[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
[H.A.S.C. No. 110-36]
THE FEDERAL SHIP CONSTRUCTION LOAN GUARANTEE PROGRAM
__________
HEARING
BEFORE THE
SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE
OF THE
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MARCH 15, 2007
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SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE
GENE TAYLOR, Mississippi, Chairman
NEIL ABERCROMBIE, Hawaii ROSCOE G. BARTLETT, Maryland
JAMES R. LANGEVIN, Rhode Island KEN CALVERT, California
RICK LARSEN, Washington TERRY EVERETT, Alabama
MADELEINE Z. BORDALLO, Guam JO ANN DAVIS, Virginia
BRAD ELLSWORTH, Indiana J. RANDY FORBES, Virginia
JOE COURTNEY, Connecticut JOE WILSON, South Carolina
JOE SESTAK, Pennsylvania
Will Ebbs, Professional Staff Member
Heath Bope, Professional Staff Member
Roger Zakheim, Professional Staff Member
Jason Hagadorn, Staff Assistant
C O N T E N T S
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CHRONOLOGICAL LIST OF HEARINGS
2007
Page
Hearing:
Thursday, March 15, 2007, The Federal Ship Construction Loan
Guarantee Program.............................................. 1
Appendix:
Thursday, March 15, 2007......................................... 37
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THURSDAY, MARCH 15, 2007
THE FEDERAL SHIP CONSTRUCTION LOAN GUARANTEE PROGRAM
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Bartlett, Hon. Roscoe G., a Representative from Maryland, Ranking
Member, Seapower and Expeditionary Forces Subcommittee......... 2
Taylor, Hon. Gene, a Representative from Mississippi, Chairman,
Seapower and Expeditionary Forces Subcommittee................. 1
WITNESSES
Bowman, Roy G., Thompson Coburn LLP, Attorneys at Law............ 14
Brown, Cynthia L., President, American Shipbuilding Association.. 11
Connaughton, Sean T., Administrator, Maritime Administration,
Department of Transportation................................... 3
Cook, H. Clayton, Jr., Counsel, Seward & Kissel LLP, Attorneys at
Law............................................................ 22
Gottlieb, Martin E., Managing Director, Argent Group Ltd......... 20
Graykowski, John E., President, Maritime Consulting.............. 17
Raymond, Charles G., Chairman and CEO, Horizon Lines, Inc........ 15
APPENDIX
Prepared Statements:
Bowman, Roy G................................................ 59
Brown, Cynthia L............................................. 44
Connaughton, Sean T.......................................... 41
Cook, H. Clayton, Jr......................................... 90
Gottlieb, Martin E........................................... 85
Graykowski John E............................................ 75
Raymond, Charles G........................................... 70
Documents Submitted for the Record:
[There were no Documents submitted.]
Questions and Answers Submitted for the Record:
Mr. Larsen................................................... 99
THE FEDERAL SHIP CONSTRUCTION LOAN GUARANTEE PROGRAM
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House of Representatives,
Committee on Armed Services,
Seapower and Expeditionary Forces Subcommittee,
Washington, DC, Thursday, March 15, 2007.
The subcommittee met, pursuant to call, at 2:26 p.m. in
room 2212, Rayburn House Office Building, Hon. Gene Taylor
(chairman of the subcommittee) presiding.
OPENING STATEMENT OF HON. GENE TAYLOR, A REPRESENTATIVE FROM
MISSISSIPPI, CHAIRMAN, SEAPOWER AND EXPEDITIONARY FORCES
SUBCOMMITTEE
Mr. Taylor. Meeting will come to order.
The committee today will meet to discuss the opportunities
for Title XI loan guarantees for the shipbuilding industry for
ship operators who choose to use that as a form of financing to
try to revive the American shipbuilding industry.
This is nothing new. Those of us who have been around here
a while have heard it under a number of different names, not to
be limited to the National Shipbuilding Initiative. Both
Democrats and Republicans have claimed to be its father, and I
am for everyone who is for this.
I for one--and I think I can speak for my ranking member--
remain concerned that a nation that can produce the world's
greatest military, the world's largest economy and a nation
that imports such a huge percentage of the world's goods
continues to do so on foreign flag vessels. And we have taken
what was once the world's greatest fleet and now become a
nation that rarely builds a commercial ship. I am also reminded
that we are a nation that is spending anywhere from $6 to $10
billion a month in another country helping them to build their
infrastructure but gets amazingly stingy when it comes to
taking care of our own.
The one that probably struck me the greatest with this
Administration was, shortly after 9/11, the cancellation of the
American classic line ships that were to have been built in
Mississippi--were being built in Mississippi. They were sold
for scrap when scrap was at an all time low, and then just a
few years later our Nation turned around and chartered foreign
flag cruise ships so that first responders in New Orleans and
other folks who had lost their homes on the Mississippi gulf
coast could have a place to live.
I am convinced that for what we spent to charter those
vessels we could have gone a heck of a long way toward
finishing those ships that were being built, had them in the
inventory and then whatever the next catastrophe is, be it a
weapon of mass destruction somewhere domestically, a typhoon in
Guam, we would have had that housing available.
And so I happen to believe that was a very bad decision on
the part of the Bush Administration. It struck me as more of a
slap at the Clinton Administration than any sound business
policy. But that is water under the bridge. But we just don't
want to keep repeating those mistakes.
So, with that, I will yield to my extremely capable ranking
member, Mr. Bartlett of Maryland.
STATEMENT OF HON. ROSCOE G. BARTLETT, A REPRESENTATIVE FROM
MARYLAND, RANKING MEMBER, SEAPOWER AND EXPEDITIONARY FORCES
SUBCOMMITTEE
Mr. Bartlett. Thank you very much, and before I give my
opening statement, I need to note that I will need to leave to
go to the floor. I hope to be back before the hearing ends, but
we will have the testimony to read.
Thank you, Mr. Chairman.
Good afternoon, ladies and gentlemen. I am pleased to be
with you today to discuss the Maritime Administration's (MARAD)
Title XI loan guarantee program. As many of you know, I am a
strong advocate of improving our domestic shipbuilding
capability. The Maritime Administration's Title XI loan
guarantee program has in the past been a useful tool for
spurring more investment in domestic ship construction. In
particular, the Title XI has helped U.S. shipbuilders maintain
the Jones Act fleet.
The purpose of today's hearing as I see it is to understand
why the Title XI program no longer achieves its mission of
promoting growth and modernization of the U.S. merchant marine
and U.S. shipyards. I note that the President's budget request
for fiscal year 2008 does not request funding for Title XI and
that Mr. Connaughton's prepared statement notes that the
Administration believes the program is a form of corporate
subsidy.
According to MARAD, ship owners and shipyards should be
able to obtain financing in the private sector without the help
of Title XI. I would like to pursue this point further.
Does the private sector indeed support financing to ship
owners and shipyards? My understanding is that some in the
industry are able to obtain private sector funding while others
are not. If you are constructing tanker vessels, for instance,
commercial financing may be more easily obtained. I think
Overseas Shipholding Group's recent contract with Aker
Shipyards in Philadelphia is a good example of a ship owner
using commercially obtained financing to build product tankers.
Yet finding private sector funding for constructing roll-on/
roll-off vessels or bulk carriers I am told is more difficult.
I am hopeful that our witnesses can help explain whether
the commercial market is indeed capable or willing to
independently, that is without Title XI guarantees, finance the
projects of ship owners.
As an advocate for increasing domestic ship construction,
this needs to be the critical question.
A related issue, Mr. Chairman, which demands our attention
is whether the MARAD loan guarantee program operates
efficiently and provides industry with the right set of
incentives. Even if the Title XI program was funded at a level
that it could give out new loan guarantees, we still need to
evaluate whether the Title XI is designed in a way that will
make the program self-sustaining. My understanding is that, in
the past, Title XI benefitted not only the ship owners and ship
builders but also the U.S. Government. During this period,
Title XI had a large, diverse pool of participants in the
program that spread the default risk across all sectors of the
industry. As a result, defaults were covered, indeed more than
covered, by fees charged for the guarantee. Moreover, I am told
that the program was even profitable.
The question I would like our witnesses to address is what
it would take, in the event MARAD had the funding to give out
Title XI loan guarantees, for the Title XI program to be once
again self-sustaining.
Again, thanks to all of our witnesses for being here today.
I look forward to your testimony.
Thank you, Mr. Chairman.
Mr. Taylor. Thank you, Mr. Bartlett.
I would like to introduce our first witness, Mr. Sean
Connaughton, graduate of the United States Merchant Marine
Academy. Being a graduate of that institution, he knows that,
on an annual basis, hundreds of young men and women will
graduate from an institution hoping to become ship captains,
and I hope his remarks today will be to let us know that the
Administration is willing to help us find a way to build some
ships for those kids to work on.
But with that, we are pleased to have you here. We know
your tight schedule. And we welcome you, and I would ask
unanimous consent that the committee rule limiting witnesses to
five minutes be waived for today.
Without objection.
So, Mr. Connaughton, please give us your thoughts.
STATEMENT OF SEAN T. CONNAUGHTON, ADMINISTRATOR, MARITIME
ADMINISTRATION, DEPARTMENT OF TRANSPORTATION
Mr. Connaughton. Thank you, Mr. Chairman, members of the
committee.
I appreciate very much the opportunity to be here today to
discuss the Title XI program which is administered by the
Maritime Administration. I have a prepared statement, Mr.
Chairman. I would like to ask if I can enter that into the
record and just do a summation.
Mr. Taylor. Without objection.
Mr. Connaughton. Thank you, sir. As most of you know, the
Title XI program provides for a full faith and credit loan
guarantee by the Federal Government of private sector debt
incurred for the construction or reconstruction of ships in the
United States--in the U.S. shipyards.
At present, we have an outstanding portfolio of around $2.9
billion in loan guarantees covering the modernization of
American shipyards as well as a wide variety of vessels. Title
XI is represented in just about every market segment in the
maritime industry in practically every geographic area.
Although the Administration has not requested funding for
new loan guarantees since 2001, Congress has periodically
appropriated money for this purpose. The most recent project we
approved was two passenger and vehicle ferries for the--also
known as the Hawaii SuperFerry. We financed a similar vessel
which began operating in Lake Michigan in 2004.
These ferries are state of the art and highly suitable for
use on America's marine highway system. In choosing to finance
the ferries MARAD is promoting a vessel type that can be used
to relieve highway congestion by providing an attractive marine
transportation alternative.
We are very proud of the fact that we have notably improved
our management of the Title XI program since audit reports were
issued in 2003 and 2004 by the General Accounting Office, and
now the Government Accountability Office (GAO) and the
Department of Transportation's (DOT) Office of the Inspector
General (IG).
In addition to the steps MARAD itself has taken, the
Department has instituted a Credit Council to provide financial
oversight for all of the Department's credit programs including
Title XI.
We are very pleased to report that our program improvements
have been recognized. In his November 2005 report on the top
management challenges facing the Department of Transportation,
the DOT Inspector General stated that the Title XI loan
guarantee program is functioning effectively.
In addition, the Title XI program went through a PART
assessment last year as mandated by the Office of Management
and Budget (OMB). Title XI received a final part score from OMB
that indicates the program is considered to be moderately
effective. The DOT Inspector General's comments and the PART
score clearly demonstrate MARAD's diligence in implementing
recommendations for improved program management. Moreover, I am
confident that MARAD is now positioned to continue to
administer the program in such a way as to maximize the benefit
to our national and economic security while protecting the
government's financial interests.
