Copyright 2002 FDCHeMedia, Inc. All Rights Reserved. Federal Document Clearing House Congressional
Testimony
July 16, 2002 Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2132 words
COMMITTEE:HOUSE ARMED SERVICES
HEADLINE: MARITIME
SECURITY PROGRAM
TESTIMONY-BY: ROY G. BOWMAN,
VICE PRESIDENT FOR
AFFILIATION: GOVERNMENT
AFFAIRS, APL LIMITED
BODY: STATEMENT
OF ROY G. BOWMAN VICE PRESIDENT FOR GOVERNMENT AFFAIRS, APL LIMITED
and EXECUTIVE VICE PRESIDENT, AMERICAN AUTOMAR, INC.
BEFORE THE HOUSE ARMED SERVICES COMMITTEE SPECIAL
OVERSIGHT PANEL ON MERCHANT MARINE
JULY 16, 2002
I am Roy G. Bowman, Vice President for Government Affairs
of APL Limited ("APL") and Executive Vice President of American Automar, Inc.
("Automar"). APL Limited and American Automar are members of the NOL Group
which, through American President Lines, Ltd. and APL Co. Pte. Ltd., performs
worldwide container transportation services under the APL brand name, with a
fleet of over 70 container vessels and an extensive network of terminals and
intermodal systems. American Automar, Inc., which was acquired by NOL in May
2001, provides strategic assistance to the U.S. Department of Defense ("DOD") by
the operation for the Military Sealift Command ("MSC") of four pre-positioning
vessels, three of which are owned by Automar subsidiaries and one of which is
owned by the Government and operated by an Automar subsidiary. Automar has
chartered vessels to the Military Sealift Command for nearly 20 years.
APL is uniquely qualified to comment on the subject of
today's hearings, the re-authorization of the Maritime Security Program ("MSP").
American President Lines, Ltd. can trace its history of U.S.-flag service in the
U.S. foreign trades to the mid-19th century. It was one of the original
operating-differential subsidy ("ODS") contractors under the Merchant Marine
Act, 1936, and performed extensive U.S.-flag service under an ODS contract until
1997. It currently employs in its services 11 modern U.S.-flag container vessels
nine of them subject to an MSP Operating Agreement, and all of them enrolled in
the VISA (Voluntary Intermodal Sealift Agreement) program. As a VISA
participant, American President Lines, Ltd. not only commits its U.S.-flag
vessels to meet national defense contingency requirements, but also its
associated intermodal systems and equipment, terminal facilities, intermodal and
management services and related services, thus providing DOD with a seamless
transportation system and allowing it to focus on military issues, rather than
having to separately assemble its water and land transportation needs. A central
benefit of the MSP program to the United States is the statutory requirement for
the commitment of MSP vessels and associated resources to the VISA program.
The critical importance of a U.S.-flag liner fleet to
national security has been a central tenet of U.S. maritime policy for
generations, most recently reaffirmed with the passage of the Maritime Security Act of 1996. In the course of enactment of that
important legislation, it was universally recognized and emphasized that
U.S.-flag liner vessels are at a severe cost disadvantage in competing in the
foreign trades. While the subject of the current hearing is the MSP program,
which focuses on the shipboard labor element of the cost disadvantage of the
U.S.-flag foreign trade fleet, it cannot be stressed too strongly that the
U.S.-flag fleet cost disadvantage is experienced not only with respect to
shipboard labor costs, but also from the fact that U.S. owners of U.S.-flag
vessels:
-are subject to U.S. income tax while foreign
competitors usually pay no tax;
-pay an ad valorem tax
on foreign repairs to U.S.-flag vessels;
-pay higher
insurance premiums because of the litigation environment in the United States;
and
-are subject to more rigorous construction
standards imposed on U.S.-flag vessels (although to a degree ameliorated by
provisions adopted in 1996 in the Coast Guard Authorization Act).
It is important to understand that U.S.-flag vessels
compete in the international marketplace, and in the absence of cost equality ??
not only for shipboard labor costs, but for these other significant
disadvantages to flying the U.S. flag as well ?? the country cannot expect
private, for-profit operators to retain their U.S.-flag ties. In this regard, it
is also important to understand that the benefits associated with U.S.-flag
operations have been seriously eroded in recent years by the marked decline in
cargoes reserved to U.S.-flag carriage, both in the civilian preference area and
with respect to DOD cargoes.
Turning to MSP itself,
that program is scheduled to expire in approximately three years. In the absence
of a program to offset the U.S.-flag crewing cost differential, one cannot
realistically expect a U.S.-flag international liner fleet to survive.
Accordingly, APL strongly supports the re-authorization of MSP. However, we are
compelled to call to the Committee's attention two aspects of the current
program that need to be modified if the program is to continue to encourage and
achieve continued participation.
The first of these
concerns is the level of the annual payment currently stipulated in the statute
to compensate an MSP contractor for the operation of its vessel under the
program. The statutory payment of $2,100,000 per year does not begin to cover
the vessel labor cost differential resulting from the employment of U.S. seamen,
let alone the various regulatory and tax costs unique to U.S.-flag operations.
The availability of a pool of U.S. seamen to man U.S.-flag vessels is an
essential ingredient of defense preparedness. However, private carriers as
distinguished from the Government cannot be expected to provide the funding to
advance this national purpose. Currently, the labor cost differential of
operating a U.S.-flag vessel in international trade is at least $3,500,000 per
year. In any re- authorization of the MSP program, the annual payment must be
increased to that level, and provide for an appropriate adjustment to account
for future inflation.
