Seaspan Marine’s Vancouver Shipyards will soon be revamped to prepare for $8 billion worth of work for OttawaDina Goldstein
It's called a Dracaena fragrans 'Massangeana'—more colloquially, a "corn plant"—the kind of floppy-leafed, wannabe palm tree that you see collecting dust in the waiting room at your dentist's office. This particular specimen is sitting in the cramped and unimposing boardroom at Seaspan Marine Corp. in North Vancouver, offering no resistance while Seaspan's executive chairman Kyle Washington pinches off dead leaves.
Washington doesn't look the least like a closet horticulturalist—and he would surely outrage his tailor by reaching through the foliage in that bespoke suit. But this diversion into indoor gardening is typical and revealing—in two ways. First, Kyle Washington doesn't sit still. He's all restless energy, at once attentive to the task at hand and impatient to move on to whatever might come up next. Second, he is entirely without the tender ego that we've come to expect of execs from the front office. Washington has no qualms whatsoever about performing what is essentially a custodial task and, perhaps more telling, his most senior managers don't even seem to notice that the boss is fussing in the corner.
Mind you, for their part, Seaspan CEO Jonathan Whitworth and his shipyard deputies Brian Carter and John Shaw are all feeling pretty chuffed, having just nailed down the largest federal shipbuilding contract—an $8-billion chunk of the federal government's National Shipbuilding Procurement Strategy—that a West Coast yard has seen since the Second World War. Only a year ago, Seaspan's shipbuilding empire was deep into what Whitworth says could fairly be described as a death spiral. "This was a make-it or break-it moment," he says of the contract. And having made it, Whitworth is not going to get twitchy if the boss wants to dust houseplants.
As for Washington, there is another explanation for why the expansive 42-year-old doesn't behave like your typical aggressive executive, driven to prove, over and over again, that he deserves the top job. Kyle Washington moves with the easy assurance of someone who knows he has a job for life—because, well, he owns the place: the docks in the water, the sheds and equipment on land, the BC Ferries Fast Cat model that's sitting on the boardroom credenza—even the wilted Massangeana. It's his—it's all his—and he couldn't be more delighted.
Given that such unabashed enjoyment of personal good fortune is more commonly an American trait, it's no surprise that Washington hails, originally, from south of the border. He is the eldest son of Montana industrialist Dennis Washington, whose $5-billion fortune puts him at No. 60 on the Forbes 400. And, between father and son, they could well be credited with saving the B.C. shipbuilding industry.
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If "industrialist" seems like an indistinct job title, Kyle Washington has a more precise description of his family's approach to business. He says: "We buy things that rust." Indrustrialist, then. Dennis Washington made his first fortune from a heavy construction business and his second from a Butte, Montana, copper and molybdenum mine. He branched out to railroads, aircraft supply and heavy equipment, buying companies that were down on their luck and then turning them around. Along the way, he also bought a summer place on Stuart Island, a little piece of West Coast heaven just north of Desolation Sound, making him an honorary, summertime Canadian.
In 1992, Washington Sr. made his first major Canadian business purchase, scooping up C.H. Cates & Sons, the Vancouver-based tug and barge operator that was being sold off (Washington thought for cheap) by a tired, third generation of family owners. Over the next few years, Washington found a series of other sellers who were losing interest in their marine holdings. He bought Norsk Pacific Steamship from the pulp giant Fletcher Challenge in 1995 and Kingcome Navigation from the fading lumber barons at MacMillan Bloedel in 1997. In between, he purchased Seaspan, another huge tug and barge operator that itself had consolidated ownership of Vancouver Shipyards, Victoria Shipyards and Vancouver Drydock. In 1998, Washington added Canadian Pacific's coastal ferry fleet (now Seaspan Ferries Corp.), by which time he owned, in aggregate, the largest ocean-going fleet of any kind on Canada's west coast.
Kyle Washington more or less stumbled into this burgeoning enterprise—"I was shipped up here in 1994"—having just completed what he describes as an unspectacular college career that culminated in a business degree from the University of Montana. He started out at Cates, living in a basement suite at the home of Cates's then-president (now Seaspan's vice-president of marketing) Doug Towill. Arriving at age 24, Kyle quickly got a reputation as a playboy bon vivant: Even now, he seems to approach life like someone who has won a huge lottery and can't quite believe his luck. He loves sports (he was a pro ski jumper) and toys (he's just had his newest truck tricked up to pump out 800 horsepower). "And, right from the start, I loved Vancouver."