At this time, the Administration does not request funding
for Title XI because it believes the program is a form of
corporate subsidy and that ship owners and shipyards should
rely on their own creditworthiness to obtain financing in the
private sector. Furthermore, the taxpayers should not bear the
risk of default by private companies. However, I want to
emphasize at this point that our position on Title XI programs
should in no way be misconstrued as a lack of support for the
U.S. shipbuilding industry or U.S. ship owners. The
Administration is on record as staunchly championing the Jones
Act in order to protect their interests. We simply believe that
the Title XI program is an unwarranted intervention in the
credit market.
I want to thank the members of this committee, and I want
to thank Chairman Taylor for holding this hearing on a very
important issue, and I will be very happy to answer any
questions you may have, sir.
[The prepared statement of Mr. Connaughton can be found in
the Appendix on page 41.]
Mr. Taylor. Thank you, Mr. Connaughton.
Connaughton. Excuse me. Shame on me.
Chair yields to Mr. Larsen of Washington.
Mr. Larsen. Thank you very much, and is it Connaughton?
Mr. Connaughton. Yes.
I get a little confused--well, it gets confused, although
we are not related, the chairman of the President's CEQ council
is Jim Connaughton, and I am Sean Connaughton.
Mr. Larsen. He has never been before us. I want to get your
name right. Like Larsen, I always get mispronounced with Larson
with an O-N. Can't tell the difference.
In your opinion--I want to go back to what Mr. Bartlett
said near the end of his opening comments. In your opinion, why
does it seem to you that, in the market, it may be easier to
get financing for something like tankers versus something like
for containers or dry cargo or bulk?
Mr. Connaughton. I believe one of the issues that the
private sector faces as well as we deal with when we are
evaluating applications is, what is the market that the vessel
is going to serve, what is the status of that market and what
are the long-term possibilities in that market.
And my assumption would be that when they end up looking at
different market sectors and for whatever the vessel itself is
going to be built for and be used as, ends up making or having
a big impact on the type of loans, the amount of loans and the
type of creditworthiness requirements. So we deal with the same
thing when we look at loan applications as well, sir.
Mr. Larsen. I understand that, certainly the philosophical
argument, and I don't want to get too much into a philosophical
argument here because there may be plenty of space between that
we are not going to meet on, but in your comments saying that
it is a fundamental--not funding Title XI comes down to
fundamental thought that it is an unwarranted intervention in
the credit market, but there are other, I think, in my
perspective and maybe others' perspectives, there are other
things to take into account about having a shipbuilding
industry, having a U.S. shipbuilding industry, being able to
invest in that shipbuilding industry, and I think Title XI
plays an important part in that. And I don't know how we bridge
maybe that philosophical difference there, but I do want to
certainly get that on the record.
But you note in your testimony that if it is functioning
well, Title XI is functioning well, then why wouldn't you fund
it? Separate from the philosophy, if it is functioning well and
if it is moderately effective, you know, why is there no money
included in the budget for it?
Mr. Connaughton. Well, the position of the Administration
is one that actually has been held by this Administration,
actually, and also the Clinton Administration.
Mr. Larsen. And the Clinton Administration was wrong as
well on that point.
Mr. Taylor. Will the gentleman yield? I do think, in
fairness, that after the Clinton Administration fought us every
step of the way on the National Shipbuilding Initiative, he did
call it the President's Shipbuilding Initiative when he signed
the bill, so with that, I yield back.
To set the record straight.
Mr. Connaughton. The Administration's position is that,
given the portfolio, given the current book of business that we
are overseeing, we are going to run this--run the Title XI
program as well and as effectively as possible to ensure that
the taxpayers' interests are protected. However, the
Administration's position is that if these loans are viable and
if they are available in the commercial and the private sector,
that that is where the carriers should be turning to, is the
private sector.
Mr. Larsen. There are 74 loans now outstanding; is that
right?
Mr. Connaughton. Actually, I have a list, sir, but I know
the total book value, but I am not sure how many we have.
Mr. Larsen. Regardless of the total book value, how many
have you, how many has this Administration done in the last--in
the life of the Administration?
Mr. Connaughton. I am not sure. Do we have the--I can get
you the exact information, sir. I don't have it with me.
[The information referred to can be found in the Appendix
beginning on page 99.]
Mr. Larsen. If you could for the record, if I can get the
number of loans outstanding, I think the book value was $2.9
billion, if I am not mistaken. And if you could also get me the
number of the loans that have gone through Title XI during this
Administration as well. I am trying to get a better idea of
maybe the Administration hasn't supported it, as the previous
Administration hadn't either, but it seems to be being used and
used well.
So, and then, finally, Mr. Chairman, just one more. Is it
necessary--I note in your testimony about the Credit Council,
that the DOT has established this Credit Council to provide
financial oversight for all the department's credit programs,
including Title XI. Is this an additional review on top of
whatever review MARAD is doing for Title XI loans?
Mr. Connaughton. Yes, sir.
Mr. Larsen. What value does it add that wasn't being
added--that wasn't there before a Credit Council review was in
place?
Mr. Connaughton. Probably the biggest thing is that it has
been an extra set of eyes and ears and review of these
applications. And adding a little bit different perspective on
some of them because it is not just simply Title XI. There are
actually other loan programs and programs in other modal
administrations, and so the Credit Council has actually been
very useful in actually getting maybe a little bit different
perspective, getting there to be a, you know, some other,
essentially eyes and ears in making sure that the applications
are going to be ones that are going to be as low a risk as
possible. So I have not at least personally seen them to be a
hindrance or a burden. They have actually been helpful in
actually you know taking a look and getting some better ideas.
Mr. Larsen. Do you know how much time is added on to review
of Title XI loans? If the Credit Council review wasn't there,
what was the average time for Title XI loan review, and now
Credit Council review is there, how much extra time?
Mr. Connaughton. I don't know, sir. I have not dealt with
any loans since I have been in the office for six months now,
but I can find out how much time. But I don't believe it is
that much. The Credit Council meets fairly regularly, and when
other loans--I have seen loans or other types of program
applications from other programs, we get those applications on
a fairly timely basis, and then we meet fairly regularly and
deal with them. But I can actually get you how much between.
[The information referred to can be found in the Appendix
beginning on page 99.]
Mr. Larsen. And just conclude on the same head scratcher,
if, for me, if you're saying things are functioning well and
things are moderately effective--certainly we want things to be
effective or supremely effective, whatever the highest rank is
on that list--that we need to add an additional layer of review
for something that is functioning pretty well. Understanding
this is a DOT initiative and not necessarily a MARAD Title XI
initiative, but it just does seem to be, you know, for some
people around here, an extra eyes and ears means more
bureaucracy as well so, thank you, Mr. Chairman.
Mr. Taylor. I thank the gentleman.
The Chair recognizes the gentlelady from Guam, Ms.
Bordallo.
Ms. Bordallo. Thank you, Mr. Chairman. I just want to
reiterate what Mr. Larsen covered. He asked a question. And I
don't think I really was able to comprehend your answer very
directly, and that was, if the program is successful, then why
would the Administration not request funding for it? I don't
think I remember directly what you said.
Mr. Connaughton. Ma'am, the Administration's position is
that when we are dealing with these types of applications, this
program, it is the taxpayers who are essentially backing up,
assuming the risk of what is a private relationship between a
shipyard and a carrier and that, if these projects are viable,
that financing should be obtained through the private financial
markets. And so the Administration's position is that, since
the private financial markets are available, that the
government should not be involved in these types of loan
guarantees.
Ms. Bordallo. On the other hand, do you agree with the fact
that if these partnerships continue, isn't it a more efficient
way of building ships?
Mr. Connaughton. Well, it is just a different way of doing
it, in that Title XI loans have some different parameters than
a private sector loan would. Probably one of the biggest
differences is that Title XI loans are for 25 years and that
there is only a requirement that 12.5 percent be put up forward
by the applicant. So, when you look at the fact that not as
much equity is necessary up front, and the fact that the loan
itself is actually for a very extensive or an extended period
of time, much longer than most commercial loans in the private
market, it makes--it makes it more attractive to utilize the
Title XI. But, again, the Administration's position is that
this is something that should be worked out in the private
sector and between private parties.
Ms. Bordallo. Thank you.
Thank you very much, Mr. Chairman.
Mr. Taylor. I thank the gentlelady.
Mr. Connaughton, there are a couple of inconsistencies in
my mind that I would like the Administration to, and if you
could on behalf of them, straighten out.
I would think the primary beneficiaries of this program
would be what we refer to in Washington as the big six. Seems
like our second tier yards are doing fine mostly because the
Jones Act protects them, and they are only competing against
other Americans and therefore can remain competitive.
Who is the only customer--or I take that back. 99 percent
of the ships that are produced by the big six are purchased by
whom?
Mr. Connaughton. The United States Government is the
primary customer of these yards.
Mr. Taylor. Is it fair to say that the laws of economies of
scale are just as true for shipbuilding as any other industry,
that the more you build of something, your fixed costs go down
and the cost per unit produced will go down?
Mr. Connaughton. In fact, sir, just recently being up in
the Aker yard, you can see quite clearly the differences when
you do have a series construction and the amount of--or the
cost of overhead per vessel goes down dramatically.
Mr. Taylor. I know it is not your job, but I have got to
believe you read the papers. And I would presume in the course
of reading that, you have heard the general's lament, the slow
delivery time on things like up-armored Humvees, on things like
the mine-resistant ambush-protected vehicle that we are trying
to field for the Marine Corps and the Army, the delays we had
in building other Defense needs that are built of steel or else
fabricated of steel. Are you aware of that?
Mr. Connaughton. Yes, sir.
Mr. Taylor. With that in mind, and since the commander in
chief is regularly reminding the American people that we are a
Nation at war, why then is there this reluctance on the part of
the same Administration to rebuild that industrial might that
would result in economies of scale when we build our Navy
ships, would provide the sort of industrial capacity that we
have so that the armor we need for the MRAP or up-armored
Humvees, would be more readily available?
I really find an incredible disconnect on the part of the
Bush Administration. And I realize that you are the messenger.
But my question is, is anyone at MARAD trying to get the
Administration to, as Secretary Rumsfeld used to say, connect
the dots and figure this out?
Mr. Connaughton. Sir, we, since I have been in office, I
have had the opportunity to visit yards, to meet with the
shipyard executives as well as their representatives. And,
obviously, we understand there are some very serious challenges
being faced by the shipyard industry as well as in general in
the carrier community in the United States.
I have asked the yards what it is that we can be doing to
make them more competitive. What do we need to be doing to look
at what types of hurdles and barriers may exist that we can end
up taking some action on? And we put that in writing to the
yards. I know that they are actually coming back to us on that.
We want to foster the shipyard industry. It is an important
driver in employment. It is an important aspect of, obviously,
our economy and specifically in various parts of the country,
very, very large employers, as well as part of our National
Defense Foundation.
The issue really is, though, how do we get to that? And
whether the programs like this are adding or potentially even
being detrimental to that. And I don't have all the answers,
sir, but we are going to try to work very closely with them,
within the obvious confines of the very difficult fiscal and
financial challenges being faced by us in the government. But
the thing is that we need to have a better idea about what can
be done to make those yards more competitive. And this is
something that we are talking to the yards about, asking the
yards about, and we will raise it within the Administration.
Mr. Taylor. Mr. Connaughton, one of the things that I would
hope the Administration would consider is being more supportive
of this program, particularly for vessels that have a military
utility. And I will give you one, for instance, that has come
out in open testimony in this subcommittee. There are five Navy
oilers in the entire Pacific. The vessels that escort our
nuclear-powered carriers are all oil fired. If I were a
potential foe of the United States, by a series of means, my
first strike would be, in a war in the Pacific, my first strike
would be to get rid of the oilers.
