Copyright 2002 Federal News Service, Inc.  
Federal News Service
July 23, 2002 Tuesday
SECTION: CAPITOL HILL HEARING

LENGTH: 13482 words

HEADLINE: HEARING OF THE SPECIAL OVERSIGHT PANEL ON THE MERCHANT MARINE OF THE HOUSE ARMED SERVICES COMMITTEE
 
SUBJECT: COMMERCIAL SHIPBUILDING IN THE UNITED STATES AND THE MARITIME SECURITY PROGRAM
 
CHAIRED BY: REPRESENTATIVE DUNCAN HUNTER (R-CA)
 
LOCATION: 2212 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: RICHARD H. VORTMANN, PRESIDENT, NATIONAL STEEL AND SHIPBUILDING, AND CHAIRMAN, AMERICAN SHIPBUILDING ASSOCIATION;
 
HERSCHEL VINYARD, VICE PRESIDENT, ATLANTIC MARINE HOLDING COMPANY;
 
RONALD J. MCALEAR, PRESIDENT, KVAERNER PHILADELPHIA SHIPYARD, INC.
 


BODY:
REP. DUNCAN HUNTER (R-CA): 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. Last week we heard from witnesses representing the ship owners, maritime labor and the so-called section 2 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 noticed that several of the witnesses 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've been developing a proposal to address this issue that is developed, in part, from discussions with other members of this panel. I hope to be in the 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's affordable and one that has -- that this administration can get behind and support. As I said last week, we intend to continue these hearings into the fall, at which time we will get the views and requirements of the ultimate users, TRANSCOM. If we can't design a program that meets and satisfies a discernible military requirement, we will not get the support of the administration. I think that's fairly clear.

Before I recognize the distinguished ranking member of this panel, I want to ask for unanimous consent that a letter dated July 19, 2002, from Andy Abbott, representing the International Brotherhood of Boilermakers, Iron Ship Builders, 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. And at this time I want to recognize my distinguished colleague from Mississippi, Mr. Taylor, for any remarks he might want to make.

REP. GENE TAYLOR (D-MS): Thank you, Mr. Chairman. I was not expecting to give the opening statement, I thought Mr. Allen would be here. But thank you. 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 points that you raised about foreign ownership of these ships, and the fact that ships are with 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 that, well, it's a different ship, it is still the same parent corporation.

And I think it's a very fair question for the American taxpayers to ask should we be subsidizing these companies? Would we not be better served investing in ships that are built in America, owned by Americans and operated by American crews? I did hear what the Maritime Labor had to say but, again, for the long run best interests of our nation, I've got some very, very grave concerns that came out of last week's hearings. I am looking forward to today's.

REP. HUNTER: Thank you very much, Mr. Taylor.

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

REP. JIM SAXTON (R-NJ): (Off mike.)

REP. HUNTER: Thank you very much. And Mr. Richard H. Vortmann, my constituent from San Diego, is president of National Steel and Shipbuilding and chairman of the American Shipbuilding Association will be our first witness followed by Mr. Herschel Vinyard, vice- president of Atlantic Marine Holding Company, and Mr. Ronald J. McAlear, president of Kvaerner Philadelphia Shipyard, Incorporated.

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. RICHARD H. VORTMANN: Thank you, Mr. Chairman and members of the panel. I truly appreciate the opportunity to address you today.

I am speaking in my capacity as chairman of the American Shipbuilding Association, or the ASA. As I said, I appreciate the opportunity to present our industry's recommendations to strengthen America's national security of 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 manufacturing of ships' 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.

While I strongly believe that it is in the national security interests of our government to have a strong merchant marine and maritime industry, it is not what I believe that matters. It is what you and Congress and what the administration thinks and believes that matters. Should you determine that it is not a national security interest to have a commercial fleet of military useful ships owned, built, crewed and controlled by Americans to serve as a military auxiliary in time 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, 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. 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. 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 multiyear 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 to meet DoD sustained lift requirements.

Under this program, DoD would request proposals annually from U.S. citizenship operators for commercial ships meeting the general description of functionality required by DoD. A 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. The lease payments to DoD would be based on the international bare boat charter rate for a comparable vessel. These 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 be either a fixed rate for those 20 years; or, alternatively, we could provide for annual adjustments to the lease payments 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're built, are particularly benefited in that they would have access to ships at competitive international prices without having to finance the upfront 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 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 significant savings in the cost of naval ships. Shipbuilding generated by this program would enable us to achieve serious production in our shipyards and our supplier base. Increased production would drive down the unit cost of ships and ships' systems under this program as our workforce 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 a quality production, would drive down the cost of naval ships.

The lease payments from the U.S. operators would be deposited into the National Defense Sealift Fund of the Department of Defense to defray the upfront 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 owners' proposed changes, would place the Department of Defense at the mercy of foreign ship owners to take whatever ship type those owners make available to DoD regardless of the military utility of those ships. This was the case when the embassy program was enacted back in '96 and the MSP owners have already indicated that they plan to bring, for example, 5,000 TEU container ships into a re-authorized program. While TRANSCOM may question the military usefulness of such a large container ship, 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 to -- wanted the increased flexibility, by having ships that can transit the Panama Canal. Now, maybe TRANSCOM will determine that requires some very large ships, but TRANSCOM should at least have a say in that decision. DoD also requires car carriers or Ro/Ros. However, neither Maersk nor Neptune Orient Lines, for example, own any Ro/Ros participating in the MSP program today. 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 shipbuilding business in peace time. But 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 cost 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. And 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. Thank you, Mr. Chairman.