While some of the locals dismissed him as a party boy with little but dad's money to recommend him, the younger Washington was working his way up the marine industry hierarchy and watching for opportunities. In 1999, he persuaded his father to start investing in the offshore container shipping business that is now Seaspan Corp. A Hong Kong-based international charter service, this arm of Seaspan buys freighters from big Asian yards and settles them quickly into long-term leases. It began, in 1999, by ordering five smallish vessels—4,250-TEU ships that they bought from Samsung Heavy Industries in South Korea. (Container ships are classified by how many containers they can carry: TEUs is short for 20-foot equivalent units.) Today, the Seaspan offshore empire claims Canada's largest container fleet: 69 vessels, ranging from the 25,000-tonne Lima, which is rated to carry 2,500 TEUs, to the 140,000-tonne Harmony, which is rated for 13,100 TEUs.
Even as Dennis Washington approaches his ninth decade, father and son still operate as a tag team—As Kyle says, "He finds the deals and we consolidate them"—but no one doubts that the son has the wit to spot a good opportunity, to hire the right talent and then to stay out of the way while his ever-expanding team contributes to his ever-expanding fortune.
Interestingly, in the context of the federal shipbuilding contract, that fortune was a critical—perhaps a crucial—factor in Seaspan's successful bid. It took someone with deep pockets and a long view just to patch up a B.C. shipbuilding industry that even the provincial government was deriding as a basket case. And it also took a good supply of cash on hand to prepare a credible bid for the federal ship contract—a competition that pitted B.C. against both Quebec and the Maritimes.
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To fully appreciate the first challenge, it's best to go back to the model of the BC Ferries Fast Cat sitting on the Seaspan boardroom bureau. These vessels, high-speed catamarans that were meant to replace the hulking great ferries that connect Vancouver Island to the Mainland, were also supposed to revolutionize shipbuilding in B.C. According to the New Democrat Glen Clark, who became premier in 1996, state-of-the-art construction techniques necessary to build superlight, superswift ferries would make B.C. shipbuilders competitive in the international market.
Trouble was that when the project was launched, no single West Coast shipyard was capable of managing the work. So, recalls Doug McArthur, Clark's deputy minister, the government decided to recruit pretty much every yard in the region—to build the ship in components—and set up a Crown agency, Catamaran Ferries International Inc., to manage construction. The advantage, says McArthur (who is now a professor at the Simon Fraser University School of Public Policy), was that this model "internalized control." The downside was that it also "internalized risk."
That was too bad for the New Democrats. Costs more than doubled (from $210 million to in excess of $460 million), the program fell badly behind schedule and the ferries, when completed, were a design disaster. BC Ferries passengers were well accustomed to bigger, slower boats—de facto cruise ships with spacious open decks. The Cats were cramped and enclosed—you weren't allowed to go outside—and the lightweight aluminum furniture was slightly less comfortable than the kind of steel chairs that McDonald's used to use to discourage people from loitering over their fries.
Worse, the fast ferries weren't allowed to go fast. Operating at full speed in B.C.'s enclosed coastal waters, these pretty and technically efficient vessels kicked up huge waves that would burst unpredictably on the shoreline, endangering swimmers and busting up docks and seawalls. The Cats came on stream in 1999, and in less than a year BC Ferries declared the whole adventure a failure. The economic loss added significantly to the political conflagration that reduced the New Democrats to just two seats in the 2001 election.
Today, Kyle Washington still defends the quality of the workmanship. Looking at the model, he says, "The world thought they would be more popular than they were."
In what many people interpreted as an effort to lay even greater responsibility at the feet of the New Democrats, the succeeding Liberal administration sold the three Cats in 2003 for a total of less than $20 million—that was a $440-million tax-funded loss. (Washington describes the whole affair as "politics as blood sport.") On the bright side, though, the Liberals sold the ferries to…the Washington Marine Group (as Seaspan was then known). The Washingtons later flipped the ferries to a buyer in the United Arab Emirates, for an undisclosed sum.