My, for instance, question is, would the Administration be
more supportive of using Title XI to build a next generation of
double hull oilers if they could be built in a way that they
would be capable of refueling Navy ships? If we tied it down a
little closer to a proven military vulnerability, a proven
military need and something that we could turn to the private
sector to augment things that, again, I have to believe any
chief petty officer and any potential foe of the United States
has already figured out, is a vulnerability of ours?
Mr. Connaughton. Sir, obviously, it is something that has
not been broached to me or as far as I am aware of anyone else
in the Administration. But, however, I will point out that
where the military is currently looking more and more to rely
on private commercial parties to support a lot of their
efforts, they are again looking--they are looking to the
domestic carrier fleet. And they are even looking at, and I
think the vessels you are talking about, some of those are
obviously reaching the point where they need to be replaced.
And I know the military is actively looking at the potential of
utilizing vessels being built in Aker, and those vessels that
are being built are being built without Title XI right now. And
so it is something that I think, at least if those types of
examinations show that as utility, I think there is a point
there that maybe the Title XI is not necessary to provide those
types of assets.
Mr. Taylor. Mr. Connaughton, again, I know that you are in
the uncomfortable position of having to defend some bad
decisions.
Mr. Connaughton. I didn't say that, sir.
Mr. Taylor. And I know you can't for the record note that
there was no movement on the part of his head yes or no. Again,
I have--I for one was outraged when this Administration
proposed to send troops to Colombia to protect the Occidental
Petroleum Pipeline. And this Administration described that as a
critical National Defense Infrastructure that the Colombians
needed to protect. It is with great irony that this
Administration would turn around and object to you trying to
improve the yards and the U.S. Merchant Marine. If he is
willing--if this President is willing to do it for the
Colombians, then I would hope he would be willing to do it for
his fellow Americans. Any other questions?
And again, I know that you are the messenger. I hope that
we can work on this. I have to say that for the record because
I really believe that to be true. I think this is something of
great importance to our Nation that we have been ignoring for
far too long. I think we have an opportunity to do something,
and we hope we can work with you along those lines.
Mr. Connaughton. Thank you, Mr. Chairman, did you have
something for me before the hearing?
Mr. Taylor. Chairman Ortiz of the Readiness Subcommittee
contacted me shortly before the hearing to express his concern
that MARAD was moving toward allowing the American reserve
fleet--those that are going to be scrapped--to be scrapped
overseas. And I would like to share his concerns with you and
also my concerns.
We both know that the price of scrap steel is comparatively
high, may well be even at an all time high. I think we are both
aware that if a vessel is scrapped in this country, it is going
to be done in an environmentally sensitive manner that doesn't
run up the cost. I think we are also aware, if it is done
overseas, it will probably be done in an environmentally
unfriendly manner.
And so, on behalf of Chairman Ortiz and myself, if there is
a move at MARAD to scrap these ships overseas, I would like to
voice his objections and my objections to that. I think we can
afford to do it domestically. I think it is going to provide
jobs domestically, and we know this can be done in an
environmentally responsible manner here. And I can't make that
guaranty for overseas.
Mr. Connaughton. Mr. Chairman, the use of foreign scrap
yards is something that grew up or grew out of, I believe, some
legislation several years ago that requested or mandated that
the Maritime Administration look at that. Given our experience
in that, I can tell you that I would be very reluctant ever
again to see the Maritime Administration utilize a foreign
yard.
Mr. Taylor. I will pass that word to Chairman Ortiz, and I
know he will be pleased to hear it.
Mr. Connaughton. Thank you, sir.
Mr. Taylor. Thank you for sharing your limited time with
us. We look forward to working with you.
Mr. Connaughton. Thank you, sir. Thank you, sir.
Mr. Taylor. The chair will now call Ms. Cindy Brown, the
President of the American Shipbuilding Association; Mr. Roy
Bowman of Thompson Coburn, Attorneys at Law; Mr. Martin
Gottlieb, the Managing Director of the Argent Group; Mr.
Charles Raymond, Chairman and CEO of Horizon Lines; and Mr. H.
Clayton Cook Jr., of Seward & Kissell, Attorneys at Law.
We appreciate all of you being here. We apologize in the
delay in getting started. My mother would haunt me if I didn't
recognize the ladies first, so we are going to start with Ms.
Brown.
STATEMENT OF CYNTHIA L. BROWN, PRESIDENT, AMERICAN SHIPBUILDING
ASSOCIATION
Ms. Brown. Thank you, Mr. Chairman, Congresswoman Bordallo,
Congressman Larsen, thank you very much for having this hearing
today on the importance of the Title XI ship loan guarantee
program in facilitating commercial ship construction in the
United States.
The American Shipbuilding Association (ASA) is a national
trade association of the six largest shipbuilders in the United
States to build all the capital ships for the United States
Navy and have a long history in building large ocean going
commercial ships. We also represent more than 70 companies
engaged in the manufacture and design of ship systems and
components. And my membership list is attached to my statement.
Today, Title XI is urgently needed for small- and medium-
sized U.S. ship owners and operators to secure affordable
financing, over 25 years, for the purpose of replacing their
aging Jones Act fleets with new ships built in our shipyards.
Without Title XI, the majority of the Jones Act owners will
not be able to invest in new tonnage, and thus desperately
needed commercial shipbuilding work will not materialize for
our industry.
The Jones Act fleet numbers 105 oceangoing ships which
carry oil and dry cargo between U.S. ports. The average age of
the fleet is 22 years, when the average economic useful life of
a tanker is 20 years and a dry cargo ship is 25 years. And many
of these ships in the fleet are well over 30 years of age.
These ships need to be replaced to ensure the United States has
the ships necessary to meet our coastwise commercial needs, our
energy transportation needs, and these ships need to be
replaced to ensure that we have safe tonnage for our water-born
commerce. The construction of oceangoing commercial ships in
the United States made possible by Title XI has many benefits
for the Nation.
Number one, it helps American shipyards retain and grow our
highly skilled engineering and production workforce, which is
vital to building ships for the United States Navy and Coast
Guard.
Second, increased ship production provided by commercial
orders reduces the cost of U.S. Navy and Coast Guard ships
because it allows the U.S. shipyards to spread their overhead
costs over a greater universe of ships. These are costs that
would otherwise be totally covered by the United States
Government.
The coast of ships built for the U.S. Government is also
reduced by stabilizing our workforce. Persistently low and
unstable rates of Navy ship construction have resulted in large
costly swings in our workforce.
When government shipbuilding orders are delayed or reduced,
we have to lay off our highly skilled workers, then to later
higher, retrain or train a new workforce. Just as an example,
it takes a minimum of $50,000 to train a welder to minimum
proficiency standards.
The huge cost and time required to train our workforce is
stabilized when we have a mix of both Navy and commercial
orders to allow us to avoid these swings.
Third, building commercial ships facilitates the
introduction of best commercial building practices which can
also increase our efficiencies and reduce our cost.
Fourth, commercial and oceangoing ships built for American
ship owners are available to the Department of Defense in time
of war and National emergency. For example, the six tankers
financed by Title XI in the late 1990's and built by Newport
News Shipbuilding were called into service for DOD in the Iraq
war to transport jet fuel to our deployed services. Commercial
roll-on/roll-off and container ships are also needed by DOD.
Without American built and owned ships, the U.S. is dependent
upon foreign ships for the resupply of our troops.
Fifth, commercial ships built in the U.S. are built to the
highest safety standards in the world. Just one example are the
double hulls we have built in the post-OPA 1990's time frame
where these ships have been built not only with double hulls
but with redundant propulsion systems, controls. In the case
that there would ever be a mechanical failure that would also
result in an oil spill, these ships have redundancy designed
and built into them.
The Title XI program was established to give ship owners
and operators an access to long-term affordable financing that
they could not otherwise find in the commercial market without
a loan guarantee.
The program was designed to ease the risk to the commercial
lending institutions, with the government assuming the risk in
order to facilitate financing for smaller and medium-sized
companies comparable to that available to large corporations.
If all ship owners and operators were huge corporations
with deep pockets, there would be no need for Title XI. The
program was designed to address financing needs of the
companies where there is some risk.
ASA strongly supports minimizing the government's risk
exposure. A default is not in the program's interest nor is it
in our industry's interest. However, in the name of risk
reduction, there have been multiple regulatory restrictions
imposed on the program by this Administration making it very
difficult for any applicant to be approved. In light of these
regulatory handcuffs, ASA asked the subcommittee for its
support in not only funding the program but also amending the
program to establish a priority category for certain ship loan
applications and an accelerated review process for these
applications.
No money has been appropriated for Title XI since fiscal
year 2003 when Congress provided $25 million in the emergency
war supplemental. Without funding, no loan guarantees can be
issued. As stated earlier, without Title XI guarantees, the
majority of Jones Act ship owners will not have the financial
means to replace their fleets. If ship owners don't have access
to affordable financing to introduce new modern tonnage in the
Jones Act trade, there will be increased pressure to repeal the
Jones Act to allow foreign tonnage to carry American's
coastwise commerce. Should that happen, there will be no
commercial shipbuilding market left for American shipyards in
the absence of a commercial shipbuilding subsidy program to
offset years of subsidies provided to foreign shipyards in
Asia. These subsidies have allowed those shipyards to corner
the commercial shipbuilding market. Without commercial work,
the risk increases for losing more U.S. shipyards that comprise
the core shipbuilding industry upon which this Nation depends
for its defense. Furthermore, the cost of naval ships will
rise.
The American Shipbuilding Association encourages Congress
to authorize and appropriate $60 million for the Title XI
program in fiscal year 2008. This funding would generate more
than $1.2 billion in ship construction in the economy.
In addition to funding, there is a need to add to the
statute priority review and approval process for traditional
applications to expedite the financing for replacement tonnage
serving the Jones Act. I ask the subcommittee to consider an
amendment which would add a new priority for loan guarantees
for replacement vessels.
For an applicant to receive priority under this proposed
new category, the applicant would have to be an established
vessel owner and/or operator in a proven Jones Act market. The
application would have to be for the construction of
replacement tonnage for vessels over 20 years of age. And the
replacement vessels would have to be militarily useful to
augment dedicated DOD sea lift assets in times of war and
National emergency.
Our recommended amendment, which is attached to my
statement, proposes that applications under this new priority
category be evaluated and processed by the Maritime
Administration without the additional review of the Department
of Transportation Credit Council. This recommendation is made
to expedite the review process while still minimizing risk
exposure of the government.
The reason the risk is minimized is because these owners
will be applying for guarantees that are established ship
owners in established proven trades where the Maritime
Administration has extensive knowledge and familiarity with the
cargo demands. This amendment further recommends that the
Maritime Administrator be directed to develop and apply to
applications under this priority category a more broadbased
financial evaluation other than the current regulatory strict
2-to-1 debt-to-equity criteria alone.
ASA recommends that the broader-based financial evaluation
also take into account an applicant's cash flow performance and
collateral assets in determining an applicant's
creditworthiness. This amendment is needed because the Credit
Council review has added many months to an application review
and approval process that heretofore took 60 days.
More disturbing is the appearance that the role of the
council is to deny new loan guarantees in reflection of this
Administration's opposition to the program. The Department
reportedly put the Credit Council in place to guard against
applications being potentially approved that had high risk of
default. Given that the applications under this priority
category would be traditional applications from proven owners
in proven trades, the risk of default is low.
The Maritime Administration would still be required to
follow and apply all the statutory risk assessments and
supplemental security provisions to avoid default in reviewing
these applications.
Mr. Chairman, members of the committee, thanks again for
having this hearing on the importance of the Title XI ship loan
guarantee program and sustaining the defense shipbuilding
industry of this country. Your favorable consideration of my
industry's recommendations for program funding and improvements
is appreciated.
[The prepared statement of Ms. Brown can be found in the
Appendix on page 44.]
Mr. Taylor. Thank you, Ms. Brown.
