This building program would foster insertion of world-class commercial technologies and manufacturing processes into naval shipbuilding programs. These commercial practices, combined with the quality production would drive down the cost of naval ships.

The lease payments from U.S. operators would be deposited into the National Defense Sealift Fund of Department of Defense to defray the up-front acquisition of the future MSP eligible ships. The contractual terms and conditions of the voluntary intermodal sealift agreement of DOD would still apply to the U.S. operators participating in this program.

Absent this type of new program, a simple renewal of the existing MSP, under its existing construct or even with the MSP ship owner proposed changes, would place the Department of Defense at the mercy of foreign ship owners to take whatever ship types those owners make available to DOD-regardless of the military utility of those ships.

This was the case when the MSP program was enacted in back in 1996, and MSP owners have already indicated that they plan to bring, for example, 5,000 Twenty-foot Equivalent Unit (TEU) containerships into a reauthorized program. While TRANSCOM may question the military usefulness of such a large containership, they would have no say in the matter.

DOD has normally needed ships that can enter a majority of the world's ports, rather than just those few that can handle these extra large ships. DOD has also wanted the increased flexibility by having ships that can transit the Panama Canal. Maybe TRANSCOM will determine that it requires some very large ships, but TRANSCOM should at least have a say in that decision.

DOD also requires car carriers, or Ro/Ro's. However, neither Maersk nor Neptune Orient Lines, for example, own any Ro/Ro's participating in the MSP program today.

TRANSCOM has a requirement for tankers. Yet, there are no tankers in the MSP program.

The mix of ships that TRANSCOM needs, while still ensuring a competitive commercial market for these ships, will be achieved under the program that we propose.

I recognize that there needs to be a balance between military usefulness and commercial viability, because these ships will have to compete in the international commercial shipping business in peacetime. I am confident that this balance can be struck with our proposal.

In closing, let me emphasize that our industry supports an enhanced Maritime Security Program. We support a 20-year annual per ship operating subsidy to offset the higher costs associated with the U.S. merchant mariners and doing business under the laws of the United States.

But a program that does not provide for a fleet of American-built ships with military utility, under the ownership and control of America, fails to meet the sovereign security requirements of the United States. A program that lacks these critical elements cannot be called a Maritime Security Program.

Will the program we propose increase the price? Yes, it will. However, 95 percent of the military cargo and supplies for our forward deployed troops will continue to have to be moved by sea.

Given this indisputable fact, this is a small price, which America can no longer ignore if the U.S. needs a merchant marine and shipbuilding industry.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Vortmann can be found in the Appendix on page 147.]

Mr. HUNTER. Thank you, Mr. Vortmann.

We are going to go down the line here and listen to the proceeding proposals for revitalizing our shipbuilding industry. But I want to allow my colleagues if you have any particular questions for Mr. Vortmann to understand the concept of what he is recommending and that is with the U.S. building ships, the Department of Defense is basically owning the ships, deemed lessor of the ships, the Hertz Rent-a-Ship Agency and the operators, leasing from DOD, from the U.S. Government thereby giving, DOD, obviously, the right to retrieve those ships at any point for military use.

That is your basic position. And you understand that maybe we can get into it later, but we have a number of statutes and statutes interpretations, which make it very difficult to do any type of creative financing with respect to DOD owning ships. It is probably going to have to be cash up front, just like the rest of our appropriations, which is going to be a fairly big piece of change that has to be dealt with.

Does anybody have any questions?

Mr. SAXTON. Mr. Chairman, since you brought up the subject, I guess I would just—the notion of a government/private partnership is very appealing. The most difficult part of that partnership for us is trying to figure out how politically we get the up front money. That is hard.

Now, we had the same problem in military housing. We solved it, or we are solving it in a similar way, with a private/public partnership. But the government is not going to own the houses. We are going to pay rent and I am just curious to know whether or not you have looked at any other concepts in terms of how the structure or partnership so that the difficult or almost impossible task of coming up with a meaningful amount of money up front is just as difficult for us-I am sure it is difficult for the private sector as well. But there are financing mechanisms available to the private sector that are not available to us.

