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[H.A.S.C. No. 107–35]









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MARCH 14, 2002




DUNCAN HUNTER, California, Chairman
CURT WELDON, Pennsylvania
JIM SAXTON, New Jersey
WALTER B. JONES, Jr., North Carolina, Vice Chairman
JO ANN DAVIS, Virginia

THOMAS H. ALLEN, Maine, Ranking Member
GENE TAYLOR, Mississippi
ADAM SMITH, Washington
JAMES H. MALONEY, Connecticut

Hugh N. (Rusty) Johnston, Professional Staff Member
Alexis Lasselle, Staff Assistant


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    Thursday, March 14, 2002, Fiscal Year 2003 National Defense Authorization Act—Administrator of the Maritime Administration

    Thursday, March 14, 2002



    Hunter, Hon. Duncan, a Representative from California, Chairman, Special Oversight Panel on the Merchant Marine


    Schubert, Capt. William G., Maritime Administrator, U.S. Maritime Administration, Department of Transportation

Schubert, Capt. William G.

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[There were no Documents submitted for the Record.]

[There were no Questions and Answers submitted for the Record.]


House of Representatives,
Committee on Armed Services,
Special Oversight Panel on the Merchant Marine,
Washington, DC, Thursday, March 14, 2002.

    The panel met, pursuant to call, at 8:00 a.m., in room 2212, Rayburn House Office Building, Hon. Duncan Hunter (Chairman of the Panel) presiding.


    Mr. HUNTER. [Presiding.] Good morning. Pardon me for being a little late. We just got the latest from our Marine Corps war fighting lab on some of the new technology we are using in the field, some of which we are developing and have been experimenting with in the Afghan theater, and it is really interesting stuff. We are finally moving to the point where we can develop things and build them fairly quickly in onesies and twosies, not big numbers.
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    My opening remarks will be brief. However, before we address the business before this panel, which is consideration of the Maritime Administration (MARAD) budget for fiscal year 2003, I would like to extend a warm welcome to our witness today, Captain Bill Schubert, Administrator of the Maritime Administration.

    Captain Schubert, thank you very much for being with us this morning. We appreciate it. It is nice to have you here.

    In reviewing your testimony, I am particularly pleased to see that your agency has backed away from a proposal to transfer the Maritime Security Program to the Department of Defense (DOD). As you know, this panel found no basis for that recommendation made by the Administration last year. We thought it lacked merit, and we could not see much in the way of savings.

    I should say, however, that we need to get started soon on reauthorization of the current program. We intend to seek your initial views today on the content of a new program. I know the task will be difficult, but I want to put the Administration on notice now and your department and agency, in particular, that we intend to get a new program in place well before its scheduled expiration in 2005.

    It strikes me that this panel put together a pretty good package in 1995, and I think we can do it again. In that regard, I intend to set up a series of panel hearings as soon as we can get through the DOD authorization to at least start the process. So we will be meeting with General Handy, the U.S. Transportation Command Commander in Chief (TRANSCOM CINC), in the next couple of weeks to get his views, and we hope to have him as a witness at one of these hearings.
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    On the Title XI issue, we are disappointed that the Administration has once again proposed eliminating this program. I recognize that we have got to make some legislative changes to assure the public that we can prevent some of the defaults that have occurred this year, and I think we are all pretty familiar with those specific problems. Maybe these defaults were not the result of problems with the legislation, but to some degree were related to the economic conditions and, of course, downturns after September 11th.

    In any event, we need to see that defaults of this magnitude do not reoccur. Again, I would like your views on ways that we can get this program back on track, how we can fix this thing.

    Finally, I have noticed in your testimony that you will submit a package of legislative provisions that you would like this panel to act on. If we do not receive these proposals in the very near future, we will not be able to even consider them in this cycle. We need them in days, not in weeks.

    I would now like to recognize my good friend, the distinguished gentleman from Maine, Mr. Allen, who is the ranking member on this panel, for any comments he might wish to make.

    [The prepared statement of Mr. Hunter can be found in the Appendix on page ?.]

    Mr. ALLEN. Thank you, Mr. Chairman. I join you in welcoming Captain Schubert to this proceeding, and I want to thank you for holding this hearing.
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    I would only note that I share your concerns, Mr. Chairman, especially about the health of the Title XI shipbuilding loan guarantee program.

    As the chairman indicated, the Administration has, for the second consecutive year, proposed eliminating that program. I believe, at least, that such a move would seriously endanger the shipbuilding industrial base that is crucial to our national security. I can go on with other comments and questions, but I think I will wait until after we have heard from you, and then I will have some further things to say.

    Welcome, Captain Schubert.

    Thank you, Mr. Chairman.

    Mr. HUNTER. Captain Schubert, welcome, and the floor is yours, sir.


    Captain SCHUBERT. Thank you. Good morning, Mr. Chairman and members of the panel. I would first like to request that my formal statement be entered into the record.

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    Mr. HUNTER. Absolutely, without objection, it will be accepted into the record.

    Captain SCHUBERT. Thank you. I have some brief comments to cover some of the highlights of the Administration's proposal.

    I welcome the opportunity to appear before you here today for the first time to discuss the Maritime Administration's authorization request for fiscal year 2003. The total budget request for MARAD for fiscal year 2003 is $211,564,681, approximately $97.2 million of which is for MARAD's operation and training.

    The operations and training fund request also includes $49,716,000 for the operation of the United States Merchant Marine Academy, USMMA, at Kings Point and $7,563,000 for continuing assistance to the six state maritime academies. I cannot stress enough the importance of the Merchant Marine Academy and the state schools, especially in today's world environment.

    In peacetime, academy graduates are needed to operate efficient, cost effective marine transportation systems. In times of conflict, academy graduates crew the ships that support our troops. They are also the largest single source of naval reserve officers.

    I am sure you will be pleased to hear that the president's budget proposes to authorize the Maritime Security Fleet program in MARAD's budget at its full funding level of $98,700,000. The program would continue to be administered by MARAD.

    Authorization for the Maritime Security Program (MSP) expires at the end of 2005. An MSP follow-on program should be approved in order to assure the continued availability of U.S. flag commercial ships and the citizen crews to meet the national security interests.
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    It is important that such a program provide modern military useful vessels able to meet national security requirements. The program should provide incentives to ensure that the most modern and efficient vessels are available throughout the program.

    Other areas that will need to be addressed are the number and mix of vessels, the length of the program, maximum vessel age, the level of financial support, and citizenship. MARAD is currently participating in discussions with DOD and meeting with the maritime industry representatives to explore options for MSP renewal.

    The disposal of obsolete ships in the National Defense Reserve Fleet, NDRF, continues to be one of the department's top 10 management challenges. Our budget contains a request for approximately $11 million for ship disposal. This funding would enable MARAD to continue disposing vessels in the NDRF that pose the most eminent environmental risks.

    MARAD had developed an action plan which involves the investigation of all alternatives to expedite the disposal of its obsolete vessels at the least cost and, where possible, on a cost recovery basis, while giving consideration to worker safety and the environment. However, without a consistent and appropriate level of funding, MARAD's ship disposal problem will only grow, and the exposure to immediate environmental threat will increase.

