, in all, $122,000, including the usual restricted discharge claim.

Back in Houston, the demurrage analyst begins her calculations in the usual way, and then she boots up the electronic footprint left by the vessel’s AIS (Automatic Identification System) signal. With key events already translated into time, date and the other usual benchmarks, she discovers a curious thing: The vessel declared its Notice of Readiness about 27 miles, or more than two hours, from the sea buoy. In the past, she’d have to rely on the word of others – perhaps the pilot or even the agent (working for the ship owner or charterer). In this case, it is clear that not only did the vessel declare its arrival well prior to the actual event but also that it had missed its charter party-mandated arrival window by a mere 31 minutes.

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In the world of skyscrapers and bad traffic, 31 minutes is a minor irritation. Today, 31 minutes means the world to a receiver whose trader made an exceedingly bad trade on a spot cargo of Bonny Light Crude. More importantly, the absolutely indisputable evidence to refute a less-thanhonest claim emanates from a software program which provides a license, per user, for as little as $2,000 per year.

In a world where commodity trading houses often view their demurrage departments as “profit centers” and traders now have to routinely tape their transaction conversations, the implications are enormous. In a heartbeat, at least in some specific markets, a way of doing business has changed forever.

I’m From the Government, and We’re Here to Help It is not often that a government-mandated requirement helps create the platform for a useful, cost-effective and thoroughly innovative business tool. Even rarer is the manifestation of something so cutting-edge that maritime stakeholders not only embrace the concept but can almost immediately put it to work to improve their bottom line.

Often resistant to change, the global maritime business community has nevertheless had to endure endless, expensive changes to the way it operates because of a myriad of new regulations thrust upon them, usually with no palpable benefit to their operating schemes. All of that is about to change.

Today, every commercial vessel that trades at a U.S. port – and most international destinations as well – is required to transmit its ship identifier and location through a standard AIS transponder. Simply stated, AIS is a specialized transmitter platform which is fitted on all SOLAS-compliant vessels. In force since 2002 and now virtually universal in its application, the intended purpose of the signal is to identify ships at sea. The broadcast system acts like a transponder in the VHF maritime band, handling more than 4,500 reports per minute and updates as often as every two seconds. The IMO requires AIS to be fitted aboard all marine vessels of 300 gross tons or more for international voyages. As a result, tens of thousands of merchant ships currently carry AIS Class “A” equipment.

As a tool to promote maritime security, collisionavoidance and general safety, the AIS system is arguably

without peer. In a post-9/11 world, it is hard to imagine merchant vessels arriving onto our shores without it. The information derived from these signals has great value to a myriad of users, including VTS operators, law enforcement, the United States Coast Guard and local marine pilots. But just as the average user of a desktop PC rarely comes close to using even a fraction of the power of that computer, the benefits of AIS for the commercial maritime world are only now being realized. Only recently, when the diversified technology company, AIRSIS, Inc., introduced to industry a product it named PortVision, did the true potential of the power of the AIS signal become obvious.

According to the United States Coast Guard, “A Class ‘A’ AIS unit broadcasts the following information every two to ten seconds while underway, and every three minutes while at anchor at a power level of 12.5 watts.” The information broadcast includes: • MMSI number - unique referenced identification • Navigation status (as defined by the COLREGS,not only are “at anchor” and “under way using engine” currently defined, but “not under command” is also currently defined) • Rate of turn - right or left, 0 to 720 degrees per minute (input from rate-of-turn indicator) • Speed over ground - 1/10 knot resolution from 0 to 102 knots • Position accuracy - differential GPS or other and an indication if RAIM (Receiver Autonomous Integrity Monitoring) processing is being used

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• Longitude - to 1/10000 minute and latitude - to 1/10000 minute • Course over ground - relative to true north to 1/10th degree • True heading - 0 to 359 degrees derived from gyro input • Time stamp - the universal time to nearest second that this information was generated.

In addition, a Class “A” AIS unit broadcasts the following information every six minutes: • MMSI number - same unique identification used above; links the data above to described vessel • IMO number - unique referenced identification (related to ship’s construction) • Radio call sign - international call sign assigned to vessel, often used on voice radio • Name - of ship; 20 characters are provided • Type of ship/cargo - there is a table of possibilities that are available • Dimensions of ship - to nearest meter • Location on ship where reference point for position reports is located • Type of position-fixing device - various options from differential GPS to undefined • Draught of ship - 1/10 meter to 25.5 meters (note “airdraft” is not provided) • Destination - 20 characters are provided • Estimated time of arrival at destination - month, day, hour, and minute in UTC. It’s all good stuff. It’s all just data, though, and there are any number of vehicles through which a user can receive this sort of data. Collating the data is another thing altogether. Dean Rosenberg, CEO of AIRSIS, Inc., says that the vast majority of AIS tracking services on the market today are primarily “points on a map” systems. “PortVision,” he says, “is so much more than that.”

