to the U.S. company at higher prices; it can make lease arrangements with the U.S. company for its foreign owned terminals at higher prices; it can make logistics agreements for the U.S. company with the parent and, it can make agency agreements with the branch offices of the parent. These are examples of the benefits that inure to the benefit of the foreign parent

Mr. TAYLOR. Mr. Davis you talked about 12 vessels being taken out of the fleet in the past couple of years. You said some were scrapped, some were reflagged. What was the ratio?

Mr. DAVIS. In my statement to the Panel, I mentioned that since January of this year I have seen 12 vessels leave the American flag, either to be reflagged foreign or scrapped and, that MEBA officers served aboard all twelve of those vessels. It now appears, upon further research, that all the reflagged vessels were destined for the scrap yard. Regardless of the final disposition of the vessels, such a loss of maritime capability is unacceptable for a nation faced with global challenges and responsibilities-even more so in light of September 11th and the on-going war on terrorism. I appreciate your question regarding the ratio of ships scrapped versus reflagged. Below are the details of the vessels that have left the U.S. flag fleet:

*Dates are approximate based on notices received from the U.S. Department of Transportation, Maritime Administration.

In addition to the original 12 vessels that I mentioned in my statement to the Panel, that have left the U.S. flag and were sold foreign for ultimate scrapping, I received notification just last week that an additional two vessels are also destined for the "bone yard" in the later part of July. These vessels are as follows:

July 19

MORMAC STAR, Mormac Tankers, Inc.

July 25

MARINE DUVAL, Marine Personnel & Provisioning, Inc.

scrapped scrapped

These 14 vessels represent 67 billets that approximately 170 MEBA officers relied upon in any given year for employment. This is a substantial loss to the members of my union and America's merchant marine.

COMMERCIAL SHIPBUILDING AND THE MARITIME SECURITY PROGRAM

HOUSE OF REPRESENTATIVES,
COMMITTEE ON ARMED SERVICES,

SPECIAL OVERSIGHT PANEL ON THE MERCHANT MARINE,

Washington, DC, Tuesday, July 23, 2002.

The special oversight panel met, pursuant to call, at 9:02 a.m., in room 2212, Rayburn House Office Building, Hon. Duncan Hunter (chairman of the panel) presiding.

OPENING STATEMENT OF HON. DUNCAN HUNTER, A REPRESENTATIVE FROM CALIFORNIA, CHAIRMAN, SPECIAL OVERSIGHT PANEL ON THE MERCHANT MARINE

Mr. HUNTER. The hearing will come to order. My opening remarks will be brief. This is the second in a series of hearings, which the panel will hold on the reauthorization of the Maritime Security Program (MSP).

Last week we heard from witnesses representing the ship owners, maritime labor and the so-called "section two citizens". If we learned anything last week, we learned that we have a very difficult task ahead of us.

This week we will receive testimony from the shipbuilding components within this industry. Judging from a review of their testimony, we will have a replay of last week's hearing. I am particularly interested in getting the best cost estimates of each of the disparate proposals that will be presented today.

I have also noted that several of the witnesses today have made comments on needed changes to the tax laws. I hope to hear more on these topics today.

As many of you know, I have been developing a proposal to address this issue that has developed, in part, from discussions with other members of this panel. I hope to be in a position to introduce this legislation ideally as a bipartisan effort after the break.

In my opinion, reauthorization and modification of the current maritime security program is only one step in a series of required changes. At the end of the day, we will need to develop a program that is affordable and one that this Administration can get behind and support.

As I said last week, we intend to continue these hearings into the fall, at which time we will get the views and requirements from the ultimate users, Transportation Command (TRANSCOM). If we cannot design a program that meets and satisfies a discernable military requirement, we will not get the support of the Administration. I think that is fairly clear.

Before I recognize the distinguished ranking member of this panel, I want to ask a unanimous consent that a letter dated July 19, 2002 from Andy Abbott, representing the International Brotherhood of Boilers-of Boilermakers, Iron Shipbuilders, Blacksmiths, Forgers and Helpers be entered into the record. Mr. Abbott was invited to testify before the panel today, but was scheduled to be out of town.

Without objection, we will take that into the record.

[The information referred to can be found in the Appendix on page 175.]

At this time, I want to recognize my distinguished colleague from Mississippi, Mr. Taylor, for any remarks he might want to make. [The prepared statement of Mr. Hunter can be found in the Appendix on page 143.]

STATEMENT OF HON. GENE TAYLOR, A REPRESENTATIVE FROM MISSISSIPPI

Mr. TAYLOR. Thank you, Mr. Chairman. I was not expecting to give the opening statement. I thought Mr. Allen would be here. Thank you.

I want to tell you, I really appreciate you having these hearings. Last week's hearings, quite honestly, left me with more questions than answers. I thought that the points that you raised about foreign ownership of these ships and the fact that ships-companies that we are paying to participate in the Maritime Security Program have other ships that are calling on places like Iraq and Iran that the president has identified as two of the countries that are part of the axis of evil.

That is disturbing. And although they will protest, well, it is a different ship; it is still the same. I think it is a very fair question of the American taxpayers to ask, should we be subsidizing these companies. Would we not be better served investing our ships that are built in America, owned by Americans, and operated by American crews.