    Cargo preference laws are an important part of the overall statutory mandate to support the U.S. flag merchant marine. The Administration's 2003 proposed authorization bill contains several provisions designed to streamline and increase compliance with cargo preference requirements and to improve the vessel profile of our bulk and breakbulk fleet.
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    The bill contains a provision which would suspend for a period of three years the existing requirement that foreign built vessels brought under the U.S. flag must wait three years before carrying certain government-impelled cargoes. This would have the direct impact of adding jobs to the U.S. merchant marine. All vessels re-flagged under this provision would also be required to utilize U.S. shipyards for all dry dock periods to maintain U.S. Coast Guard and classification requirements, adding work opportunities for U.S. shipyards.

    The president's budget request for 2003 seeks no new funding for Title XI loan guarantees. MARAD will continue to manage the existing loan portfolio and associated financial activity in the program, with $4,482,152 of funds requested for the Administration of the program.

    However, in an effort to free up capital already set aside, the Administration proposes some improvements to the Capital Construction Fund (CCF). Currently, there are approximately 151 CCF fund holders with an aggregate balance of approximately $1.35 billion.

    Our bill would permit the use of CCF deposits for the construction or reconstruction of vessels to be used in the contiguous coastwise domestic trade and mobile offshore drilling units. This could help alleviate passenger and freight congestion and support the Administration's effort to enhance the exploration and production of energy in America.

    MARAD will also continue our efforts to increase U.S. carrier participation in the carriage of international trade by negotiating improved access to foreign markets. A major area of activity is China, where government controls restrict the ability of U.S. carriers to deploy their vessels, market their services, and conduct intermodal operations.
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    New regulations recently issued by China in December impose significant additional restrictions on the operations of not only shipping companies, but also shippers and intermediaries. I will be traveling to Beijing the week of March 18th for consultations on these issues. I hope to make enough progress to subsequently begin negotiations on a new maritime agreement.

    In the coming years, I welcome the opportunity to continue our role in preserving both economic and national security. Your continued support will help us do our part in this mission.

    This concludes my prepared statement, and I would be happy to address any questions that the panel may have at this time.

    [The prepared statement of Captain Schubert can be found in the Appendix on page ?.]

    Mr. HUNTER. Thank you very much, Captain Schubert. Let me go to one of our pressing issues here.

    First, I want to welcome Ander Crenshaw, who is also a member of the panel from Jacksonville.

    Ander, thank you for being with us this morning. We appreciate it.
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    Let's go to something that we are all concerned about. Can you give us a little background on the most recent cruise ship default? How many ships are involved, and what are your plans for the vessels in question?

    Captain SCHUBERT. Yes, sir. All of the American Classic Voyages (AMCV) vessels, except for the American Queen, had defaulted—that is a total of five ships, not including the American Queen—on MARAD debt, with an aggregate amount of approximately $330 million. The American Queen, which is not in default, is currently in a 30-day grace period for making its debt service payments. We have, however, received some confidential proposals for the American Queen which are under consideration.

    Now, with regard to our plan for the disposal of these ships or the liquidation of the ships, we have developed a very, I would say, comprehensive plan to address this, to try to obtain the maximum recovery to the U.S. government. We have, for example, the Independence, which is a 50-year-old cruise vessel, which, in my opinion—and I am giving you my opinion as an ex-mariner who went to sea for 12 years—is really at the end of its economic useful life.

    We are proceeding on two paths on this vessel. We are currently advertising the vessel, as-is, where-is, without clear title, in an attempt to see if there is any potential buyers out there that would be interested in the vessel right now. And I think this was a prudent thing to do, because, as I think we have discussed in the past, the military, for example, may have a need for hotel accommodations for troops. So we wanted to give the private sector an opportunity to take a look at the ship now and evaluate that option.
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    However, we are also proceeding on foreclosure to get clear title, which should take, we believe, between four and six months. At that time, we will again advertise the vessel for sale.

    We also have two vessels that are part of these defaults, the Cape May Light and the Cape Cod Light. One vessel is basically brand new, and the other vessel has not been delivered yet, so it is still at the shipyard. We are kind of constrained for the time being from taking prompt action on these vessels and also the other ones that I am going to mention because of the bankruptcy proceedings. We are cooperating with the bankruptcy court in allowing an investment banker to go out and market these ships. But we do preserve the right to reject any offers that we do not deem to be adequate.

    The other vessel is the Great Pacific Northwest Cruise, which is a river boat that is up in Columbia. That is also part of the bankruptcy court's effort, working through an investment banker, to try to get a price.

    But I will tell you right now that I am committed to, first of all, preserving these assets so they do not deteriorate. So we have taken actions in that regard.

    But I am also, from my past experience and in advising the agency during the late 1980s, aware that you have to make some decisions on what assets to hold until a better day and what assets to get rid of. I believe the three ships that I just mentioned are assets that we can get a very good recovery on if we do not rush into it with accepting only fire sale type prices.
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    Now, with regard to the project, America One ship, which is approximately 40-percent complete, we had actively been pursuing an agreement with the shipyard. We are not quite there yet, but we expect in the very near future to hopefully come to an equitable arrangement.

    Mr. HUNTER. What did you say was the percentage of completion?

    Captain SCHUBERT. It is approximately 40-percent complete. We have put together a time table to dispose of the ship. But, there again, we have to be very practical in this, in the sense that a 40-percent complete ship just sitting there in the shipyard is not a very marketable asset. So we are proposing to seal the ship up to where it is in a floatable and towable condition. That means that we will launch the ship sometime later this year, and we will then have the most flexibility to seek potential buyers for that ship.

    We have made an offer to the Navy, and if they are interested, they need to speak up by April 1st. I sent the secretary of the Navy a letter to request that they respond if there is any interest.

    Mr. HUNTER. Now, when Mr. Taylor asked the Navy to tell us about their plan, if any, to see if there is a good utilization in the Navy for these ships, the answer was a plan is forthcoming very shortly. Have you folks seen that?

    Captain SCHUBERT. Well, we have seen quite a bit of activity, and, by the way—
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    Mr. HUNTER. Where do you think they are going with that?

    Gene, do you have any more light you can shed on that, or Mr. Allen?

    Mr. TAYLOR. Thank you, Mr. Chairman.

    I had the opportunity to have sort of a pre-briefing from the Navy. One of the mistakes the Navy has made is, number one, they started off doing a baseline study of how much is completed, how much has been purchased, how much of it belongs to MARAD, how much of those things belong to the shipyard, and I think they have done that very well.

    Unfortunately, the Navy walked in only looking for one option for the ship, which was a command and control ship. And I could have told them six months ago that this is not a war ship. This is built to be a cruise ship. It is not built to take a hit. I mean, it does not take a genius to see it does not have watertight doors and the decks are very thin, because it was going to be a very tall ship, and, therefore, it had to be light on the topside. It was only yesterday that they agreed to take a look at it for some sort of a barracks or burden ship.

    So, Captain, I have got a problem with you saying you have given them until April 1, because they were looking in the wrong direction. They should have known six months ago this would never be a war ship. I do not know who put command and control in their mind. I can assure you it was not me.

