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so that we can get some of these jobs back to the American taxpayer.

I am offended by what I have heard today, quite frankly.

Mr. HUNTER. Well, Mr. Jones, we are going to be working to put a package together hopefully to address exactly what our gentlemen are talking about.

Anybody else have any questions on clarifying the basics of Mr. Vinyard's proposal here? We are going to go back over and let everybody ask questions, but it is a little bit complex to have the three proposals put out unless you kind of understand the thrust of where they are going.

Yes, go right ahead, Mr. Crenshaw.

Mr. CRENSHAW. When you were talking about mandatory doing repairs, I mean, have you thought about mandatory having them constructed here.

Mr. VINYARD. Certainly that would be the best benefit for our new construction yards, yes, sir.

Mr. CRENSHAW. What would be wrong with that? Mr. VINYARD. Well, I guess the primary issue would be cost, which ultimately falls back to Congress' court.

Mr. CRENSHAW. Have you ever done a comparison of either the repairs or the construction from time to time, how much more it might cost?

Mr. VINYARD. Well, we have to understand that both in Korea and Japan, they have, really, a double whammy that shipyards are facing. One, they are getting day to day subsidization, but the fact that they have had these subsidies for 30 years, they have real good and efficient at building ships.

There was an announcement this weekend that Japan's order book for this quarter is 447 ships. I do not know if that many ships have been built in the United States in 20 years, 40 years. I do not know.

So, the answer is, there will be it will cost more to build them in the United States and I do not have an exact figure on that. Maybe Mr. Vortmann and Mr. McAlear.

Mr. CRENSHAW. I just think, Mr. Chairman, I mean, if we are looking at this proposal to kind of deal with repairs on a mandatory basis, we ought to think about the merits of actually building some of these ships.

Mr. HUNTER. The gentleman makes a good point, but I think the thrust of Mr. Vinyard's last statement is to the effect that to reverse this decline, there is going to be a little up front pay, which

, is probably the greatest fear in American politics is up front pay. And it is going to cost a little money.

We are going to get to that when we go back on our questions here, we are going to get to the cost, because we are going to have to address that.

Are you finished, Mr. Vinyard?
Mr. VINYARD. Yes, sir.

Mr. HUNTER. Okay. Thank you very much. Thanks for a great presentation. Mr. McAlear.

STATEMENT OF RONALD MCALEAR, PRESIDENT, KVAERNER

PHILADELPHIA SHIPYARD, INC. Mr. MCALEAR. Mr. Chairman, members of the committee, I also want to thank you for this opportunity to appear before you today to present my thoughts on the reauthorization of the MSP.

I am president and CEO of Kvaerner Philadelphia Shipyard, the newest and the most technologically advanced shipyard in the United States. We are really the only shipyard capable of building large commercial vessels and we are exclusively focused on commercial construction.

So, our entire future is based upon the investment we have made, the work force we have created and our ability to attract and satisfy commercial customers.

I support the concept of MSP, both as a shipbuilder and a former merchant mariner. I also see this as an essential component of our national and economic security.

Frankly, if we do not maintain a program like MSP and other similar programs, I think the consequences will be felt for generations to come in ways we cannot foresee today.

I believe we are at a crossroads and to me, I think the decision is fairly easy as compared to the alternative, which is to allow the maritime industry to continue its decades long slide into oblivion and to threaten our national security even further.

I think the operators made a mistake in not reaching out to the U.S. shipbuilding industry when they tried to come up with a new MSP. I fear that some of the proponents of the reauthorization overlooked the fact that the real shipbuilding industry is a real critical part of the maritime industry in the United States.

Our industry strongly supported the original MSP legislation and that the current law contains provisions which give a preference to U.S. built vessels participating in the MSP, but as I mentioned later, we need to strengthen that preference.

It is true. Costs of vessels in the United States cost more for a lot of valid reasons. In this way, however, shipbuilders are no different from the U.S. flag commercial flag vessel operators whose costs are also far above those of their foreign flag competitors.

