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Mr. VORTMANN. We do not have a specific quantification because we are awaiting TRANSCOM's definition of precisely the types of ships they would like in the fleet that we would expect that in a few weeks and we would be pleased to submit that when we dollarize our estimates on what the capital costs would be for those ships.

But as a rough ballpark estimate, if we are considering a fleet of 40 ships that would be acquired, say, over an eight year time period, we would be looking at the government having to buy those ships for somewhere between $5 billion and $6 billion that would be spread out over the eight year authorization/appropriation period.

Then when those ships are delivered to the commercial operators, they would commence annual payments that would flow back into DOD, into the receiver fund that could be used then to underwrite part of the cost for the subsequent year's new ship acquisitions.

Mr. ALLEN. And it is the international bareboat charter rate for a comparable vessel. How much does that rate fluctuate? Is it a fairly stable rate from year to year? Does it fluctuate depending on economic conditions?

Mr. VORTMANN. It fluctuates dramatically, but our intent is to be able have a rate such that the operators who would prefer to be able to go to China or Korea and buy a ship at an extremely low price, a subsidized price, effectively, that that charter rate would reflect that current market price for a new building.

That would be effectively what they are paying to get the ship from the U.S. shipyard. The difference between that and what it cost the U.S. shipyard to build that ship is, in essence, what the government is going to have to fund into the DOD.

Mr. ALLEN. And when you say that DOD would get back about half of the amount, are you saying it would get back about half of the cost of construction over the 20 years?

Mr. VORTMANN. That is correct.

Mr. ALLEN. So, taking interest costs out of the picture, these payments would be about half of the initial cost of construction.

Okay. The second question, obviously, the same point of view. How do we get the best deal? How many of your shipyards do you think would be interested in competing for construction of these ships?

Mr. VORTMANN. I mentioned that we really have eight shipyards that are capable of building large ocean going ships. And I think all but two of them would be very aggressively interested-the two I excluded, one is Electric Boat, which specializes in nuclear submarines. I doubt whether they would be or not and I question whether the destroyer builder in your state would be interested. They might well. They have certainly participated in years gone by. I think many of the shipyards who have retrenched out of the commercial shipbuilding business because a lack of a market, if they see that market there, they will refacilitize and actively join in that.

Mr. ALLEN. Okay. Good.

You, in your testimony you said that this program you expected would ultimately reduce the cost of naval shipbuilding simply be

cause the yards would be, you know, operating at a higher level and there would inevitably be savings. Is there any way can you think of any way to quantify those savings or is that one of those areas where we have to believe, and I do, by the way.

Mr. VORTMANN. We are attempting to quantify that now. We would be pleased to submit it. But I think that it is a very, very significant factor and it is not a simple issue. Everybody's mind immediately goes to the idea that if we can increase the volume in the yards, that we will reduce the overhead costs and therefore there will be a savings on the naval ships that are rebuilt in those yards. And that is true.

In my personal opinion, that is not the most significant thing. The most significant thing is going to come from the improvements in productivity that comes from world-class technology. It is the commercial shipyards around the world that lead shipbuilding technology, not military yards.

And our country's military yards are not benefiting from that because we do not participate in that. I build the same tanker in my yard that is built in Korea and in China and they can do it for lower man-hours.

As Mr. Vinyard has already expressed, they do that because they receive the benefits of subsidies for many years now and they have become proficient. We need to bring that technology into our yards. We cannot do it just focusing on naval new buildings.

If we can get commercial buildings of a sizeable volume in our yard, we can drive down that productivity curve and that savings is probably going to be greater to the Navy than the overhead savings. You will get the benefit of both. It can be very significant.

Mr. ALLEN. Mr. Vortmann, I have one more question for you. As you know, the previous hearing was all about the section two citizen requirement. I wondered if ASA has a position on what we were hearing at our last panel.

Mr. VORTMANN. We very much do. We believe they should be U.S. citizens, period.

Mr. ALLEN. Mr. Chairman, I will defer to others.

Mr. HUNTER. Okay. Well, thank you.

Mr. Saxton.