The Chair now recognizes Mr. Roy Bowman.
STATEMENT OF ROY G. BOWMAN, THOMPSON COBURN LLP, ATTORNEYS AT
LAW
Mr. Bowman. Good afternoon, Mr. Chairman, members of the
committee. I want to just start by saying I am appearing here
only to express my own views developed over some 35 years or so
in this industry, including my first introduction to Title XI
as General Counsel of the Maritime Administration in the
1970's. Rather than read my testimony, I would like to the
submit it for the record and just summarize.
Mr. Taylor. Without objection.
Mr. Bowman. A few points particularly taking off on what
Mr. Bartlett said. Mr. Bartlett mentioned the availability of
the Aker--commercial financing in the Aker transaction, which I
think is a marvelous illustration of commercially available
financing, but I think one has to put it in context. If you
look at the world of shipping today, the international shipping
community is flush with profits. World trade is at the highest
level. The emergence of China has meant that every sector of
international shipping community is prospering. That goes for
the tankers to carry the oil, the ore carriers for the iron,
and steel and the liner carriers to bring the products back to
the United States.
At the same time, what has happened is that the appetite
for risk among the banks is very high. The premiums for risk
are at a low, as low as they have ever been. So what does this
mean? It means, it is not going to stay this way. There is
going to be a change coming, and when that change comes, the
opportunity for Title XI to function as a back stop will be
very useful and very worthwhile. So the mere fact that we can
do some things today--which I absolutely applaud--nevertheless
doesn't mean that it will be always this way.
The second point I would like to make is that there is a
problem with financing American ships. And it is a problem that
anybody who has been around this industry knows for years and
years and years. American built ships are very expensive. In
fact, they may often be twice the cost of an internationally
built ship.
The significance of this is that the international
financial community is going to be reluctant to finance any but
the very best credits because the ability to redeploy the
American built ship in the international trade is going to be
very limited. And I think that may be why there is part of the
difference between the liner and the tanker industry that Mr.
Bartlett alluded to, but maybe Mr. Raymond will address that
further. So I think there is a role for Title XI,
notwithstanding the availability of commercial financing, for
those reasons.
The second point I would just like to make is that I think,
unlike the approach that Ms. Brown takes, I think we need to
broaden the program. You know this program becomes more and
more limited to fewer and fewer customers. The risk profile is
enhanced. It is increased. And even the GAO report pointed to
the concentration of loans, for instance, in the AMC situation.
One area where U.S. shipyards are still competitive is the
offshore drilling industry and the offshore service boat
industry. These participants in the program, these customers if
brought into the program could spread the risk.
Finally, I would like to just agree with the comments on
the Credit Council and the other steps that need to be taken to
expedite this process. Title XI has now become so cumbersome
that only applicants who have limited access to other financing
will resort to it. In order to broaden the program and thus
allay the risk, it needs to be brought into a more streamlined
and more responsive kind of agency without narrowing the
profile of participants.
Finally, I can't resist just referencing here the members
of the Credit Council perhaps everybody has looked at this, but
if one just reads the list of the Credit Council, I think it is
clear that the addition of expertise to MARAD is very limited.
For instance, just from DOT's press release, the Assistant
Secretary for Budget of DOT, the Under Secretary of
Transportation for Policy, the General Counsel, the Assistant
Secretary for Transportation Policy, Federal Highway
Administrator, the Federal Transit Administrator, the Federal
Railroad Administrator, the Maritime Administrator--that is
nice--and the Director of Office of Small and Disadvantaged
Business.
These are the experts that are going to add to MARAD's
judgment. I think these kinds of overly bureaucratic responses
to risk need to be changed. So my testimony speaks to other
things. I will be happy to amplify it if anyone has any
questions.
[The prepared statement of Mr. Bowman can be found in the
Appendix on page 59.]
Mr. Taylor. Thank you, Mr. Bowman.
Chair recognizes Mr. Charles Raymond.
STATEMENT OF CHARLES G. RAYMOND, CHAIRMAN AND CEO, HORIZON
LINES, INC.
Mr. Raymond. Thank you, Mr. Chairman. I also would like to
enter my testimony into the record, and I will not read that,
with your permission.
Mr. Taylor. Without objection.
Mr. Raymond. I would like to take a few minutes and recap
and focus on a few of the more important points of my
testimony. First of all, I started out, like Secretary
Connaughton, as a cadet at Kings Point. In my case, I started
in 1961 and had been in this industry one way or the other--as
a student, as a vessel officer, as a manager of Sea Land's
international business--for 32 years, and now as chairman of
Horizon Lines, for 45 years.
The origins of our company: Horizon Lines go back to Sea
Land in 1956 when Malcom McLean and I believe Representative
Bentley sailed the Ideal X from New Jersey down to Texas with
containers on board using our marine highway.
I think we are coming full circle on that need and that
opportunity. And I also want to address that in my testimony.
Today, Horizon Lines is our Nation's leading liner
operator. It is the largest Jones Act carrier but also is the
largest American flag liner operator. Our company is publicly
held. Our market capitalization is about $1 billion. It is not
a large corporation by definition. It is a small cap. Our
management and our boards of directors are populated with some
very patriotic individuals and successful business people,
including General Privatsky, who is the former head of Military
Traffic Management Command; John Handy, who you are familiar
with serving as our Executive Vice President; Secretary Mineta,
who served both as Transportation Secretary and Commerce
Secretary, also esteemed Member of this House for many years;
and most recently, recently retired Chief of Naval Operations
Admiral Vern Clark.
We have a fleet today of 16 Jones Act vessels, every one of
which was built here in the United States, crewed by American
crews and owned by U.S. citizens. Those vessels have an average
age today of 31 years. They range from 20 years of age to 38
years of age. Two of the older vessels that we have in fact
were deployed out of the Puerto Rico trade, out of Operation
Desert Storm in order to move materiel to support our troops in
the war zone at a time when foreign crews of Denmark and Japan
refused to go into the war zone.
These vessels had been militarily useful, and what I am
going to propose to you in terms of our need for the program
going forward would include military usefulness of the vessels
that we would build.
We have a unique opportunity, I believe, to put in place a
systematic replacement of not only our own fleet but of the
other Jones Act operators with whom we compete. We will also
have, in many cases, vessels close to the same age as our own.
This would be a multi-year program which would be predictable,
would hopefully be funded and would be very efficient under
Title XI. In our own case, our company is operating today eight
different types of ships that have been acquired over the
years. They are vessels of maritime designations C-6s, C-7s, C-
8s, lash vessels that have been converted, SL-18s that were
bought in 1972 and diesel ships that were built in the Lakes
back in 1985.
We have a menagerie of vessel classes if you will. And in
order for us to be more efficient, we want to go to a standard
class of ships which our existing models that are being built
overseas and vessels that we can take those designs and,
through technology transfer with U.S. shipyards, put in place a
long-term building program that will build a long series of
vessels.
With that, the unit cost, as you point out, Mr. Chairman,
will come down. The startup costs, which involve new
architecture fees, organizing computer-driven protocols for
cutting and for welding and other technologies in the shipyards
will be very efficient and will bring the unit costs down and,
as Ms. Brown pointed out, would take the overhead costs for the
entire shipbuilding community and spread that across a much
broader base.
The vessels that would be replaced in this program would be
freed up to serve our marine highway, something that is getting
more and more attention--and should get the attention of not
only the Department of Transportation but the Maritime
Administration per se. These are vessels that can carry up to
600 to 700 containers each at speeds of 21 knots or better, and
connect the deep water ports of our Nation with ports that are
not quite as fortunate enough to have the water that deep water
ports do.
These vessels, as I say, would be militarily useful. They
are of the speed and draft and tonnage capability that the U.S.
Transportation Command has identified as being militarily
useful and the commanders in the field as well.
It would provide a predictable and systematic work flow for
our Nation's shipyards, enabling us to approach young people
that it costs $50,000 to train and weld and show them a career
going forward, not one that is going to be populated with
layoffs and then rehiring that has characterized the business
in past years. It would provide a series of identical ships
which not only serves the shipyards well but also would serve
our very valued customers, both the commercial customers and
the military customers, effectively taking the unit costs of
those assets down and therefore helping to maintain inflation
in the markets that we serve which in many cases don't have any
choice but to ship; certainly the cases of Puerto Rico, Hawaii
and, in many cases, Alaska and certainly Guam.
All of these factors support the need for a multiyear
authorization, something that is predictable, that we can go to
our shareholders and get their votes to approve something that
fits our economic models, enables us to build the vessels in a
way that sustains the high speed, the reliability that the
Jones Act requires but also that is required by our military
forces going forward.
Mr. Chairman, I appreciate the opportunity to address the
committee, and I hope that this is a hearing that will help us
keep the Title XI program from continuing to run aground.
Thank you.
[The prepared statement of Mr. Raymond can be found in the
Appendix on page 70.]
Mr. Taylor. Thank you, Mr. Raymond.
The Chair now recognizes Mr. Graykowski.
STATEMENT OF JOHN E. GRAYKOWSKI, PRESIDENT, MARITIME CONSULTING
Mr. Graykowski. Thank you, Mr. Chairman, and members of the
subcommittee, and I, too, would like to include my full
statement in the record.
Mr. Taylor. No objection.
Mr. Graykowski. I kind of find myself feeling like the
Ghost of Christmas Past here because a lot of the controversy
and the discussion related to the Title XI program occurred
while I was at the Maritime Administration. And in large part,
the last 13 or 14 years of my life have been spent involved in
commercial shipbuilding at MARAD as deputy and acting
administrator, as a private attorney representing clients
trying to get Title XI, and as general counsel of Aker
Philadelphia shipyards, so I am bringing a number of
perspectives here.
Mr. Larsen, if I could just kind of correct an impression
that was left by Mr. Connaughton, who is a great guy and good
friend, and I value him as someone who is a leader in the
industry. I am a bit confused at the comment that the Clinton
Administration opposed the program because I was there from
January 20, 1994, until the end of the Administration. It is
true we had fights within the Administration on funding. Mr.
Taylor, you were a major leader in the effort to sustain this
program.
By way of history, the National Shipbuilding Initiative in
my recollection was sourced in a speech that candidate Clinton
gave at NASSCO in San Diego in May of 1992 when he told the
workers there that, if I am elected, I will revitalize
commercial shipbuilding. He said that in response to the
decline in the Soviet Union and the inevitable reduction in
Navy shipbuilding.
Following his election, I think, Mr. Taylor, you were here,
you worked on it. Mr. Batemen, who is a terrific leader,
enacted the National Shipbuilding Initiative, which was a five-
part shipbuilding initiative aimed at revitalizing the
commercial shipbuilding industry in the country. The major tool
that was contained in that act was an expansion of the Title XI
program, an expansion in funding and an expansion in authority
to fund shipyard modernization and also export projects.
By any measure of success, Mr. Chairman, and members of the
committee, I believe that program was a success. Within seven
months following enactment, we had regulations issued; the
Maritime Administration had partnered with the U.S.
shipbuilding industry to actually market our ships and our
shipyards to foreign customers. And by the end of the fiscal
year 1994, we had done seven deals. And by the end of the
Administration, 80 deals had been completed, generating $6
billion--$6 billion in shipyard activity in the country, big
vessels, small vessels, barges, tower barges. The money went to
all sectors of the country, all shipyards, large and small.
Some 400 vessels of all types were built in that time period.
I think it bears, you know, at least some mention. There
were defaults. The defaults were--are a tragedy to the country
in terms of the financial impact. They are a tragedy of the
applicant who does lose money. It may be 13.5 or 12.5 of the
deal, but 12.5 of $100 million is a lot of money by any
measure. But the impact that really is lasting and long
tailored the consequences of the agency because what it says to
the people there, all of the work you put into this deal, where
you thought, at the end of the day, it was the right thing to
do, and let's go, turned out to be wrong. And they are left to
pick up the pieces. And so what it does is, in effect,
demoralizes staff and makes it harder and harder for the next
deal and the next deal to be done.