Everybody in the maritime industry faces the same problems of cost differentials and foreign subsidies. The crucial difference is between U.S. flag operators and shipbuilders are one, the degree of support rendered by foreign governments, two, the fact our industry has effectively been out of the commercial business since the abrupt termination of the construction differential program in the early 1980s. It has not been funded since then.

And three, the mere inescapable fact that we simply cannot reflag our shipyards in order to survive and continue in business. We either make it on our own facilities or we do not. We really have no other options.

I recognize, certainly, that we need to improve our productivity and we have made progress to that end. But, as we talked about just a second ago with Mr. Vinyard, how can anyone expect us to become more competitive with our foreign shipbuilders when our own U.S. flag international liner companies, who are seeking the reauthorization of MSP, have not placed an order for any vessel in the last 20 years in the United States. Not one.

As I look ahead, unless we do something to change it, we in the shipbuilding industry do not have any assurances of consistent fleet replacement orders from the U.S. flag operators. Consequently, we are never going to have the opportunity to further reduce costs through series construction and continuous building of vessels. That is where you learn and that is where you increase your productivity.

Here are several ideas that I would like you to consider, which I believe would create shipbuilding opportunities in the United States, two which apply to the MSP reauthorization directly and others which help the U.S. shipbuilders more generally.

First, I suggest that we continue and strengthen the preference for the U.S. built vessels found in Section 652(0)(4) of the current law. Section 652(p) of the current law also contains a notice provision to U.S. shipbuilders before MSP operators can contract for new vessels in a foreign shipyard.

Mr. HUNTER. Now, what is it that you recommend, in substance here?

Mr. MCALEAR. Well, I think we need to strengthen this—as far as 652, we need to strengthen the issue where the U.S. shipbuilders given notice provision do not just call up and say, “Hey, I am going to contract in a foreign yard. Give me a price tomorrow". They need to be able to work with us in order to try to put a deal together in recommending a stronger, longer period of notification.

Mr. HUNTER. A consultative

Mr. McALEAR. A consultative notification and discussion. Too many times, we get caught into the situation where we find out that they have been working with a foreign shipyard for 30 days or 45 days and they give us a short period of time to come up with a price. And that is not a way to put a program together and a deal together that can be competitive. I think we need to strengthen those.

I think, second, I would suggest that we consider coupling a U.S. built preference with a larger MSP payment for a U.S. built vessel to take into account the difference between the capital cost of a U.S. built vessel and a foreign built vessel.

It would seem to me that if we combined statutory preference for U.S. built vessels, a higher MSP payment for the MSP U.S. built vessel, capital construction fund tax benefits and Title XI guarantees, this would significantly reduce the net cost of the vessel for the operator and would provide good jobs for American citizens.

It would help revitalize an important national security industry and it would give us a chance to get an order book that we can get our productivity in line and get it down by building a series of vessels.

Mr. HUNTER. Okay. Now, you realize that in previous panels that we have had, we have a proposal to increase the rate per ship from $2.1 million to, I believe, $3.5 million.

Mr. McALEAR. It is a coveted difference in operating costs, I understand.

Mr. HUNTER. Well, that is the labor cost, but that is the payment, that is the MSP payment that we are going to be making if that proposal should be adopted. We are going to be asking the ap

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propriators who are relevant to this process to come up withespecially if we increase the number of ships under that title from some 67 close to 100. We are looking at several hundred million dollars now in that program without additional dollars being paid.

Your recommendation is that some additional dollars be paid to mitigate the increased cost of constructing the ships in America.

Mr. McALEAR. And taking out the difference in the capitalized costs, the payment is over a 20 or 30-year period.

Mr. HUNTER. But you understand that this burden has already been previous panels have proposed that it goes up from a little under 100 to an excess of 200. We are putting a few saddles on this horse.

Mr. McALEAR. I understand that.
Mr. HUNTER. Okay. Please proceed.

