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[H.A.S.C. No. 107–47]









JULY 23, 2002

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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

Rusty Johnston, General Counsel
Alexis Lasselle, Staff Assistant


    Tuesday, July 23, 2002, Commercial Shipbuilding and the Maritime Security Program

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    Tuesday, July 23, 2002

TUESDAY, JULY 23, 2002

    Allen, Hon. Tom, a Representative from Maine, Ranking Member, Special Oversight Panel on the Merchant Marine
    Hunter, Hon. Duncan, a Representative from California, Chairman, Special Oversight Panel on the Merchant Marine
    Taylor, Hon. Gene, a Representative from Mississippi


    McAlear, Ronald J., President, Kvaerner Philadelphia Shipyard, Inc.

    Vinyard, Herschel T., Vice President, Atlantic Marine Holding Company

    Vortmann, Richard H., President, National Steel and Shipbuilding, Chairman, American Shipbuilding Association


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Allen, Hon. Tom
Hunter, Hon. Duncan
McAlear, Ronald J.
Vinyard, Herschel T.
Vortmann, Richard H.

[The Documents Submitted can be viewed in the hard copy.]

[The Questions and Answers can be viewed in the hard copy.]


House of Representatives,
Committee on Armed Services,
Special Oversight Panel on the Merchant Marine,
Washington, DC, Tuesday, July 23, 2002.

    The special oversight panel met, pursuant to call, at 9:02 a.m., in room 2212, Rayburn House Office Building, Hon. Duncan Hunter [chairman of the panel] presiding.

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    Mr. HUNTER. The hearing will come to order. My opening remarks will be brief. This is the second in a series of hearings, which the panel will hold on the reauthorization of the Maritime Security Program (MSP).

    Last week we heard from witnesses representing the ship owners, maritime labor and the so-called ''section two citizens''. If we learned anything last week, we learned that we have a very difficult task ahead of us.

    This week we will receive testimony from the shipbuilding components within this industry. Judging from a review of their testimony, we will have a replay of last week's hearing. I am particularly interested in getting the best cost estimates of each of the disparate proposals that will be presented today.

    I have also noted that several of the witnesses today have made comments on needed changes to the tax laws. I hope to hear more on these topics today.

    As many of you know, I have been developing a proposal to address this issue that has developed, in part, from discussions with other members of this panel. I hope to be in a position to introduce this legislation ideally as a bipartisan effort after the break.

    In my opinion, reauthorization and modification of the current maritime security program is only one step in a series of required changes. At the end of the day, we will need to develop a program that is affordable and one that this Administration can get behind and support.
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    As I said last week, we intend to continue these hearings into the fall, at which time we will get the views and requirements from the ultimate users, Transportation Command (TRANSCOM). If we cannot design a program that meets and satisfies a discernable military requirement, we will not get the support of the Administration. I think that is fairly clear.

    Before I recognize the distinguished ranking member of this panel, I want to ask a unanimous consent that a letter dated July 19, 2002 from Andy Abbott, representing the International Brotherhood of Boilers—of Boilermakers, Iron Shipbuilders, Blacksmiths, Forgers and Helpers be entered into the record. Mr. Abbott was invited to testify before the panel today, but was scheduled to be out of town.

    Without objection, we will take that into the record.

    [The information referred to can be found in the Appendix.]

    At this time, I want to recognize my distinguished colleague from Mississippi, Mr. Taylor, for any remarks he might want to make.

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


    Mr. TAYLOR. Thank you, Mr. Chairman. I was not expecting to give the opening statement. I thought Mr. Allen would be here. Thank you.
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    I want to tell you, I really appreciate you having these hearings. Last week's hearings, quite honestly, left me with more questions than answers. I thought that the points that you raised about foreign ownership of these ships and the fact that ships—companies that we are paying to participate in the Maritime Security Program have other ships that are calling on places like Iraq and Iran that the president has identified as two of the countries that are part of the axis of evil.

    That is disturbing. And although they will protest, well, it is a different ship; it is still the same. I think it is a very fair question of the American taxpayers to ask, should we be subsidizing these companies. Would we not be better served investing our ships that are built in America, owned by Americans, and operated by American crews.

    I did hear what maritime labor had to say, but again, for the long run and the best interests of our nation, I have some very, very grave concerns that came out of last week's hearing, so I am looking forward to today's.

    Mr. HUNTER. Well, thank you, Mr. Taylor.

    Mr. Saxton, any remarks you would like to make?

    Thank you very much and Mr. Richard H. Vortmann, my constituent from San Diego who is president of National Shipbuilding and chairman of the American Shipbuilding Association will be our first witness, followed by Mr. Herschel Vinyard, the vice president of Atlantic Marine Holding Company and Mr. Ronald J. McAlear, president of Kvaerner Philadelphia Shipyard, Incorporated.
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    So, gentlemen, thank you very much for being with us. Thank you for your leadership in the shipbuilding industry and, Dick, the floor is yours.


    Mr. VORTMANN. Thank you, Mr. Chairman and members of the panel. I certainly appreciate the opportunity to address you today.

    I am speaking in my capacity as chairman of the American Shipbuilding Association or the ASA. I appreciate the opportunity to present our industry's recommendations to strengthen America's national security, our merchant marine and the maritime industry.

    The American Shipbuilding Association, or ASA represents the six largest shipbuilders in the United States. We build large oceangoing commercial ships, as well as all of the capital ships for the United States Navy. ASA also represents 22 major companies engaged in the manufacture of ship systems and components.

    Unfortunately, as you heard last week, the United States is at serious risk of not having a merchant marine engaged in international commerce in the future. Our merchant marine, and the maritime industry in the United States is dying.

    This death is analogous to a patient afflicted with cancer where each segment of the industry grows weaker over time, until gradually, we are no more. It is past time for all segments of the maritime industry to come together to rebuild our merchant marine and the industries that support this merchant marine. This cannot be accomplished, however, without the help of the United States government.
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    While I strongly believe that it is in the national security interest of our government to have a strong merchant marine and maritime industry, it is not what I believe that matters. It is what you in Congress, and what the Administration thinks and believes that matters.

    Should you determine that it is in our national security interest to have a commercial fleet of militarily useful ships—owned, built, crewed, and controlled by Americans—to serve as a military auxiliary in times of war and national emergency, a financial investment will be required.

    A simple band-aid, like the extension of the existing Maritime Security Program or the changes the MSP ship owners recommend, will neither save nor foster an American merchant marine to meet our nation's sovereign military requirements in time of war and national emergency.

    As this chart over here to my right and your left demonstrates, in 1980, the U.S. merchant marine fleet engaged in international commerce numbered 165 American-owned, American-built, and American-controlled ships, employing some 13,000 American mariners.

    Today, the active fleet numbers 45 ships, employing only 2,600 mariners. Similarly, back in 1980 there were 22 shipyards engaged in the construction of oceangoing commercial and Navy ships employing some 140,000 people. Today, there are just eight shipyards employing 59,000 people.

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    Today, 99 percent of the ships in the MSP fleet are foreign-built, and 87 percent are foreign-owned. It is just a matter of time until there will be only two—and quite possibly—just one company left in this fleet. These companies are Neptune Orient Lines of Singapore and Maersk of Denmark.

    The current MSP program has not achieved the intended objectives. By all measurements, the U.S. merchant marine is worse off today than it was 10 to 20 years ago.

    If Congress reauthorizes the existing MSP program, the Department of Defense will have no say in the types of ships these companies enroll in the MSP program. They may have little or no military utility, and there will be no assurance that when the going gets tough that these ships will be available to the Department of Defense (DOD).

    To address these serious deficiencies in the Maritime Security Program, we propose that the Department of Defense pay for the design and construction of ships over a multi-year construction period. The general types, tonnage, and number of each ship type would be identified by the transportation command, in consultation with the Maritime Administration (MARAD), to meet DOD sustainment lift requirements.

    Under this program, DOD would request proposals annually from U.S. citizen ship operators for commercial ships meeting the general description and functionality required by DOD.