The second concern relates to
changes required to account for the globalization of the U.S.-flag liner fleet
since the 1996 enactment of the MSP program. In 1996, all of the major
international U.S.-flag container operators were so called Section 2 citizens
meaning that, in addition to having a preponderantly U.S.-citizen board of
directors and management, the majority interest in the company was U.S.-citizen
owned. Today, the opposite is true. Every major international operator of
U.S.-flag container vessels is affiliated with a foreign owner. APL was acquired
in 1997 by NOL (Neptune Orient Lines), a Singapore company. Lykes Brothers is
now owned by CP Ships, a Canadian group. Sea-Land is owned by the A.P. Moeller
group of Denmark. Farrell Lines has been acquired by P&O Nedlloyd, a UK-
Dutch joint venture. Each of these countries has economic and strategic ties
with the United States, ties made all the more important by recent events.
The reasons for this globalization of the U.S.
international fleet are various, and include not only the cost disadvantages and
resulting financial pressures that U.S. carriers have been burdened with for a
prolonged period, but also the imperatives of consolidation to meet the capital
requirements of providing the worldwide intermodal service that shippers have
come to expect and require. Whatever the reasons, the fact is that the backbone
of the U.S.-flag international fleet including the associated intermodal systems
and terminal facilities that are enrolled in VISA and that DOD relies upon for
contingency needs is under foreign ownership. Ironically, many of these
companies or their affiliates provide essential sea-lift services direct to DOD,
but are not eligible to operate their own vessels under the MSP. If the
companies that own these resources are to continue their availability under a
re-authorized MSP program, the change of ownership that has taken place must be
accommodated under the new program.
The issue is this:
when MSP was enacted in 1996, Congress provided that MSP contracts for operation
of U.S.-flag vessels should be available both to entities that qualified as so
called documentation citizens and to Section 2 citizens. A documentation citizen
is an entity that meets the requirements for documenting a vessel under the U.S.
flag, which in the case of a corporation requires that the corporation be
incorporated in the U.S., that its board of directors include no greater number
of non citizens than would constitute a minority of a quorum, and that its
Chairman and Chief Executive Officer be citizens. A Section 2 citizen the
reference being to the definition in Section 2 of the Shipping Act, 1916 must
meet the same standards, and in addition be majority-owned by U.S. citizens. The
Maritime Security Act, while recognizing that documentation
citizens are eligible to be MSP contractors, included a priority for the award
of MSP contracts to Section 2 citizens and most of the MSP contracts including
the 24 MSP contracts awarded to APL and Sea-Land were awarded on that basis. An
equivalent priority was established for a documentation citizen that was
operating or managing vessels for DOD, but made available for only a few MSP
contracts.
The problem created by the statutory
priority in favor of Section 2 citizens is that when APL, Sea-Land, and other
MSP contractors were acquired by foreign owners, for the reasons I have just
described, they no longer qualified as Section 2 citizens, and accordingly no
longer qualified to continue to hold the MSP contracts for their U.S.-flag
vessels. In order to continue the MSP vessels of these operators under the
U.S.-flag, and comply with the Section 2 citizenship requirement with respect to
the MSP vessels and contracts, a highly artificial legal structure was developed
involving the creation of new, independent Section 2 citizen operating companies
to which the former MSP operators chartered their vessels, and from which the
former MSP operators then time chartered the vessels back for use in their
services. The result has been a cumbersome division between the international
carrier that had originally been the contractor under the MSP contract and which
continues to use the MSP vessels in its service, and the independent operating
company created to hold the MSP contracts and operate the vessels. Not only is
the structure unwieldy, but it also materially adds to the cost of providing
U.S.-flag service by interposing another organizational layer into the operating
structure, thus adding to the disadvantage of and deterrent to operating a
U.S.-flag service.
If companies such as APL are to
continue their participation in a re-authorized MSP program, it is essential
that any new legislation eliminate the artificial barrier to a participating
carrier's ownership and operation of its vessels.
We
can understand and emphatically agree with the need of the Government to assure
that vessels in the MSP program (and associated transportation resources) are
available to it to fulfill the mission that lies at the heart of the MSP
program. However, this assurance can be achieved without the requirement that
ultimate ownership in an MSP contractor lie with U.S. citizens. Congress
acknowledged this in the existing MSP legislation when it granted documentation
citizens that are operating vessels for DoD a priority equal to that of a
Section 2 citizen for a limited number of ships.
We
suggest that, in order to permit direct participation in MSP programs by those
companies currently providing MSP vessels through an independent Section 2
citizen operating company and assure the Government control of the vessels, the
reauthorized MSP treat documentation citizens that are parties to a Special
Security Agreement with the Department of Defense the same as Section 2 citizens
with respect to the existing authorized MSP vessels.
We
would remind the committee that U.S.-flag MSP vessels are embedded in a global
transportation system that includes containers and related cargo-handling
equipment, terminals, IT infrastructure and people on the ground in virtually
every country in the world. It is the global reach of these systems, combined
with U.S.-flagged and crewed vessels that provide the strategic value to the DOD
warfighter that justifies reauthorization of the program. The reality of our
global world is that these essential non-vessel resources are controlled and
operated by the foreign parent companies of APL, Maersk-Sea-Land, Lykes and
Farrell, and not by the Section 2 companies that are the MSP contractors for
their vessels. A reauthorized MSP program must reflect this reality.
To sum up: APL fully supports the reauthorization of MSP,
and hopes to continue to be actively involved in the program. However, we feel
it important to emphasize that APL can do so only on terms that make its
participation, and continued service under the U.S. flag, economically and
commercially feasible.