Mr. MCALEAR. I believe, third, the third point I would like to make in support of what Mr. Vinyard said, I believe the CCF program should be open to domestic operators who desire to build vessels in the United States. I think that would be a good program and a good opportunity.

Fourth, I believe that the Jones Act is indispensable and I think everybody here also is indispensable to our survival as shipbuilders. I know, Mr. Chairman, you are a supporter of the Jones Act. I thank you for that, and I just want to make the point that we need to continue to work together to prevent any weakness of the U.S. bill provisions in the Jones Act requirement.

Fifth and finally, I believe that the continuing battle over funding for Title XI really should stop. We have to end that. We need a stable Title XI program so operators can depend on a program with certainty.

Mr. Chairman, I believe that we are truly one industry, similar to what Mr. Vortmann said and Mr. Vinyard said. I would urge that we approach this matter in a way that ensures all parts of this industry-operators, shipbuilders, ship repairers, labor alike are supported. In this way, this is the way our country has operated for many years. The Merchant Marine Act of 1936 is explicit in citing shipyards along with labor and operators as co-equal parts of the maritime industry and I see no reason why we should change that today.

Thank you for letting me give my comments today. I appreciate it.

[The prepared statement of Mr. McAlear can be found in the Appendix on page 164.]

Mr. HUNTER. Thank you, Mr. McAlear. I appreciate it. I agree with one major point that you made here at the end which is everybody is going to have to work together on this. You heard—components that you mentioned have been divided.

I think there is always a tendency, just as there are in politics, to try to cut the deal for your particular sector and perhaps in the long run, by not being united with the other sectors end up disserving the long term interests, whether it is labor, operators or build

ers.

So, we all have to work together. That is when we have to be consistent—“Buy American” position. I have admonished for example, shipbuilders in the United States about going to Mexico with certain component construction. I remind them of their latest "Buy American” speech with respect to shipbuilding. But that philosophy, I think, has to tie us all together.

Hopefully we can put together a package that is going to carry some of this load.

Mr. Allen, you got here just a touch late. I apologize for not letting you make your opening statement. Why don't you lead off with any questions or any comments you would like to make? STATEMENT OF HON. TOM ALLEN, A REPRESENTATIVE FROM

MAINE, RANKING MEMBER, SPECIAL OVERSIGHT PANEL ON THE MERCHANT MARINE

Mr. ALLEN. I would be glad to. My apologies. Walter Jones and I got caught up in our 8 meeting and did not notice the time was going by.

I would like to submit my opening statement for the record.

Mr. Vortmann, I have you have an interesting proposal and I am trying to—I am going to ask you to—flesh it out is the wrong metaphor, but taking it as far as you can with some of the numbers.

As I understand it, what you are saying is your proposal would involve an upfront cost to the Federal Government that basically would fund the construction of these ships and that the costs would be paid back in one way or another through the lease payments.

Can you help me with the math? Have you developed your proposal enough to be able to say, is the savings to the operator, to the shipyard, the interest costs on the capital, is it more than that? I mean, how can you can you give us some more precise cost estimates?

I am trying to think of the impact to the Federal budget. What kind of—if DOD essentially up fronts the cost for these vessels, will the entire cost be paid back. If so, over what period of time, if not, to what extent will it be paid back, that sort of thing? And I do not know if your proposal is advanced enough to give us that information, but that is what I am interested in.

[The prepared statement of Mr. Allen can be found in the Appendix on page 146.]

Mr. VORTMANN. I think it is a very good question and let me clarify a couple of points. The concept is that DOD would effectively buy the ship. The commercial operator is going to spec out that ship to get what they want as long as it meets the requirements of the military.

But the government would buy that ship and the operator would lease that ship from the government over 20 years. The commercial operator would lease that at an international price, which is lower by at least half of what the government would have to buy the ship in a U.S. yard.

So, the commercial operator will not totally reimburse the government over that 20-year life.

Mr. ALLEN. Okay. That was my question, because you—let me find it here in the testimony.

Mr. HUNTER. The government is the financial institution here. They are the owner of the ship and they lease it to the private sector.

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