    The U.S. citizen operator would enter into a contractual agreement with DOD, based on the design selected by the operator, to lease the commercial vessel over a 20-year period. DOD would then pay for the construction of that ship in a U.S. shipyard. Lease payments by the operator to DOD would commence on the date of the delivery of the vessel.
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    The lease payments to DOD would be based on the international bareboat charter rate for a comparable vessel. Lease payments to DOD could be made on a monthly basis. While the contractual length of the lease would be for 20 years, the contract could either be at a fixed rate for those 20 years, or alternatively, it could provide for an annual adjustment of the lease payment to reflect any increase or decrease in international charter rates.

    We believe this program is a win-win-win for the commercial U.S. ship operators, for DOD, for the U.S. crews, and for the U.S. shipbuilders. U.S. ship operators, which are financially hard pressed to invest in new ships—no matter where they are built—are particularly benefited in that they would have access to ships at competitive international prices, without having to finance the up-front capital cost.

    Under this program, the Department of Defense would own the ships thereby ensuring their utility and availability in times of emergency. This program would strengthen the U.S. defense shipbuilding and repair industrial base, and create thousands of long-term jobs for skilled craftsmen essential to building both commercial and Navy ships.

    While DOD would have to finance the construction of the fleet, it would realize savings in the costs of naval ships. Shipbuilding generated by this program would enable us to achieve series production in our shipyards and our supplier base.
Increased production would drive down the unit cost of ships and ship systems under this program as our work force becomes more efficient with each ship of the same design we produce.

    This building program would foster insertion of world-class commercial technologies and manufacturing processes into naval shipbuilding programs. These commercial practices, combined with the quality production would drive down the cost of naval ships.
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    The lease payments from U.S. operators would be deposited into the National Defense Sealift Fund of Department of Defense to defray the up-front acquisition of the future MSP eligible ships. The contractual terms and conditions of the voluntary intermodal sealift agreement of DOD would still apply to the U.S. operators participating in this program.

    Absent this type of new program, a simple renewal of the existing MSP, under its existing construct or even with the MSP ship owner proposed changes, would place the Department of Defense at the mercy of foreign ship owners to take whatever ship types those owners make available to DOD—regardless of the military utility of those ships.

    This was the case when the MSP program was enacted in back in 1996, and MSP owners have already indicated that they plan to bring, for example, 5,000 Twenty-foot Equivalent Unit (TEU) containerships into a reauthorized program. While TRANSCOM may question the military usefulness of such a large containership, they would have no say in the matter.

    DOD has normally needed ships that can enter a majority of the world's ports, rather than just those few that can handle these extra large ships. DOD has also wanted the increased flexibility by having ships that can transit the Panama Canal. Maybe TRANSCOM will determine that it requires some very large ships, but TRANSCOM should at least have a say in that decision.

    DOD also requires car carriers, or Ro/Ro's. However, neither Maersk nor Neptune Orient Lines, for example, own any Ro/Ro's participating in the MSP program today.

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    TRANSCOM has a requirement for tankers. Yet, there are no tankers in the MSP program.

    The mix of ships that TRANSCOM needs, while still ensuring a competitive commercial market for these ships, will be achieved under the program that we propose.

    I recognize that there needs to be a balance between military usefulness and commercial viability, because these ships will have to compete in the international commercial shipping business in peacetime. I am confident that this balance can be struck with our proposal.

    In closing, let me emphasize that our industry supports an enhanced Maritime Security Program. We support a 20-year annual per ship operating subsidy to offset the higher costs associated with the U.S. merchant mariners and doing business under the laws of the United States.

    But a program that does not provide for a fleet of American-built ships with military utility, under the ownership and control of America, fails to meet the sovereign security requirements of the United States. A program that lacks these critical elements cannot be called a Maritime Security Program.

    Will the program we propose increase the price? Yes, it will. However, 95 percent of the military cargo and supplies for our forward deployed troops will continue to have to be moved by sea. Given this indisputable fact, this is a small price, which America can no longer ignore if the U.S. needs a merchant marine and shipbuilding industry.

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    Thank you, Mr. Chairman.

    [The prepared statement of Mr. Vortmann can be found in the Appendix.]

    Mr. HUNTER. Thank you, Mr. Vortmann.

    We are going to go down the line here and listen to the proceeding proposals for revitalizing our shipbuilding industry. But I want to allow my colleagues if you have any particular questions for Mr. Vortmann to understand the concept of what he is recommending and that is with the U.S. building ships, the Department of Defense is basically owning the ships, deemed lessor of the ships, the Hertz Rent-a-Ship Agency and the operators, leasing from DOD, from the U.S. Government thereby giving, DOD, obviously, the right to retrieve those ships at any point for military use.

    That is your basic position. And you understand that—maybe we can get into it later, but we have a number of statutes and statutes interpretations, which make it very difficult to do any type of creative financing with respect to DOD owning ships. It is probably going to have to be cash up front, just like the rest of our appropriations, which is going to be a fairly big piece of change that has to be dealt with.

    Does anybody have any questions?

    Mr. SAXTON. Mr. Chairman, since you brought up the subject, I guess I would just—the notion of a government/private partnership is very appealing. The most difficult part of that partnership for us is trying to figure out how politically we get the up front money. That is hard.
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    Now, we had the same problem in military housing. We solved it, or we are solving it in a similar way, with a private/public partnership. But the government is not going to own the houses. We are going to pay rent and I am just curious to know whether or not you have looked at any other concepts in terms of how the structure or partnership so that the difficult or almost impossible task of coming up with a meaningful amount of money up front is just as difficult for us—I am sure it is difficult for the private sector as well. But there are financing mechanisms available to the private sector that are not available to us.

    And so, I guess I would just put that thought into the mix at this point and maybe we can talk about it when the other panelists are finished.

    Mr. HUNTER. I thank the gentleman.

    And that leads us to Mr. Herschel Vinyard. Herschel, thank you for being with us today and for putting your creative capabilities to work on this problem.


    Mr. VINYARD. Thank you, Mr. Chairman, for holding this very important hearing on the shipbuilding industry. My name is Herschel Vinyard. I am vice president of the Atlantic Marine Holding Company. We own and operate shipyards in Jacksonville, Florida and Mobile, Alabama. We have about 2,000 shipyard workers.

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    Unfortunately, the large commercial ship construction and repair industry is in trouble. America's share of the international shipbuilding market is less than .5 percent. The Asian shipyards, in contrast, have captured over 83 percent of that world market.

    A number of U.S. shipyards have closed their doors in the last 20 years. During that period, total shipyard employment has fallen by more than half. It took every shipyard worker and every shipyard to get our Ready Reserve Fleet (RRF) ready in 1991 for the Persian Gulf War and I am not sure we are up to the challenge today. We have just had such a dissipation of the shipyard workers and the shipyards themselves that it would be a daunting challenge.

    It will certainly not be easy to revitalize the U.S. shipyard industry. The governments of Korea and Japan made commitments 30 years ago that they wanted to be the world leader in this economic segment.

    And so, the shipyards in Korea and Japan now really have a—they are world leaders in this market. They have benefited from significant subsidies over this long, extended period of time.

    Mr. Chairman, as you have seen in my written statement, we have five specific what we view to be cost effective methods and changes in government policies that we believe will improve the shipyard industry in the United States. The first, as you know, MSP is up for reauthorization. We certainly support the reauthorization in that program.

    Unfortunately, it does nothing to help the shipyard industrial base, which we view as to be an important national security requirement as having a sufficient number of merchant mariners and sufficient ship operators.
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    Mr. HUNTER. Incidentally, Herschel, on that point, I do not want to interrupt you from your prepared statement, but I will anyway. It is always fun to interrupt you, Herschel.

    I do not know if you saw the little shootout we had the other day. We had MSP participants, the so-called ''middlemen'' the American holding companies or the operating companies with the foreign ownership who feel that they, by golly, ought to have a direct control of the operations.

    So, we have quite a little—there was a little conflict there, a little difference in philosophy. I heard Dick give a very strong statement with respect to the need to have America control these ships.

    Do you folks have any position on that on whether or not we should have American companies operating the MSP program, even if it requires injecting a so-called ''middleman'' into the situation, which has American citizenship?

    Mr. VINYARD. Mr. Chairman, I guess I have not fully focused on that particular issue since we do not have a direct dog in that hunt but I think having——

    Mr. HUNTER [continuing]. Fight.

    Mr. VINYARD. Yes, sir. I know that. But I think American operators; American merchant mariners and American companies certainly give us the most protection that we can get.
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    Mr. HUNTER. Okay. Please proceed.

