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Federal Document Clearing House Congressional Testimony
July 16, 2002 Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2918 words

COMMITTEE: HOUSE ARMED SERVICES

HEADLINE: MARITIME SECURITY PROGRAM

TESTIMONY-BY: ERIK F. JOHNSEN,, PRESIDENT

AFFILIATION: INTERNATIONAL SHIPHOLDING CORPORATION

BODY:
STATEMENT OF ERIK F. JOHNSEN, PRESIDENT INTERNATIONAL SHIPHOLDING CORPORATION

BEFORE THE HOUSE ARMED SERVICES COMMITTEE SPECIAL OVERSIGHT PANEL ON MERCHANT MARINE

JULY 16, 2002

Mr. Chairman and Members of the Panel:

As a United States owner and operator under section 2 of the Shipping Act, 1916, of commercial cargo vessels in the United States-flag fleet, I am particularly pleased to appear before you today to address the vital need for the reauthorization of the Maritime Security Program (MSP) to ensure the continued viability and survival of the U.S.-flag fleet.

I am Erik Johnsen, the President of International Shipholding Corporation (ISC). Through its principal U.S.-flag subsidiaries Central Gulf Lines, Inc. (Central Gulf) and Waterman Steamship Corporation (Waterman), ISC provides a wide range of oceangoing freight transportation through pure car/truck carrier services, roll-on roll-off, breakbulk, and domestic coastwise services. Central Gulf and Waterman collectively are among the largest participants in the current MSP program, having operated seven Aactive, militarily useful, privately-owned@ U.S.-flag vessels under MSP operating agreements with the U.S. Maritime Administration (MarAd). Of particular importance to the Department of Defense and its critical military sealift needs, Central Gulf and Waterman operate several of the newest and largest roll-on/roll-off vessels in the U.S.-flag fleet under the MSP program. As a result of ramp capabilities and variable spacing of movable interior decks, these ARO-RO@ vessels can accommodate a significant number of large military vehicles, including military trucks, HUMVEEs, military supply vehicles and many of the most modern tanks in the military=s inventory, and can quickly transport large quantities of such equipment and other materiel where needed by U.S. armed forces around the world. Without the MSP program, Central Gulf and Waterman would not have been able to acquire such modern tonnage to significantly enhance the military sealift capacity of the U.S.- flag fleet.

Mr. Chairman, there is clearly a need for a strong U.S.-flag fleet to support our nation=s armed forces in times of war or national emergencies. To that end, the MSP program has been a tremendous success. It has ensured the availability of at least 47 militarily-useful U.S.-flag cargo vessels to the U.S. Transportation Command (TRANSCOM) of the Department of Defense for sustained sealift capability to all points around the globe. Central Gulf, Waterman and other U.S.-flag vessel operators, U.S. seafaring labor unions, MarAd, and TRANSCOM have all worked closely and cooperatively together to ensure, under the MSP program and the associated Voluntary Intermodal Sealift Agreement (VISA) program, that U.S.-flag cargo vessels are fully staffed and ready should they be called on a moment=s notice to transport equipment and supplies to support the U.S. armed forces. Because this Maritime Security Fleet is readily available to the U.S. military, the Department of Defense has not been forced to duplicate this sealift capacity through the prohibitively expensive construction and operation of its own vessels.

Mr. Chairman, in a statement on the House floor last year, you expressed your own strong views on the importance of the MSP program Ato the national security and the maritime capability of the United States@. As you so correctly noted:

Without the MSP program, U.S.-flag vessel owners would have been forced to shift their operations to foreign flags with foreign crews in order to remain internationally competitive. This would have been detrimental to our national security interests. .... Without the MSP the cost to [the Department of Defense] would be substantial B approximately $800 million annually would be required by DOD to provide similar sealift and related system capacity on its own for the rapid and sustained deployment of military vehicles, ammunition and other equipment and material.

Shortly before his departure last year as TRANSCOM=s Commander-in- Chief, General Tony Robertson -- then the highest ranking military officer responsible for sea and air transportation of U.S. troops, equipment and supplies around the world-- reflected on the importance of the MSP program in his testimony before the Seapower Subcommittee of the Senate Armed Services Committee. In that testimony, he also shared your views by stating the following:

I am a strong supporter of the MSP... I will tell you if you ask me, I will sing out in support of anything that increases the health and vitality of the U.S. flag fleet and men and women who crew that flag fleet. So MSP has been a valuable, valuable contributor to the health of that fleet.

Adding to this chorus of support, Maritime Administrator William Schubert stated the following in his testimony before your Panel just last month:

[T]he best way to protect our homeland and national security interests across the globe is a strong U.S.-flag fleet manned by U.S. citizen mariners. If we did not have the Jones Act, cargo preference, and the MSP and VISA programs, I can assure you it is unlikely that ships would remain under the U.S.-flag, and the U.S.-citizen mariner pool needed by the Department of Defense in times of national emergency or war would disappear.