Mr. SAXTON. Mr. Chairman, it seems to me that we are talking about two sets of circumstances here the short term set of circumstances and a longer term set of circumstances.

The hearing last week was about MSP and it seems to me that those are a set of issues that we need to deal with, recognizing that it is a short term set of issues and how to refurbish our fleet, an American owned fleet is quite a different set of issues, wouldn't you agree, Mr. Vortmann?


Mr. SAXTON. And so, to the extent that last week's hearing dwelt on some of these same issues, it is just as important, but in some respects, a different set of issues.

In some of the issues that we are talking about focusing on today, there are two factors in these issues that I would just like to focus on. The first is cost and the second is financing. I think that is what this conversation is really about. The first-the cost of building ships is a particular problem to us simply because

American costs are higher than they are in the countries that compete with us.

We have costs of doing business that the Chinese do not have, for example. We buy insurance in our yards, don't we? I do not know whether the Chinese do or not, but in a government owned yard, they probably do not.

Mr. VORTMANN. That is right. They do not need it.

Mr. SAXTON. The cost of raw materials is probably higher here— steel.

Mr. VORTMANN. Absolutely.

Mr. SAXTON. And the cost of labor is higher here, because we enjoy a higher standard of living and our workers make more. So, cost is a factor, a set of factors and we probably cannot do a lot about that. Would you agree?

Mr. VORTMANN. I would agree it is very difficult to bridge the wage gap, for example. Our wages are eight times what the Chinese shipyard worker earns today.

Mr. SAXTON. Right. So, the set of factors that come under the category of costs are kind of fixed. So, let's recognize that up front.

The second set of factors, however, in dealing with Americanrebuilding our capability to build ships in America are really about financing. And who is going to pay the cost of that financing. Is it the American taxpayers? Is it the ratepayers who pay rates to ship on American ships? Or is it the shipbuilders. I think that is where we really need to concentrate on how we are going to finance these ships.

Now, I like your idea about having basically government owned ships and having them leased to shipping companies. I wish I could sit here and say we can get that done. It is a hard task and frankly, I want to point out two examples of needs that we have for national security where we were not able to do that and we opted for another method.

One is in military housing. I have already mentioned that. We have a shortage of military housing that is extremely serious. I am chairman of the military construction subcommittee and for the last seven or eight years, we have tried hard to find ways to come to grips with it. But the volume of cash that we need to fix military housing through appropriated funds proved to be impossible.

So, we formed a partnership with the private sector. The private sector basically is going to build the houses and we are going to pay rent out of an account called "base housing allowance". So, we hope that is going to work.

The second example is in airlift, actually tankers. We are, as you probably have heard, are in the process of making a deal with Boeing to lease a large number of 767s-Mr. Chairman, I think, 767s? Mr. HUNTER. Close enough for government work.

Mr. SAXTON. Whatever they are these big airplanes with spouts on the back-because we could not finance them up front through the appropriations process.

Now, I am almost sure that with your proposal, which I like and you know, I am sure the chairman likes it too, because we are two of the guys around here, all of us on this subcommittee are people who care a lot about national security and that is why we are here.

But the realistic assessment-my realistic assessment of getting, as you said, $6 billion over eight years is going to be hard to do. And so, I think we ought to look at this financing situation and see if there are some other options where we can leverage the capabilities the private sector has that we do not have and find ways to do construction differentials or lease differentials or something where we can truly be partners in solving this financing problem. Have you considered any other options other than having us put the money up front?

Mr. VORTMANN. We are starting to look at different options. Your suggestion is a very good one. If we can creatively combine the notion of this concept we are proposing today with some of the previous techniques that have been used—a build in charter concept that was used many years ago-if we can bring that back and marry those two concepts together, I think we can come very close to the concepts that you are talking about, for example, in the housing market.

Mr. SAXTON. The housing market was a little easier because we had some tangible assets that we could use to leverage the construction. But I look forward to working with all of you.

Herschel, do you have any thoughts on these?