And so, I guess I would just put that thought into the mix at this point and maybe we can talk about it when the other panelists are finished.

Mr. HUNTER. I thank the gentleman.

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

STATEMENT OF HERSCHEL VINYARD, VICE PRESIDENT,
ATLANTIC MARINE HOLDING COMPANY

Mr. VINYARD. Thank you, Mr. Chairman, for holding this very important hearing on the shipbuilding industry. My name is Herschel Vinyard. I am vice president of the Atlantic Marine Holding Company. We own and operate shipyards in Jacksonville, Florida and Mobile, Alabama. We have about 2,000 shipyard workers.

Unfortunately, the large commercial ship construction and repair industry is in trouble. America's share of the international shipbuilding market is less than .5 percent. The Asian shipyards, in contrast, have captured over 83 percent of that world market.

A number of U.S. shipyards have closed their doors in the last 20 years. During that period, total shipyard employment has fallen by more than half. It took every shipyard worker and every shipyard to get our Ready Reserve Fleet (RRF) ready in 1991 for the Persian Gulf War and I am not sure we are up to the challenge today. We have just had such a dissipation of the shipyard workers and the shipyards themselves that it would be a daunting challenge.

It will certainly not be easy to revitalize the U.S. shipyard industry. The governments of Korea and Japan made commitments 30 years ago that they wanted to be the world leader in this economic segment.

And so, the shipyards in Korea and Japan now really have athey are world leaders in this market. They have benefited from significant subsidies over this long, extended period of time.

Mr. Chairman, as you have seen in my written statement, we have five specific what we view to be cost effective methods and changes in government policies that we believe will improve the shipyard industry in the United States. The first, as you know, MSP is up for reauthorization. We certainly support the reauthorization in that program.

Unfortunately, it does nothing to help the shipyard industrial base, which we view as to be an important national security requirement as having a sufficient number of merchant mariners and sufficient ship operators.

Mr. HUNTER. Incidentally, Herschel, on that point, I do not want to interrupt you from your prepared statement, but I will anyway. It is always fun to interrupt you, Herschel.

I do not know if you saw the little shootout we had the other day. We had MSP participants, the so-called "middlemen" the American holding companies or the operating companies with the foreign ownership who feel that they, by golly, ought to have a direct control of the operations.

So, we have quite a little there was a little conflict there, a little difference in philosophy. I heard Dick give a very strong statement with respect to the need to have America control these ships.

Do you folks have any position on that on whether or not we should have American companies operating the MSP program, even if it requires injecting a so-called "middleman" into the situation, which has American citizenship?

Mr. VINYARD. Mr. Chairman, I guess I have not fully focused on that particular issue since we do not have a direct dog in that hunt but I think having

Mr. HUNTER. Fight.

Mr. VINYARD. Yes, sir. I know that. But I think American operators; American merchant mariners and American companies certainly give us the most protection that we can get.

Mr. HUNTER. Okay. Please proceed.

Mr. VINYARD. On the MSP program, what we would do in this reauthorization or what we would recommend that we do is that

we require all non-emergency maintenance and repair on MSP ships be performed in the United States. We think that will bring some of that work back to U.S. shipyards.

Mr. HUNTER. Now, let me ask you. That is not presently the case?

Mr. VINYARD. No, sir.

Mr. HUNTER. Okay.

Mr. VINYARD. They are free and often do go to foreign shipyards. Our second proposal, you all are familiar with the Title XI shipbuilding loan guarantee program. And it has been moderately successful, but quite honestly, I do not think it is going to meet its full potential until we have a long term funding stream for Title XI.

Before a ship owner makes a decision whether or not to build a new ship, there is a multiyear decision making process and they do their economic modeling. If they cannot count on Title XI from year to year, they cannot then factor in the extended amortization schedule that Title XI allows and if they cannot do that, that may mean that they ultimately decide not to build the ship.

