Copyright 2002 FDCHeMedia, Inc. All Rights Reserved. Federal Document Clearing House Congressional
Testimony
July 23, 2002 Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2398 words
COMMITTEE:HOUSE ARMED SERVICES
HEADLINE:MARITIME SECURITY PROGRAMS
TESTIMONY-BY: RONALD J. MCALEAR, PRESIDENT AND CEO
AFFILIATION: KVAERNER PHILADELPHIA SHIPYARD, INC
BODY: STATEMENT OF RONALD J. McALEAR,
PRESIDENT AND CEO KVAERNER PHILADELPHIA SHIPYARD, INC.
BEFORE THE HOUSE ARMED SERVICES COMMITTEE SPECIAL OVERSIGHT PANEL ON
MERCHANT MARINE
JULY 23, 2002
Mr. Chairman and Members of the Committee:
Thank you for this opportunity to appear before you and the
Subcommittee to present my thoughts regarding the reauthorization of the Maritime Security Program (MSP) and the need to continue and
strengthen the provisions that exist in the current law to encourage U.S.-flag
operators to build new vessels in the United States.
I
am Ron McAlear, and I am President and CEO of Kvaerner Philadelphia Shipyard
(KPSI) the newest and most technologically advanced shipbuilding facility in the
United States. We have been open for business for approximately two years and
have completed an investment of over $400 million in public and private funds.
We now employ over 900 trained and skilled workers and have just recently signed
a contract for two 2600 TEU, ocean-going container vessels for Matson
Navigation, a leading operator in the domestic non-contiguous trades. We are the
only shipyard in the United States capable of building large vessels that is
focused exclusively on commercial construction. We have no U.S. Navy work, have
not sought that work, and at this time we currently do not have plans to
construct Naval vessels. Therefore, our entire future, the investment we have
made and the workforce we have created in the shipyard and throughout the
Delaware River Valley Region of Pennsylvania, New Jersey and Delaware depends on
our ability to attract and satisfy commercial customers.
I support the concept of MSP because as both a shipbuilder and a former
merchant mariner, I know the criticality and the necessity of maintaining a
strong capability in terms of the manpower and the vessels that are required to
provide sealift in support of our national security objectives. I support the
concept of MSP, because it supports our nation in its role as a world leader.
And I support the concept of MSP because, frankly, the livelihood of hundreds of
thousands of people depend on the maritime industries of the United States -
operators and shipyards alike --; it is a critical element of our National
Economy and National Security and if we do not maintain a program like MSP and
other similar programs, the consequences will be felt for generations to come
and in ways we cannot foresee today.
Despite the
compelling nature of these reasons, and the sound public policy foundation for
maritime support programs, we must recognize that our industry continues to
shrink, the manpower pool grows smaller and our U.S.-flag fleet has diminished
to what is now less than one half of its size twenty years ago. A scary thought
indeed. This has occurred despite the fact that international trade has grown,
and will continue to grow, and our entire economy is almost wholly dependent on
imports and exports which, by definition and geography, must be transported on
ships that are now 95% owned and operated by foreign companies and flagged in
foreign countries.
So, I think we have reached a point,
Mr. Chairman, where we have to make some important decisions affecting the
maritime industry. We are at a crossroads, and to me the decisions we face are
easy since the alternative is to allow our maritime industry to continue its
decades-long slide into oblivion and threaten our national security. You,
however, may have a difficult job of convincing your colleagues, who in some
measure reflect the low level of visibility and appreciation for the maritime
industry, that these modest investments sought by our industry are valuable and
well worth the cost.
I think a mistake has been made in
the efforts to craft the next MSP that have been undertaken by the operators in
not reaching out to the U.S. shipbuilding industry. The old cliche about either
we all "hang together or we hang separately" applies here, and I fear that some
of the proponents of reauthorization of MSP have overlooked the fact that the
shipbuilding industry is a critical part of the maritime industry of the United
States, that our industry strongly supported the original MSP legislation and
that the current law contains provisions which give a preference for U.S.-built
vessels participating in the MSP program. I would like to see that preference
maintained in the reauthorization and certain incentives added to the law to
encourage U.S.-flag operators to purchase qualified MSP vessels in the United
States.