Mr. VINYARD. Just following along with what Mr. McAlear said and Mr. Vortmann-another option is this graduated payment under MSP-essentially have a commercial owner construct the ship and then the government would be able to have some elevated level of payment under the MSP program for U.S. built ships. That may be a way that the U.S. Government can help abridge that price gap between U.S. prices and overseas prices.

Mr. MCALEAR. Mr. Congressman, I would just reiterate that under my suggestion is not so much that we are putting all the money up front. It is the differential in the cost.

We can leverage the expertise of the private ownership to maximize the financing ability of that company, combining a number of other programs that can really significantly reduce the costs, I believe of the vessel for an operator, and then paying the difference I mean, I am just thinking if you are looking at like over a period of eight years, just a quick calculation-a period of eight years, 24 ships, we are talking less than a half a billion dollars-less than $200 million as the differential in costs, in capital costs-quick calculations I have to do a lot more work in that particular area.

But it is putting the burden on the owner, the particular owner and operator who has the expertise to come up with the innovative financial solutions that they are trying to do today.

Let me just talk a little about the make a comment about the cost, as you indicated. Yes, the cost of labor is more here. The cost of materials is more, but it should not be significantly more. A lot of work has to be done by our industry to reduce the cost of materials, to develop a supply base here in the United States, a maritime supply base. Part of the reason the cost of materials are a lot more right now is we do not have a U.S. marine qualified supplier base. A lot of material is bought overseas.

We need a foster, a relationship between foreign companies and U.S. companies to work together to develop a local supplier base

to support them, the marine industry, to narrow the gap of materials. There should not be a gap in materials in that regard.

Mr. HUNTER. Will the gentleman yield for a second on that point. Could you give some examples on components of the maritime supply base?

Mr. MCALEAR. Well, one main component would be a slow speed diesel engine. They are not built in the United States at all. But, they are sold throughout the world through licensees. There are two major slow speed engine manufacturers who supply 100 percent of the diesel engines throughout the world. Different companies in different countries

Mr. HUNTER. Well, we are probably talking about reinventing the wheel on that one, right.

Mr. MCALEAR. No, we are not going to reinvent the wheel. However, there are licensee provisions that some of these manufactures have that do not allow foreign countries to compete and sell into the United States. You have to buy it through the corporate head office who sets the price and you have no control over that. That is the problem.

Mr. SAXTON. How do you get around that?

Mr. MCALEAR. Well, I got around it at Avondale once, and I am getting around it at Kvaerner Philadelphia Shipyard by not buying a diesel engine. I buy a drive train.

Mr. HUNTER. A what?

Mr. MCALEAR. I buy a drive train. I buy a propeller and a shaft and a bearing and everything attached to it and something on the end to make it all go around in a circle. And then the I am buying a drive train off of a middleman, not an engine off of a licensee. There are ways you can get around that.

Mr. HUNTER. Have you ever thought about running for Congress?
Mr. MCALEAR. Not yet, Congressman.

Mr. HUNTER. I do not have any other questions at this point.
Mr. Taylor.

Mr. TAYLOR. Just to be clear. I am puzzled. I thought I had visited a very large diesel engine factory on the outskirts of Chicago in Wisconsin by the name of Kohler.

Mr. MCALEAR. Medium speed diesels. They are not slow speed. Mr. TAYLOR. Well, they are good enough for our Amphibious Assault Ships (LHDs). I have a little trouble with someone saying they are not good enough to propel a commercial ship. It sounds like someone is trying to skirt the "Build in America" laws.

Mr. MCALEAR. No, I am not saying they are not good enough for American ships. I am saying the majority of the commercial vessels; the commercial operators that you are talking about today all drive their vessels with slow speed diesels, not medium speed diesels for operating costs.

Mr. TAYLOR. You understand it sounds like someone is trying to skirt "Made in America" laws.

Mr. HUNTER. I think it is a different technology.

Mr. MCALEAR. It is.

Mr. TAYLOR. A diesel is a diesel. Some of them spin a little faster than others, but the big difference is in the type of fuel.

Mr. HUNTER. What he is saying is the ones that spin faster cost a lot more to run.

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