    Captain SCHUBERT. It was not us, either.
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    Mr. TAYLOR. But I have been talking barracks ship all along, because the fact of the matter is we have rented cruise ships. We had them in Bahrain during the Gulf War for R&R purposes. We have had them at Guantanamo when we had overflows of refugees. We put the Navy personnel on the cruise ship and put the refugees in the barracks.

    We left $60 billion worth of stuff behind in Panama when we were asked to leave. There is no telling how much we left behind in the Philippines when we were asked to leave. I think it puts us in an incredible negotiating position to retain a base if we can take our barracks with us when we leave instead of the local politicians going in there and looting them like they did in Panama.
    For that reason, it is being built to the two-plus-one standard, which is what we are shooting for in the barracks, which is two people for every room and one bathroom for every two people. So it could be built very easily to a barracks standard.

    It does not even have to be self-propelled, quite frankly, Captain Schubert. I do not see any good reason for it to be self-propelled, and that frees up a lot of room for putting storage down below. You are going to have to do something for bow-thrusters, to make up for the engines not being there. But if it is going to be sitting at a dock for the vast majority of its life, and commercial towing is readily available and fairly cheap, I see absolutely no reason to go to the expense of putting the engines in.

    Captain SCHUBERT. Yes, sir. That is basically the same plan that we have proposed for the Independence. It does not have to be able to steam around. It does not have to have a full maritime crew on board. It could be pulled up someplace and provide 1,100 berths right now. I have taken that message directly to the secretary of the Navy in a personal meeting that we are willing to cooperate.
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    Now, with regard to the ship, let me just emphasize that our actions that we are taking now are very responsible, in that it allows the most flexibility on what to do with the ship. I believe we need to continue the work on the hull to seal it up, to make it floatable and towable someplace. And, also, it is for another more practical reason, and that is that the yard needs that space sometime in November.

    Mr. HUNTER. What kind of cost are we looking at for completion, if we completed it to, for example, a barracks ship?

    Captain SCHUBERT. I respectfully do not have an answer for that. They have not shared that information with us, because they were going on that initial track of a command and control vessel.

    Let me just mention to you all that I have gone down to the ship. I spent a whole day walking the ship to look at it myself. And from my, let's say, seagoing background and being on ships most of my life, I can tell you that I consider it almost a crime that we cannot find a more, let's say, constructive use of government assets.

    But at the same time, our agency is under a mandate. We have a fiduciary responsibility to try to get the best recovery for the ship. I am 100-percent committed to cooperating with the Navy, but I think you all would agree if you do not give the Department of Defense deadlines to go by—we cannot stretch this thing out forever. We have to get some resolution to it.

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    Mr. TAYLOR. I do appreciate what you are saying, but a bad artificial deadline is worse than no deadline at all. I do not think in two weeks, they can do justice to looking at it as a barracks. I deeply regret that that was not one of the things they looked at.

    But the baseline study is good. Number one, you have got a ship that is self-sufficient for making its own water, self-sufficient for generating its own power. If you pull the engines out, you can have incredible space to store food or fuel or water or whatever. It can treat its own sewage.

    It does not become a burden on whatever installation it is tied up to, although one of the things I have asked them to look at is if it would have the options of taking water on, have the options of disposing of the sewage through plant treatment. And, quite frankly, Captain, I do not see anybody out there who is going to give us anywhere near the return on our dollar that the Navy would—sitting out there like vultures waiting for a cow to die on this one.

    Captain SCHUBERT. No, we have done quite a bit of actually working in cooperation with the yard and have made some very significant efforts to try to determine what it costs. But until we actually advertise it, we will not really know for sure.

    But at the same time, the options that I have outlined to you that we are moving forward on as soon as we can get an agreement with the yard to make it towable and floatable—then you can take a vessel like this, move it to the reserve fleet, and give the military as much time as they need to really do the technical part. What I am asking for—
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    Mr. HUNTER. What is the crew requirement on this ship, operation-wise?

    Captain SCHUBERT. The way it is configured, to be honest with you, I am not exactly sure. Are you talking about the marine crew, the certificate inspection crew?

    Mr. HUNTER. Yes.

    Captain SCHUBERT. I am not really exactly sure on that.

    Mr. HUNTER. Gene, what is the investment so far in this ship?

    Captain SCHUBERT. From our perspective, it is $185 million in terms of liens that we have against the ship.

    Mr. TAYLOR. If I may, Captain, for what it is worth, one of the clarifications I got from the Navy is that all of the materials that it is going to take to complete this ship have been purchased. As a matter of fact, almost all of the materials that it is going to take to complete two ships have been purchased. One of them is 40-percent complete. The other one, they have just purchased the materials for.

    They got a volume buy on engines, got a volume buy on bow-thrusters. Each of the compartments is pre-fab. They are going to build decks and slide the finished compartments in there. All those compartments that are going to be the actual berthing have been purchased.
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    So the materials have been purchased. It is now the cost of hiring the welders, the fitters, the electricians, the painters to put these things together.

    Captain, two things I wanted to ask—

    Mr. HUNTER. But, Gene, what is your estimate on what you think it is going to take to complete these babies?

    Mr. TAYLOR. I would think we would have to get a hard and fast number from Ingles.

    Captain SCHUBERT. I have seen some numbers to complete it as a cruise ship. They are not official numbers, so that is why I am a little—

    Mr. HUNTER. But what are the unofficial numbers?

    Captain SCHUBERT. The unofficial numbers to complete the ship as a cruise ship are in excess of $500 million. I would like to make one technical comment, though.

    Mr. HUNTER. Gene, is that consistent with what you have seen?

    Mr. TAYLOR. This is my shipyard, so I have got mixed feelings saying this. But Ingles is trying to recoup all of their costs, as any business. They are on the line for two complete ships. So when they keep throwing that number out there, that is for two complete ships.
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    Given that we all, to a certain extent, have our fingers in the wringer on this one, I would ask that we go back to Ingles and say, ''Look, the world is going to get back to normal sooner than later. The cruise ship business is going to recover, I think sooner than later. Let's finish this first one as a barracks. Hang onto your materials.'' I do believe the cruise ship industry is going to come back, and I do think that there is a learning curve.

    We both know that Ingles has used some of this money to make fairly dramatic investments in the shipyard. They are a better shipyard for having done that. They have got better equipment, better cranes, and better buildings to do work during the wintertime and in inclement weather.

    I think we, as a committee, need to go back to Ingles and say, ''What do you want to finish it as a barracks barge with the idea that that still leaves you the option of completing the second one when things turn around for the cruise ship industry?''

    Captain SCHUBERT. Can I make one technical comment, though?

    Mr. TAYLOR. Sure, Captain.

    Captain SCHUBERT. Just so you know, from a marine person's point of view, there would not be any benefit—and I am sure Ingles would tell you the same thing—to take those engines out of there and all the equipment. It would probably cost more money to take it out, and the room that you would gain down there is not—I would say, just from a professional point of view, the engines and everything that is down there—you are better off leaving it in there, because it would be quite expensive to remove it.
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    Mr. TAYLOR. Captain, two things I wanted to ask you—going back to the Cape May Light and the Cape Cod Light and the other one, I thought I heard you say an investment banker to market it.