REP. HUNTER: Thank you, Mr. Vortmann. And we're going to go down the line here and listen to the seating proposals for revitalizing our shipbuilding industry. But I want to allow my colleagues, if you have any just particular questions of Mr. Vortmann, to understand the concept of what he's recommending. That is with the U.S. building ships, the Department of Defense basically owning the ships, being leaser 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's your basic position.

And you understand that we have, and maybe we can get into it later, but we have a number of statutes and statute interpretations which make it very difficult to do any type of creative financing with respect to DoD owning ships. That's probably going to have to be cash upfront like the rest of our appropriations, which is kind of a big -- fairly big piece of change that has to be dealt with. But does anyone have any questions on Mr. --

REP. 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 upfront money. That's hard. 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's not going to own the houses, we're going to pay rent.

And I'm just curious to know whether or not you have looked at any other concepts in terms of how to structure a partnership, so that the difficult or almost impossible task of coming up with a meaningful amount of money upfront is difficult for us and I'm sure it's difficult for the private sector as well. But there are financing mechanisms available to the private sector that aren't available to us. And so I guess I would just put that thought into the mix at this point and maybe not -- maybe we can talk about it when the other panelists are finished.

Okay?

REP. HUNTER: I thank the gentleman.

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

MR. HERSCHEL VINYARD: Good morning. Thank you, Mr. Chairman, for holding this very important hearing on the shipbuilding industry.

My name is Herschel Vinyard. I'm vice president of Atlantic Marine Holding Company. We own and operate shipyards in Jacksonville, Florida, and Mobile, Alabama. We've got about 2,000 shipyard workers. Unfortunately, the large commercial ship construction and repair industry is in trouble. America's share of the international shipbuilding market is less than 0.5 percent. And 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, and during that period total shipyard employment has fallen more than half. It took every shipyard worker in every shipyard to get our reserve fleet ready in 1991 for the Persian Gulf War, and I'm not sure we're up to the challenge today. We've just had such a dissipation of the shipyard workers and the shipyards themselves, 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're world leaders in this market and they've benefited from significant subsidies over this long extended period of time.

Mr. Chairman, as you've seen in my written statement, we've got five specific what we view to be cost-effective methods -- 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 and we certainly support the reauthorization in that program. Unfortunately, it does nothing to help the shipyard industrial base, which we view to be as an important national security requirement as having sufficient number of merchant mariners and sufficient ship operators.

REP. HUNTER: Incidentally, Herschel, on that point, I don't want to interrupt you from your prepared statement --

MR. VINYARD: But you will anyway.

REP. HUNTER: I will anyway.

(Laughter.)

It's always fun to interrupt you, Herschel.

MR. VINYARD: Yes, sir.

REP. HUNTER: I don't know if you saw the little shootout we had the other day. We had MSP participants, the so-called middle men in the American holding companies or operating companies with the foreign ownership, who feel that they, by golly, ought to have a direct control of the operation. So it was quite a little -- there was a little conflict there, a little difference in philosophy. And I heard Dick give a very strong statement with respect to the need to have American control of 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 middle man into this situation which has American citizenship.

MR. VINYARD: Mr. Chairman, I guess I haven't fully focused on that particular issue since we don't have a direct dog in that hunt. But I think --

REP. HUNTER: Oh, it's a 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.

REP. HUNTER: Okay. 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.

REP. HUNTER: Now, let me ask you, that's not presently the case?

MR. VINYARD: No, sir.

REP. HUNTER: Okay.

MR. VINYARD: They're 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's been moderately successful. But quite honestly I don't think it's 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's a multiyear decision making process and they do their economic modeling. And if they can't count on Title XI from year to year, they cannot then factor in the extended amortization schedule that Title XI allows. And if they can't do that, that may mean that they will ultimately decide not to build the ship. 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 onto U.S.-flag ships. 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 doesn't 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.

REP. 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. And many of these ships, while they're getting payments from the U.S. government, they go overseas for their repairs.

REP. HUNTER: I got you.

MR. VINYARD: The fourth specific guideline we have is Capital Construction Fund. CCF, as it's known, is a bit like 401(k) for ship owners, where they're able to take their pre-tax profits and put it into an account to build ships in the United States. 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 (OPN-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 United States. If, for example, 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 and I think that would unleash a significant investment in U.S. shipyards. And one of the really good things about this CCF change is that the government doesn't have to pay out any additional money. These are the ship owners' accounts, and so it doesn't tax the Treasury.

Finally, Mr. Chairman, MSC operates 68 active sealift ships. Half were built in foreign shipyards. Moreover, much of the maintenance and repair on these MSC 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's a way that we can alter MSC's contracting policies where we can spend those tax dollars at home rather than overseas.