AIRSIS, a firm focused on providing solutions that increase operating efficiency and reduce costs, touts PortVision as its flagship product. Launched in 2006, PortVision provides real-time visualization and historical information to allow users to get up-to-date visibility of vessel activities and receive alerts when events of particular interest occur. AIRSISwas formed in April 2005 from the merger of Abaris Technologies, LLC and Applied Digital Security, Inc. According to company-provided documentation, the new firm “combines nearly two decades worth of enterprise software and maritime logistics technology development experience.”

Accurate INTEL Powers Improved Business Decisions According to its Web site, “PortVision tracks and processes these signals to provide the most comprehensive management tool of its kind in the maritime industry. In fact, PortVision processes over one million ship signals on a 52

The Maritime Executive

typical waterway each day to provide mapping, alerting, reporting, and increased maritime domain awareness for PortVision subscribers. PortVision’s comprehensive features and functions give you the power of perfect information on the waterway.” A patent is pending on the technology as MarEx goes to press.

It wasn’t always possible, says Rosenberg. But in 2005 AIS system requirements changed, and vessels now had to broadcast their unique identifying signals in a continuous mode and in port. That’s what opened up this service for commercial applications. Overlaid onto commercial e-chart software, the PortVision software not only tracks the targets and information selected by the client but also enters that information into logs, which can be easily accessed by the user. The manual entry of routine data such as arrival and docking times, so long the bane of operations and dispatching personnel everywhere, has suddenly been eliminated. Gone, too, is the possibility of a mistaken (or dishonest) entry, which could cost a marine transportation concern – or terminal – literally thousands of dollars.

In a nutshell, the potential benefits of PortVision are many, but some of the more important ways that port stakeholders can take advantage of the new technology might include: • Schedule work shifts better based on real-time information about vessel arrivals and departures • Make better business decisions based on the current location of your fleet, harbor tugs, pilots, and related service vessels • Always be kept in the know on your PC or cell phone regarding arrival, departure, and point-passing status for any vessel • Reduce demurrage payments and other overage costs • Collaborate better with clients, partners and regulatory agencies • View vessel activity by port, terminal, and time period.

• Benchmark your performance against other port activity • Use the “Playback” feature to review historic incidents and have the documentation you need for contracting, compliance, training, and litigation

• Compare actual recorded AIS data to ship logs and statements • Generate ad-hoc reports to identify best practices and improve operational efficiency • Better communicate with your customers and partners regarding a vessel or terminal’s latest activity • Enhance Maritime Domain Awareness • Maintain a comprehensive record of every ship arrival, departure, and movement on the water way • Generate ad-hoc reports for stakeholders • Publish quarterly and annual port activity reports • Support litigation efforts through use of the playback and data warehousing features.

Unlike other “points on a map” systems, PortVision is driven by business events. Configurable on a user-by-user basis, the customer defines their traffic and areas of concern while superfluous background noise can be filtered out. Users can receive “alerts” sent directly to their handheld PDAs, and historic “playbacks” allow the customer to replay what actually transpired on a particular transit or port call.

Industry Weighs In In 2006, four refining companies with facilities on the Sabine River got together to compare notes on their demurrage bills. What they discovered was a $20 million tab, spread between Total, Premcor, Motiva and ExxonMobil. With a combined refining capacity of 1.1 million barrels per day, the four heavyweights knew that something had to be done. Analyzing the source of these losses was problematic, however. It was quickly apparent that not enough detailed information regarding these delays was available, and what information they could glean from various sources on the ship channel was clearly of poor quality. Jerry Bemberg, Manager of Heavy Fuels and Marine Logistics for Total, told MarEx in February, “We knew that if we had well-documented information, we could do something about the problem.”

According to Bemberg, the channel users turned to AIRSIS and their PortVision service as a way of providing consistent data across the board from all four refiners.