Mr. Chairman, I can assure you that Administrator Schubert is absolutely correct in his assessment of the state of the U.S.- flag fleet. Without the MSP and other federal maritime programs, our companies would be unable to compete against foreign-flag operators who benefit from unrestrictive laws, little or no tax liability, minimal vessel registration fees, and many other operating advantages. We would therefore be forced to leave the U.S.-flag fleet, thus depriving the U.S. armed forces of RO-RO and other sealift capability that it absolutely requires. And Central Gulf and Waterman would not be alone. Other U.S.-flag carriers are similarly situated and would be unable to maintain their own vessels under the U.S.-flag without the support of the MSP program. Without MSP, TRANSCOM would be faced with a significant and irreplaceable gap in the sealift capability it needs in times of war or national emergency.

In addition to our national defense, the importance of a U.S.- flag fleet to protect our economic interest in international commerce is equally well-established. America has a strong tradition of participation in international trade, and the presence of a U.S.-flag merchant fleet is vital to the world-wide commercial interests of U.S. companies. Without the participation of U.S.-flag vessels to ensure fair and balanced competition, foreign carriers would be able to exert control over the price of U.S. imports and exports. It is the U.S.-flag fleet that helps American businesses to maintain equitable participation in international commerce, and that fleet itself depends very heavily on the MSP program to maintain its presence in the foreign trade of the U.S.

However, as currently authorized, the MSP program will expire at the end of Fiscal Year 2005 on September 30, 2005. We are only three years away from the potential end of the MSP program, and we must work expeditiously together to ensure that the program is reauthorized in the immediate future to provide U.S.-flag companies with the ability to continue to recapitalize their vessel fleets and to address other economic issues to secure the long-term stability and operation of such companies. Mr. Chairman, I am pleased with your earlier floor statement where you also recognized the need to quickly Amove forward with the reauthorization of the MSP@ in order to Aprovide the [maritime] industry with the timely assurance they need that the MSP program will continue beyond the year 2005.@ General Robertson emphasized the same urgency when he forthrightly stated in his Senate Seapower Subcommittee testimony that Awe need to get on with reauthorization [of the MSP] and probably sooner, rather than later.@ We all agree -- it is imperative that we act now to reauthorize, as well as strengthen, the MSP program that is so critical to the military and economic security of the United States.

Mr. Chairman, during the past year, Central Gulf and Waterman have been working closely with TRANSCOM, MarAd, other MSP participants and maritime labor unions in the effort to develop a legislative proposal to reauthorize the MSP program that would preserve and enhance the Maritime Security Fleet of the United States. I am very pleased to report that we have reached a strong consensus on the statutory provisions that are required to ensure the viability of the MSP program. To that end, we strongly support an extension of the MSP program for a period of at least 20 years. This extension would give investors and lending institutions more confidence to provide the funds necessary for the replacement of vessels and the expansion of the U.S.-flag fleet. Additionally, we urge the expansion of the MSP fleet to at least 60 militarily-useful vessels. This will bolster the U.S. sealift capability while providing a greater base of employment for American merchant mariners. We further propose that each vessel in the MSP program would be eligible to receive $3.5 million in the first year of the extended program, with annual inflationary adjustments thereafter, to more appropriately compensate vessel owners and operators for the increased costs of maintaining vessels under the U.S.-flag.

A complete overview of the provisions that should be included in a reauthorized MSP program are as follows:

! Encourage private lending institutions to invest in U.S.-flag vessel operations: It is proposed that the MSP program be extended for a period of twenty years, i.e., to run from October 1, 2005, to September 30, 2025. Financial institutions and the maritime business community require long-term certainty when making capital investment and other economic decisions, especially when the vessel assets involved in such decisions have a lifespan frequently in excess of 20 years. Financial certainty and extended vessel operations require the assured existence of the MSP program for at least a 20-year period.

! Enhance the economic and national security benefits to the United States resulting from the MSP program, and provide existing MSP program participants with an opportunity to participate in or increase their participation in the MSP: It is proposed that the MSP program be expanded to authorize 13 additional privately-owned, militarily-useful United States-flag commercial vessels, providing first priority for the additional 13 MSP operating agreements to Asection 2" citizens of the United States. It is clear to TRANSCOM, MarAd and MSP participants that the increasing sealift requirements of the United States military can only be met through an expansion of the MSP program to at least 60 militarily-useful cargo vessels.

! Retain the current priority preference for section 2 United States citizen companies for certain purposes: It is proposed that all additional MSP operating agreements, and any other operating agreements which would have reverted to MarAd for any reason, be offered and awarded pursuant to the following priority system: Asection 2@ citizens have a first priority, followed by Adocumentation@ citizens who have entered into a binding Special Security Agreement with the Department of Defense.