With respect to where the program is today, Mr. Larsen, you
asked how many deals had been done, and I think Mr. Connaughton
is in an exceedingly difficult position because of the funding
profile and philosophical view of the Administration that this
program is wrong and somehow supports a bad thing. I happen to
believe shipbuilding is really good for this country for what
it does for jobs, what it does for the economy, what it does
for our National security.
But in the last three years, Mr. Chairman, MARAD--in 2003,
three deals were completed; 2004, two deals were completed;
2005, one deal was completed; and in 2006, no deals were
completed.
Now they have certainly made the program I guess more
secure. But they are not building any ships.
And the one message of the National Shipbuilding Initiative
to me at MARAD was: Build ships; we need them.
I think what I would like to, you know, sort of associate
myself most strongly with are the comments with respect to the
Credit Council. I used to tell people when we were marketing
the program--and we really tried to build a partnership. And I
left the program I think in a good shape, MARAD's reputation
intact, and you can ask any shipbuilder and most ship owners in
this country what they thought of Title XI, and you would get a
positive response. But it took--I used to tell them it would be
9 to 12 months to complete an application and around $100,000
in transaction costs for attorneys through closing; 100 and a
quarter, 90 whatever, depending on the complexity of the deal.
MARAD did not approve every application. For the 80 that we
approved, just on a back-of-the-envelope calculation, probably
250 deals we didn't approve.
We turned down the Quincy shipyard deal. Told the guy no.
Congress enacted a law that told MARAD to waive economic
soundness criteria. The guy comes back and applies. MARAD does
the deal. Default occurs. But that was the direct result, I
believe, of the congressional enacting law which took the major
tool out of MARAD's toolbox. MARAD's due diligence process,
which no one ever talks about, the most persistent complaint I
got from applicants everywhere in the Title XI practice, many
of whom are in the room, is, John, you are taking too long; you
are asking too many questions; you are imposing too difficult
conditions.
So where I stood at the program, I felt we were complying
with congressional intent, meeting the intent of the public
policy which is to generate shipyard activity, and we did the
best we could to make sure every deal, before it was approved,
had the protections necessary for the government. Any loan
program has risk in it. Ask Chase Manhattan. Ask Eximbank. Ask
Sallie Mae. There are going to be defaults, and I am not
trivializing them, but they are an essential and intrinsic part
of the lending program, and you do your best to mitigate the
risk. AMCV. 9/11 completely cut the legs out from that company
and its business plan, and it had a 30-year monopoly on the
trade in Hawaii. Shipyard costs increased. You have got a lot
of factors that are difficult to foresee in the beginning, and
remember, Title XI is a 25-year program. You are trying to
project out there that this deal is going to work. So the basic
point from where I sit--and I know I may sound defensive to
you--is we tried very hard to do what we were supposed to do
both to build ships but to do it in a responsible fashion.
Where things sit today, this Credit Council--and I am just
angry about it, actually. Mr. Larsen, you hit the nail on the
head. Logically, how can you add another layer of review and
increase the efficiency of the program? As Roy Bowman pointed
out, the people reviewing these applications are not maritime
experts. They know nothing about the industry, either its
history or its importance or its value or any of the other
things, and yet, they are making people delay. The cost goes
up. Frustrations increase, and it is all done in secret. There
is no transparency. There is no accountability, which offends
me as someone who has spent 25 years in government. You know,
if you are making decisions that affect me, you ought to look a
person in the eye and tell him why. In the case of the Credit
Council, as I understand the process, the council tells MARAD
to tell the applicant what the problems are, and then the
applicant goes back to MARAD and back to the Credit Council.
That is intrinsically wrong and unfair. So, if I made any
changes in this program, if I sat where you did, I would
eliminate the Credit Council, and if you cannot do that, then
make it transparent and make it accountable; put some
regulations and some boundaries on it because you have to--I
would hope we could return to the Title XI program that was
welcoming. It would have told anybody who had a vessel they
needed to replace, a market they wanted to enter, a new design
they wanted to sort of look at, come in and we will talk to
you. Short sea shipping, which Mr. Raymond is involved in, in
which everybody is talking about--get trucks off the highway--
it is inherently a high risk project. It is a new market with a
new company with new cargos, high capital requirements, and you
are supposed to get that from the commercial lending sector?
I will close with this. The Merchant Marine Act of 1936,
which is kind of our Holy Grail in this industry--and MARAD
operates under it. We all live by it--says it is necessary for
the national defense and the development of the foreign and
domestic commerce of this country to have a Merchant Marine,
composed of the best equipped, safest and most suitable types
of vessels constructed in the United States and supplemented by
efficient facilities for shipbuilding and ship repair. Now, if
that is our national policy and we have a Title XI program that
is broken and in disrepair, there is a disconnect that needs to
be fixed.
Thank you.
[The prepared statement of Mr. Graykowski can be found in
the Appendix on page 75.]
Mr. Taylor. I thank the gentleman, and I thank him for the
refresher in history. To the extent that I should be--to the
extent I should stand corrected, I do stand corrected.
Mr. Graykowski. You do not need to be corrected, Mr.
Chairman.
Mr. Taylor. The Chair now recognizes Mister--I hope I say
this correctly--Mr. Gottlieb.
STATEMENT OF MARTIN E. GOTTLIEB, MANAGING DIRECTOR, ARGENT
GROUP LTD.
Mr. Gottlieb. Yes, Mr. Chairman.
Mr. Chairman, distinguished members of the committee, I am
Martin Gottlieb, the Managing Director of Argent Group,
Limited. Argent specializes in arranging and structuring
financing for U.S. Flag vessels. Since the beginning of 2000,
Argent has raised financing for 35 of the 41 U.S. flag
oceangoing vessels built to order during that period. The total
cost of those vessels is approximately $4.5 billion, but 85
percent of that cost was commercial financing, and 15 percent
of that cost was Title XI financing. Since 2003, as Mr.
Graykowski talked about, six projects have been approved by the
Maritime Administration. Argent was involved in three of those
projects, which include the only five oceangoing vessels that
have been approved for Title XI by the Maritime Administration
since 2003.
As I am sure all of you know, commercial financing is
readily available for foreign built ships, but it is much more
of a challenge for U.S. Ships, largely because the volume of
the commercial ships built in the U.S. is just too small to
come anywhere near the economies of scale for foreign vessels.
Foreign built vessels are viewed as commodity assets because
they can be readily deployed or sold. U.S.-built assets are
viewed as purpose-built assets that cannot be readily sold.
The Title XI program addresses this challenge through four
principal benefits. First, it enables shipowners to obtain
construction financing for U.S.-built ships in much the same
way that guarantees backed by export credit agencies of foreign
countries do so for foreign built ships.
Next, Title XI provides financing for up to 87-1/2 percent
of the cost where commercial financing would be 40 to 70
percent of the cost. Title XI provides a financing term of up
to 25 years. Commercial financing is 7 to 10 years.
Last, Title XI carries a lower interest rate than
commercial debt, making the acquisition of U.S.-built vessels
more affordable. We should not forget about the fact, though,
that the Maritime Administration charges a guarantee fee. The
guarantee fee on top of the Title XI interest rate
significantly increases that rate, still more attractive than
commercial financing, but it is not so much lower as many
people think when they look just at the interest rate.
Now some recent experiences with the Title XI program.
Argent's experience with the program dates back to the 1970's,
when it was transforming from an insurance program to a credit
program. It also spans the before, during and after effects of
the DOT Credit Council, which we have heard a lot about
already, and to answer one of Mr. Hanson's questions, for one
of the projects of which I was involved in 2003 for an
established operator in a proven trade route, we made a Federal
XI application in 2003, and we had the approval in three and a
half months. Approximately one year later, as the Credit
Council was being formed for that identical company for an
identical vessel, the amount of time took nine and one half
months. Significantly additional conditions were imposed which,
from my observation, came through the Credit Council.
In terms of the Credit Council, which you have heard a lot
about already, since the formation of that Credit Council there
has been an attempt to run this program on a risk-free basis.
While I believe that is a laudable objective, it is just not
consistent with the policy objectives. It also appears to us
that the industry expertise that resides in MARAD, which, by
the way, is every bit as comparable to that in the commercial
sector, is just being diluted in the process. I believe that
this industry expertise is essential to an effective evaluation
of applications and the implementation of the appropriate terms
and conditions for any given project.
A couple of suggestions I have to make the program operate
more efficiently. First, the financial test and the regulations
should be updated. They are actually out of date at this stage,
in my view. For a vessel operated by an established carrier on
an existing trade route, a debt-to-cash-flow-type test should
replace some artificial debt-to-equity test. Similarly, the
working capital test should be replaced with an earnings or a
coverage test. These tests would be exactly in line with
commercial financing. I also recommend that approval of
projects for established operators on existing trade routes not
require the Credit Council or outside consultant review and to
be put back in the hands of MARAD.
In closing, I believe a strong and well-functioning Title
XI program is vital to our country, our Merchant Marines and
our domestic industrial base. If Title XI is not revitalized,
in my view, there will be vessels that just will not be built
for the U.S. flag. With proper funding, appropriate revisions,
updates and proper oversight, the Title XI program can be
revitalized to perform the functions that Congress intended
that are necessary to rejuvenate our Merchant Marine.
Thank you, Mr. Chairman and members of the committee. I
will be happy to answer any questions you have.
[The prepared statement of Mr. Gottlieb can be found in the
Appendix on page 85.]
Mr. Taylor. Thanks to the gentleman.
The Chair now recognizes Mr. Cook.
STATEMENT OF H. CLAYTON COOK, JR., COUNSEL, SEWARD & KISSELL
LLP, ATTORNEYS AT LAW
Mr. Cook. Thank you.
Chairman Taylor and committee members, thank you for
inviting me here this afternoon. My name is Clayton Cook. I am
counsel to Seward & Kissell, a New York City-based law firm
that was founded in 1890. It was internationally recognized as
a leader in U.S. flag vessel finance. I served as General
Counsel of the Maritime Administration from 1970 through 1973.
I am working with Roy Bowman, who was responsible for the legal
aspects of the implementation of the Merchant Marine Act of
1970 and for the drafting of the Federal Ship Financing Act of
1972, which governs MARAD's current Title XI program.
These two acts ushered in the most successful period of
commercial shipbuilding in U.S. history. The Title XI program
was critical to the shipbuilding success. The Title XI program,
properly funded and managed, could play a similar critical role
today in the successful financing of container and railroad
vessels that we need for our American marine highway.
I was interested in Administrator Connaughton's comments
with respect to the availability of commercial financing. They
are comments that I have heard for at least the last decade,
perhaps longer, and in some instances from Maritime
Administrators. I think it is true that commercial financing is
available for new vessel construction, for vessels in the
petroleum trades, and this has been true for at least 30 years
because, professionally, I have dealt with long-term financing
for petroleum vessels for at least 30 years, but it is not true
when it comes to new container and Roll on/Roll off (Ro/Ro)
vessels that we need today, and these vessels cost and will
cost in the range of $150 million to $250 million.
In some situations where we are looking not at established
carriers but possible new carriers and even old established
carriers, there are no long-term charters. These vessels are
being built with the hopes of ``the customer will come''
situations, and there is no 20- or 25-year financing apart from
a Maritime Administration credit support or perhaps, in some
cases, with a very strong parent company guarantee.
Before coming over today, I went to my desktop computer and
went to a Web site that Tim Colton, who is a Marine consultant,
runs. On that Web site, he has a list. He maintains a list of
vessels built in the United States, and there is one list of
all of the container ships that have been built in the United
States since World War II and another list of all of the Roll-
on/Roll-off vessels that have been built during that period.