Before PortVision, says Bemberg, “We had no consistent methodology or dissemination of information.” But with the system in place and running since October, Bemberg was effusive in his praise of the tool: “I can’t speak for the other refiners, but we expect to recover our costs in the first quarter of 2007.” The PortVision experiment on the Sabine River –using the exact same software which is now available elsewhere – will become a permanent fixture at about the time MarEx goes to press for this edition. The system has so far shown itself to be reliable, receiving signals from two redundant positions and working in partnership with one another.

PortVision has commenced operations with service in The Maritime Executive 53

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four places only: the Sabine River area, the port of Houston, San Diego and the ports of LA / Long Beach. Eventually, Bemberg says, Total wants coverage for the entire Gulf Coast from Pascagoula to Corpus Christi, and plans to make this a reality are underway. One of Bemberg’s favorite features of the software and data-collection system are the “alerts,” which allow his schedulers to tag passing waypoints on the Intracoastal Waterway for his inland marine traffic and thereby send automatic alerts to petroleum inspection companies. Bemberg says simply, “This is going to revolutionize scheduling.”

Out in the ports of Los Angeles and Long Beach, the Marine Exchange of Southern California is currently negotiating with PortVision on a “mutual benefit agreement” whereby the Marine Exchange would become their agents in those ports. Captain Manny Aschemeyer, the Executive Director for the Marine Exchange, says that this could become a reality, and sooner rather than later. Similar initiatives are possible in San Diego and Port Huenene.

The New “Normal” On a dreary Sunday morning in Orange, TX, the appointed cargo inspector of record for the discharge of the motor tanker Neversail slumbers peacefully as the crude carrier weighs anchor at Sabine Pass, two hours earlier than expected. No one calls him to advise him of this fact. Two hours later, the PortVision alert rouses him to advise that the vessel is passing under the Sunshine Bridge. The inspector arrives for his work, on time and in a routine fashion.

So does everyone else, including U.S. Customs, Immigration and the ship’s agent. They subscribe to the cutting-edge service as well. Four hours later, an angry cargo representative hired by the supplier to monitor, expedite and supervise cargo measurement also arrives and wants to know why he wasn’t called. The boarding party returns his outburst with a blank stare and then continues with the business of getting the cargo off the vessel.

If and when the PortVision concept gains widespread acceptance as a business tool, the way that scheduling, dispatching, claims negotiations and a host of other maritime industry tasks are accomplished will have changed forever.

Not everyone will be happy about this. The first disruptive and far-reaching effect of this new tool will be to simplify the business of demurrage. As a labor-saving device, the downstream benefits to anyone who has to manually 54

The Maritime Executive

key in data – some of it questionable in accuracy – will be obvious. Beyond this, the almost routine fudging of time entries for vessels that can cost as much as $2,000 per hour to operate will become a thing of the past. And everyone will have to get on board because it’s going to be a little difficult to argue with the data generated by the mandated AIS signal.

Happy customers are going to outnumber those who are loath to see this type of service come into play, says Rosenberg. He calls his innovative platform, “Harvesting marine information to drive business intelligence.” He goes on to say, “We’re not looking to put shipping agents out of business. Instead, we want to augment ship husbandry.” In the future, cargo inspectors and their dispatchers, vetting consultants, oil industry operations staff, and commodity traders will have the opportunity to receive real-time, automated data derived from millions of AIS signals. The power of this data, especially when dealing with someone who does not possess it, will be significant.

PortVision promises a lot of things. Indeed, there are users who say this nascent service is already delivering on those promises. Perhaps more significant than the possibilities for this tool in the maritime business world, however, is the bang-for-the-buck which accompanies it. Available right now in selected ports, the service starts at $2,000 per year, per user and is also available in a network format.

Dean Rosenberg envisions early users setting up a “bullpen” type arrangement where company employees will go to check on their data and then return to their desk. But anyone who has visited and seen the beehive of activity on the typical trading floor knows that, if the product delivers, everyone is going to want one at their desk. The full-blown business model will cost about $10,000 per user, according to Rosenberg.

The value of this new service transcends big business.

The independent marine consultant hopping his way along the Gulf Coast to follow a list of ship vettings, crude oil discharges and damage surveys can probably afford the baseline model of PortVision. Eventually, he may not be able to afford to be without it.

1984 has come and gone. In the years since George Orwell’s ominous warning about government surveillance, we’ve come to see the power of technology and what it can accomplish for the greater good. Now, a new idea has emerged from the pack of impressive new technologies currently being presented to the maritime world. PortVi-

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New Technology

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56

The Maritime Executive

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