[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
                              ----------                              

                        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

                              ----------                              

                  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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             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.

                                  
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