But if the Washingtons scraped some extra profit out of the cast-off ferry flip, the political damage from the debacle inflicted a lasting injury on the local industry—almost all of which was now in the hands of the Washingtons. (Allied Shipbuilders is pretty much the only non-Washington yard on the coast that is capable of building a ship larger than 1,000 tonnes.) BC Ferries went to Germany for its next three ferry purchases, signing a $325-million contract with the Flensburger Schiffbau-Gesellschaft shipyard in 2004, and then negotiating for relief from the federal import tariff on the basis that the local yards weren't up to the task.
By that time, the shipbuilding industry's problem seemed to be epidemic—nationally. Aside from BC Ferries, the most obvious public-sector shipping investor is the federal Department of Defence. But the big navy contracts have usually been reserved for Eastern Canadian operations. And lately, even those yards had been starved for work. The last major federal-sponsored project was launched more than 20 years ago—Saint John Shipbuilding Ltd. in Saint John and Davie Shipyard across from Quebec City turned out a dozen Halifax-class frigates that have operated impressively in salty theatres around the world.
Two decades is a long time for a national shipbuilding industry to go without government work. It's hard in a country with a sprawling geography and a small population for yards to keep up with the latest efficiencies and technologies, especially in an industry that is as protectionist as shipbuilding. As a consequence, when Ottawa announced its Joint Support Ship project in 2004, saying it would call for tenders on a $2.1-billion project to build two (or perhaps even three!) state-of-the-art supply ships, the industry all but laughed. Given the inevitable cost of modernizing yards, no one could afford to bid on the work at that price. Canada had lost the capacity to build its own naval fleet.
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That realization, according to sources intimately familiar with the federal procurement strategy, is what inspired the government to change the question. Rather than asking, "Where can we get good, cheap ships, without sending taxpayer money on a European vacation?" they asked, "How can we be sure that the federal government has access to a supply of efficiently built ships, forever?" As one federal government source says, it became an issue of national security: "As a sovereign nation, we should have the capacity to build our own naval vessels."
Of course, these gigantic government spending sprees—this particular program, known as the National Shipbuilding Strategy, is estimated to be worth $33 billion—are also a wonderful opportunity for political showboating. Aidan Vining, a business professor at Simon Fraser University, says, "Normally, the government wants to take political credit for job creation in the regions.…Normally, the 'winners' in these tournaments are very happy while the 'losers' are highly dispersed."
But the Conservative administration of Prime Minister Stephen Harper could see, for a couple of reasons, that these were not normal circumstances. First, there was a hard historical lesson in the dangers of playing East against West on big defence contracts. In 1986, the Progressive Conservative government of then-prime minister Brian Mulroney ran a relatively transparent bidding process for a maintenance contract on its then-new CF-18 fighter jets. Bristol Aerospace in Winnipeg emerged the clear winner, on both technical and financial grounds—but the clout of Mulroney's Quebec caucus meant the contract was given to Canadair in Montreal. Western Tories responded in a destructive fury. It was a major factor in the West's shifting allegiance to the Reform Party, splitting the right-of-centre vote and dispatching conservatives to the federal political wilderness for more than a decade. That's not a mistake that Stephen Harper was going to repeat.
Second, because there are so few shipbuilding centres in Canada—and because the federal government couldn't afford to revive them all—Vining's "losers" were going to be concentrated in a single province. Rather than take the heat for manipulating a process that was going to leave a single group of voters seriously unhappy, the Tory political machine did something that no one ever expects from a group of politicians: They got out of the way.
There followed a procurement process that—in contrast to the debacle surrounding the contract for the Lockheed Martin F-35 stealth fighters—has been held up as a model of bureaucratic rectitude and political restraint. The feds knew from the failed Joint Support Ship project that rustling up some specifications and suggesting a preferred purchase price was not going to work. So, beginning in 2009, federal officials began meeting with the folks at Seaspan—and their counterparts at other yards across the country—asking how the government should engage, and how industry could guarantee that it would upgrade its capacity and invest in its own sustainability.