    Captain SCHUBERT. My understanding is that the bankruptcy court has appointed one investment banker and given them so many days to try to market primarily the Cape May Light and the Cape Cod Light in a package, and then a separate package would be the river boats. Now, as I mentioned, one of the river boats has not paid out yet. We have not actually paid it out yet.

    Mr. TAYLOR. My problem with that is, Captain, I hate doing business with one of anything, be it one realtor, one hardware store, one of anything. A little bit of competition keeps everybody on their toes, and by giving it to just one banker—I see a problem with that.

    Captain SCHUBERT. Can I make a comment on that, though?

    Mr. TAYLOR. Sure.

    Captain SCHUBERT. We opposed this idea. MARAD through the Department of Justice opposed the idea and the way it was implemented to do this. We would rather have, I think, taken possession of the assets as a lien holder in possession and really have control over the preservation of these vessels. MARAD has a lot of experience in preservation techniques, and I think if we are patient and we do not run into a fire sale, we can do pretty good on these ships.
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    Mr. TAYLOR. Well, the other point I was going to make is that I am a subscriber to Work Boat, I am a subscriber to Ports and Harbors, and I have not seen one ad for any of these vessels yet. So where in the heck are you advertising?

    Captain SCHUBERT. It is totally out of our control.

    It was the bankruptcy—

    Mr. TAYLOR. I understand it is out of your control, but maybe we ought to bring this to the attention of the judge, because this guy is not trying very hard to market it.

    Captain SCHUBERT. We are going to eventually try to get control of this if we do not have any offers. Now, if they come in with some offers that are acceptable, we will certainly consider them.

    Mr. HUNTER. Captain Schubert, maybe what you could do for the committee is to get a little synopsis to us, a little paper, on what they are doing to market this thing. Maybe you could do a little survey on that or an investigation and call them up and ask them to send us copies of any advertisements they have put out and contacts they have made, just a little summary of the status of their operation.

    What do you think, Gene?

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    Mr. TAYLOR. I would greatly appreciate that. And the last point, while I am thinking of it, is the Navy did not feel that the engineering spaces were being well preserved. I just want to pass that on. That is from a briefing I received yesterday. So I would hope that we could get at least a clarification between you and them.

    Captain SCHUBERT. I would say, since I have had a lot of personal experience in preservation work, that if the space was actually closed up properly—and down in the engine space, you could put everything under dehumidification and handle it that way. What I saw when I was down there was sort of a stop gap approach to preservation for a short-term period of time until all these other issues get worked out.

    I do not think the yard intended to say that this is a long-term preservation plan, because it is not. But I can understand what the Navy would feel about that.

    Mr. TAYLOR. Mr. Chairman, thank you.

    Mr. HUNTER. Thank you.

    Mr. Allen, what do you think about this?

    Mr. ALLEN. I wanted to turn your attention to the implications for the future. How much of the default situation do we find ourselves in as a result of September 11th, and can you anticipate any future defaults on the horizon? And are you recommending any changes, legislative or otherwise, that would minimize risk in the future?

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    I mean, this has been a very successful program over the years, very successful, and this is obviously a problem for us right now. Are there any lessons learned, or ideas for the future?

    Captain SCHUBERT. Yes, we always need to be vigilant in looking at how to improve the program, even if it is working properly. But I would just address what I heard was about three questions there.

    First of all, since the Credit Reform Act took place, there has been approximately $5,719,000,000 in net approvals, net meaning there was a larger number of approvals, but they did not go forward with the financing. But that is the net approvals.

    Out of that, we have had approximately $468 million in defaults, and if you want me to list those, I would be happy to. This really represents about an 8.19 percent defaults to approval ratio.

    In terms of what we are anticipating in the near future, or at least what we have indications of in terms of future defaults, we have the one vessel that I mentioned earlier that is still part of the AMCV bankruptcy, which is the Great American Steamboat Company. That is the vessel that is up in the Columbia River. We have not paid out on that yet, but that would represent approximately $45.7 million, including principal and interest.

    We also have another situation with the Free and Goldman, formerly known as the Hann Marine Yard, which was a shipyard modernization project, and that represents about $19.9 million. Those are the ones that we can foresee right now as potential defaults, or on the horizon for defaults.
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    Now, with regard to your request for some ideas on improvements to the Title XI program, I first would like to put this in the context of our current authorization, since the Administration, as I said, is not proposing any more funding. But, generally, how I look at this question and how we should proceed is that we have to be good stewards of what we have, and we have to use our resources wisely.

    We are currently awaiting, as you know, the Department of Transportation Inspector General's (IG) review of the program, and we are committed to taking appropriate action based on their recommendations. That being said, the rest of my suggestions are going to be related to risk mitigation, primarily risk mitigation.

    One of the ideas that we would consider is, at our sole discretion, due to new market technology, complex financial structures, I think we need to look at having the flexibility or the ability to go out to outside third party companies that specialize in highly complex transactions.

    This model, by the way, is not new. The U.S. Export-Import (Ex-Im) Bank, several years ago, when they got into project financing, which is very complicated financing, had gone out and solicited and approved a list of vendors—or actually financial consultants is what they call them—to do a lot of the due diligence analysis. I think this third party look at some of these transactions, especially the ones in the category that I mentioned, could be beneficial to the program in mitigating risk.

    There is also another concept which would involve requiring additional equity for projects deemed to have higher risk due to market technology or financial structure. This is another potential way to mitigate risk.
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    Now, my next suggestion may be considered a little bit controversial, but we should also consider an evaluation of the proposed shipyard that they are going to use, including past performance.

    Mr. HUNTER. Before you move on, Captain Schubert, what do you mean by what you just said, in terms of trying to have a more complicated, more sophisticated structure and mitigate risk?

    Captain SCHUBERT. Well, let me put it another way. Some of the applications—and we have approximately $5 billion in pending applications right now. At the same time, we have only $700 million in authorization left over.

    So, that being said, some of these applications are very complex in terms of the financial structure, but also the due diligence that is required to evaluate the potential cash flow, the market, may be things that we, with our own internal staff, may not have the needed expertise to do a good job, not that they are not good people, but—

    Mr. HUNTER. So you might want to contract with some of the Wall Street people or other folks that do this in a number of areas?

    Captain SCHUBERT. What I would do is something very similar to what the Export-Import Bank does. They have a list of three—actually, I think it is three or five financial advisers under contract to do just that.

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    Mr. HUNTER. Let me just follow that just for a second, if I may. And I think Mr. Allen still has some questions. But when you are building cruise ships, you, by definition, are engaged in an industry which is very much subject to movements in the economy that can send the constituency for the cruise industry back to their home or keep them at home, just as the September 11th tragedy has brought about.

    So do you think there has been too much reliance on that industry, in terms of building ships? Obviously, it is one of the only games in town. I mean, we understand that.