    Mr. VINYARD. On the MSP program, what we would do in this reauthorization or what we would recommend that we do is that we require all non-emergency maintenance and repair on MSP ships be performed in the United States. We think that will bring some of that work back to U.S. shipyards.

    Mr. HUNTER. Now, let me ask you. That is not presently the case?

    Mr. VINYARD. No, sir.

    Mr. HUNTER. Okay.

    Mr. VINYARD. They are free and often do go to foreign shipyards. Our second proposal, you all are familiar with the Title XI shipbuilding loan guarantee program. And it has been moderately successful, but quite honestly, I do not think it is going to meet its full potential until we have a long term funding stream for Title XI.

    Before a ship owner makes a decision whether or not to build a new ship, there is a multiyear decision making process and they do their economic modeling. If they cannot count on Title XI from year to year, they cannot then factor in the extended amortization schedule that Title XI allows and if they cannot do that, that may mean that they ultimately decide not to build the ship.
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    So, what we would propose would be a long-term funding schedule for Title XI so we can really make the best use of those dollars.

    Number three, the cargo preference program, as you know, cargo preference requires some portion of government impelled cargo to be shipped on U.S. flagships. The cargo preference laws like MSP are to help ensure that we have a sufficient number of merchant mariners and a sufficient number of ships. But also, like MSP, cargo preference does not do anything for the shipyards.

    What we would propose is that cargo preference be modified so that ships built in the U.S. and/or repaired in the U.S. be given priority status when the U.S. Government is awarding cargo preference contracts.

    Mr. HUNTER. Now, aren't there a number of cargo preference niches that presently do exist?

    Mr. VINYARD. Yes, sir. But there is no priority, like I said, for ships built in the United States and/or repaired. Many of these ships, while they are getting payment from the U.S. Government, they go overseas for their repairs.

    Mr. HUNTER. I got you.

    Mr. VINYARD. The fourth specific item we have is capital construction fund (CCF). CCF, as it is known, is a bit like 401(k) for ship owners, where they are able to take their pre-tax profits and put it into an account to build ships in the United States.
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    Unfortunately, the ships are limited in the types of trades they are able to compete in. What we would propose is that CCF be expanded where, for example, if a ship owner wants to use money out of their own account to build a coastwise ship, which we need right now, both for open 90 reasons and to relieve congestion on the interstates and railways.

    Let them use their own money in these accounts to build coastwise ships in the United States. And we would also recommend that the program be changed to where they can use CCF dollars to have repairs done in the U.S.

    For example, if a ship owner wants to do a $50 million conversion in the United States, let them tap into their own CCF accounts and use those dollars to spend the money in the United States. The ship owners have already put $1.4 billion into these accounts.

    I think that would unleash a significant investment in U.S. shipyards. One of the really good things about this CCF change is the government does not have to pay out any additional money. These are the ship owners' accounts, so it does not tax the Treasury.

    Finally, Mr. Chairman, MSP operates 68 active sealift ships. Half were built in foreign shipyards. Moreover, much of the maintenance and repair on these MSP ships are done overseas, so we have our U.S. tax dollars going to repair U.S. Government ships in foreign shipyards that are competing with us, foreign shipyards that are getting subsidies from their governments.

    Surely there is a way that we can alter MSP's contracting procedure policies where we can spend those tax dollars at home rather than overseas.
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    Mr. Chairman, I am not asking for a government subsidy of shipyards, but I would like to point out that the short term piecemeal policies that are in place today are clearly not working. We are falling farther and farther behind. We need a long-term commitment by the government to the maritime industry.

    Thank you very much for your time, Mr. Chairman.

    [The prepared statement of Mr. Vinyard can be found in the Appendix.]

    Mr. HUNTER. Okay. Thank you, Mr. Vinyard.

    We are going to move on to Mr. McAlear, but if anybody has any questions about the general concept that Mr. Vinyard laid out, just go right ahead and ask him.

    Yes, sir?

    Mr. JONES. I would like to ask Mr. Vinyard, which country is the leading country as far as these ships being sent to be repaired. Which country gets the most business?

    Mr. VINYARD. I would say probably Korea and China. China is actually an emerging repair country that is competing against us as well as the Singapore shipyards.

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    Mr. HUNTER. Who owns the yards there?

    Mr. VORTMANN. The government. The Chinese government owns essentially every yard in China.

    Mr. JONES. The communist Chinese government.

    Mr. Chairman, a real quick one on that and then I have a follow up.

    Mr. HUNTER. Go right ahead.

    Mr. JONES. Basically, in 1989, our trade deficit with China was about $6 billion. Today we owe China $84 billion. I just want to state that for the record. I could not agree more about that if we do not start trying to do more to help the American worker—in particular, I want to compliment and commend you and I am sorry, Mr. Vortmann, that I was late getting here to hear you speak.

    But if we as a Congress on a bipartisan basis start looking at—this is a national security issue. I am just really dismayed and outraged that we continue to turn our back on the American companies and also to the American workers. I would look forward to working with you and this committee and the full Armed Services Committee to see what we can do to bring some parity, if you will, so that we can get some of these jobs back to the American taxpayer.

    I am offended by what I have heard today, quite frankly.

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    Mr. HUNTER. Well, Mr. Jones, we are going to be working to put a package together hopefully to address exactly what our gentlemen are talking about.

    Anybody else have any questions on clarifying the basics of Mr. Vinyard's proposal here? We are going to go back over and let everybody ask questions, but it is a little bit complex to have the three proposals put out unless you kind of understand the thrust of where they are going.

    Yes, go right ahead, Mr. Crenshaw.

    Mr. CRENSHAW. When you were talking about mandatory doing repairs, I mean, have you thought about mandatory having them constructed here.

    Mr. VINYARD. Certainly that would be the best benefit for our new construction yards, yes, sir.

    Mr. CRENSHAW. What would be wrong with that?

    Mr. VINYARD. Well, I guess the primary issue would be cost, which ultimately falls back to Congress' court.

    Mr. CRENSHAW. Have you ever done a comparison of either the repairs or the construction from time to time, how much more it might cost?

    Mr. VINYARD. Well, we have to understand that both in Korea and Japan, they have, really, a double whammy that shipyards are facing. One, they are getting day to day subsidization, but the fact that they have had these subsidies for 30 years, they have real good and efficient at building ships.
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    There was an announcement this weekend that Japan's order book for this quarter is 447 ships. I do not know if that many ships have been built in the United States in 20 years, 40 years. I do not know.

    So, the answer is, there will be—it will cost more to build them in the United States and I do not have an exact figure on that. Maybe Mr. Vortmann and Mr. McAlear.

    Mr. CRENSHAW. I just think, Mr. Chairman, I mean, if we are looking at this proposal to kind of deal with repairs on a mandatory basis, we ought to think about the merits of actually building some of these ships.

    Mr. HUNTER. The gentleman makes a good point, but I think the thrust of Mr. Vinyard's last statement is to the effect that to reverse this decline, there is going to be a little up front pay, which is probably the greatest fear in American politics is up front pay. And it is going to cost a little money.

    We are going to get to that when we go back on our questions here, we are going to get to the cost, because we are going to have to address that.

    Are you finished, Mr. Vinyard?

    Mr. VINYARD. Yes, sir.

    Mr. HUNTER. Okay. Thank you very much. Thanks for a great presentation. Mr. McAlear.
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    Mr. MCALEAR. Mr. Chairman, members of the committee, I also want to thank you for this opportunity to appear before you today to present my thoughts on the reauthorization of the MSP.

    I am president and CEO of Kvaerner Philadelphia Shipyard, the newest and the most technologically advanced shipyard in the United States. We are really the only shipyard capable of building large commercial vessels and we are exclusively focused on commercial construction.

    So, our entire future is based upon the investment we have made, the work force we have created and our ability to attract and satisfy commercial customers.

    I support the concept of MSP, both as a shipbuilder and a former merchant mariner. I also see this as an essential component of our national and economic security.

    Frankly, if we do not maintain a program like MSP and other similar programs, I think the consequences will be felt for generations to come in ways we cannot foresee today.