The result was not a traditional Call for Proposals or even for Expressions of Interest. Rather it was a challenge to Canada's largest shipyards. Limiting the conversation only to those yards that had a track record of building ships larger than 1,000 tonnes, the government asked potential bidders to explain how they could reach and sustain a world-class shipbuilding standard—while also kicking back part of the federally funded bonanza into community benefits.
The government then produced something called a Solicitation of Interest and Qualifications, which went out in September, 2010. According to Seaspan vice-president John Shaw, a 30-year veteran of the marine industry and the leading architect of Seaspan's bid, it was not the usual question: "Who wants to build ships A, B and C?" It was, more broadly, "Who thinks they have what it takes to be the federal government's preferred shipbuilding contractor for the next 20 or 30 years?"
The solicitation also set out a very clear assessment process, heavily populated by third-party validators (the third parties not to include federal cabinet ministers). There was a "fairness monitor" (Hill International Inc.), there were advisers and validators for process and financial matters (KPMG and PricewaterhouseCoopers), and there was a technical analyst, what the federal government describes as "the foremost expert in international shipyard assessment," the U.K. firm First Marine International (FMI). Among them, these validators were to measure four areas.
Bidders would be accorded 60 points for their Current State and Plans—how close were they to a globally competitive capacity now and what were they prepared to do to achieve a target state. They got 20 points based on the Costs to Canada for Upgrades and Improvements required to get to the target state; 10 points for the shipyard's Financial Situation; and 10 points for what the federal government called the Value Proposition—the investment that yards would make in such things as "human resources development, technology investment and industrial development activity." To make that last part completely obvious, the material specified that "A sum equivalent to 0.5% of the value of the shipbuilding contracts is to be invested in these value propositions."
The theory (and everyone involved says that it rolled out well in practice) was that the external validators would score the bidders and that a Deputy Ministers' Governance Committee would make a decision—with no ministerial intervention.
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Three yards rose to the challenge: Irving Shipbuilding in Halifax, Davie Shipyard in Quebec and Seaspan all bid on the smaller of two contracts: to build seven so-called non-combat vessels, an icebreaker, two naval support ships, three fisheries vessels and one research ship. Only Irving and Seaspan bid on the larger "combat vessel" contract: to build 15 frigates and destroyers. And the rules made it clear that no yard would get both contracts.
On decision day, Irving claimed the larger prize, Seaspan the smaller and Davie was left standing on the largest dry dock in Canada, with nothing to do but wait for repair work and its share of a $2-billion federal package of 116 much smaller vessels. Remarkably, while acting NDP Opposition leader and Quebec MP Nycole Turmel was complaining, mildly ("We have to build this industry everywhere, not pick winners and losers like the Conservatives have done"), her shipbuilding critic, Nova Scotia MP Peter Stoffer, was calling it "a very, very great day for all of Canada."
That was certainly the West Coast consensus. When asked if he was disappointed that his company had lost out on the combat vessel package, Seaspan CEO Jonathan Whitworth pointed out that he had just scooped the largest shipbuilding contract that any West Coast yard had won in more than half a century. An $8-billion job would do, thanks. In a quote that summons an image that a more conventional executive would have tried to avoid, Whitworth told The Vancouver Sun, "Today is living proof that sometimes that scrappy dog catches the bumper of that car."
Whitworth again makes no bones about the "junkyard dog" status of his enterprise. When Seaspan threw itself into this process, he says, "There was no Plan B." Looking around at the state of the industry and the amount of work that Seaspan could attract without a serious upgrade, "We realized that we had to win this or start shutting shipyards." So the company spent $2.5 million producing a 25,000-page proposal.
Which brings the story back to the Washington fortune: The actual cost of the National Ship Procurement Strategy bid was only a small first step in the necessary spending. Specifically, in order to make sure that Seaspan scored 20 out of 20 in the second category, "Costs to Canada for Upgrades and Improvements," the Washingtons committed to spending between $150 million and $200 million on new buildings and equipment, principally at the 35-acre Vancouver Shipyards site in North Vancouver—at no cost to the government or taxpayer. It's likely that Seaspan also scored an easy 10 out of 10 for "Financial Situation." Dennis Washington's idea of an interesting personal project is to rebuild luxury yachts. His most recent refit, the 328-foot Attessa IV, is estimated to have cost $200 million, which would suggest that the Washingtons' financial situation is just fine, thanks.