! Authorize an MSP payment that better reflects the cost of doing business under the United States-flag resulting from government imposed rules, regulations, and tax obligations: It is proposed that, consistent with all existing operational requirements and limitations, each vessel in the MSP program would be eligible to receive $3.5 million in the first year of the extended program, with that amount to be adjusted annually by the increase in an appropriate and acceptable pricing index beginning with Fiscal Year 2004. The current annual MSP payments of $2.1 million for each participating militarily-useful vessel do not adequately address the differences in operating and other costs between U.S.- flag and foreign flag carriers. Furthermore, the payments have never been adjusted on an annual basis to address the ever increasing operating costs for U.S.-flag vessels. In his testimony before the Senate Seapower Subcommittee, General Robertson, on behalf of TRANSCOM, forcefully stated that Athe MSP program as it is currently structured in my view does not adequately compensate the carriers who get the MSP funding for what MSP was designed for. In other words, the per ship stipend I think has outlived its value, inflation has outstripped its value, and it needs to be adjusted.@ Accordingly, increased MSP operating payments are required to partially offset the higher costs of operating vessels under the U.S.-flag.

! Increase MSP payments as soon as possible: For purposes of the proposed increased MSP payment, the effective date would be October 1, 2002 B making the increased payment applicable for the remaining duration of existing MSP contracts. Again, the current annual MSP payments for each participating militarily-useful vessel do not adequately compensate for the higher operating and other costs and fees imposed on Central Gulf, Waterman and other U.S.-flag carriers.

! Permit parties to an operating agreement to withdraw from the MSP before the end of the program: Because it is proposed that the MSP program be extended for a period of 20 years, it is possible that a contractor to an MSP operating agreement may be obligated to, or decide, to withdraw from the MSP prior to the end of that authorized 20-year time period. The legislative proposal would permit early termination following appropriate notice to the Maritime Administration, and would require the contractor to assist MarAd in identifying applicants to replace the contractor in the MSP.

! Grant documentation citizens with a Special Security Agreement the right to operate vessels participating in the MSP program on September 30, 2005 directly under any extended MSP: It is proposed that consistent with all existing age and other eligibility requirements for MSP vessels contained in the existing law, each of the 47 United States-flag vessels in the MSP program as of September 30, 2005 would be automatically enrolled in the reauthorized program provided the entity applying for the MSP operating agreement in the extended program is, as of October 1, 2005, a Asection 2@ United States citizen or a Adocumentation@ citizen with a Special Security Agreement with the Department of Defense. Accordingly, for the specific, limited purpose of awarding operating agreements under the extended program for the existing 47 ships in the MSP program, this legislative proposal would treat Asection 2" and Adocumentation@ citizen companies with Special Security Agreements as the same with equal and first priority for those vessels, while reserving first priority for Asection 2" companies for the new 13 additional vessels in the MSP program.

! Allow certain proposed changes to take effect prior to October 1, 2005: For most purposes in the reauthorization of the MSP program, the effective date would be October 1, 2005. However, the proposed legislation would permit the transfer of operating agreements from a Asection 2@ citizen to a Adocumentation@ citizen with a Special Security Agreement prior to October 1, 2005, but only to the extent consistent with existing commercial contracts or as otherwise agreed by the parties to a commercial contract.

! Repeal section 804 of the Merchant Marine Act, 1936: Consistent with the modification in eligibility requirements noted above, section 804 of the Merchant Marine Act, 1936, would be repealed.

! To maintain existing collective bargaining relationships: The legislative proposal would require that, in order to be eligible for an operating agreement, an applicant must agree to maintain the collective bargaining relationships that are in effect for the vessel on the date of enactment of the legislation. Specific terms, conditions or requirements of any such agreement would not necessarily be maintained. U.S.-flag carriers agree that it is important to maintain stability for the manning of the 47 vessels that currently participate in the MSP program.

Mr. Chairman, as you can see from this review of proposed legislative provisions for reauthorization of the MSP program, hard choices have been made to address the issues and concerns of U.S.-flag carriers, maritime labor and other interested parties. As two of the leading Asection 2" citizen companies in the U.S.- flag fleet, Central Gulf and Waterman are keenly aware of, and sensitive to, the associated MSP citizenship issues that have been the focus of much discussion and debate. The legislative compromise discussed above provides for the necessary U.S. citizenship involvement for participation in the MSP program, and further ensures that at least 60 active, militarily useful, privately-owned U.S.-flag vessels will be readily available to the Department of Defense for the expeditious movement of military equipment and other materiel in time of war or national emergency.

Mr. Chairman, I very much look forward to working closely with you on this matter of vital importance to our national and economic security. Thank you for allowing me to appear before you today.



LOAD-DATE: July 17, 2002