Each of those lists is between 40 and 50 vessels long. With the
container ships, every one of those vessels was built with
Title XI credit support except two, and those were two very
recent vessels built for Matson Navigation, which has a very
strong parent in place in Alexander & Baldwin. So that is two
vessels out of over 40, and I often wonder if someone has found
a new means of credit support that I have not heard of or that
I have not seen.
Turning to Ro/Ro vessels, every one of the Ro/Ro vessels
built in the United States since World War II except vessels
that were built for U.S. Government military use was financed
with the Title XI program. Now, where we go without the program
I am not sure.
I would like to end my comments here. I thank the
committee, and look forward to receiving questions.
[The prepared statement of Mr. Cook can be found in the
Appendix on page 90.]
Mr. Taylor. I thank the gentleman.
The Chair now recognizes the gentlewoman from Guam.
Ms. Bordallo. Thank you. Thank you very much, Mr. Chairman.
I have been very impressed with the panel's comments, and
before I make my short statement, I just want to say that both
military and commercial ships are the lifeline to the territory
of Guam, so I want to see the industry continue building ships.
Mr. Chairman, you and I and Mr. Bartlett toured shipyards
in the Far East, and we saw the activity going on in these
shipyards, and we were told that their governments subsidized
them, many of them, and I do not know how you felt, Mr.
Chairman, but I just kept thinking about our U.S. shipyards and
hoping that we certainly could keep up and not supersede them
in their work, and I want to see our U.S. shipbuilders/
shipbuilding companies succeed, so I support the Title XI loan
program.
I want to say this. Ms. Brown mentioned the amendment. I
looked over that amendment regarding the experts, the so-called
``experts,'' on the Credit Council. In my lifetime, I have
dealt with large committees and small committees. You get far
more done with a smaller committee, and certainly, from all of
those different fields of expertise, I do not know how anyone
would ever come to a consensus, and I think the thing that
really brought light to my eyes was the possibility that they
could deny new loan guarantees just to reflect the
Administration's position, and I think that is something we
have to look at very carefully.
Mr. Chairman, I want to go on record as saying that I
support the Title XI loan program. Thank you.
Mr. Taylor. I thank the gentlewoman. I want to open this up
to the panel.
Years ago when the Clinton Administration had just been
elected and we were going to have a Democratic House and a
Democratic Senate, I remember asking a friend who was in the
shipbuilding industry but did not know government work what
could we do to get things going, and his answer was very, very
similar to yours. I do not know if he had read it in a
publication, but he said Title XI--which I had never heard of
at the time--with the help of Bill Anderhase and others,
certainly was not as easy as any of us wanted, I think in
fairness, but we were able to do something, and as you
mentioned, we were able to do some good things.
Aside from Title XI, what is this committee or this
Congress or this Administration missing that we could do to try
to revitalize the shipyards because, of all of the things I
have pointed to, the lack of industrial base on the
vulnerability--I very much remember the national embarrassment
of this Nation having to rent something like 85 foreign flag
vessels to resupply our troops in Desert Storm. Many of those
troops just--I am sorry. 85 foreign ships--and many of those
ships were flying flags that just a few years prior to that
were in the Warsaw Pact, something unthinkable, something
incredibly lucky for us but something we certainly could not
have counted on.
So, besides Title XI, what opportunities do you see, and if
you were to have the opportunity to speak to the President of
the United States and get his support for this, what would you
say? I will open this up to the panel. How about if we go by
seniority since I am getting to be one myself?
Ms. Bordallo. Mr. Chairman, would you yield for a moment--
--
Mr. Taylor. Absolutely.
Ms. Bordallo [continuing]. For a correction on my
statement?
I kept referring to it as ``Title X.'' I am sorry,
gentlemen. Please go.
Mr. Taylor. We will start with Mr. Cook.
Mr. Cook. Mr. Chairman, part of the 1970 act package was a
tax deferral program called the Capital Construction Fund. That
is a program that has been enormously beneficial and which
deserves the committee's attention at this time. That program
should be extended to cover ocean coastwide traffic. It now
applies to our noncontiguous trades and our Great Lakes trades.
It was used by Matson Navigation in the purchase of its four
container ships and was, I believe, one of the reasons that it
was able to purchase the final two ships without Title XI. It
is a program that is widely used, is enormously beneficial, not
well understood but a program that we should try and extend
now. Thank you.
Mr. Graykowski. Mr. Chairman, and I agree, and Mr.
Connaughton did ask the industry. He did have a caveat when he
sent the letter to the industry and said without costing any
money, but if we take that limitation off of it, I will tell
you what--I represent Aker Philadelphia Shipyard, and I am
involved with the Shipbuilders Council, and I think you will
hear this from Ms. Brown as well that the persistent and
chronic and very scary problem is labor, to me, losing guys,
men and women really, and it is both in numbers and it is
training, and I think there is a function--it is partly a
function of the cyclical nature of the business. A lot of the
folks that were the stable labor supply in the Gulf were
decimated by Katrina in a number of ways or disrupted and
either dispersed to other geographical regions or they got jobs
elsewhere, but I think on the labor side it is almost a ticking
time bomb. The average age at the shipyard in Philadelphia is
about 46, and you know, it seems to me that if this government
could put together a training program to address not only the
basic skills that Ms. Brown talked about but almost a
continuing education program--because training is not just a
one-day, one-time thing, and all of us, I think, in the
industry have our training programs, but there is no
comprehensive sort of umbrella organization, standards.
I have looked at the Employment and Training Administration
at Department of Labor (DOL), and I do not believe I can find
the word ``shipbuilding,'' and in a sense, welders are welders,
but in another sense, I think we should try to develop a
professional class of shipbuilders. We are doing it at Aker. We
have a four-year program, and we want to train the guys and
keep them for their whole lives, but I think there would be a
valuable investment in focusing on attracting and bringing
people in, and it is not just peculiar to shipbuilding. The
entire industrial base in this country is suffering sort of a
labor shift, but you know, that certainly comes to mind as an
area that would be very fruitful and profitable to put
together.
Mr. Taylor. This is a modification of a question posed by
Mr. O'Rourke. His question would be has anyone been able to
quantify the savings that resulted from the investments that
were made at Avondale and NASSCO as far as the reduced price to
the Navy for the ships that were built there. I would think
that that would be a powerful point to be made if anyone has
ever made--yes, ma'am.
Ms. Brown. Let me say, Mr. Chairman, I do not have those
figures here with me, but we will get back to you for the
record if I could, but could I also expand on that as you just
opened the question up that, other than Title XI, what could be
done to rebuild our shipyards, our Merchant Marine in this
country? I am going to go back to something that you know very
well, and it is how do you get more volume of ships into your
shipyards.
Mr. Bowman talked about not narrowing the field of giving a
priority category under Title XI. I think that, you know, we
need to look at that. There is a Jones Act. We need to hold
that. That is what Title XI can help to do, but if we are going
to expand the universe, if you look out internationally, there
are 2,000 ships every year being ordered, oceangoing ships. If
we could increase the percentage of our market share--and you
do not have to take a large part. We do not have to go back to
the 9 percent before the construction differential subsidy was
eliminated--but if we could get 4 percent, just think about how
many ships that would equate to of being built every year in
this country. But we are never going to capture that market
from standing still to get there unless there is a subsidy
program of some nature put into place so that we can attract
equal--the lowest price because the commercial market chases
the lowest priced bidder, and we have got to be able to have a
subsidized price to equal the Chinese cost because they are
dictating the market, and that is an unpopular thing to say,
but it is the reality of expanding the marketplace.
Mr. Taylor. Mr. Bowman.
Mr. Bowman. May I add to that and say--look, it is really
not rocket science. We have done it before, and here I may
sound a little apologetic, but if you go back to the 1970 act,
if we had had a coordinated program that involved a
construction differential subsidy to make the price of a ship
equivalent to the international market price, an operating
program, a guarantee program that financed the ship, and a tax
program that Mr. Cook alluded to today. That worked for 10
years, and in that time--I just happen to have some old data
with me--in 1969, we built 10 ships for the international trade
markets in the United States. Those programs built ships and
took up the slack when the military program was not in effect,
but now what happened.
In 1980, the Reagan Administration cut the connection with
the construction program. All of the yard capacity was
dedicated to military programs, and now that the military
programs are winding down, we do not have the mechanism in
place to penetrate the international market. So it can be done
if you want to. Maybe there is not enough money to do it, but--
--
Mr. Taylor. Mr. Bowman, the Chair has noted on previous
occasions the irony of the Reagan Administration's taking our
shipyards from some government dependence to total government
dependence----
Mr. Bowman. Precisely.
Mr. Taylor [continuing]. Lessening the dependence on the
taxpayer.
Mr. Raymond. Mr. Chairman, if I might add just one thing,
that is on the maritime security program, I believe if more
true U.S.-owned companies were participants in the MSP program
that the ability to build a common-sized vessel for the
international support of our fleets and for the Jones Act would
ultimately make the shipyards more efficient as well.
Mr. Taylor. I want to throw this open to the panel because,
again, I have been fortunate enough to serve for a while. I
know that there will be people--the Wall Street Journal comes
to mind; the Financial Times comes to mind; the Administration
comes to mind--that would say, ``Well, here they go again,''
and they undoubtedly will point to the American classic lies.
My memory, which is far from perfect, is that at the time that
that program was abandoned, which was shortly after 9/11,
people looked at a snapshot or this Administration looked at a
snapshot--and when I say ``snapshot,'' just for a matter of
months--of the downturn in the cruise ship industry, which had
been growing astronomically prior to that, and said this is not
a viable business deal. They not only chose to pull the plug on
it in addition to Mr. Zalpo's pulling the plug on it, but our
Nation still could have finished them, and if my memory is
correct, they sold the ships for scrap at a time when the price
of scrap steel was at rock bottom even with just--if they had
waited just a few years to sell them for scrap, the price would
have gone up dramatically, but it has always been my opinion
that if they had finished the ships then within two or three
years of the events of 9/11, the cruise ship industry would
have recovered, and they could have sold those ships almost for
the value of the cost of building them.
You are the experts. I would like to hear your thoughts on
that because that question is going to get asked, and I would
like to hear your answer to that question.
Mr. Cook. Well, Mr. Chairman--and all of us here on the
panel, I think, can agree--that those two ships are, in fact,
operating today in the Hawaiian Islands as cruise vessels. They
were sold abroad; they were completed abroad and then brought
back, and if that is not the proof of the pudding of your
proposition, I do not know what is.
Mr. Taylor. If my memory is correct, they were finished in
Germany----
Ms. Brown. Correct.
Mr. Taylor [continuing]. Which is not a low-wage nation.
Ms. Brown. No. They were towed--one was towed to Germany
for completion, and then the parts for the second one that were
sold to the same were taken also to Germany.
Mr. Taylor. Okay.
Mr. Larsen.
Mr. Larsen. Thank you, Mr. Chairman. Just a few points, one
point and one question. I want to clarify my comments as well.
Mr. Graykowski clarified the past history. I was only
trying to make a point about the reference to the Clinton
Administration because it is usually everything bad that
happened around here happened in the 1990's unless it helps
someone's argument, and my only point is whatever happened in
the 1990's happened in the 1990's. I do not care. We have a
problem now, and we have to be focusing on that problem.
Mr. Cook, I apologize I had to step out, but while I was
stepping out to meet with a constituent, you were just talking
about financing for shipping in the petroleum industry, and one
of the questions I had had earlier from Mr. Connaughton is, is
there a difference between and why is there a difference, if
there is, between financing shipbuilding in the petroleum
industry versus other elements of the shipping industry?