    But it is also an industry which is highly volatile in terms of being an industry that rides the crest of an economy very nicely when you are on the upswing, but also falls into the trough very quickly when the edge is taken off the economy, which is the situation we have right now. And all the king's horses and all the king's men, in terms of financial advisers and wizards and gurus and analysts, cannot do much to change those basic strong wave patterns, if you will.

    Captain SCHUBERT. I agree, and I was not aiming at any specific type of project. I just—

    Mr. HUNTER. But could you comment on that, that we do focus strongly on the cruise industry on Title XI? What do you think in terms of the wisdom of that?

    Captain SCHUBERT. The wisdom of financial advisers and—

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    Mr. HUNTER. No, of focusing on the cruise industry in terms of Title XI construction, which, as we know, is an industry that has the ability to hit the trough fairly quickly in times of economic downturn.

    Captain SCHUBERT. Well, when you are talking about 20 to 25-year financing, you have to account for peaks and valleys. I mean, in good financial analysis, you would need to do that.

    I would be the first to admit to you that the events of 9-11, having had a direct impact on the cruise industry, is probably, to a great degree, responsible for what actually happened. You cannot predict those types of events.

    Similarly, back in the 1980s, prior to the Credit Reform Act, we had—I am not trying to go on a rabbit trail here. I am trying to answer your question. But we had approximately $5 billion in a portfolio value, and $2 billion of that was in the oil field. And when the oil field went south and totally collapsed, we experienced about $2 billion in defaults as a result of that event.

    I do not know if you can ever account for those types of things, nor could you say that there is no risk involved in any of these transactions, because if you did not have risks, you would not need a loan guarantee program. But at the same time, back to what I was saying earlier, there are some transactions that I think would be beneficial—for us to have the ability, at the applicant's expense, to do more due diligence from an arm's length type of approach and actually get experts in that industry that could add more substance and value to the application.
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    Mr. HUNTER. Do you have the right under present law to be able to do that, to contract a team to do that?

    Captain SCHUBERT. Again, these ideas are in the context of ideas. But our staff believes that some extra mandates would give more teeth to our ability to do this, even though we do have the ability now.

    Mr. HUNTER. Okay. So maybe we could look at that with respect to legislation.

    Captain SCHUBERT. I would request that you take a serious look at it, yes, sir.

    Mr. HUNTER. I think it makes sense. We want to have as many smart folks scrub this stuff as possible.

    Captain SCHUBERT. And there is precedent for it in terms of what the Ex-Im Bank is currently doing.

    Mr. HUNTER. Okay. Thank you.

    Mr. Allen, thank you for letting me interrupt.

    Mr. ALLEN. Thank you, Mr. Chairman.
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    Captain Schubert, I just want to state again for the record my belief that we may be, as you say, in a valley right now in terms of this particular program. But over the years, this seems to me to be a program that has helped sustain the shipbuilding industrial base in this country and provided directly and indirectly a considerable number of jobs in this economy. That is why I am so troubled and I think other members of the panel are troubled by the Administration's suggestion that we should just walk away from this particular program.

    I do not hear you saying—I hear you recognizing the significance of September 11th, which does seem to me to be a major factor in the defaults.

    I do want to take a moment on another topic, and that has to do with the funding for the disposal of obsolete vessels. In 1994, the overseas scrapping was halted, and since then, we have got this huge backlog.

    Now, I think it is a good thing that you have requested $11.1 million for ship disposal, as compared to last year. But this does not even begin to scratch the surface. It seems to me what this Administration and the last Administration have not come to grips with is that we can no longer export our worker safety and environmental concerns overseas.

    It is not just this program where this issue is arising. You know, some of the scrap from the World Trade Center recently was in the news. Back in Maine, a private concern in India tried to buy mercury from a plant that was shutting down in Maine, and the Indian government turned it back.

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    I think the days when we can export our environmental waste overseas are gone, and that means, in my opinion, that we ought to take care of this ship disposal here at home. They may be low end jobs, but there is a significant amount of economic activity in scrapping these ships.

    I know you are in conversations with the Environmental Protection Agency (EPA). I am told you are in conversations with EPA to develop a means to resume overseas ship disposal as part of a broader regime. I would like you to talk about that and react to my concerns.

    Captain SCHUBERT. Sure.

    Mr. ALLEN. I mean, I really worry that the effort to move scrapping overseas, at the end of the day, is really going to be a way to transfer our environmental problems to somebody else.

    Captain SCHUBERT. I would like to assure you that our intention, first of all, is to solve the problem. And I have to say that one of my first priorities since December 6th, when I was sworn in, was to address this problem, and I had actually given it quite a bit of thought beforehand.

    I have quite a bit of experience in scrapping ships myself, in terms of how it is done, so it is not a learning curve in that sense for me, personally. But I have to tell you that when I went down about a month and a half ago, two months ago, to the James River fleet and looked at the ships myself—and this is coming from someone who has been on a lot of ships in my life—I could not believe just what I was seeing down there.
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    For the last seven years, for these ships to have been sitting there and having no substantive action taken, to me is almost a sin. So when I look at this issue, I am looking at it as potentially one of the most serious environmental problems that we have to deal with.

    Yes, you are correct. I have been speaking with the deputy administrator at the EPA. I will also say that we have given quite a bit of thought to how we are going to approach this.

    Now, as you know, we did not receive funds in this fiscal year. From my agency's point of view, we had two choices to make. We either use that as an excuse and do nothing, or we take responsible action, and I have chosen to take responsible action to look at every alternative we have.

    I think one of the illustrations—and I have given speeches all over the place on this—is that everything is okay until something bad happens. My biggest concern right now—

    Mr. HUNTER. We use that as our monitor, also.


    Captain SCHUBERT. Okay. Everything is fine until something happens. Well, the kind of thing that could happen very realistically here is—and it is happened before—if a hurricane comes up the east coast or even goes into the Gulf of Mexico for the Beaumont fleet, I am very concerned about this. But, you know, you cannot control mother nature, and we are doing everything we can to protect those assets.
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    Now, I would like to give you an overview, very briefly, on what we are actually doing now in addition to asking for funds. We currently have about 133 obsolete ships to be scrapped, and we have temporarily halted any new ships coming in that the Navy wants to give us, non-combatants. Over 60 of these ships are World War II vintage ships. We have identified 28 ships that need to be scrapped immediately or as soon as possible, as they pose a serious environmental risk as they just sit there.

    Our action plan right now—and this is very important to the whole issue that you are talking about—is that, currently, right now, we are advertising for sale every vessel that we have of those 133 ships. We think that this is a prudent thing to do, because there are some ships in there, in that mix, that are not as bad as some of the others. The Poly Chlorinated Biphenyls (PCBs) and some of the other problems are not as bad on some of these ships. We think there is, potentially, a positive value to some of these ships. We need to get rid of them, then.

    Mr. HUNTER. May I just ask you one quick question? Do you have a study, a report, something available that we could have that would highlight those ships with the most serious environmental problems?

    Captain SCHUBERT. Yes, we can.