Mr. Chairman, I'm not asking for government subsidies for shipyards, but I would like to point out that the short term, piecemeal policies that are in place today are clearly not working. We're 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.

REP. HUNTER: Thank you, Mr. Vinyard. And we're 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. Any -- yes, sir?

REP. JONES: Mr. Chairman, I'd like to ask Mr. Vinyard which country is the leading country as far as these ships being sent to be repaired? Which country gets most of the business?

MR. VINYARD: I would say probably Korea and China. China's actually an emerging repair country that's competing against us, as well as the Singapore shipyards.

REP. SAXTON: Who owns the yards there?

MR. VINYARD: Well, I --

REP. HUNTER: The government -- the Chinese government owns essentially every yard in China.

REP. JONES: The communist Chinese government.

Mr. Chairman, real quickly on that and then I have a follow up --

REP. HUNTER: Go right ahead.

REP. JONES: Basically, in 1989 our trade deficit with China was about $6 billion. Today we owe China $84 billion and I just wanted to state that for the record.

I couldn't agree more that if we don't start trying to do more to help the American worker, and particularly I want to compliment and commend you -- and I'm sorry that, Mr. Vortmann, I was late getting here to hear you speak. But if we as a Congress in a bipartisan way can't start looking at -- this is a national security issue, and I am just really dismayed and outraged that we continue to turn our back on the American companies and also to the American workers. And 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 give some of these jobs back to the American taxpayer. I'm offended by what I've heard today, quite frankly.

REP. HUNTER: Well, Mr. Jones, we're 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're going to go back over and let everybody ask questions, but I wanted to -- they're a little bit complex to have the three proposals put out, unless you kind of understand the thrust of where they're going.

Yes, go right ahead, Mr. Crenshaw.

REP. ANDER CRENSHAW (R-FL): When you talk about mandatory doing the repairs, have you thought about mandatorily having them constructed here?

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

REP. CRENSHAW: What would be wrong with that?

MR. VINYARD: Well, I guess the primary issue would be cost, which ultimately falls back into Congress' court.

REP. CRENSHAW: Have you ever done a comparison of either the repairs or the construction time to time and how much more it might cost?

MR. VINYARD: Well, you have to understand that in both Korea and Japan they have -- it's really a double whammy that shipyards are facing. One, they're getting day-to-day subsidization, but the fact that they've had these subsidies for 30 years, they've gotten real good and efficient at building ships. There was an announcement this weekend that Japan's order book for this quarter is 447 ships. I mean, I don't know if that many ships have been built in the United States in 20 years, 40 years. I don't know. So the answer is that there will be -- it will cost more to build them in the United States, and I don't have an exact figure on that. Maybe Mr. Vortmann and Mr. McAlear --

REP. CRENSHAW: Can I just say, Mr. Chairman, I mean if we were looking at this proposal to kind of deal with repairs on a mandatory basis, we ought to think to about the merits of actually building them.

REP. 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's going to be a little upfront pay, which is probably the greatest fear in American politics is upfront pay.

(Laughter.)

And it is going to cost a little money. We're going to get to that and, incidentally, when we go back on our questions here, we're going to get to the cost because we're going to have to address that.

Are you finished, Mr. Vinyard?

MR. VINYARD: Yes, sir.

REP. HUNTER: Okay, thank you very much and thanks for a great presentation.

Mr. McAlear.

MR. RONALD J. McALEAR: Mr. Chairman and 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 the 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 workforce we have created and our ability to attract and satisfy commercial customers.

I support the concept of MSP, both as a ship builder 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're 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. I think the operators made a mistake in not reaching out to the U.S. shipbuilding industry when they tried to come up with the new MSP.

I fear that some of the proponents of the reauthorization overlook the fact that the shipbuilding industry is a real critical part of the maritime industry of the United States. Our industry strongly supported the original MSP legislation, in that the current law contains provisions which give a preference for U.S. built vessels participating in the MSP. But, as I mentioned, later we need to strengthen that preference.

It's 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 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 differences between U.S. flag operators and shipbuilders are: (1) the degree of support rendered by foreign governments; (2) 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 hasn't been funded since then, and; (3) the mere inescapable fact that we simply can't re-flag our shipyards in order to survive and continue in business. We either make it on our own facilities or we don't. 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.

As I look ahead, unless we do something to change it, we in the shipbuilding industry don't have any assurances of consistent fleet replacement orders from the U.S.-flag operators. Consequently, we're never going to have the opportunity to further reduce costs through series construction and continuous building of vessels. That's where you learn and that's 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'd suggest that we continue and strengthen the preference for the U.S. built vessels found in section 65204 of the current law. Section 652P of the current law also contains a notice provision to U.S. shipbuilders before MSP operators can contract the new vessels in a foreign shipyard.

REP. 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, give a notice provision, don't just call up and say "Hey, I'm gonna 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.

REP. HUNTER: A consultative period?

MR. McALEAR: A consultative notification and discussion. Too many times we get caught into the situation where we find out that they've 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's not a way to put a program together and a deal together that can be competitive. I think we need to strengthen (those points ?).

I think we -- I 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 costs of a U.S. built vessel and a foreign built vessel. It would seem to me that if we combine 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.