    I believe we are at a crossroads and to me, I think the decision is fairly easy as compared to the alternative, which is to allow the maritime industry to continue its decades long slide into oblivion and to threaten our national security even further.
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    I think the operators made a mistake in not reaching out to the U.S. shipbuilding industry when they tried to come up with a new MSP. I fear that some of the proponents of the reauthorization overlooked the fact that the real shipbuilding industry is a real critical part of the maritime industry in the United States.

    Our industry strongly supported the original MSP legislation and that the current law contains provisions which give a preference to U.S. built vessels participating in the MSP, but as I mentioned later, we need to strengthen that preference.

    It is true. Costs of vessels in the United States cost more for a lot of valid reasons. In this way, however, shipbuilders are no different from the U.S. flag commercial flag vessel operators whose costs are also far above those of their foreign flag competitors.

    Everybody in the maritime industry faces the same problems of cost differentials and foreign subsidies. The crucial difference is between U.S. flag operators and shipbuilders are one, the degree of support rendered by foreign governments, two, the fact our industry has effectively been out of the commercial business since the abrupt termination of the construction differential program in the early 1980s. It has not been funded since then.

    And three, the mere inescapable fact that we simply cannot reflag our shipyards in order to survive and continue in business. We either make it on our own facilities or we do not. We really have no other options.

    I recognize, certainly, that we need to improve our productivity and we have made progress to that end. But, as we talked about just a second ago with Mr. Vinyard, how can anyone expect us to become more competitive with our foreign shipbuilders when our own U.S. flag international liner companies, who are seeking the reauthorization of MSP, have not placed an order for any vessel in the last 20 years in the United States. Not one.
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    As I look ahead, unless we do something to change it, we in the shipbuilding industry do not have any assurances of consistent fleet replacement orders from the U.S. flag operators. Consequently, we are never going to have the opportunity to further reduce costs through series construction and continuous building of vessels. That is where you learn and that is where you increase your productivity.

    Here are several ideas that I would like you to consider, which I believe would create shipbuilding opportunities in the United States, two which apply to the MSP reauthorization directly and others which help the U.S. shipbuilders more generally.

    First, I suggest that we continue and strengthen the preference for the U.S. built vessels found in Section 652(o)(4) of the current law. Section 652(p) of the current law also contains a notice provision to U.S. shipbuilders before MSP operators can contract for new vessels in a foreign shipyard.

    Mr. HUNTER. Now, what is it that you recommend, in substance here?

    Mr. MCALEAR. Well, I think we need to strengthen this—as far as 652, we need to strengthen the issue where the U.S. shipbuilders given notice provision do not just call up and say, ''Hey, I am going to contract in a foreign yard. Give me a price tomorrow''. They need to be able to work with us in order to try to put a deal together in recommending a stronger, longer period of notification.

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    Mr. HUNTER. A consultative——

    Mr. MCALEAR. A consultative notification and discussion. Too many times, we get caught into the situation where we find out that they have been working with a foreign shipyard for 30 days or 45 days and they give us a short period of time to come up with a price. And that is not a way to put a program together and a deal together that can be competitive. I think we need to strengthen those.

    I think, second, I would suggest that we consider coupling a U.S. built preference with a larger MSP payment for a U.S. built vessel to take into account the difference between the capital cost of a U.S. built vessel and a foreign built vessel.

    It would seem to me that if we combined statutory preference for U.S. built vessels, a higher MSP payment for the MSP U.S. built vessel, capital construction fund tax benefits and Title XI guarantees, this would significantly reduce the net cost of the vessel for the operator and would provide good jobs for American citizens.

    It would help revitalize an important national security industry and it would give us a chance to get an order book that we can get our productivity in line and get it down by building a series of vessels.

    Mr. HUNTER. Okay. Now, you realize that in previous panels that we have had, we have a proposal to increase the rate per ship from $2.1 million to, I believe, $3.5 million.

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    Mr. MCALEAR. It is a coveted difference in operating costs, I understand.

    Mr. HUNTER. Well, that is the labor cost, but that is the payment, that is the MSP payment that we are going to be making if that proposal should be adopted. We are going to be asking the appropriators who are relevant to this process to come up with—especially if we increase the number of ships under that title from some 67 close to 100. We are looking at several hundred million dollars now in that program without additional dollars being paid.

    Your recommendation is that some additional dollars be paid to mitigate the increased cost of constructing the ships in America.

    Mr. MCALEAR. And taking out the difference in the capitalized costs, the payment is over a 20 or 30-year period.

    Mr. HUNTER. But you understand that this burden has already been—previous panels have proposed that it goes up from a little under 100 to an excess of 200. We are putting a few saddles on this horse.

    Mr. MCALEAR. I understand that.

    Mr. HUNTER. Okay. Please proceed.

    Mr. MCALEAR. I believe, third, the third point I would like to make in support of what Mr. Vinyard said, I believe the CCF program should be open to domestic operators who desire to build vessels in the United States. I think that would be a good program and a good opportunity.
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    Fourth, I believe that the Jones Act is indispensable and I think everybody here also is indispensable to our survival as shipbuilders. I know, Mr. Chairman, you are a supporter of the Jones Act. I thank you for that, and I just want to make the point that we need to continue to work together to prevent any weakness of the U.S. bill provisions in the Jones Act requirement.

    Fifth and finally, I believe that the continuing battle over funding for Title XI really should stop. We have to end that. We need a stable Title XI program so operators can depend on a program with certainty.

    Mr. Chairman, I believe that we are truly one industry, similar to what Mr. Vortmann said and Mr. Vinyard said. I would urge that we approach this matter in a way that ensures all parts of this industry—operators, shipbuilders, ship repairers, labor alike are supported. In this way, this is the way our country has operated for many years. The Merchant Marine Act of 1936 is explicit in citing shipyards along with labor and operators as co-equal parts of the maritime industry and I see no reason why we should change that today.

    Thank you for letting me give my comments today. I appreciate it.

    [The prepared statement of Mr. McAlear can be found in the Appendix.]

    Mr. HUNTER. Thank you, Mr. McAlear. I appreciate it. I agree with one major point that you made here at the end which is everybody is going to have to work together on this. You heard—components that you mentioned have been divided.
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    I think there is always a tendency, just as there are in politics, to try to cut the deal for your particular sector and perhaps in the long run, by not being united with the other sectors end up disserving the long term interests, whether it is labor, operators or builders.

    So, we all have to work together. That is when we have to be consistent—''Buy American'' position. I have admonished for example, shipbuilders in the United States about going to Mexico with certain component construction. I remind them of their latest ''Buy American'' speech with respect to shipbuilding. But that philosophy, I think, has to tie us all together.

    Hopefully we can put together a package that is going to carry some of this load.

    Mr. Allen, you got here just a touch late. I apologize for not letting you make your opening statement. Why don't you lead off with any questions or any comments you would like to make?


    Mr. ALLEN. I would be glad to. My apologies. Walter Jones and I got caught up in our 8 meeting and did not notice the time was going by.

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    I would like to submit my opening statement for the record.

    Mr. Vortmann, I have—you have an interesting proposal and I am trying to—I am going to ask you to—flesh it out is the wrong metaphor, but taking it as far as you can with some of the numbers.

    As I understand it, what you are saying is your proposal would involve an upfront cost to the Federal Government that basically would fund the construction of these ships and that the costs would be paid back in one way or another through the lease payments.

    Can you help me with the math? Have you developed your proposal enough to be able to say, is the savings to the operator, to the shipyard, the interest costs on the capital, is it more than that? I mean, how can you—can you give us some more precise cost estimates?

    I am trying to think of the impact to the Federal budget. What kind of—if DOD essentially up fronts the cost for these vessels, will the entire cost be paid back. If so, over what period of time, if not, to what extent will it be paid back, that sort of thing? And I do not know if your proposal is advanced enough to give us that information, but that is what I am interested in.

    [The prepared statement of Mr. Allen can be found in the Appendix.]

    Mr. VORTMANN. I think it is a very good question and let me clarify a couple of points. The concept is that DOD would effectively buy the ship. The commercial operator is going to spec out that ship to get what they want as long as it meets the requirements of the military.
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    But the government would buy that ship and the operator would lease that ship from the government over 20 years. The commercial operator would lease that at an international price, which is lower by at least half of what the government would have to buy the ship in a U.S. yard.

    So, the commercial operator will not totally reimburse the government over that 20-year life.