Mr. Cook. Well, there is an enormous difference, and there
are several reasons for it.
One is if you have vessel users in the petroleum industry
or investment grade credits. Whereas, our U.S. flag carriers in
our foreign and coastwide trades are generally not investment
grade credits.
The other element is that, in the petroleum industry, many
of the vessels are financed with long-term charters. I have
done petroleum financing now for over 30 years, and I was doing
financing in the mid-1970's in the petroleum industry without
Title XI, and if you look at the Aker Philadelphia transactions
that are being done now, the vessels that are being turned
out--the first four vessels that were turned out--are on
charter to Shell Oil Company and British Petroleum (BP). When
you have that sort of credit available and you have long-term
charters available, you do not need Title XI. When you are
building container ships and Ro/Ro's and serving an uncertain
market without long-term charters, you do.
Thank you.
Mr. Gottlieb. I agree with what Mr. Cook said.
Within the petroleum industry, the ultimate sponsors for
those vessels are the major oil companies. When the major oil
companies will contract for those vessels under long-term
contracts, whether it be three years or five years or seven
years, the financings are based on the strength of those oil
companies and those contracts.
Mr. Larsen. Is that function essentially kind of creating a
vertical integration because they are contracting for the ship,
itself, on a long-term basis as opposed to in the container
industry? In the container industry, the person shipping the
container does not own the ship as well usually.
Mr. Gottlieb. Well, the difference, sir, is the fact that
in the petroleum industry the trades are really point to point.
The oil is not where it needs to be. The oil coming out of the
ground is not where it is being refined. The oil where it is
being refined is not where it is being consumed. So these are
point-to-point type trades. They tend to be the contracts of
long-term charters. In a liner trade, as Mr. Raymond can say,
the ship leaves the dock every Tuesday at this time whether it
is full of containers or whether it is half full of containers
or whether there are no containers on it. So it is a whole
different kind of a trade with the economics supporting the
underlying asset. It is either by contract or by expectation. I
think that is really where the difference is. In the oil trade,
it is really just basically, they say, by contract with very
strong counterparties at the other end of the contract.
Mr. Larsen. Ms. Brown.
Ms. Brown. It gets back to the fact that it is not the
product that the vessel is carrying. It is the pockets, the
wealth of the owner-operator, to the money that is financed or
who has access to the financing of the product. Independent
tanker operators who are small, independent companies that do
not have a long-term charter with a major oil company are not
going to have the same difficulties getting financing in the
commercial market, just like a container ship operator. So it
really comes down to the strength, the financial strength, of
the owner, the buyer, that company, rather than the type of
vessel being financed.
Mr. Graykowski. The first deal--again, the voice of history
here. The first deal we did, as I recall--yes, probably the
first was American Heavy Lift, which was, as I recall, the
first company, oil transportation company--product tankers--
that was going to be eliminated and made extinct by OPA 90, and
we did a deal, an innovative deal in my view, and Avondale
Shipyard put four bodies on an existing power plant. The ships
are still in operation, are paid off, have continued to pay
off. The next tanker deal we did was with what is called the
Elliottson Corporation, which was going to be an export deal to
a very prominent Greek oil transportation company, through a
number of evolutions. One of the ships went to Mobil Oil.
Another went to--right now Sea-Bulk owns it. Those are Title XI
transactions.
As Ms. Brown alluded to, the market shifted, the oil
market. Back in the 1990's, there was a predominance of spot
trading, and very few--companies were not going long because
they could shop around, and you would get the best price out of
operators. That has slowly and finally flipped. So, in recent
years, more of the majors--Shell, BP, Chevron, and such--will
go long, and you can use that charter to finance construction
in the private market, but if you are operating in the spot
environment, I would have to--I mean I believe Title XI is a
lot more attractive financing than a commercial if you are on
the spot basis.
Mr. Larsen. Do you mean to say in the U.S. market?
Mr. Graykowski. Yes, sir. The Jones Act.
Mr. Larsen. Yes, the Jones Act.
Thank you, Mr. Chairman.
Mr. Taylor. The Chair recognizes the gentleman from
Maryland if he has any questions.
Mr. Bartlett. I want to apologize for my absence. Things
are not traditional on the floor today, and I did my 25th one-
hour on a problem which will involve you all probably more than
almost any other element of our society, and that is energy and
oil and so forth since we use a lot of it in our big ships, and
so forth. So I apologize for having to go to the floor to do
that.
Is it going to be feasible in the future to have enough
participants and a big enough program that there will be enough
assurance that we are not going to lose money on the guarantee?
Almost everywhere else--I am on the Committee on Small
Business. We have lots of loan guarantees in Small Business and
various programs in Small Business, and usually we are talking
about cutting the rate. We have pretty low rates to begin with,
but the recovery of those loans is so efficient that we are
talking about, gee, we need to cut the rate because this is not
supposed to be a money maker for the government. We are
supposed to help spread the risk, which is what these things
are supposed to do.
Is there a reasonable probability that we can have a big
enough base and we can supervise the risk so that this can be a
defensible program again?
Mr. Cook. Mr. Chairman and Mr. Bartlett, I can say that if
past history is a guide the answer is yes. The Title XI program
as administered during the 1970's and really right up until the
last ten years or so has been, by and large, a money maker for
the United States Government, and it should be. It is
essentially a mortgage insurance program. You purchased an
insurance policy. You paid the Maritime Administration a fee,
and that fee for many years was sufficient to pay for the
Administration of the program and to cover the defaults and to
return a profit to the government. To do that, you need volume.
It is hard to predict the future with volume, but we have a
situation where if we do not do something it is not going to
make money, and it perhaps may go away. If we put the program
back into operation, if we have leadership from this Congress,
we should be able to get a volume of transactions that will be
such that that program will not cost the taxpayers but will be
run at a profit.
Mr. Raymond. Mr. Congressman, if I could just add my
comments on that from my line of perspective. We are operating
16 vessels today. With our competition between Alexander &
Baldwin and the Saltchuk Group and Crowley, they have
approximately another 18 container ships, so that is about 34,
35 ships. There are only four of those that have been built
within the last 15 years. So there is a very defined market
there. The vessels that will have to replace those ships will
be used in the noncontiguous offshore trades serving Alaska,
Hawaii, Puerto Rico, and Guam. Those markets depend upon
efficient ocean transportation. We are their lifeline. Our
company alone carries about 37 percent of all of the cargo that
moves between the lower 48 States and Hawaii, Alaska and Puerto
Rico. So you could almost look at this business as a utility.
The difficulty in getting financing is that the cost of the
American ships is very high. For us to replace five ships today
would be on the order of magnitude almost equal to our market
capitalization. The issue comes out that if a commercial bank
were financing our ship and for whatever reason we were to
default, then they would only have two or three customers to go
to try to place those vessels, and they would not be fungible
on the international markets, as was pointed out earlier, so
the lending institution would take a heck of a hit, and that is
why the numbers of basis points that you pay for commercial
lending without Title XI adds up to significant dollars over
time when you are talking about a 25-year financing. When you
are talking about vessels that cost in the range of $125
million to $200 million and for the series that we are talking
about, there is a lot of money that the residents of Hawaii,
Puerto Rico, Alaska, and Guam and also the consumers in the
U.S. who are buying the products that are shipped from there
are going to have to pay for no good reason.
Mr. Bowman. Could I just add to that?
I think in order to get a true diverse profile, though, you
need to go beyond the Jones Act trades. I mean that is one of
the problems. In the past, we had a wide diversity because we
had penetration in the international shipping markets which was
made possible by the Construction Differential Subsidy Program.
Now, certainly, there is a wide market in the Jones Act, but it
still is limited American trade with, by international
standards, a small number of ships. You really have to try and
expand the shipping program, the shipbuilding program, beyond
the Jones Act and include the offshore services industries--it
is the same shipyards--and you have got to broaden the base and
the shipyards. The shipyards have to do some of their part,
too. They have got to address this cost issue because it has
been a problem we have struggled with, as I said, for 100
years, but as long as the ships are two and even more times as
expensive, you are not really going to get any penetration in
the international market.
Mr. Raymond. Mr. Chairman, on that point if I might add
just an observation. I was the Chief Operating Officer at
Sealand Service for about 12 years, and at the time that we
sold the company to the international piece, we were operating
about 110 ships. We had bought them all over the world. In my
view, there is absolutely no reason why American shipyards
cannot be competitive absent the issue of subsidies from
foreign governments that was pointed out, I believe, earlier.
What is going to be necessary, though, is for there to be a
stream of construction projects that build vessels of a like
kind and that enable the shipyards to apply technology in a way
that the foreign yards do. That is why when you went to Korea
you saw a Hyundai or a Hanjin building vessels in series. We
are building ships right now for an international trade that
are being built in 133 days from keeling to delivery. They are
the 30th, 31st and 34th vessels of that series, so they have it
down. It is like buying a suit off the rack. When somebody has
already built 1,000 of those, they have got the dimensions
right. The buttonholes are right. Whereas, if you go build one
of a kind, then you have a huge learning curve. You have the
risk during construction as well as the risk after construction
that we did not get it right, which makes it very difficult for
the shipyards.
I think that the best example of what the shipyards can do
in the U.S. is look at the automotive industry and look at what
happened when we partnered the U.S. manufacturers and the U.S.
labor with foreign entities that had it down, with the Toyotas,
with the Hyundais and others, that today are building cars in
the United States. We are building them in Marysville, Ohio,
and we are shipping cars out of Marysville and selling them in
Korea. There is no reason we cannot tackle that, but the answer
is going to be that you are going to have to apply the
techniques that they use in the international yards, partner
with labor to get that done, but be able to show labor a stream
of construction projects that, to them, makes sense.
Thank you, sir.
Mr. Bartlett. Mr. Raymond, thank you for your answer.
The chairman and I have gone to shipyards all over the
world--in Europe, in Asia and in this country--focusing on the
challenge just as you presented it, and the reason for my
question was, obviously, if the only commercial ships we ever
build are Jones Act ships, that is probably not going to be a
big enough base to justify this program, and we represent a
fourth of the world's economy, and we represent a tiny fraction
of the world's commercial shipbuilding, and if we can compete
with foreign--if we can compete in heavy equipment and if we
can compete in auto manufacturing, why can't we compete in
shipbuilding? I think we can, and I appreciate your counsel as
to the kinds of things we need to do to get there.
We went to the big yards. We went to Hyundai. Is it the
biggest in the world? Yes. I was stunned. They build their own
engines. You could live in one of those engines. They were
three stories high. You know, you have a big living room,
kitchen, dining room, and several bedrooms inside one of those
big engines, and I think--what?--40 percent of all of the
screws in the world are made there in Hyundai heavy industry,
and we hope that we can do something so that we can become
competitive, and for a large number of reasons we need to. That
is for national security reasons we need to do that, and I
think that this commercial shipbuilding, if we can exploit this
appropriately, will bring down the cost of our military ships,
and we have got to do that. Just everywhere we look there are
challenges in that, and we have got to do that, and if
everybody is focused on it, I think we can.
Mr. Chairman, there is something that we might explore, and
that is another hearing in which we have experts in who do not
have a vested interest so that we can get counsel as to whether
or not we ought to reestablish this Title XI program. We
certainly need the capability to build these ships, and if the
loan market out there will not make the loans without the
guarantees, then, you know, we have got to make the guarantees.
Mr. Taylor. Mr. Chairman, if you have a suggested list of
witnesses----
Mr. Bartlett. I will ask our panel if they have suggestions
of witnesses of whom nobody could argue they are honest
brokers.