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

MR. McALEAR: To cover the difference in operating costs, I understand.

REP. HUNTER: Well, I mean that's a labor cost but that's a payment that we're -- that's the MSP payment that we're going to be making. If that proposal should be adopted, we're going to be asking the appropriators who are relevant to this process to come up with a -- especially if we increase the number of ships under that title from some 67 to close to 100, we're looking at several hundred million dollars now in that program without additional dollars being -- your recommendation is that some additional dollars be paid to mitigate the increased cost of constructing the ships American.

MR. McALEAR: To take into account the difference in the capitalized cost so it's over a 20 to 30 year period.

REP. HUNTER: Okay. But you understand that this burden has already been -- previous panels have proposed that it goes up from a little under 100 to in excess of 200?

MR. McALEAR: Yes, sir.

REP. HUNTER: We're taking it -- we're putting a few saddles on this horse.

MR. McALEAR: I understand that.

REP. HUNTER: Okay, please proceed.

MR. McALEAR: I believe -- and the third point I would like to make in support of what Mr. Vinyard said, I believe that the CCF program should be opened to domestic operators who desire to build vessels in the United States. I think that would be a good program and a good opportunity.

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 want to just make the point that we need to continue to work together to prevent any weakness of the U.S. field provisions in the Jones Act requirement. Fifth and finally, I believe that the continuing battle over funding for Title XI really should stop. We've got to end that. We need a stable Title XI program so operators can depend on -- they can depend on a program with certainty.

Mr. Chairman, I believe that we are truly one industry and 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 Maritime Marine Act of 1936 is explicit in citing shipyards along with labor and operators as coequal 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.

REP. HUNTER: Thank you, Mr. McAlear, appreciate it. I agree with one major point that you've made here at the end, which is that everybody's going to have to work together on this and we've heard -- the components that you've mentioned have been divided and there's always, I think there's always a tendency just as there is 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 interest.

MR. McALEAR: Yes, sir.

REP. HUNTER: Whether it's labor, operators or builders. So we all have to work together and we have to be consistent with our buy American position. And I've 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. And hopefully we can put together a package that's 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, but why don't you lead off with any questions and any comments you would like to make?

REP. THOMAS H. ALLEN (R-MN): I'd be glad to. My apologies. Walter Jones and I got caught up in our 8:00 meeting and didn't notice the time was going by. I'd like to submit my opening statement for the record.

Mr. Vortmann, I have -- you have an interesting proposal and I'm trying to -- and ask you to -- flesh it out is the wrong metaphor but take me as far as you can with some of the numbers.

As I understand it, what you're saying is your proposal would involve an upfront cost to the federal government, basically fund the construction of these ships and that the costs would be paid back in one way or another over the -- 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 ship -- well, to the shipyard, the interest cost of the capital, is it more than that? I mean, how can you -- can you give us some more precise cost estimates? I guess what I'm trying -- I'm trying to think of the impact on the federal budget.

What kind of -- if we -- if DoD essentially upfronts the costs for these vessels, will the entire cost be paid back? If so, over what period of time? If not, you know, to what extent will it be paid back, that sort of thing? And I don't know if your proposal is advanced enough to give us that information but that's what I'm interested in.

MR. VORTMANN: I think that's 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. 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 pay to buy the ship in a U.S. yard. So the commercial operator will not totally reimburse the government over that 20-year life.

REP. ALLEN: Okay, that was my question because when you -- I'll just find it here in your testimony.

REP. HUNTER: The government is a financial institution here, they're the owner of the ship and they lease it to the private sector.

MR. VORTMANN: Right. We do not have a specific quantification because we're awaiting TRANSCOM's definition of precisely the types of ships they'd like in the fleet and we expect that in a few weeks, and we'd be pleased to submit that when we dollarize our estimate for what the capital costs would be for those ships. But as a rough ballpark estimate, if we're considering a fleet of 40 ships that would be acquired over say an eight year period, we'd be looking at the government having to buy those ships for somewhere between $5 and $6 billion (dollars). That would be spread out over the eight year authorization appropriation period.

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

REP. ALLEN: Okay. It's the international bare boat charter rate for a comparable vessel. How much does that rate fluctuate? Is it a fairly stable rate year to year? Does it fluctuate depending on economic conditions?

MR. VORTMANN: It can fluctuate dramatically but our intent is to be able to 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 a 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.

REP. 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's correct.

REP. ALLEN: Okay. So leaving interests costs out of the picture, the lease payments would be about half of the initial cost of construction?

Second question, obviously by the same point of view, how 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 today 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 certainly have participated in years gone by. I think many of the shipyards who have retrenched out of the commercial shipbuilding business because of a lack of a market, if they see that market there, they will refacilitize and actively join in that.

REP. ALLEN: Okay. Good. In your testimony you said that this program, you expected, would ultimately reduce the cost of naval shipbuilding simply because the yards would be 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, but --

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

I build the same tanker in my yard as built in Korea and China and they can do it for lower man hours. As Mr. Vinyard has already expressed, they do that because they've received benefits of subsidies for many years now and they have become proficient. We need to bring that technology into our yards. We can't do it just focusing on naval new buildings. If we can get commercial buildings of a sizeable volume in our yard, we can drive that productivity curve and that savings is probably greater to the Navy than the overheads savings. You'll get the benefit of both. It can be very significant.