    Mr. HUNTER. Is there some way that we could look at the ones that have serious and relatively immediate environmental problems, along with, hopefully, some sense of what it would take to scrap those ships safely? That would give us some sense of the magnitude of the problem.
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    Captain SCHUBERT. Yes, we can provide all the information you would like on this, and we would be happy to even do a briefing on it, if you would like, similar to what we did over at EPA. The issue of cost—I mean, if you are paying for scrapping services, we did much better in our $10 million that we got in the 2001 budget.

    I think we were projecting $2.5 million a ship, and we were able to get those ships adequately scrapped in an environmentally sound way for approximately $1.6 million per vessel. That is a pretty good indication, I think, when you take into account the significant deterioration and some of the other hazardous material issues.

    I would like to say, however, that is 28 ships that we have right now. One of our problems is oil on these ships, and it is very expensive just to remove oil from the ships. So we have opted to scrapping the ship with the oil as a more economical alternative.

    One of the things I would like to inject in here is, to give you an idea how bad this could be, we did a study in the James River, for example, where if you had a two tank rupture on a vessel that has 12 tanks, by the way, on just one ship, the cost to clean up the oil, just the oil that might get into the waterway system and the ecosystem there—not including the actual environmental damage, but just the cleanup cost alone we project to be about $45 million on a two tank rupture. So you can imagine that I—

    Mr. HUNTER. What quantity of oil can you suck out of these ships?

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    Captain SCHUBERT. We can suck the oil out of the ships or take the oil out, but we are talking about spending anywhere between $600,000 and $800,000 just to do that. And we do not have the money to do that. That is the other issue.

    But the other thing is that when you scrap the ship, it is more efficient to scrap the ship with the oil in it, because to some scrap dealers, they look at the oil as actually a positive, not a negative, meaning it can offset—that is why we are able to get $1.6 million instead of $2.5 million, for example, on a ship.

    So this is a very serious problem, and you can imagine that my worst nightmare is a hurricane coming up the coast, and these ships sitting there in the fleet. I forgot the exact number. But it could be a lot worse than $45 million is what I am trying to say.

    Now, with that being said, what we are doing now is very prudent. We are advertising these ships for sale in the open market to both domestic and scrap, and we are going to be the first to tell you that we do not think scrapping all these ships internationally, even if we had permission to do so, is even possible. Some of these ships just will not make it on any long voyage.

    Mr. HUNTER. You mean they could not cross the ocean?

    Captain SCHUBERT. They could not cross the ocean or—you know, I am worried about them crossing the Gulf of Mexico, let alone the ocean. But that being said, we do have some ships in our fleet that we believe—at least we have reason to believe—because prior to 1994, we were scrapping ships—in fact, if you go back to the seven-year period before 1994, we scrapped 130 ships with no cost to the U.S. government. So we know that there are ships that have value that we do not have to necessarily spend money to scrap. And I think, you know, we are under a mandate type thing to have the best value to the U.S. government.
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    So what we have done with the EPA, basically, is ask them for three things. First of all, recognizing that there are some potential options over—we have done quite a bit of study on this. There is a couple of yards that we have identified that we think have the ability to scrap in an environmentally sound manner. One yard is a brand new yard that was built just to scrap ships, with all the latest whistles and bells when it comes to remediation of hazardous material.

    Mr. HUNTER. Where is that?

    Captain SCHUBERT. That one is in India. We think there may be yards in Mexico, and I think we have identified Spain as a possibility. But the idea is that we want to see what the market value of our 133 ships really is, and that is why we have taken this action.

    Now, the EPA has agreed to work with us. There is no authority for us to export carte blanche, but if we get some offers from some foreign yards, and we are able to determine that there is adequate safety standards for the people doing the work, that they have proper remediation for the hazardous material—and very key to this is that we do what we call readily removable on the PCBs and other hazardous material before the ship is exported, and that, by the way, would be work for the domestic industry, even if we were to export the ships. Provided all those things are in place, they are prepared, on a case by case basis, to take a look at this.

    Again, we are trying to solve the real problem, which is to get rid of the ships before something bad happens. But if we are to go this direction, we would do it in a responsible way.
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    I do not believe that this at all cuts the opportunities that we think are going to be available for domestic scrapping. But we have to look at all alternatives.

    The other thing that EPA has agreed to work with us on—and I do appreciate very much their cooperation in recognizing this serious issue. Offshore reefing has been something that we are very interested in doing, and it is a very constructive use of government assets. The problem is that we do not have any national standards—EPA has not established any national standards for offshore reefing.

    So that being said, you have a little bit of a problem where people that are interested in using vessels for that capability want to know to what degree they have to remediate the vessel before they do it. So we are working with the EPA to establish those standards.

    We are also pursuing bilateral—

    Mr. HUNTER. Excuse me. On that point—and I think this kind of follows the pattern that I think we need to establish here in these other areas, too. You need to have a close working relationship with EPA if we are going to make this thing work, correct? If you are going to do reefing, you are going to need to be working with Fish and Wildlife, also. Obviously, you are already working with EPA on this

    But what we would like to do is have you let us know how the discussions are going. And we would like to at least have some of the committee staff folks either attending or monitoring what you are doing so maybe we can be helpful. Or maybe you guys can give us a little joint briefing, you and EPA.
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    But also, I think, the reefing is going to have to be engaged in by the Fish and Wildlife folks fairly strongly if it is going to be successful and if we are going to get it done before those ships dissolve of old age. I mean, if you do not have standards for reefing, I can see five and 10-year studies before they come up with standards.

    Captain SCHUBERT. Oh, I agree.

    Mr. HUNTER. So do let us know who you are partnering with or who you are talking with in EPA, and just let us know as you go along how the discussions are going. And we would like to have some participation to the degree that we can perhaps follow this with any legislative changes that we need to make to help you along.

    Captain SCHUBERT. I agree. I would be happy to do that.

    Mr. HUNTER. I think you have got to contact Fish and Wildlife and get them involved in this mix. I am real interested in this reefing thing. I think that could be a great asset to our sport angler folks.

    Captain SCHUBERT. You bet.

    Mr. HUNTER. So let's work on that.

    And, Mr. Allen, with your indulgence, too, I know that Ms. Davis is very interested in the scrapping of these ships. When I am down in her district, I can see those ships out there on the James River.
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    Ms. Davis, do you have any comments?

    Mrs. JO ANN DAVIS OF VIRGINIA. Yes, Mr. Chairman.

    Captain Schubert, I am glad to see that you see how serious a problem this is, because with it being in my district down there by the James River, I do not want to see a hurricane come. And I do not think some of those ships would make it across the James River, let alone the Gulf of Mexico.

    That is where my real concern is. If I have read everything right, the $11 million that you have asked for might take care of four or five ships, but you just said there are 133. I know a lot of those in the James River are in really bad condition.

    Captain SCHUBERT. For our budget purposes—I am sorry. I did not mean to interrupt you.

    Mrs. JO ANN DAVIS OF VIRGINIA. Well, I am just wondering—I think there is a mandate to get rid of all the ships by 2006 or 2007?

    Captain SCHUBERT. That is correct.

    Mrs. JO ANN DAVIS OF VIRGINIA. How are we possibly going to do that? How much money would you need to get rid of all the ships?

