Copyright 2002 Journal of Commerce, Inc.  
Journal of Commerce - JoC Week
January 7, 2002
SECTION: SPECIAL REPORT1; Pg.38

LENGTH: 1212 words

HEADLINE: US-flag debate
; Future of subsidies for US-flag ships hangs on industry agreement

BYLINE: BY R.G. EDMONSON

BODY:
The Maritime Security Program subsidy for U.S.-flag ships doesn't expire until 2005, but Albert Herberger believes it's none too soon to start working Capitol Hill for a new, improved version."Our strategy is to ensure that the decision-makers have an understanding of the whole program," Herberger said. "You need to get started a couple of years ahead."

Herberger, a former maritime administrator and Navy admiral, is vice chairman of American Ship Management, a U.S. company that operates subsidized U.S.-flag ships for APL Ltd. He said members of the National Defense Transportation Association, an industry group that supports military transportation, will educate -- not lobby -- lawmakers. He said their work will begin in earnest in early 2002.

The Maritime Security Program provides $2.1 million a year for 47 U.S.-flag ships operating internationally. MSP was established as a 10-year program, subject to annual appropriations. It replaced the Operating Differential Subsidy Program that was established by the 1936 Merchant Marine Act to help offset the higher crew costs and other operating expenses of U.S.-flag ships.

Herberger said the program has been a cost-effective "insurance policy" that assures the military that ocean transportation will be available if war or national emergency requires the U.S. to deploy forces overseas. Rather than buying and maintaining its own transport fleet, the Defense Department underwrites part of a ship's operating costs in commercial trade. In return, owners make the vessel available when needed for military service. The law requires MSP vessels to be owned and manned by American citizens, and flying the U.S. flag.

Herberger said that a new MSP will correct some of the original program's shortcomings. Before Congress appropriates funds, defense transportation planners will present what sealift capacity they need -- most likely 55 to 60 vessels. The program would run 20 years, a ship's normal service life. That will allow owners to use the annual stipend toward the ship's financing. Herberger said the subsidy also would be adjusted for inflation, something that doesn't happen today.

"We have to take a valid [defense] requirement, then we look at the economics of it. What is it going to take to get companies to volunteer?" Herberger said. "The idea is to bring in modern, productive ships. It all has to fit."

But carriers contend that subsidy alone will not necessarily induce companies to volunteer vessels for MSP. Nor will the additional benefits such as the ability to carry military goods and other cargoes that must move on U.S.-flag ships. Non-U.S.-flag ships still enjoy an economic advantage from lower labor costs and tax burden. For that reason, MSP renewal is being matched with a bold idea that supporters say will make U.S. registry an attractive alternative to the tax havens of flags of convenience.

The House Ways and Means Committee received a bill in November that would replace income taxes on ships' earnings with a fixed annual tonnage-based tax. U.S. mariners' overseas earnings also would be tax-exempt. The bill also would permit U.S. ships to adhere to International Maritime Organization safety standards instead of the stricter U.S. standards they now must meet, and would allow some insurance-liability relief for owners.

MSP participants enthusiastically endorse the tonnage tax. They say that tax reforms have resulted in dramatic comebacks for the British and Norwegian merchant fleets. Improvements to the subsidy program, combined with the tax advantages of U.S. registry, would create a ready pool of U.S. ships with U.S. crews for an improved Maritime Security Program.

Sounds good, but selling the idea won't be easy. Supporters will have to go before lawmakers who are reluctant to change the U.S. tax code, and either tax reform or MSP reform alone will not be enough. Congress will have to embrace the two -- it's an all-or-nothing proposition. It will take a unified industry to deliver a strong business case for the programs. Reaching unity has been no easy task.

Other issues also must be resolved. The U.S. citizenship requirements for the Maritime Security Program have divided participants in the program. Last spring the trade community caught glimpses of a bitter behind-the-scenes battle between Maersk Sealand and APL, the two largest non-U.S. operators in the program, and International Shipholding Corp.

The Maritime Administration awarded contracts for MSP vessels on a priority system. First priority went to companies owned by U.S. citizens, as defined in the Shipping Act of 1916 -- so-called Section 2 citizens. Those companies included International Shipholding, U.S. Ship Management and American Ship Management. The latter two companies operate MSP ships on behalf of Maersk Sealand and APL, respectively, under an arrangement that allowed the steamship lines to maintain ships under the U.S. flag after Sea-Land and APL were sold to foreign companies.

The program included a second priority that included "documentation citizens," U.S. subsidiaries of foreign corporations, such as Maersk Line Ltd. In fact, Marad never reached the second priority, and turned away first-priority applicants when all the MSP slots filled. However, Maersk Line Ltd. received contracts for four MSP ships under a special exemption in the law for companies that already had vessels under contract to the Defense Department.

The citizenship battle flared last year when Maersk Sealand approach-ed members of Congress to lift the citizenship requirement from MSP, complaining that it incurred unnecessary costs due to the presence of its "middleman" company, U.S. Ship Management. Removal of the Section 2 re-quirement would have enabled Maersk Sealand to operate all the MSP ships by itself. International Shipholding strongly opposed the idea.

The battle continued through the summer, but after the terrorist attacks on Sept. 11, other MSP beneficiaries stepped in. Michael Sacco, president of Seafarers International Union, and Timothy Brown, president of Masters, Mates and Pilots, called the adversaries back to the conference table. MSP could be a casualty if all participants did not present a united front to Congress, they argued.

In the closing months of 2001, MSP participants were approaching consensus on the citizenship issue, but it's not yet resolved. Resolution hinges on a change in the priority system, and the number of vessel slots that will be available for the program. The Section 2 citizenship requirement will remain, but top priority may be extended to "documentation citizens." If Maersk Sealand severs its relationship with U.S. Ship Management, that company still may participate in MSP under arrangements with other carriers.

C. James Patti, president of the Maritime Institute, an affiliate of Masters Mates and Pilots, said the ownership arrangement was intended to be as inclusive as possible: "We want to give existing players a legitimate opportunity to participants in MSP."

"I'm pleased it's being worked out among parties," Herberger said. "We're the world's greatest trading nation. We're a maritime nation. I can't imagine a large maritime trading nation not having its own flag fleet."

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