REP. ALLEN: Mr. Vortmann, I have one more question for you. As you know, the previous hearing was all about the Section 2 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.

REP. ALLEN: Thank you.

Mr. Chairman, I will defer to others.

REP. HUNTER: Okay. Thank you.

Mr. Saxton.

REP. 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 a different set of issues.

Wouldn't you agree, Mr. Vortmann?

MR. VORTMANN: Yes.

REP. 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. And come to the issues that we are talking about -- focusing on today, there are two factors in these issues that I'd just like to focus on. The first is cost and the second is financing. I think that's what this conversation is really about.

And 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. We have costs of doing business that the Chinese don't have. For example, we buy insurance in our yards, don't we? I don't know whether the Chinese do or not, but government owned yards probably don't.

MR. VORTMANN: That's right, they don't need it.

REP. SAXTON: The cost of raw materials is probably higher here.

MR. VORTMANN: Absolutely.

REP. SAXTON: Steel, and the cost of labor is higher here, as we enjoy a higher standard of living and our workers make more. So cost is a set of factors and we probably can't do a lot about that. Would you agree?

MR. VORTMANN: I would agree. It's very difficult to bridge the wage gap, for example. Our wages are eight times what the Chinese shipyard worker earns today.

REP. SAXTON: Right. So the set of factors that come under the category of costs are kind of fixed, so let's recognize that upfront. The second set of factors, however, in dealing with American -- rebuilding our capability to build ships in America are really about financing and who's 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?

And I think that's where we really need to concentrate on: how are we going to finance these ships? 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's a hard task and, frankly, I want to point out two examples of needs that we have for national security where we weren't able to do that and we opted for another method.

One is in military housing. I've already mentioned that. We have a shortage of military housing that is extremely serious. I'm 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 is basically going to build the houses and we're going to pay rent out of an account called Base Housing Allowance. So we hope that's going to work.

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

REP. HUNTER: Close enough, for government workers.

REP. SAXTON: Whatever they are. They are big airplanes with spouts on the back. Because we couldn't finance them upfront through the appropriations process. Now, I'm almost sure that with your proposal, which I like, and I'm 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's why we're 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 capability of the private sector has that we don't 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 upfront?

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're proposing today where some of the previous techniques that have been used: the build and 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 you're talking about for example in the housing market.

REP. 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. Herschel, you have any thoughts on this?

MR. VINYARD: Just following on 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 bridge that price gap between U.S. prices and overseas prices.

MR. McALEAR: Congressman, I would just reiterate that under my suggestion it's not so much that we're putting all the money up the 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'm just thinking in this -- if you're looking at like over a period of eight years, just a quick calculation of period of eight years, 24 ships, we're talking less than a half a billion dollars, less than $200 million, as you -- the differential in costs of capital cost.

Quick calculations, I have to do a lot more work in that particular area. But it's 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're trying to do today.

Let me just talk a little bit about -- make a comment about the costs. 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 costs of materials are a lot more right now is we do not have a U.S. marine qualified supplier base, a lot of the material is bought overseas.

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

REP. HUNTER: Would 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're not built in the United States at all but they're sold throughout the world through licensees. There's two major slow speed diesel engine manufacturers who supply 100 percent of the diesel engines throughout the world. Different companies in different countries.

REP. HUNTER: Well, we're probably not going to reinvent the wheel on that one, right?

MR. McALEAR: No, we're not going to reinvent the wheel. However, there are licensee provision that some of the manufacturers have that do not allow foreign countries to compete and sell into the United States, and you have to buy it through the corporate head office who sets the price and you have no control over that. That's the problem.

REP. HUNTER: How do you get around that?

MR. McALEAR: Well, I got around it at Avondale once and I'm getting around it at Kvaerner Philadelphia Shipyard by not buying a diesel engine, I buy a drive train.

REP. HUNTER: A what?

MR. McALEAR: I buy a drive train. I buy a propeller and a shaft in 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'm buying a drive train off a middle man, not an engine off a licensee.

There are ways you can get around that.

REP. HUNTER: Have you ever thought about running for Congress?

(Laughter.)

MR. McALEAR: Not yet, Congressman.

REP. HUNTER: Go ahead.

REP. SAXTON: Mr. Chairman, I don't have any other questions at this point.

REP. HUNTER: Okay. Mr. Taylor.

REP. TAYLOR: Mr. McAlear, I'm puzzled. I thought I had visited a very large diesel engine factory on the outskirts of Chicago in Wisconsin by the name of Coltec.

MR. McALEAR: That's medium speed diesels. They're not slow speed.

REP. TAYLOR: Well, they're good enough for our LHDs. I have a little trouble with someone saying they're not good enough to propel commercial ships. Sounds like someone's trying to skirt the build in America laws.

MR. McALEAR: No, I'm not saying that they're not good enough for American ships, I'm saying that the majority of the commercial vessels, the commercial operators that you're talking about today all drive their vessels with slow speed diesels, not medium speed diesels, for operating costs.