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    Captain SCHUBERT. I appreciate that question. The current exercise that is underway in which every ship is currently for sale and this process for opening up the fleet for people to come in and look at the ships to get a good idea on this—this is a good exercise to really establish the true market value—when I say market value, either positive or negative. I am not sure that we will get offers on all 133 ships, but we will have a better idea after we do this.

    Mrs. JO ANN DAVIS OF VIRGINIA. But some of them, if you just touched them, they would fall apart.

    Captain SCHUBERT. Well, I was very careful when I was walking around on them. Let's put it that way.

    Mr. HUNTER. We are going on one, right, Jo Ann?

    Mrs. JO ANN DAVIS OF VIRGINIA. We are going there tomorrow, yes. And I do not think I am going to walk around on them.

    Captain SCHUBERT. I am very happy that you are doing that, because if you actually see the ships like I have done, personally, you just—but the whole idea is that we put in our budget $11 million, and we estimated for budget purposes three to five ships. Now, again, we had that $10 million the last go-around, and we were talking about four ships, and we did six ships.

    I think with some creativity here, which is something that I am very committed to, we can stretch those dollars out a lot further than that. I cannot make promises, but I can just say with some creativity, which we are working hard on almost every day—we are putting a lot of effort into this—we can do much better.
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    Mrs. JO ANN DAVIS OF VIRGINIA. Are the ones in Texas and the other states in as bad a condition as those in the James?

    Captain SCHUBERT. Texas, my home state, does not have the same problem with the ships now. In the Suisun Bay Reserve Fleet, we have, I think, nine ships that fall into these 28 that I mentioned earlier. Nine of those ships are in Suisun Bay.

    Mrs. JO ANN DAVIS OF VIRGINIA. Are the other 19 in the James?

    Captain SCHUBERT. Yes, ma'am. And these are ones that have—we have a rating system, which we update every month, just so you know, on the condition of the ships. And a lot of factors are in there, like if there is oil in there, and the hull condition. Some of the remedial things that we have done, which we did not have any real money to do, by the way—when we thought there was potential for leakage, we hired divers to go down and patch it up. But we cannot continue to do this for too long.

    I am sure you will appreciate when you get back what we are faced with. But what I wanted you to know is that we are not using the fact that we do not have money this year as an excuse to do nothing. We are taking very aggressive steps to handle this problem, and I think we are going to maybe surprise a few people around here that we can actually do the job. But we cannot control mother nature.

    Mrs. JO ANN DAVIS OF VIRGINIA. I would like to be surprised.

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    Captain SCHUBERT. Well, I am committed to do that. But there are some other things you need to know about our proposed legislative package that is coming up, besides the $11 million. We have also asked for some new authority.

    We have what is known as the Vessel Operating Revolving Fund (VORF). If we were, in fact, able to sell some ships in the open market for a positive cash flow, right now, we are not really allowed to use that money to scrap ships. It is sort of a nuance to the way the rules are written.

    We need authority under the Secretary's discretion that if we sell ships and get money back into this, what they call the VORF fund, we would like to have at least the flexibility to use that money wisely to pay for scrapping services. We are not currently able to do that.

    Also, if we had a hurricane or any kind of event that would involve an oil spill of some kind, we would like to have the ability, under the Secretary's authority, to borrow funds from Treasury to handle any environmental remediation. We currently do not have that. So those are addressed in our proposed authorization.

    Mrs. JO ANN DAVIS OF VIRGINIA. If you do not have the authority to borrow money to clean it up, and you do not have the funds to clean it up, what would happen to the James River if the oil spills?

    Captain SCHUBERT. Well, it is actually happened before. It is not good for national defense, what I am going to tell you. We have the National Defense Fund, which funds the Ready Reserve Fleet and other things that have to do with running these fleets. This does not come directly to MARAD, but it comes through the Navy to MARAD.
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    We have had to spend money in the past—I have a list here somewhere—but it is not chump change. It is like $800,000 in one case and I think $1.2 million in another case where we actually put booms out and cleaned up the oil. Fortunately, there was not any environmental damage. We were able to clean it up.

    But happens is when we take money from that pot to do it, we put our national defense at risk. This is money that is normally used for the operation of the Ready Reserve Fleet.

    We did that because it was the responsible thing to do. But we do not think that we can use this as our normal operating procedures. It would be better to have the borrowing authority to do this.

    Mr. HUNTER. Captain Schubert, thank you, and I thank the gentlelady. I am going to be with her shortly striding the deck of some of these ships, and I want the strongest possible ship. I think we need to reinforce this baby before we get on it.

    Captain SCHUBERT. Yes, and wear a hard hat, too.

    Mr. HUNTER. I am going to have to take off here in about 10 minutes or so, and I hope the gentlelady can stick around and help to chair for further questions.

    We have had a good discussion here this morning, Captain Schubert, and I think before we leave, we have got to go to the Maritime Security Program. Obviously, it is going to be expiring in 2005, and we need a new program. Give us your initial thoughts here.
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    Captain SCHUBERT. As I put in my opening remarks and also in my detailed statement, the Administration is committed to finding a replacement program by 2005 for the Maritime Security Fleet Program. In my opinion, and I am sure everybody would agree, this has been a very successful program. It has done everything and accomplished everything that the original authors had intended it to do.

    I think what really needs to be understood when we start talking about this program is that we are not talking about just providing ships or funding ships. What the military is getting and our nation is getting are several-fold.

    Number one, it is not just ships, as I said. It is the infrastructure. It is the ability to move cargoes intermodally to virtually any place in the world. We are talking about infrastructure and capital cost that would equal, by some estimates, $9 billion that the military has access to for the amount that is being appropriated for the operation of this plan. I think it could be said that it is good value to our taxpayers and also to our nation.

    I think, even more importantly, we are wrestling with the issue of manning today, where we have a merchant marine that is not what it was 10 years ago, in terms of numbers of crew, and we are faced with all kinds of issues here. If we do not have a sufficient number of ships operating both internationally and domestically, we will not have a sufficient number—we cannot guarantee a sufficient number, I should say, of adequately trained and available crew. So the MSP program does provide a basis for this, and it is very important to our national security.

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    Now, at the present time, we are in active discussions with the U.S. TRANSCOM. We have had several meetings and discussions on this. We are in discussions with the stakeholders, the ship operators, and the labor unions. We are working for a consensus, and I believe a consensus is critical from all the parties concerned before we can move forward on this.

    As I mentioned in my opening statement, we will have to address the number of ships that will be required in the program, the funding levels, the types of ships, the mix of ships. All these issues are going to have to be addressed.

    Now, we are not quite there yet, where we can firmly tell you this is a firm proposal on how we should go forward. But we are working together with all the parties concerned, and this is a high priority for both myself and the Administration.

    Mr. HUNTER. You know, you have only got a couple of companies now. You started out in the old days with a lot of companies. Is that problematic?

    Captain SCHUBERT. I think, actually, from a technical point of view, we have the same number of ship managing companies, the Section 2 companies especially, as we had before. But in terms of the vessel operators, you are correct. With consolidation in the industry, which is, I have to say, just a fact of life, not only for the maritime industry, but for many industries, we have a situation where we do not have—with the consolidations that have taken place in the last few years, we do not have as many ship operators.