    Mr. ALLEN. Okay. That was my question, because you—let me find it here in the testimony.

    Mr. HUNTER. The government is the financial institution here. They are the owner of the ship and they lease it to the private sector.

    Mr. VORTMANN. We do not have a specific quantification because we are awaiting TRANSCOM's definition of precisely the types of ships they would like in the fleet that we would expect that in a few weeks and we would be pleased to submit that when we dollarize our estimates on what the capital costs would be for those ships.

    But as a rough ballpark estimate, if we are considering a fleet of 40 ships that would be acquired, say, over an eight year time period, we would be looking at the government having to buy those ships for somewhere between $5 billion and $6 billion that would be spread out over the eight year authorization/appropriation period.

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    Then when those ships are delivered to the commercial operators, they would commence annual payments that would flow back into DOD, into the receiver fund that could be used then to underwrite part of the cost for the subsequent year's new ship acquisitions.

    Mr. ALLEN. And it is the international bareboat charter rate for a comparable vessel. How much does that rate fluctuate? Is it a fairly stable rate from year to year? Does it fluctuate depending on economic conditions?

    Mr. VORTMANN. It fluctuates dramatically, but our intent is to be able have a rate such that the operators who would prefer to be able to go to China or Korea and buy a ship at an extremely low price, a subsidized price, effectively, that that charter rate would reflect that current market price for a new building.

    That would be effectively what they are paying to get the ship from the U.S. shipyard. The difference between that and what it cost the U.S. shipyard to build that ship is, in essence, what the government is going to have to fund into the DOD.

    Mr. ALLEN. And when you say that DOD would get back about half of the amount, are you saying it would get back about half of the cost of construction over the 20 years?

    Mr. VORTMANN. That is correct.

    Mr. ALLEN. So, taking interest costs out of the picture, these payments would be about half of the initial cost of construction.
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    Okay. The second question, obviously, the same point of view. How do we get the best deal? How many of your shipyards do you think would be interested in competing for construction of these ships?

    Mr. VORTMANN. I mentioned that we really have eight shipyards that are capable of building large ocean going ships. And I think all but two of them would be very aggressively interested—the two I excluded, one is Electric Boat, which specializes in nuclear submarines. I doubt whether they would be or not and I question whether the destroyer builder in your state would be interested. They might well. They have certainly participated in years gone by.

    I think many of the shipyards who have retrenched out of the commercial shipbuilding business because a lack of a market, if they see that market there, they will refacilitize and actively join in that.

    Mr. ALLEN. Okay. Good.

    You, in your testimony you said that this program you expected would ultimately reduce the cost of naval shipbuilding simply because the yards would be, you know, operating at a higher level and there would inevitably be savings. Is there any way—can you think of any way to quantify those savings or is that one of those areas where we have to believe, and I do, by the way.

    Mr. VORTMANN. We are attempting to quantify that now. We would be pleased to submit it. But I think that it is a very, very significant factor and it is not a simple issue. Everybody's mind immediately goes to the idea that if we can increase the volume in the yards, that we will reduce the overhead costs and therefore there will be a savings on the naval ships that are rebuilt in those yards. And that is true.
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    In my personal opinion, that is not the most significant thing. The most significant thing is going to come from the improvements in productivity that comes from world-class technology. It is the commercial shipyards around the world that lead shipbuilding technology, not military yards.

    And our country's military yards are not benefiting from that because we do not participate in that. I build the same tanker in my yard that is built in Korea and in China and they can do it for lower man-hours.

    As Mr. Vinyard has already expressed, they do that because they receive the benefits of subsidies for many years now and they have become proficient. We need to bring that technology into our yards. We cannot do it just focusing on naval new buildings.

    If we can get commercial buildings of a sizeable volume in our yard, we can drive down that productivity curve and that savings is probably going to be greater to the Navy than the overhead savings. You will get the benefit of both. It can be very significant.

    Mr. ALLEN. Mr. Vortmann, I have one more question for you. As you know, the previous hearing was all about the section two citizen requirement. I wondered if ASA has a position on what we were hearing at our last panel.

    Mr. VORTMANN. We very much do. We believe they should be U.S. citizens, period.

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    Mr. ALLEN. Mr. Chairman, I will defer to others.

    Mr. HUNTER. Okay. Well, thank you.

    Mr. Saxton.

    Mr. SAXTON. Mr. Chairman, it seems to me that we are talking about two sets of circumstances here—the short term set of circumstances and a longer term set of circumstances.

    The hearing last week was about MSP and it seems to me that those are a set of issues that we need to deal with, recognizing that it is a short term set of issues and how to refurbish our fleet, an American owned fleet is quite a different set of issues, wouldn't you agree, Mr. Vortmann?

    Mr. VORTMANN. Yes.

    Mr. SAXTON. And so, to the extent that last week's hearing dwelt on some of these same issues, it is just as important, but in some respects, a different set of issues.

    In some of the issues that we are talking about focusing on today, there are two factors in these issues that I would just like to focus on. The first is cost and the second is financing. I think that is what this conversation is really about. The first—the cost of building ships is a particular problem to us simply because American costs are higher than they are in the countries that compete with us.
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    We have costs of doing business that the Chinese do not have, for example. We buy insurance in our yards, don't we? I do not know whether the Chinese do or not, but in a government owned yard, they probably do not.

    Mr. VORTMANN. That is right. They do not need it.

    Mr. SAXTON. The cost of raw materials is probably higher here—steel.

    Mr. VORTMANN. Absolutely.

    Mr. SAXTON. And the cost of labor is higher here, because we enjoy a higher standard of living and our workers make more. So, cost is a factor, a set of factors and we probably cannot do a lot about that. Would you agree?

    Mr. VORTMANN. I would agree it is very difficult to bridge the wage gap, for example. Our wages are eight times what the Chinese shipyard worker earns today.

    Mr. SAXTON. Right. So, the set of factors that come under the category of costs are kind of fixed. So, let's recognize that up front.

    The second set of factors, however, in dealing with American—rebuilding our capability to build ships in America are really about financing. And who is going to pay the cost of that financing. Is it the American taxpayers? Is it the ratepayers who pay rates to ship on American ships? Or is it the shipbuilders. I think that is where we really need to concentrate on how we are going to finance these ships.
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    Now, I like your idea about having basically government owned ships and having them leased to shipping companies. I wish I could sit here and say we can get that done. It is a hard task and frankly, I want to point out two examples of needs that we have for national security where we were not able to do that and we opted for another method.

    One is in military housing. I have already mentioned that. We have a shortage of military housing that is extremely serious. I am chairman of the military construction subcommittee and for the last seven or eight years, we have tried hard to find ways to come to grips with it. But the volume of cash that we need to fix military housing through appropriated funds proved to be impossible.

    So, we formed a partnership with the private sector. The private sector basically is going to build the houses and we are going to pay rent out of an account called ''base housing allowance''. So, we hope that is going to work.

    The second example is in airlift, actually tankers. We are, as you probably have heard, are in the process of making a deal with Boeing to lease a large number of 767s—Mr. Chairman, I think, 767s?

    Mr. HUNTER. Close enough for government work.

    Mr. SAXTON. Whatever they are—these big airplanes with spouts on the back—because we could not finance them up front through the appropriations process.
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    Now, I am almost sure that with your proposal, which I like and you know, I am sure the chairman likes it too, because we are two of the guys around here, all of us on this subcommittee are people who care a lot about national security and that is why we are here.

    But the realistic assessment—my realistic assessment of getting, as you said, $6 billion over eight years is going to be hard to do. And so, I think we ought to look at this financing situation and see if there are some other options where we can leverage the capabilities the private sector has that we do not have and find ways to do construction differentials or lease differentials or something where we can truly be partners in solving this financing problem.

    Have you considered any other options other than having us put the money up front?

    Mr. VORTMANN. We are starting to look at different options. Your suggestion is a very good one. If we can creatively combine the notion of this concept we are proposing today with some of the previous techniques that have been used—a build in charter concept that was used many years ago—if we can bring that back and marry those two concepts together, I think we can come very close to the concepts that you are talking about, for example, in the housing market.

    Mr. SAXTON. The housing market was a little easier because we had some tangible assets that we could use to leverage the construction. But I look forward to working with all of you.
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    Herschel, do you have any thoughts on these?