REP. TAYLOR: Yeah, and it sounds like someone's trying to skirt the made in America laws.

REP. HUNTER: I think it's a different technology.

REP. TAYLOR: A diesel's a diesel. Some of them spin a little faster than others but the big difference is in the type of fuel they burn.

REP. HUNTER: What he's saying is that the ones that spin faster cost a lot more to run. So if there's different fuel.

MR. VORTMANN: Different fuel and it's a trade off.

REP. TAYLOR: So is this a heavy fuel engine?

MR. McALEAR: Slow speed diesels? Yes.

REP. TAYLOR: But at today's fuel prices it really isn't necessary, is it? It's only when fuel prices go up that people want to build the heavier fuels.

MR. VORTMANN: I think it's a fact if you look at the international fleet the ships that are being built today and for the last 20 years, that the 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.

REP. TAYLOR: Mr. Chairman, more of an observation and I'll allow the panel to comment at the end of questioning. Having served with you and Mr. Saxton, former Congressman Bateman and former Congressman Sisisky, I really think we're not paying the price of this reduction by degrees that this Congress has allowed, at least for 13 years and probably for the past 30 years.

That being an exemption here, little crack in the wall there. Foreign ownership but U.S. built. Foreign ownership, foreign built. You know, little break in the law here, little break in the law now to where we're getting ready to pay $100 million a year for a fleet that Mr. Vortmann pointed out is to a large extent foreign owned, foreign built. Well, heck, if they're going to be there for us anyway why are we paying them? They're going to buy their ships overseas, why are we paying them?

I mean, this is absolutely crazy. I do think it's time and I hope that -- and I have watched your voting record over 13 years and I've very much impressed with it, believe you me. So that makes your constituents and me that are impressed with it. But I do think it's time that we get pure again. And I don't think we ought to be subsidizing foreign ownership and I don't think we ought to be subsidizing foreign ships period. And I think the great nations of the world have been great manufacturers, they've been great maritime powers, and I think we have absolutely lost our minds, sending our money overseas for foreign built ships.

Doggone, if we can find $50 billion a year so that the Bush girls and the Cheney girls don't have to pay any inheritance tax, then maybe we can find a little money to take care of our own folks who are the blasters and the chippers and the painters and the diesel engine mechanics. And I'm dead serious about that. And I'll just leave it at that. If you gentlemen want to comment on it you're welcome to.

But we are going to wake up one morning much like the Turks found themselves 100 years ago right now, and 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 they ordered from the British turned around and bombed Constantinople. That is a historical fact. And we're going to end up in the exact same boat if we don't draw the line somewhere, and I sure hope under your leadership we draw the line here.

MR. McALEAR: Thank you for your comments, Congressman Taylor, I agree with them wholeheartedly.

REP. HUNTER: I thank you, Mr. Taylor, for your comments, and I'm reminded that there's 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 exception to your comments on the inheritance tax, because I think --

REP. TAYLOR: Mr. Chairman, that was a $50 billion annual operating loss to our nation and we can't run away from that.

REP. HUNTER: Mr. Taylor, I think if look throughout the maritime industrial base you're going to find lots of businesses that were started by families, and today the facts are that if you've got 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 the family -- whether it's your burr propellers (ph) down in your area or any other component maker, the fact that the patriarch of that family dies, that family-owned business, and the business has to liquidate to pay off Uncle Sam, that doesn't help workers or business.

But 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, put together a good package that's going to be satisfactory in terms of keeping American crews, American operators and American constructors in business and that's the purpose of this hearing. I think we can move forward and put something together. And I think Mr. Saxton's laid this thing out pretty effectively with respect to laying out the challenge, which is financing. And you gentlemen have brought up the -- these major tools that we have right now. We've got Title XI, we've got MSP, we've got CCF, we can -- and of course we've got the DoD component itself which ostensibly has fairly large amounts of dollars but has a fairly anemic shipbuilding budget frankly.

Let me just run something by you -- or 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. And I presume are we on for a vote right -- are we voting right now? Okay, in a few minutes, okay.

Ms. Davis, go right ahead.

REP. SUSAN A. DAVIS (R-CA): 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're 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.

REP. DAVIS: Since I wasn't here then, what happened to it?

MR. VORTMANN: Cindy, do you know exactly how that --

REP. HUNTER: Apparently not much.

REP. DAVIS: I know.

(Laughter.)

REP. (?): Where did it go?

REP. HUNTER: Probably Cindy Brown didn't work hard enough on that.

(Laughter.)

REP. DAVIS: I can't believe that, Mr. Chairman.

MR. VORTMANN: One of the reasons was a pragmatic reason because it was an extremely complex proposal that had imbedded in it many different elements that required its approval by many different committees in Congress, and it was kind of moving the hypothetical one committee to another. It required all sorts of different tax benefits as well as acts out of the merchant marine panel at that point in time and it just was 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.

REP. DAVIS: Would you have to do the same thing this time?

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 as straightforward as possible. I would prefer it not to try to have to go issues relating to taxes, to avoid those same complexities.

REP. DAVIS: I would prefer to just through here and appropriations if you want to get it anywhere. Right, Mr. Chairman?