    But I will tell you they are doing the job that they are asked to do. The ships are ready for national defense purposes. They are providing superior service, I might say, to the military, and I, personally, do not have a problem, or I do not think we have addressed any problems, with the number of ship operating companies.
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    But when we start looking down the road, and we see the different types of vessels that we might need—because, obviously, the kind of war we are engaged in right now is quite a bit different than we were thinking seven years ago. We will have to address the vessel type in a very detailed way.

    Mr. HUNTER. Are there any more questions on this program?

    Mr. Allen, what do you think?

    Mr. ALLEN. No.

    Mr. HUNTER. Gene, do you have any more questions on this program, the Maritime Security Program?

    Mr. TAYLOR. Not on maritime security.

    Mr. HUNTER. Okay, but go ahead if you have got anything else.

    Mr. TAYLOR. Captain, could you give me some ballpark figures of how much oil is on these vessels you want to scrap, and what type of oil, whether it is diesel, bunkersea, lube oil?

    Captain SCHUBERT. I think primarily it is bunkersea, and we do have numbers that we can give you on that, a little better than ballpark, I might say, because we are watching it every day. But we will be happy to provide that to you for the record.
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    [The information referred to can be found in the Appendix beginning on page ?.]

    Mr. TAYLOR. The second thing is—and I do not think we touched on it. If we did, I apologize. When we passed the revitalization of Title XI back in 1993 or so, one of the markets that we had targeted that we know is coming down the line is the replacement of the Jones Act Fleet with double-hull tankers.

    Of the potential market out there, how much of that has already been replaced? It is my gut feeling that not much of it has been replaced, and there is still a heck of a market that is going to be exclusively for American shipbuilders that is coming down the pipe, I want to say, within the next decade.

    Captain SCHUBERT. In the last two years, we have had quite a few double-hull replacement projects that we have been involved in. And I might say—

    Mr. TAYLOR. If I may, Captain, I am talking about, for want of a better term, the American market pie. How much of what we anticipate is going to be the American Jones Act market has already been replaced with double hulls, and how much remains to be replaced with double hulls?

    Captain SCHUBERT. Well, we have conducted a tank study, projecting, based on demand, what is going to be required through 2005. And just to let you know, we currently have approximately 12 applications that are pending that deal with these double-hull replacement barges. We also have some tankers that are not using Title XI, just for your information, but are using the CCF fund. Just so you know, that program is a viable program.
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    Now, I have a list that I can provide for the record of what we have done in this respect, if you would like. But I would like to mention to you—which kind of gets back to an earlier question, but it does answer your question to some degree—that when we have $5 billion in applications, and we have $700 million in authorization, I think we need to look at more prioritization of what is important for our country and inherent value to the taxpayers and meet some national goals. Double-hull replacement would fall into that.

    [The information referred to can be found in the Appendix beginning on page ?.]

    Mr. TAYLOR. Look at the 1993 act, because that was the priorities, and Rusty Johnston was one of the two staffers who helped draft it, and Bill Anderhase has since moved on. But if you look at the 1993 act, that is very clear, that we were taking for the first time Department of Defense money because we wanted to make it Department of Defense priorities.

    Captain SCHUBERT. Are we talking about Title XI?

    Mr. TAYLOR. Yes, sir. It was called the National Shipbuilding Initiative.

    Captain SCHUBERT. I am under the impression that we are supposed to give national defense prioritization.

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    Mr. TAYLOR. Absolutely.

    Captain SCHUBERT. Now, what I am saying, though, is that in my mind, tankers and double-hull replacement is strategically important to our country, not the only strategically important project—but there are some others that I could say, like anything that would relieve congestion on the highways on a coastwise basis would be strategically important for our nation to look at. But I am pleased to say that the program has been used to a great extent for double-hull replacement.

    Mr. TAYLOR. Okay. If you do not have those numbers off the top of your head, I would like to know what remaining market is out there for double-hull replacements.

    Captain SCHUBERT. Remaining market. We have to define the remaining market as people that have come in the door with applications, and we have 12 applications pending right now.

    Mr. TAYLOR. If I may, I would prefer that it be based on capacity that has to be replaced, single hull capacity that has to be replaced with double hulls in the Jones Act.

    Captain SCHUBERT. Well, I can answer in terms of what our analysts have looked at to 2005. We are not going out to the 2015 date. But what I will tell you is with the applications that we have currently in place, the other order books that may not involve Title XI but are just—like these tankers I was telling you about under the CCF.
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    There are a lot of factors that you have to consider in this, in what you need to replace, and that is what the demand is. You have to also remember that a lot of our demand is associated with the north Alaskan crude. With that declining over the next few years and without replacement, without means to replace that oil, then you are going to have less demand.

    But in a nutshell, I can tell you that with the current applications pending and all the other order books through 2005, domestic construction Jones Act qualified vessels, we do not project through 2005 a shortage, although it is a very close supply-demand relationship, meaning we do not have a lot of extra ships out there. If the military needed to grab some tankers to go over to the Middle East from here, product tankers, let's say, you would not have that excess capacity to do that. But in terms of addressing the needs of the country for energy, we have projected that sufficient tonnage will be available if you factor in the applications that we have right now.

    Mr. TAYLOR. Mr. Chairman, we all need to be downstairs in about three minutes.

    Captain, I am very favorably impressed with our first meeting. I want you to know that.

    Captain SCHUBERT. Thank you.

    Mr. TAYLOR. I think your attitude is right on track, and I hope you can maintain that desire to do good things for America.
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    Mr. HUNTER. And very good questions from Mr. Taylor. I think we had a great discussion this morning. I think we have got a requirement in a couple of areas for that thing which is so difficult to attain often in this bureaucracy, and that is to work with several other agencies in trying to solve these major problems.

    We are going to have some questions for the record, Captain Schubert, and then any members that have extra questions, just get them to Rusty and we will get those to you. But I would like to see a working group—and, obviously, you already have a working group working the Title XI issue and, particularly, your Navy contact, obviously, in trying to come up with something with this utilization for the ships that are in question here.

    We also need to have a working group on the scrapping with EPA, and I think, also, with Fish and Wildlife, and we would like to know how that is going to go. And, also, obviously, you are talking with industry here on the MSP program and with the Navy, and we need to have a little working group on that, which I know is important.

    I think our role is to assist you and do what is necessary legislatively to expedite a successful conclusion in all those areas. But meshing with all these other governmental agencies is a little art form. So if you could let us monitor that, I want to have—Rusty here has a lot of time on his hands, and we want to keep him off those decks with his nail gun.

    So if you could work with us on those, I would like to have you identify for us the working group that is working those three issues in each of those areas and let us participate to the degree that we make a few suggestions and also follow your recommendations for legislation. Let's solve these problems together.
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    Captain SCHUBERT. Thank you so much.

    Mr. HUNTER. Thanks a lot for being with us.

    Folks, thank you. Next time, we are going to have coffee for everybody.

    [Whereupon, at 9:30 a.m., the panel was adjourned.]