    Mr. VINYARD. Just following along with what Mr. McAlear said and Mr. Vortmann—another option is this graduated payment under MSP—essentially have a commercial owner construct the ship and then the government would be able to have some elevated level of payment under the MSP program for U.S. built ships. That may be a way that the U.S. Government can help abridge that price gap between U.S. prices and overseas prices.

    Mr. MCALEAR. Mr. Congressman, I would just reiterate that under my suggestion is not so much that we are putting all the money up front. It is the differential in the cost.

    We can leverage the expertise of the private ownership to maximize the financing ability of that company, combining a number of other programs that can really significantly reduce the costs, I believe of the vessel for an operator, and then paying the difference—I mean, I am just thinking if you are looking at like over a period of eight years, just a quick calculation—a period of eight years, 24 ships, we are talking less than a half a billion dollars—less than $200 million as the differential in costs, in capital costs—quick calculations I have to do a lot more work in that particular area.

    But it is putting the burden on the owner, the particular owner and operator who has the expertise to come up with the innovative financial solutions that they are trying to do today.

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    Let me just talk a little about the—make a comment about the cost, as you indicated. Yes, the cost of labor is more here. The cost of materials is more, but it should not be significantly more. A lot of work has to be done by our industry to reduce the cost of materials, to develop a supply base here in the United States, a maritime supply base. Part of the reason the cost of materials are a lot more right now is we do not have a U.S. marine qualified supplier base. A lot of material is bought overseas.

    We need a foster, a relationship between foreign companies and U.S. companies to work together to develop a local supplier base to support them, the marine industry, to narrow the gap of materials. There should not be a gap in materials in that regard.

    Mr. HUNTER. Will the gentleman yield for a second on that point. Could you give some examples on components of the maritime supply base?

    Mr. MCALEAR. Well, one main component would be a slow speed diesel engine. They are not built in the United States at all. But, they are sold throughout the world through licensees. There are two major slow speed engine manufacturers who supply 100 percent of the diesel engines throughout the world. Different companies in different countries——

    Mr. HUNTER. Well, we are probably talking about reinventing the wheel on that one, right.

    Mr. MCALEAR. No, we are not going to reinvent the wheel. However, there are licensee provisions that some of these manufactures have that do not allow foreign countries to compete and sell into the United States. You have to buy it through the corporate head office who sets the price and you have no control over that. That is the problem.
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    Mr. SAXTON. How do you get around that?

    Mr. MCALEAR. Well, I got around it at Avondale once, and I am getting around it at Kvaerner Philadelphia Shipyard by not buying a diesel engine. I buy a drive train.

    Mr. HUNTER. A what?

    Mr. MCALEAR. I buy a drive train. I buy a propeller and a shaft and a bearing and everything attached to it and something on the end to make it all go around in a circle. And then the—I am buying a drive train off of a middleman, not an engine off of a licensee. There are ways you can get around that.

    Mr. HUNTER. Have you ever thought about running for Congress?

    Mr. MCALEAR. Not yet, Congressman.

    Mr. HUNTER. I do not have any other questions at this point.

    Mr. Taylor.

    Mr. TAYLOR. Just to be clear. I am puzzled. I thought I had visited a very large diesel engine factory on the outskirts of Chicago in Wisconsin by the name of Kohler.
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    Mr. MCALEAR. Medium speed diesels. They are not slow speed.

    Mr. TAYLOR. Well, they are good enough for our Amphibious Assault Ships (LHDs). I have a little trouble with someone saying they are not good enough to propel a commercial ship. It sounds like someone is trying to skirt the ''Build in America'' laws.

    Mr. MCALEAR. No, I am not saying they are not good enough for American ships. I am saying the majority of the commercial vessels; the commercial operators that you are talking about today all drive their vessels with slow speed diesels, not medium speed diesels for operating costs.

    Mr. TAYLOR. You understand it sounds like someone is trying to skirt ''Made in America'' laws.

    Mr. HUNTER. I think it is a different technology.

    Mr. MCALEAR. It is.

    Mr. TAYLOR. A diesel is a diesel. Some of them spin a little faster than others, but the big difference is in the type of fuel.

    Mr. HUNTER. What he is saying is the ones that spin faster cost a lot more to run.

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    Mr. VORTMANN. Different fuel.

    Mr. MCALEAR. Different fuel and it is a tradeoff.

    Mr. TAYLOR. So, is this a heavy fuel engine?

    Mr. MCALEAR. Slow speed diesels? Yes.

    Mr. TAYLOR. But at today's fuel prices, it really is not necessary, is it? It is only when fuel prices go up that people want to burn the heavier fuels.

    Mr. VORTMANN. I think it is a fact. If you look at the international fleet, the ships that are being built today and for the last 20 years, a vast, vast majority of them are slow speed diesels. There are some medium speed diesels. You have some gas turbines, no steam anymore, but the vast majority of them, by a wide margin, are slow speed. That is the chosen technology for operating efficiencies of the international fleet.

    Mr. TAYLOR. Mr. Chairman, more of an observation and I will allow the panel to comment on it than a question. Having served with you, Mr. Saxton, former Congressman Day and former Congressman Sisisky, I really think we are now paying the price of the seduction by degrees that this Congress has allowed, at least for 13 years and probably for the past 30 years—that being an exemption here, a little crack in the wall there, foreign ownership, but U.S. built, foreign ownership, foreign built.

    We are breaking the law here, we are breaking the law now to where we are getting ready to pay $100 million a year for a fleet that Mr. Vortmann pointed out is to a large extent, foreign owned and foreign built.
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    Well, heck if they are going to be in the force anyway, why are we paying them. If they are going to buy their ships overseas, why are we paying them? I mean, this is absolutely crazy. I do think it is time and I hope—I have watched your voting record over 13 years and I am very much impressed with it. That makes your constituents and me that are impressed with it.

    But I do think it is time we get pure again. I do not think we ought to be subsidizing foreign ownership and I do not think we ought to be subsidizing foreign ships, period. And I think the great nations of the world have been great manufacturers. They have been great maritime powers and I think we have absolutely lost our minds sending our money overseas for foreign owned, foreign built ships.

    I will be doggoned if we can find $50 billion a year so that the Bush girls and the Cheney girls do not have to pay any inheritance tax, then maybe we could find a little money to take care of our own people, the blasters and the shippers and the painters and the diesel engine mechanics. I am dead serious about that.

    I will just leave it at that. Gentlemen, if you want to comment on it, you are welcome to, but we are going to wake up one morning, much like the Turks found themselves 100 years ago right now when they thought it was a swell idea to buy their warships from the British.

    But 10 years later, they were at war with the British and the same ships that they ordered from the British turned around and bombed Constantinople. It is a historical fact and we are going to end up in the exact same boat if we do not draw the line somewhere and I sure hope under your leadership we draw the line here.
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    Mr. MCALEAR. Thank you for your comments, Congressman. I agree with them wholeheartedly.

    Mr. HUNTER. I thank you, Mr. Taylor, for your comments and I am reminded that there are lots of businesses that are owned by Americans that under the present taxation laws, the inheritance taxation laws have to break up and liquidate to be able to pay off Uncle Sam because the guy that founded the business died so, I endorse your entire recommendation with the exception of the comments on the inheritance tax.

    Mr. TAYLOR. My point, Mr. Chairman, was that was a $50 billion annual operating loss to our nation. And we cannot run away from that.

    Mr. HUNTER. Mr. Taylor, I think if you look throughout the maritime industrial base, you are going to find lots of businesses that were started by families and today the facts are that if you have a family in a certain position, a family business of a certain size, you come in with a 45 percent tax on that family because the patriarch of that family, whether it is your Byrd propellers down in your area or any other component maker, the fact that the patriarch in that family dies in that family owned business and the business has to liquidate to pay off Uncle Sam, that does not help workers or businesses.

    That disagreement notwithstanding, I appreciate your main theme, which is we all have to stick together on this and we have to bring all these components together and put together a good package that is going to be satisfactory in terms of keeping American crews, American operators and American constructors in business.
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    That is the purpose of this hearing. I think we can move forward and put something together. I think Mr. Saxton has laid this thing out pretty effectively with respect to laying out the challenge, which is financing.