REP. HUNTER: Just buying stuff is always the cheapest way to go but we'll concede that one.

REP. DAVIS: I have one question for Mr. McAlear and you may have stated it and I'm 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. with the Maritime Security Program since its enactment?

MR. McALEAR: I cannot say since its enactment (off mike) -- none, zero.

REP. DAVIS: Thank you, Mr. Chairman.

REP. HUNTER: Mr. Crenshaw.

REP. CRENSHAW: No.

REP. HUNTER: Let me just throw something out and ask my colleagues. I think we need to -- we've got a great panel just to have a good discussion on how we're get from A to B and how we're 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'd ask Mr. Vortmann and Mr. Vinyard to comment on this too. You got 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 at some degree. Let's say over a 20 year period you can count on that going up to maybe 4 million per ship. If you had -- you also have the Title XI program. The Title XI program inherently appears, would appear more attractive to us as members who have a lot of -- who know we're operating under a constrained budget because you get that great multiplier. It's always better in terms of dollars out the Treasury to have a loan guarantee than to have to make a loan to give that one-twentieth of the million dollars, that is the $50,000, appropriate dollars to secure a loan or guarantee of loan of a million dollars. That makes it doable.

On the other hand, we've got now in the public eye these two cruise ships that are half built, which if the general thrust of the testimony that we've received is accurate, have little residual value that are going to be reflecting non-beneficially on the Title XI program, two cruise ships that are -- that we couldn't find a military use for even though we tried. And 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 successfully.

So let me ask you this: what would your thoughts be about a program where going in, the operator -- if the operator built 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 if he had to take over the payment and get the pink slip back as the guarantor, he has something he could use. That and the idea of guaranteeing to the U.S. government committing upfront to a 20 year contract of MSP. Basically an MSP ship is like a reservist in the Army, you're 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's $3 million or $4 million per ship, well that's an $80 million value, not a present value but a Vinyard value to the U.S. government, that's what the operator is guaranteeing to the U.S. government. You combine that -- and that's a criteria for receiving Title XI funds. So we're getting a couple of things that make it a little shinier than the present Title XI. One thing is this, it's not going to be a cruise ship, it's not going to be casino ship so we know it's 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.

So you'd 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 the -- 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.

REP. HUNTER: Okay.

Mr. Vinyard

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

REP. HUNTER: Did you have a --

REP. CRENSHAW: But just on that I was going to --

REP. HUNTER: Go right ahead and guys, just jump in any time here. Let's have a conservation. Go ahead, Ander, and then Gene.

REP. CRENSHAW: Kind of on the same line in terms of the financing aspect that Hunter was getting to. You know, compared -- your proposal, I'd say that $200 billion ship that we spend $200 million a day and then you pay us back $100 million, 50 percent of the cost over 20 years, as has been pointed out, that's an outlay initially of $200 million. I think what he's getting to is there a better way, it has to do with Mr. Saxton's point about financing, you're having one thought is similarly you've got a loan of $100 million that you pay back over 20 years and then the federal government is out half as much money, if it's $8 billion. Instead of that up front it's $4 billion.

I mean, there are a lot of ways and I guess you're 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 finances.

In other words, if you had $100 million to start with, you go out and finance a ship with the other $100 million and then you pay that back, save the federal government A) 50 percent of its outlay, and B) carrying costs for 20 years. Those are the kinds of things I think we're kind of looking for.

REP. HUNTER: Yes. Thank you very much, Mr. Crenshaw. Mr. Crenshaw has got a pretty good background in finances. It's good to have that talent on this panel. We appreciate that.

Now, the one thing this would do, though, is -- I think it would meet Mr. Vortmann's concern -- or it would raise Mr. Vortmann's concern. You're going to have a lot of players in this. We'd have to have a coordination with MSP and we'd 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 simplest package to pass is always cash upfront. The only problem with that is cash upfront.

Mr. Taylor.

REP. TAYLOR: I want to open this up to the panel.

Mr. Vortmann, you mentioned that -- going back to your build and charter program, you said that we'd charter to commercial operators. Based on last week's hearings, I'm of the belief that we have very few commercial operators left who are American citizens. Is that accurate or not?

MR. VORTMANN: There are certainly a declining number at a very rapid rate and our fear if it's left unchecked, it's going to go down to zero and we'll have nothing but foreign. I'd like --

REP. TAYLOR: Who is left, Mr. -- and I'm 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.

REP. TAYLOR: And they are, off the top off your head?

MR. VORTMANN: I'm sorry?

REP. 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.

REP. TAYLOR: Okay, Waterman --

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.

REP. TAYLOR: Okay, I'll open this -- again, this one up to the panel, including our good friend Mr. Johnson. 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. flag? Those things that are shipped 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 that.

REP. HUNTER: As Rusty strokes his chin here as he contemplates his answer, okay -- Gene, I think it's in a number of areas. For example, we talked the other day with people with deliver American aid. I think all American aid, in terms of food aid, delivered to other continents has to be delivered by American ships. That's not a huge niche, but that's a little niche. The agricultural community has, as I know, has historically resisted cargo preference because they think that gets their wheat to the docks of some foreign country a few cents more expensive per pound than if they shipped it on Third World ships.