I did hear what maritime labor had to say, but again, for the long run and the best interests of our nation, I have some very, very grave concerns that came out of last week's hearing, so I am looking forward to today's.

Mr. HUNTER. Well, thank you, Mr. Taylor.

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

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

So, gentlemen, thank you very much for being with us. Thank you for your leadership in the shipbuilding industry and, Dick, the floor is yours.

STATEMENT OF RICHARD VORTMANN, PRESIDENT, NATIONAL STEEL AND SHIPBUILDING, CHAIRMAN, AMERICAN SHIP. BUILDING ASSOCIATION

Mr. VORTMANN. Thank you, Mr. Chairman and members of the panel. I certainly appreciate the opportunity to address you today. I am speaking in my capacity as chairman of the American Shipbuilding Association or the ASA. I appreciate the opportunity to present our industry's recommendations to strengthen America's national security, our merchant marine and the maritime industry. The American Shipbuilding Association, or ASA represents the six largest shipbuilders in the United States. We build large oceangoing commercial ships, as well as all of the capital ships for the United States Navy. ASA also represents 22 major companies engaged in the manufacture of ship systems and components.

Unfortunately, as you heard last week, the United States is at serious risk of not having a merchant marine engaged in international commerce in the future. Our merchant marine, and the maritime industry in the United States is dying.

This death is analogous to a patient afflicted with cancer where each segment of the industry grows weaker over time, until gradually, we are no more. It is past time for all segments of the maritime industry to come together to rebuild our merchant marine and the industries that support this merchant marine. This cannot be accomplished, however, without the help of the United States government.

While I strongly believe that it is in the national security interest of our government to have a strong merchant marine and maritime industry, it is not what I believe that matters. It is what you in Congress, and what the Administration thinks and believes that matters.

Should you determine that it is in our national security interest to have a commercial fleet of militarily useful ships-owned, built, crewed, and controlled by Americans-to serve as a military auxiliary in times of war and national emergency, a financial investment will be required.

A simple band-aid, like the extension of the existing Maritime Security Program or the changes the MSP ship owners recommend, will neither save nor foster an American merchant marine to meet our nation's sovereign military requirements in time of war and national emergency.

As this chart over here to my right and your left demonstrates, in 1980, the U.S. merchant marine fleet engaged in international commerce numbered 165 American-owned, American-built, and American-controlled ships, employing some 13,000 American mari

ners.

Today, the active fleet numbers 45 ships, employing only 2,600 mariners. Similarly, back in 1980 there were 22 shipyards engaged in the construction of oceangoing commercial and Navy ships employing some 140,000 people. Today, there are just eight shipyards employing 59,000 people.

Today, 99 percent of the ships in the MSP fleet are foreign-built, and 87 percent are foreign-owned. It is just a matter of time until there will be only two-and quite possibly-just one company left

in this fleet. These companies are Neptune Orient Lines of Singapore and Maersk of Denmark.

The current MSP program has not achieved the intended objectives. By all measurements, the U.S. merchant marine is worse off today than it was 10 to 20 years ago.

If Congress reauthorizes the existing MSP program, the Department of Defense will have no say in the types of ships these companies enroll in the MSP program. They may have little or no military utility, and there will be no assurance that when the going gets tough that these ships will be available to the Department of Defense (DOD).

To address these serious deficiencies in the Maritime Security Program, we propose that the Department of Defense pay for the design and construction of ships over a multi-year construction period. The general types, tonnage, and number of each ship type would be identified by the transportation command, in consultation with the Maritime Administration (MARAD), to meet DOD sustainment lift requirements.

Under this program, DOD would request proposals annually from U.S. citizen ship operators for commercial ships meeting the general description and functionality required by DOD.

The U.S. citizen operator would enter into a contractual agreement with DOD, based on the design selected by the operator, to lease the commercial vessel over a 20-year period. DOD would then pay for the construction of that ship in a U.S. shipyard. Lease payments by the operator to DOD would commence on the date of the delivery of the vessel.

The lease payments to DOD would be based on the international bareboat charter rate for a comparable vessel. Lease payments to DOD could be made on a monthly basis. While the contractual length of the lease would be for 20 years, the contract could either be at a fixed rate for those 20 years, or alternatively, it could provide for an annual adjustment of the lease payment to reflect any increase or decrease in international charter rates.

We believe this program is a win-win-win for the commercial U.S. ship operators, for DOD, for the U.S. crews, and for the U.S. shipbuilders. U.S. ship operators, which are financially hard pressed to invest in new ships-no matter where they are builtare particularly benefited in that they would have access to ships at competitive international prices, without having to finance the up-front capital cost.

Under this program, the Department of Defense would own the ships thereby ensuring their utility and availability in times of emergency. This program would strengthen the U.S. defense shipbuilding and repair industrial base, and create thousands of longterm jobs for skilled craftsmen essential to building both commercial and Navy ships.

While DOĎ would have to finance the construction of the fleet, it would realize savings in the costs of naval ships. Shipbuilding generated by this program would enable us to achieve series production in our shipyards and our supplier base. Increased production would drive down the unit cost of ships and ship systems under this program as our work force becomes more efficient with each ship of the same design we produce.