    And you gentlemen have brought up these major tools that we have right now. We have Title XI, we have MSP, we have CCF. And, of course, we have the DOD component in itself, which ostensibly has fairly large amounts of dollars, but it has a fairly anemic shipbuilding budget.

    Let me just run something by you. I tell you what. Let's go on to the rest of our members and let them get their questions in and at the end, let's have another discussion about these proposals.

    I presume—are we on for a vote right now? Okay. In a few minutes? Okay. Ms. Davis, go right ahead.

    Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Chairman. My colleague, Mr. Allen, asked some of the main questions that I had, but I do have one more for Mr. Vortmann. The program that you are proposing, was that not proposed in front of the 1987 bipartisan presidential commission on the merchant marines?

    Mr. VORTMANN. It is essentially the same concept that was raised and endorsed by that bipartisan committee that was put in place by then President Reagan. It is essentially the same concept.
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    Mrs. DAVIS OF VIRGINIA. Since I was not here then, what happened to it?

    Mr. VORTMANN. Cindy, do you know exactly how that——

    Mr. HUNTER. Apparently not much.

    Mrs. DAVIS OF VIRGINIA. I know.

    Mr. HUNTER. The problem is, Cindy Brown did not work hard enough on that.

    Mrs. DAVIS OF VIRGINIA. I cannot believe that, Mr. Chairman.

    Mr. VORTMANN. One of the reasons was a very pragmatic reason, because it was an extremely complex proposal that it had embedded in it many different elements that required its approval by many different committees in Congress.

    It was kind of moving the hot potato from one committee to another. It required all sorts of different tax benefits as well as acts out of the merchant marine, that point in time. And it was just not able, as my memory recalls to work its way through the various different committees and get assent from all of them at the same time.

    Mrs. DAVIS OF VIRGINIA. We will just have to do the same thing this time?
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    Mr. VORTMANN. I would be concerned that ideally, we would not try to put as many different aspects into this, to keep it as simple and straightforward as possible. I would prefer it not to try to have to go to issues relating taxes to avoid those same complexities.

    Mrs. DAVIS OF VIRGINIA. I would prefer it just go through here and appropriations if you want to get it anywhere. Right, Mr. Chairman?

    Mr. HUNTER. If just buying stuff it is always the cheapest way to go. We will concede that one.

    Mrs. DAVIS OF VIRGINIA. I have one question for Mr. McAlear. You may have stated it; I am not real sure. But in your statement, you said your company supports maintaining a preference for U.S. built ships in the Maritime Security Program.

    Can you tell me how many ships have been built in the U.S. for the Maritime Security Program since its enactment?

    Mr. MCALEAR. I cannot say since its enactment.

    Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Chairman.

    Mr. HUNTER. Mr. Crenshaw.

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    Let me just throw something out and ask my colleagues—I think we have a great panel to have a good discussion on how we are going to get from A to B and how we are going to use these tools without making this thing too complex, to try to come up with a package that works.

    Mr. McAlear, let me ask you and I will ask Mr. Vortmann and Mr. Vinyard to comment on this, too. You have the MSP program, which is worth to the operators a couple of million dollars per ship per year and with the prospects of going up to some degree.

    So, let's say over a 20 year period you can count on that going up to maybe $4 million per ship. You also have the Title XI program. The Title XI program inherently would appear more attractive to us as members who have a lot of—who know we are operating under a constrained budget, because you get that great multiplier.

    It is always better in terms of dollars out of the Treasury to have a loan guarantee than have to make the loan, to give that 120th of the $1 million, that is, the $50,000, in appropriated dollars, to secure a loan, guarantee a loan of $1 million. That makes it doable.

    On the other hand, we have now in the public eye these two cruise ships that are half built, which if the general thrust of the testimony we have received is accurate, have little residual value that are going to be reflecting non-beneficially on the Title XI program—two cruise ships that we could not find a military use for, even though we tried. Mr. Taylor made a valiant effort to try to derive some military use and I know lots of other folks worked on that too, but not successful.

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    So, let me ask you this. What would your thoughts be about a program where going in, the operator, if the operator built the ships in the United States and received a Title XI guarantee, with the U.S. Government getting two things—one, a militarily useful ship going in, something that he knows that if he had to take over the payment and get the pink slip back as a guarantor, he would have something he could use.

    That and the idea of guaranteeing to the U.S. Government, committing up front to a 20 year contract of MSP. Basically, an MSP ship is like a reservist in the Army. You are there working your domestic job, but you are, by golly, a reserve and if they call you up for Desert Storm, you go.

    So, in exchange for being a reservist in our sealift program, you agree when you go in to get your $200 million ship built, you sign up for 20 years at say, whether it is $3 million or $4 million per ship, well, that is an $80 million value, not a present value, but a venture value to the U.S. Government. That is what the operator is guaranteeing to the U.S. Government.

    You combine that with—and that is a criteria for receiving Title XI funds. So, we are getting a couple of things that are making it a little shinier than the present Title XI.

    One thing, it is not going to be a cruise ship, it is not going to be a casino ship, so we know it is going to be a military ship which perhaps even has some military features as directed by DOD, maybe some things that help the Roll On/Roll Off aspect, maybe some things that would involve strengthening the deck so you could run helicopter operations off the ship. Most of them, I think, these big carriers would accommodate chopper operations.
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    So, you get that and you also get this $20 million sign up as a reservist for the next 20 years in the U.S. fleet. What do you think about that? Any comments?

    Mr. MCALEAR. Well, I think that incentive would narrow the gap. I am not knowledgeable enough whether-without doing a lot of numbers and calculations-whether the gap would narrow enough for somebody to have that extra incentive to build in the United States.

    Mr. HUNTER. Okay. Mr. Vinyard.

    Mr. VINYARD. I think we are on the track, but I also agree with Mr. McAlear that we are not going to be able to leap over that differential. Perhaps one other item you can throw in there is the fact that if you have a U.S. built ship, perhaps you move to the front of the line on the cargo preference. You can lock in those contracts because you have a U.S. built ship.

    Mr. HUNTER. Did you have a—go right ahead. And guys, just jump in any time. Let's have a conversation. Go ahead, Ander, then Gene.

    Mr. CRENSHAW. About on the same line in terms of the financing aspect that Hunter is getting to, your proposal, let's say that $200 million ship that we spend $200 million a day and you pay us back $100 million, 50 percent of the costs over 20 years.

    As has been pointed out, that is an outlay initially of $200 million. The thing is what you are getting to is there a better way that has to do with Mr. Saxton's question about financing to having one thought is similarly, you have a loan of $100 million that you pay back over 20 years and then the Federal Government out have as much money, if it is $8 billion so to add up front it is $4 billion.
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    I mean, there are a lot of ways—I guess you are beginning to think about that in terms of how we can help without outlaying great deals of money on the front end. It just has to do with financing.

    In other words, if you had $100 million to start with, you go out and finance a ship with another $100 million and then you pay that back, say to the Federal Government a, that 50 percent of it is outlay and b, carrying costs for 20 years.

    Those are the kinds of things, I think, we are looking for.

    Mr. HUNTER. Thank you very much. Mr. Crenshaw has got a pretty good background in finances. It is good to have that talent on this panel, so I appreciate that.

    Now, the one thing that this would do, though, I think it would meet Mr. Vortmann's concern or raise Mr. Vortmann's concern. You are going to have to have a lot of players in this. We would have to have a coordination with MSP and we would have to have some changes in Title XI. And as Mr. Vortmann says, the more changes and the more committees you involve, the more difficult it becomes to pass a package.

    The best, the simplest package to pass is always cash up front. The only problem with that is cash up front.

    Mr. Taylor.

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    Mr. TAYLOR. I am going to open this up to the panel. Mr. Vortmann, you mentioned that going back to your build and charter program, you said that you charted to commercial operators. Based on last week's hearings, I am of the belief that we have very few commercial operators left who are American citizens.

    Is that accurate or no?

    Mr. VORTMANN. There are certainly a declining number at a very rapid rate and our fear if left unchecked, it is going to go down to zero and we will have nothing but foreigners.

    Mr. TAYLOR. Who is left and I am not being argumentative. For my information, who is left?

    Mr. VORTMANN. There are—participating in the MSP program right now, there are 10 U.S. operators.

    Mr. TAYLOR. They are, off the top of your head?

    Mr. VORTMANN. I am sorry?