Mr. Graykowski. Well, I am confused by--you know, you want
to hear from people who actually are involved in shipbuilding,
and I mean I have worked in a yard; I have been a lawyer, and I
have worked in the government, and that is a perspective. I
mean, am I biased? Yes, I am biased for U.S. shipbuilding, but
you know, there are a lot people who you could find out at OMB
who would have a distinctly different view than I do of this
program. I can assure you of that. They were there when I was
there at MARAD. So I do not know who the, quote, ``honest
brokers'' would be. I mean you have to accept the premise that
shipbuilding is important, essential, critical, and any other
adjective you want to say, to this country.
Mr. Bartlett. Congressional Research Service (CRS),
Government Information Office (GIO), as examples, and
obviously, we have to use our judgment because you can get
different stories, as many as you want.
Mr. Graykowski. But, Mr. Bartlett, I do not mean to quarrel
with you. It is just that in the policy world shipbuilding is
an anomaly, the Jones Act. There is not an economist in the
world or in this country who is going to tell you the Jones Act
is good, but the chairman knows it. I know it. Everybody here
knows it, not just because it is good for business, but it is
good for the country, but you know, you could have that type of
a debate, but you know, off the top of my head, I do not know
where you are going to find people who are not involved in the
shipbuilding industry or in the ship finance industry who will
sit here and say this is a good thing to do because it is good
for the country, the world, people or whatever.
Mr. Bartlett. I understand the Administration has zeroed
this out. If we are going to fight for it, we just need as much
support as we can in fighting for it.
Mr. Cook. Mr. Bartlett, I believe when you were out I made
part of my presentation, and I pointed out that I had gone to
my computer this morning and printed out a list of all of the
container ships and all of the Roll-on/Roll-off vessels that
have been built in this country since World War II, and what I
said after having reviewed that list was that, in terms of
Roll-on/Roll-off vessels, every vessel built in the United
States since World War II, except for vessels that were built
for the U.S. military, was financed with Title XI financing,
and when I looked at the container list, I found that every
vessel, every container ship that had been built in the United
States since World War II with the exception of two very recent
vessels from Matson Navigation, which has Alexander & Baldwin
as a parent that can provide parent company guarantees--every
one of those ships was built with Title XI financing. So while
I think it is very interesting that the Maritime Administrator
can talk about the availability of commercial financing, I do
not know where it is. Perhaps there is something secret that
these other people are unaware of.
Mr. Graykowski. Can I say just one other thing? I know I
have been talking more than anybody.
Mr. Bartlett, when I was at MARAD, we did 400 different
vessels. We financed 400 different types of vessels, and
sometimes people just think of big ships, which are important
and, frankly, great things to watch and be part of building,
but sort of the bread and butter of this program, in my view,
are all of the barge guys, guys in your district and along the
coast who are, in large part, family-owned companies who need
new equipment or they keep the old stuff going way longer than
they should or they are folks with catamarans; it is drill
rigs; it is oil service vessels. So, in terms of spreading the
risk, there were 80 projects in seven years, big yards, small
yards, big vessels, small vessels. The portfolio was spread,
and I really believe that the market here is sufficient, if you
include these types of vessels, to support the program and meet
your objectives of minimizing the risk.
Certainly, getting back to the export market, in fact, we
did export vessels and do today certain types--oil service
being a good example--and we did export deals under Title XI,
but the issue, as Mr. Taylor knows full well, of why we are
where we are as a shipbuilding industry and as a shipbuilding
nation, that is the subject of a long hearing and, in a sense,
a philosophical debate. There are a lot of problems that got us
where we are today, and it is going to take a lot of different
activities to get us out of the hole we are in today.
Mr. Bartlett. Well, we believe that the more ships our
country builds, the cheaper we will be able to get our military
ships. Anything that helps us build more ships we think moves
us down the right road.
Thank you, Mr. Chairman.
Mr. Taylor. Thank you, Mr. Bartlett.
I want to thank all of our panelists for being here. I hope
you know that we want to make this happen, and I hope--so my
last question would be--Ms. Brown was the only one to actually
throw a target figure before the committee when she said $60
million would create $1.2 billion worth of loan guarantees. I
feel like, with the cooperation of Mr. Bartlett, that that
would be an achievable goal coming out of this subcommittee.
My question is--and I would open it up to the other members
of the panel--is that a realistic goal to shoot for? Is that
something for which we know we would have to have the
cooperation of the Appropriations Committee as well? I would
like to open it up to your thoughts as to what that number
should be given the PAYGO rules of this Congress and of the
situation that exists.
Mr. Raymond. Mr. Chairman, one thing I would mention is I
do not know if $60 million is right or wrong. I think it is a
very, very significant number in terms of what that can
generate, but I believe we are talking about a multiyear
program here that is very essential for our company, and I know
for the other Jones Act carriers that they can talk to their
customers; they can talk to their investors and explain to them
that there is an ability to replace this fleet and also talk to
the U.S. military that there is an ability to replace this
fleet with the appropriate kinds of ships. So, you know, taking
advantage of a flash-in-the-pan program for 1 year versus 2, 3
or 4 years does not allow that stream of vessels of a like kind
to be planned for which translates into a tremendous benefit
for the shipyards so that they can gear up for a long-term plan
and get the economies to scale and be competitive perhaps on
other types of vessels.
Mr. Taylor. The other question I would pose to you is if
you were to adjudicate--well, if you were to dispense this
money, how would you do so in comparison to the ship
acquisition versus yard modernization, because the one thing
that the chairman's trips to Maersk and Hyundai left me with is
that at least of the American yards I have seen we are decades
behind them.
Mr. Raymond. I believe they go hand in hand, but I will
pass that to Ms. Brown.
Ms. Brown. May I just add?
Of the Title XI loan guarantees in the 1990's after your
shipbuilding initiative with Herb Bateman that initiated, there
were guarantees for shipyard modernization. The Avondale Steel
fabrication facility that they called the ``factory'' was
financed with Title XI. In NASSCO, there was a facility to
enhance pre-outfitting capability there. So, of Title XI, those
are the examples that I am personally aware of because of my
familiarity and of who I represent.
I will say that today, though, since those shipyards are no
longer independently owned, they probably would look to other--
they can still use Title XI, but I would say that they may
still look more internally to their corporations, but it is a
factor.
Mr. Taylor. Mr. Graykowski, to answer my own question,
should that discussion be left entirely to MARAD? Because my
heartburn is that MARAD is apparently not supportive of this
idea at all.
Mr. Graykowski. Number one, in terms of the amount of
money, Mr. Chairman, do not put a dollar into Title XI without
changing the way the applications and the Credit Council and
the other nonsense works, okay? Please, and that is a statement
against interest, you know, because I love the program, but do
not do it. I ask you.
Number two, originally back in the 1990's we funded it, at
least in part if not in whole--I cannot remember the exact
split--with 050 money, and I know that there are problems in
the DOD budget, but we crosswalked it over because of the
recognition of DOD, you know, the intersection of Navy
shipbuilding and this, so that was part of the funding.
Number three, in terms of Capital Expenditure (CAPEX), it
is a crying need as you have identified. Two years ago, in H.R.
3506, they passed the Small Shipyard Assistance Act, which is a
CAPEX program--Ted Stevens did it--which contains grants.
Grants would be a great way to do it because you can leverage
against it, but I think, given the way that MARAD sometimes
blows hot and cold, if you will, or is somewhat ambivalent at
times on where they are going on this program and the more
direction they receive from the Congress, perhaps that would be
better. I know I was responsive when I read legislation on
perhaps putting the split in, but you know, we need to leave
flexibility to the agency because we beg people for shipyard
modernization all the time. We got NASSCO. We got Avondale. I
did the deal with Dick Fortman, but not a lot of guys took
advantage of it at that time, and so the money would flow. So,
you know, I am a little leery of actually putting a wall and a
fence between the two.
Mr. Taylor. Okay. Mr. Gottlieb, Mr. Bowman and then you if
you do not mind, sir.
Mr. Bowman. Yes. I would like to take a little different
view.
I think, in today's PAYGO world you have so little
flexibility in terms of the money that you are not going to get
shipyard modernization unless they see a real market, unless
they see the throughput, the customer there to buy the ship. To
the extent you take this money and divide it among
modernization and throughput, you are not going to get enough
applicants, and the result is that the modernization is going
to be done but it will get done for the benefit of the Navy,
really, who will use the same facilities for the Navy.
Ms. Brown. It will not be there to build ships.
Mr. Bowman. Right. So I think a small amount of minimized
yard modernization because, as Ms. Brown says, people who see a
market--these people, the big shipyards, have plenty of
wherewithal to build the markets, but they have to see a
market.
Mr. Taylor. Mr. Gottlieb.
Mr. Gottlieb. Mr. Chairman, back to your question on the
numbers, $60 million is a lot of money, but in some of my
calculations--and maybe Mr. Raymond can help me here--I look at
the dry cargo fleet over the next 10 years or so, the Jones Act
dry cargo fleet, and I see 15 to 20 replacement vessels. If you
think that the average cost of that in today's dollars is $150
million, you are talking about a $3 billion requirement. $60
million really does not get you to $3 billion.
The other thing is I would get back to Ms. Brown.
Historically, the multiple factor for Title XI versus the
amount of subsidy was 20 to 1. We have not seen that for a
while, Mr. Chairman. As for the most recent program that was
approved by the Maritime Administration--the ferries for
Hawaii--the subsidy factor was a fraction of that 20 to 1.
Ms. Brown. That was because of the Credit Council.
Mr. Gottlieb. Well, that was because of the Credit Council,
and that was because of OMB. OMB came in with a new subsidy
calculation, as I understand it, and the multiple factor was in
single digits, not 20 to 1.
Mr. Taylor. Mr. Bartlett, the Chair recognizes in the
room--and I do not recognize everyone--but two experts in the
field, one being Mr. Ronald O'Rourke, who works with the
Congress, and Mr. Jerry Lamm, who is a shipbuilder, and I would
like, with your permission, to ask unanimous consent that they
be allowed to submit additional comments since we did not have
an opportunity to have them as a part of the record. Again, I
think what they have to say is worth hearing with your
approval. It would be for the record.
Mr. Bartlett, without objection?
Mr. Bartlett. Oh, absolutely.
Mr. Taylor. Okay.
Anything else? Again, we very much appreciate all of you
being here. We regret the late start, but I certainly think it
was worth hearing, and I very much appreciate your attendance.
The committee stands adjourned.
[Whereupon, at 4:25 p.m., the subcommittee was adjourned.]
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A P P E N D I X
March 15, 2007
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PREPARED STATEMENTS SUBMITTED FOR THE RECORD
March 15, 2007
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[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD
March 15, 2007
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QUESTIONS SUBMITTED BY MR. LARSEN
Mr. Larsen. How many Title XI loan guarantees are currently
outstanding?
Mr. Connaughton. 73.
Mr. Larsen. How many loan guarantees have been approved during the
Bush Administration?
Mr. Connaughton. 26.
Mr. Larsen. How much time is added on to review of Title XI loan
guarantees by Credit Council review? Before the Credit Council was
established, what was the average time for a Title XI loan guarantee
review and now that a Credit Council review is required, how much extra
time is added?
Mr. Connaughton. There is no ``average time'' for review of a Title
XI loan guarantee that would fairly represent the review process. Each
application for a guarantee can vary greatly, from one that is from an
established operator for a replacement vessel in an existing service to
one from a start-up company for a vessel involving new technology in a
new market. Clearly, the former will require far less time to review
than the latter. Such factors as market volatility and the operator's
financial condition also add to the review time of a particular
application. The speed with which the applicant responds to the
agency's requests for additional information is a further factor in the
review time. Each application is unique and there is no one amount of
processing time that can be said to be representative. There is only
one Title XI application that has undergone the Credit Council review
process and it was for a new operator with a new service. The Credit
Council review process is intended to accompany the Maritime
Administration's review process and should not add time.