So, what we would propose would be a long-term funding schedule for Title XI so we can really make the best use of those dollars. Number three, the cargo preference program, as you know, cargo preference requires some portion of government impelled cargo to be shipped on U.S. flagships. The cargo preference laws like MSP are to help ensure that we have a sufficient number of merchant mariners and a sufficient number of ships. But also, like MSP, cargo preference does not do anything for the shipyards.

What we would propose is that cargo preference be modified so that ships built in the U.S. and/or repaired in the U.S. be given priority status when the U.S. Government is awarding cargo preference contracts.

Mr. HUNTER. Now, aren't there a number of cargo preference niches that presently do exist?

Mr. VINYARD. Yes, sir. But there is no priority, like I said, for ships built in the United States and/or repaired. Many of these ships, while they are getting payment from the U.S. Government, they go overseas for their repairs.

Mr. HUNTER. I got you.

Mr. VINYARD. The fourth specific item we have is capital construction fund (CCF). CCF, as it is known, is a bit like 401(k) for ship owners, where they are able to take their pre-tax profits and put it into an account to build ships in the United States.

Unfortunately, the ships are limited in the types of trades they are able to compete in. What we would propose is that CCF be expanded where, for example, if a ship owner wants to use money out of their own account to build a coastwise ship, which we need right now, both for open 90 reasons and to relieve congestion on the interstates and railways.

Let them use their own money in these accounts to build coastwise ships in the United States. And we would also recommend that the program be changed to where they can use CCF dollars to have repairs done in the U.S.

For example, if a ship owner wants to do a $50 million conversion in the United States, let them tap into their own CCF accounts and use those dollars to spend the money in the United

States. The ship owners have already put $1.4 billion into these accounts.

I think that would unleash a significant investment in U.S. shipyards. One of the really good things about this CCF change is the government does not have to pay out any additional money. These are the ship owners' accounts, so it does not tax the Treasury.

Finally, Mr. Chairman, MSP operates 68 active sealift ships. Half were built in foreign shipyards. Moreover, much of the maintenance and repair on these MSP ships are done overseas, so we have our U.S. tax dollars going to repair U.S. Government ships in foreign shipyards that are competing with us, foreign shipyards that are getting subsidies from their governments.

Surely there is a way that we can alter MSP's contracting procedure policies where we can spend those tax dollars at home rather than overseas.

Mr. Chairman, I am not asking for a government subsidy of shipyards, but I would like to point out that the short term piecemeal policies that are in place today are clearly not working. We are falling farther and farther behind. We need a long-term commitment by the government to the maritime industry.

Thank you very much for your time, Mr. Chairman.

[The prepared statement of Mr. Vinyard can be found in the Appendix on page 159.]

Mr. HUNTER. Okay. Thank you, Mr. Vinyard.

We are going to move on to Mr. McAlear, but if anybody has any questions about the general concept that Mr. Vinyard laid out, just go right ahead and ask him.

Yes, sir?

Mr. JONES. I would like to ask Mr. Vinyard, which country is the leading country as far as these ships being sent to be repaired. Which country gets the most business?

Mr. VINYARD. I would say probably Korea and China. China is actually an emerging repair country that is competing against us as well as the Singapore shipyards.

Mr. HUNTER. Who owns the yards there?

Mr. VORTMANN. The government. The Chinese government owns essentially every yard in China.

up.

Mr. JONES. The communist Chinese government.

Mr. Chairman, a real quick one on that and then I have a follow

Mr. HUNTER. Go right ahead.

Mr. JONES. Basically, in 1989, our trade deficit with China was about $6 billion. Today we owe China $84 billion. I just want to state that for the record. I could not agree more about that if we do not start trying to do more to help the American worker-in particular, I want to compliment and commend you and I am sorry, Mr. Vortmann, that I was late getting here to hear you speak.

But if we as a Congress on a bipartisan basis start looking atthis is a national security issue. I am just really dismayed and outraged that we continue to turn our back on the American companies and also to the American workers. I would look forward to working with you and this committee and the full Armed Services Committee to see what we can do to bring some parity, if you will,