There is one other interesting aspect about the Washington participation. In normal circumstances, national governments can get quite protective about where they are spending their job-creation funds. And they are pointedly disinclined to line the pockets of a foreign owner. But birthplace notwithstanding, Kyle Washington is no longer a "foreign owner." In this context, his acquisition of Canadian citizenship is one of Seaspan's most useful assets. And as CEO Whitworth is quick to point out, "The Washingtons don't repatriate capital." Money that's made in Canada will be reinvested in Canada.
Kyle Washington's eye for talent is also critical—and seems to be playing out well in the young team at Seaspan. John Shaw says that, now the contract is in hand, "Our top five issues are: people." That begins, most critically, with the senior management team, which was recently bolstered with the hiring of the new president of Seaspan Shipyards, Brian Carter, 41, a Seattle-area native who spent 10 years at the General Dynamics NASSCO yards in San Diego, where he oversaw $1 billion in shipbuilding work.
But the talent search will quickly extend to all levels. The company reports having received 1,600 resumés in the weeks immediately after the contract was announced. Included are a large number from British Columbians who have taken their skills to Alberta's tar sands in search of employment and are eager to return. Paul Dangerfield, a vice-president at the British Columbia Institute of Technology, says that news of the contract also sparked an instant doubling in applications for programs such as welding, ironwork, electrical and boilermaking.
That sense of optimism—of security—is being touted as one of the most important outcomes of the federal announcement, even well in advance of any construction actually being started. "This is an industry with a good history, but a bad reputation," says Whitworth. "In what other industry would you expect to get a job on Monday and be laid off on Tuesday?"
In the life of a West Coast shipbuilder, that was often your fate, says George MacPherson, president of the Marine Workers and Boilermakers Industrial Union Local 1. And while it was manageable when Vancouver had many busy yards, it was never secure. In his four-plus decades in the business, MacPherson says he has never seen a time when you could walk into a single shipyard and think that more than just picking up a job, you were starting a career.
Now, the Seaspan yards will have what Whitworth describes as "an anchor tenant," one that will enable them to justify the upgrades that FMI says will bring the yard to a global standard. Just the news of that development has made a difference. In the month after the contract was announced, Whitworth received calls from other potential clients inquiring about work totalling $2 billion. None of it is actually booked, but the credibility that comes with having been judged worthy—by an international validator such as FMI—is such that even BC Ferries has been nosing around.
That's a point that B.C. Premier Christy Clark wouldn't confirm. When asked directly: "Will this contract make Seaspan a more credible bidder for future BC Ferries shipbuilding contracts?" Premier Clark dodged nicely, saying, "This procurement will help Seaspan remain competitive for generations." But while steering clear of the ferries, the Premier is happy to take whatever credit she can, saying, "As you can imagine, winning the largest federal procurement in our province's history is a huge part of our BC Jobs Plan."
This, of course, sounds galling to B.C. New Democrats. NDP MLA John Horgan, whose riding is next to the Victoria Shipyards in Esquimalt, says, "It's a bit odd that a government that participated in the dismantling of the shipbuilding industry is the first to be there when the ribbons are cut." Even Liberal caucus members such as the West Vancouver-Capilano MLA Ralph Sultan are critical of Clark for being slow to get behind the Seaspan bid.
But sitting in a Seaspan boardroom—with Kyle Washington talking hockey and trimming the greenery—nobody cares about the politics. Neither does union president MacPherson. Two years ago, he sat down with Seaspan and agreed to roll back a 4.5% increase that was already included in the midst of a five-year contract. ("It was the right thing to do," he says. "It got some of our members back to work.") Next year, when that contract comes up for renewal, discussion may go a little differently. But MacPherson ends with two things. First, he says, "We have a very good relationship with the employer and we expect to keep it. If he stays healthy, we stay healthy."
Second, in his 46 years in the business, MacPherson says, "This industry has never seen anything this big—and if there's any part of it that isn't good news, I haven't found it."