As you know, a lot of people criticize the U.S.
shipbuilding industry as being inefficient, non-productive, behind the times,
and they even suggest that the industry either die, or basically confine itself
to Naval construction and smaller vessels of the types that Mr. Vinyard's
shipyard constructs. The primary evidence cited to prove all these propositions
is the disparity in prices between foreign-built vessels and those built in U.S.
Shipyards. I believe that these same critics either don't know, or don't care
about some of the realities of the world that we in the shipbuilding industry
face in each and every day.
It is true that vessels
cost more here. We pay higher wages than other shipbuilding nations (although
the gap is narrowing); our regulatory requirements are far more burdensome than
elsewhere; our tax structure imposes greater costs on U.S. businesses; and other
nations subsidize their industry to a degree not available in the United States.
In this way, however, shipbuilders are no different from the U.S. flag
commercial vessel operators, whose costs are far above those of their foreign
flag competitors. Everyone in the maritime industry faces the same problems of
cost differentials and foreign subsidies.
This is not a
new phenomenon, and the effects of these disparities have produced a decline in
the U.S. share of world commercial shipbuilding from almost 10% in 1979 to 0.4%
in 2001. Over the same period, total shipyard employment has been cut by close
to 50%; and many shipyards with long histories and proud galleries of vessels
constructed over the years are now out of business. Again, Mr. Chairman, not
unlike what has occurred in the international liner trades.
The crucial differences between the U.S.-flag operators and U.S.
shipbuilders are: (1) the degree of support rendered by foreign governments; (2)
the fact that our industry has effectively been out of the commercial business
since the abrupt termination of the Construction Differential Subsidy (CDS)
program in the early 1980s; and (3) the inescapable fact that we cannot simply
"re- flag" our shipyards in order to survive and continue in business. We either
make it with our facilities or we don't. We have no other options!
I've been in the marine industry for over thirty years and
in shipbuilding for twenty years, and I have been involved in marketing both
commercial vessels and naval support vessels. I have associations with shipyards
throughout the world and it has always struck me, as I observe the business
practices of the shipyards in Japan, Korea, and China, that shipbuilders in
those nations operate with the full confidence that their governments see the
shipbuilding industries as a critical element of their industrial base. Public
and private resources in all of these nations have been specifically allocated
to support shipbuilding, and as a result over the last twenty years the market
shares of the U.S., Europe and Asia have reversed. In 1979, Asia maintained a
38% share. By 2001 Asian Builders increased their share to 80% of all new vessel
construction. Europe, despite its subsidy regimes, has declined from a 39%
market share to 14% today. In that same period, we have seen China progress from
a virtual non- entity in the shipbuilding world to one of the top three Asian
players, now producing good vessels at extraordinarily competitive prices with
Korea and Japan.
In my view, the pricing of ships in
the world markets has very little relationship to the cost of producing the
ship. In my work previously with Avondale Industries in New Orleans La., and now
with Kvaerner, I have the ability to obtain accurate international pricing
information on all of the components for vessels. In many areas, I am purchasing
exactly the same materials as the shipyards in China, Korea and Japan. So I know
what the parts of a vessel cost, and yet I see vessels being sold at prices that
are well below my cost of materials.