    Mr. TAYLOR. Off the top of your head, can you name some of them?

    Mr. VORTMANN. American Ship Management, American International Car Carriers, First Ocean Bulk Carriers, First American Bulk Carriers, U.S. Ship Management, OSG, Central Gulf, Waterman.
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    Mr. TAYLOR. Okay. Waterman's——

    Mr. VORTMANN. They do not own those ships, but they operate them and they would be in a position, with the proper financing techniques, to step in the place of the foreign owners and own those ships themselves and continue to operate them as they do today.

    Mr. TAYLOR. Okay. I will open this again, this one up to the panel, including our good friend, Mr. Johnston. Cargo preference. Where does it stand now? Is it 100 percent American? Do we carve out a certain niche that we allow to go foreign or is it 100 percent U.S.—those things that are ship cargo preference.

    Mr. VORTMANN. There is a strong preference for cargo in a U.S. built ship, but that is not a very significant market in the sum total of things.

    Mr. HUNTER. Rusty strokes his chin here as he contemplates his answer. I think, Gene, I think it is in a number of areas. For example, we talked the other day with people that deliver American aid. I think all American aid, in terms of food aid delivered to other continents is delivered, has to be delivered by American ships. Now, that is not a huge niche, but that is a little niche.

    The agriculture community, as I know, has historically resisted cargo preference, because they think that gets their wheat to the docks in some foreign country a few cents more expensive per pound than if they shipped it on Third World ships.
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    Does anybody have—Mr. Johnston, do you have a fix on the scope of what cargo preference is now?

    There is no U.S. built requirement, but it is U.S. operator requirement.

    Mr. JOHNSTON. Yes.

    Mr. HUNTER. Okay. So, you are saying there is no—so, Gene, the answer is there is no U.S. bill requirement—U.S. bill preference or repair.

    Mr. TAYLOR. Okay. Next question and I realize that this is strictly off the back of an envelope, but for my information, what would it cost to build a Panamax-sized container ship in America today.

    Mr. VORTMANN. Do you want me to address that?

    Mr. MCALEAR. I just contracted for two ships and the value to the maximum navigation line is $110 million each.

    Mr. TAYLOR. Panamax costs——

    Mr. MCALEAR. Panamax is 2,600 TEU, container ships length overall is about 750 feet, 105 feet wide, 22 and a half knots, 32,000 horsepower slow speed diesel, 2,600 TEU container ship boxes. The ship is designed and will be capable of transit in between the West Coast and Hawaii for Hawaiian trade.
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    Mr. TAYLOR. Does anyone have a price estimate on a Panamax tanker?

    Mr. VORTMANN. Panamax tanker?

    Mr. TAYLOR. In the States, yes, because you mentioned in your testimony that there were no American built tankers in the——

    Mr. VORTMANN. Probably in range in the mid $80 million to $90 million.

    Mr. MCALEAR. I would agree with that.

    Mr. VORTMANN. In a U.S. yard.

    It would be less than half of that in a Korean or Chinese yard. That is the challenge.

    Mr. TAYLOR. Let me open this up to you. We all know that—going back to what I said, we have had an exemption here, a little breaking the law there. The net result of this is, as you mentioned, we have a foreign fleet, a foreign-owned fleet.

    What are the loopholes that need to be closed so that someone like a Waterman or someone like former Delta Lines can go back into business with U.S.-built, U.S.-flagged, U.S.-crewed fleet? What are the unfair advantages that we have unintentionally given away so that every one is now foreign-built, foreign-owned.
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    Mr. VORTMANN. I am not certain that we have given them away. The foreign governments have aggressively stepped into that vacuum over the last several decades to aggressively sponsor their shipbuilding industries. And initially, they did it with some very blatant subsidies.

    Over time, as they generated volume and as they went out and brought market share, they have also, to their credit, applied intelligence and become very proficient at building ships so their productivity has improved dramatically. That makes it very difficult when you take their improved productivity that came with this volume and their low labor rates, it is virtually impossible that the American industry who has not had any volume over the last 20 years and therefore has not been able to continue to drive down the productivity curve. Plus, we have the disadvantage of much higher wages. There is no way you are going to get head to head pricing.

    That vicious spiral has to be broken and the only way it can be broken is with government assistance. That is how they did it initially and in China, they are still doing it. In Europe, if you take the Spanish industry and the Italian industry, it is 100 percent owned by the government. And they will sit here and tell you they do not subsidize. They just lose hundreds of millions of dollars every year and their government fills up the coffers.

    Mr. TAYLOR. Mr. Chairman, last question.

    Mr. HUNTER. Go right ahead.

    Mr. TAYLOR. A few years ago, again, the old Merchant Marine Committee which Mr. Hunter was a member and Mr. Day and Mr. Sisiski, we funded the medium speed ro-ros and a lot of them had been built, I actually visited the Red Cloud.
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    Going to your idea of a build and charter, what do you think would be the response on a demonstration program if we took a few of those vessels and made them available for charter. Would there be any market out there for those vessels at all?

    Mr. VORTMANN. I am not certain. They would be a very difficult ship to be commercially viable. They are specifically designed for the military's needs with deck strengthening that the chairman spoke about but at some price it could have some material—commercial utility as car carriers, but they would not be an efficient ship.

    There has to be a much more refined compromise between what the commercial operators need and what the military can use in a military emergency. Those ships were designed for prepositioning basically and the eight we have built are sitting out in Diego Garcia full of military equipment. So, they are very specialized ships. That would not be the best model.

    But I think the idea of building charter is an excellent one and it gets back to your colleague's comments about creative financing, of how do we get around this up front nut of the government having to put this money in up front.

    I think that is where the challenge is for us to come back with some very specific proposals of how to combine the different concepts we talked about today with the financing technique that you are not putting out all the money up front, but it is spread out over 20 years.

    Mr. HUNTER. Mr. McAlear, you had a comment on that.
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    Mr. MCALEAR. I second what Mr. Vortmann said about the Large Medium Speed Roll On/Roll Offs (LMSRs). They would not be commercially viable vessels to charter to commercial operators. I think the combination has to be working with the commercial operators and working with DOD to have a compromise in controlling the cost of the ship.

    The cost of the ship is labor and material and overhead. And the more material you put in it, the more it costs. So, the compromise would have to be to get a good commercially viable vessel that can be military useful.

    Mr. HUNTER. Does anybody else have any questions they would like to follow up right now?

    What I would like to do—we are going to go into this break here in a couple of days. We are going to be gone for a month. What I would like to do is to have some membership and I will ask Rusty to kind of organize this to have the folks that testified on the earlier panels with respect to the labor and the operators and now the builders to get together and work with our staff over the next two or three weeks and come up with some general concepts that we can all coalesce around, so we can find out at least if there is some show stoppers for one contingent or another and the things that we cannot agree on and maybe—and for our members of our panel, I would like to ask you to engage as much as you want to on this.

    So, if you have some ideas, especially in terms of the financing, how we can make this thing go, you are invited to do that. So, you might want to dedicate a staff member to sit in on these meetings.
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    So, Rusty, if you could cancel your vacation and get this thing done over the next couple of weeks. We need to do this. We need to come back in September with something more than the idea that we have to do something. So, are you gentlemen willing to do that, dedicate a few people to it?

    The WITNESSES. Certainly. Sure. Very definitely.

    Mr. HUNTER. Okay. Let's work this. We have also got a statement we would like to add. Mr. Allen's statement will be included in the record. Without objection.

    We have a daunting challenge ahead of us here, but I think we have some ideas we can move on. I still see if we had a link between Title XI guarantees, military utility and signing up for the MSP program, I see some value there. I think it is going to be tough to wring $800 million a year out of the direct appropriations for this program, although that is not necessarily mission impossible.

    So, Dick, we should not give up on that. Let's see what can be done there. So, let's engage on this. Mr. Thomas has said that he had a staff person he would assign to any discussions we had on this, because obviously tax implications are important.

    So, we will try to include his staff member in this mix here.

    Thank you very much for excellent testimony. We would like to be able to call on you for more—if we have questions or follow ups and get more facts, so if you could be available to do that, that would be excellent.
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    The WITNESSES. Thank you very much.

    Mr. HUNTER. Thank you very much and the panel stands adjourned.

    [Whereupon, at 10:29 a.m., the panel was adjourned.]