Does anybody have -- Mr. Johnson, do you have a fix on the scope of what cargo preference is now?

There's no U.S. bill requirement but it's U.S. operator requirement.

MR. JOHNSON: Yes.

REP. HUNTER: Okay. But you're saying there's no -- so, Gene, the answer is there is no U.S. build requirement -- U.S. build preference or repair?

REP. TAYLOR: Okay. Next question, and I realize 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. McALEAR: Do you want me to address that?

MR. (?): You're building one.

MR. McALEAR: I just contracted for two ships and the value to Matson Navigation Lines is $110 million each.

REP. TAYLOR: And it's a Panamax, approximately

MR. McALEAR: Panamax. It's 2,600 TEU container ships.

REP. TAYLOR: Your length overall is what?

MR. McALEAR: Length overall is about 750 feet, 105 feet wide, 22 and a half knots, 32,000 horse power slow speed diesel. 2,600 TEU container ships -- boxes. The ship is designed and will be capable of transiting between the West Coast and Hawaii for the Hawaiian trade.

REP. TAYLOR: Has anyone got a price estimate on a Panamax tanker --

MR. VORTMANN: Panamax tanker?

REP. TAYLOR: -- (cross talk) in the States. Yes, because you mentioned in your testimony that there were no American built tankers in the --

MR. VORTMANN: Probably range in maybe $80 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's the challenge.

REP. TAYLOR: Let me open this up to you. We all know that -- going back to what I was saying. Without an exemption here or breaking the law there, the net result of this is -- as you mentioned, we've got a foreign fleet -- foreign owned fleet. What are the loopholes that need to be closed so that someone like a Waterman or someone like the former Delta Lines can go back into business and build U.S. Flag, U.S. crude fleet? What are the unfair advantages that we have unintentionally given away so that everyone is now foreign built, foreign owned?

MR. VORTMANN: I'm not certain that -- you just said that we have given them away --

REP. TAYLOR: Well, we being Congress.

MR. VORTMANN: I think 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 bought 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 drive down the productivity curve, possibility have the disadvantage of much higher wages. There's no way you're 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's 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's 100 percent owned by the government and they will sit here and tell you they don't subsidize.

They just lose hundreds of millions of dollars every year and the government fills up the coffers.

REP. TAYLOR: Mr. Chairman, last question.

A few years ago, again the old Merchant Marine Committee, which Mr. Hunter was a member and Mr. Bateman and Mr. Sisisky. We funded the medium speed Ro/Ros and a lot of them have been built. I've actually visited the Red Cloud. Going to your idea of a build and charter. What do you think would be the response if, on a demonstration program, 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'm not certain --

(Cross talk.)

MR. VORTMANN: But the LMSRs would -

REP. HUNTER: Remember the Red Cloud?

MR. MCALEAR (?): It comes to mind.

REP. HUNTER: The whole tribe came out for the commission.

MR. VORTMANN: They were playing your song, as I remember.

(Laughter.)

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 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 and that would not be the best model.

But I think the idea of build and charter is an excellent one and it gets back to your colleague's comments about creative financing, of how do we get around this upfront nut of the government having to put this money in upfront. And I think that's where the challenge is for us, is 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 all the money out upfront, but it is spread out over 20 years.

REP. HUNTER: Mr. McAlear -- I think you had a comment on that, Gene. Did you --

MR. McALEAR: No, I second what Mr. Vortmann said about the LSMRs. 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. I mean, so the compromise would have to be to get a good commercially viable vessel that can be military useful.

REP. HUNTER: Anybody else have any questions they'd like to follow up right now? What I'd like to do -- you know, we're going on to this break in a couple of days. We'll be gone for a month. What I'd like to do is to have some membership and I'll 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 could all coalesce around. We can find out at least if there are some show stoppers for one contingent or another and the things that we can't agree on and maybe for our members of the panel, I'd like to ask you to engage as much as you want to on this.

So if you've got some ideas especially in terms of financing how we can make this thing go, you're invited to do that. You might want to dedicate a staff member to sit in on these meetings. So, Rusty, if we could cancel your vacation --

(Laughter.)

REP. HUNTER: -- 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've got to do something. So are you gentlemen willing to do that? Dedicate a few people to that?

MR. VORTMANN: Very definitely.

REP. HUNTER: Okay. So let's work this. We've also got a statement that we'd like to add. Mr. Allen's statement will be included into the record without objection. We've got a daunting challenge ahead of us here but I think we've got some ideas we can move on. I still see if we had a link between Title XI guarantees, military utility and signing out for the MSP program, I see some value there. I think it's going to be tough to wring 800 million bucks a year out of the direct appropriations for this program although that's not necessarily mission impossible. So we shouldn't give up on that. Let's see what can be done there.

So let's engage on this. Mr. Thomas has said he had a staff person he would assign to any discussions we had on this because obviously tax implications are important. So we'll try to include his staff member in this mix here.

Thank you very much for excellent testimony. We'd like to be able to call on you for more, if we have more questions or follow-ups and get more facts. So if you could be available to do that, that would be excellent. Thank you very much. The panel stands adjourned.

(Adjourn)

END

LOAD-DATE: July 25, 2002