Certainly I
recognize that we need to improve our productivity. We in the U.S. have been
working hard for a number of years to do that, and we have made progress to that
end. All of us here have made tremendous capital investments in new technologies
and processes. But how can anyone expect us to become "competitive" with foreign
shipbuilders when faced with these impediments to fair competition, and when
confronted with the reality that since 1981 we have built precious few
commercial vessels in the United States? Our U.S.-flag international liner
companies, which were our reliable partners and customers, have not placed an
order for any vessels in the last twenty years in the United States. The last
container ship ordered, prior to the two-ship Matson contract I signed on May 29
was in 1992, again by Matson, which is not an MSP recipient. The last Roll
On/Roll Off vessels were constructed in the mid-1980s. NASSCO currently has the
TOTE program, again a Jones Act operator which does not receive MSP.
MSP recipients have either run their existing vessels well
past the normal operating lives of comparable vessels or purchased their vessels
abroad. One thing that has not happened in the MSP program is any effort by MSP
recipients to build new vessels in the United States. And as I look ahead, we in
the shipbuilding industry don't have any assurance of consistent fleet
replacement orders from U.S.-flag operators. Consequently we will not have the
opportunity to further reduce costs through series construction.
We have the opportunity now, Mr. Chairman to give the U.S. shipbuilding
industry a chance to approach U.S. operators as partners, to craft financial
incentives that make good business sense, and to support them to buy ships in
the United States. While the National Shipbuilding Initiative was a worthwhile
endeavor, we still haven't had a real chance to build for our own citizens and
that, in part, is why the shipbuilding industry is struggling as it is.
I am suggesting that you include in the MSP
reauthorization a continuation and strengthening of the preference for
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. I would urge
you to retain this provision but modify it to require MSP operators to notify
U.S. shipbuilders sufficiently far in advance of contracting with a foreign
shipyard to give us an opportunity to put together a deal, but I would also ask
you to consider strengthening the notice provision by including recently built
vessels (e.g. less than two years old or under construction). At the very least,
I believe MSP operators should be required to provide U.S. shipbuilders with a
genuine opportunity to see if a deal can be made to work before they get a
"green light" to purchase new vessels outside the country. In order to enforce
this provision, I would suggest that MSP operators be required to certify to
Marad which U.S. shipbuilders they have contacted, the dates of those contacts
and the results of those contacts before Marad permits them to bring a
foreign-built vessel into the MSP program.
I would also
suggest that you consider coupling the U.S.-built preference with a larger MSP
payment for a U.S.-built vessel to take into account the difference in capital
costs between U.S. and foreign-built vessels. While the amount would have to be
worked out among your colleagues, and would be dependent on budgetary
constraints, I would anticipate a differential of approximately $4-5 million per
year, per U.S.-built vessel over the life of an MSP contract would create a
financial inducement to purchase a vessel in the U.S.
It seems to me that if we combined the statutory preference for
U.S.-built vessels, higher MSP payments for the U.S.-built vessel, Capital
Construction Fund (CCF) 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 and help to revitalize an important
National Security industry.
I also believe that the CCF
program should be opened to domestic operators who must build vessels in U.S.
shipyards. The prohibition appears to me to be an historical anomaly that is
restricting recapitalization of the domestic fleet, and possibly stifling the
creation of a coastwise container service. Venture capital is scarce in the
maritime world, and ships are expensive. Why not utilize a proven mechanism to
allow the domestic operators to build up the funds necessary to re-build their
fleets?
The Jones Act is indispensable to our survival
as shipbuilders, as evidenced by the customers that all of us see as our "core"
business. I know, Mr. Chairman, you are a strong supporter of the Jones Act, I
thank you for that and I know you will prevent any weakening of its U.S.-build
provisions from occurring.
Finally, the continual
battle over funding for Title XI, which is the only federal program that
supports all owners to build vessels in the U.S., must end. We need a Title XI
program that operators know will be in existence over the next ten years, which
is funded adequately, and on which they can depend as a stable source of
financing.
Mr. Chairman, we are truly one industry, and
I would urge you to approach this matter in a way that insures all parts of this
industry; operators, builders and labor alike are supported. That 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 that should change today.
Thank you for your time and I will be happy to answer any
questions you might have.
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