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unrestrictive laws, little or no tax liability, minimal vessel registration fees, and many other operating advantages. We would therefore be forced to leave the U.S.-flag fleet, thus depriving the U.S. armed forces of RO-RO and other sealift capability that it absolutely requires. And Central Gulf and Waterman would not be alone. Other U.S.-flag carriers are similarly situated and would be unable to maintain their own vessels under the U.S.-flag without the support of the MSP program. Without MSP, TRANSCOM would be faced with a significant and irreplaceable gap in the sealift capability it needs in times of war or national emergency.

In addition to our national defense, the importance of a U.S.-flag fleet to protect our economic interest in international commerce is equally well-established. America has a strong tradition of participation in international trade, and the presence of a U.S.-flag merchant fleet is vital to the world-wide commercial interests of U.S. companies. Without the participation of U.S.-flag vessels to ensure fair and balanced competition, foreign carriers would be able to exert control over the price of U.S. imports and exports. It is the U.S.-flag fleet that helps American businesses to maintain cquitable participation in international commerce, and that flcct itself depends very heavily on the MSP program to maintain its presence in the foreign trade of the U.S.

However, as currently authorized, the MSP program will expire at the end of Fiscal Year 2005 on September 30, 2005. We are only three years away from the potential end of the MSP program, and we must work expeditiously together to ensure that the program is reauthorized in the immediate future to provide U.S.-flag companies with the ability to continue to recapitalize their vessel fleets and to address other economic issues to secure the long-term stability and operation of such companies. Mr. Chairman, I am pleased with your earlier floor statement where you also recognized the need to quickly "move forward with the reauthorization of the MSP" in order to "provide the [maritime] industry with the timely assurance they need that the MSP program will continue beyond the year 2005." General Robertson emphasized the same urgency when he forthrightly stated in his Senate Seapower Subcommittee testimony that "we need to get on with reauthorization [of the MSP] and probably sooner, rather than later.” We all agree -- it is imperative that we act now to reauthorize, as well as strengthen, the MSP program that is so critical to the military and economic security of the United States.

Mr. Chairman, during the past year, Central Gulf and Waterman have been working closely with TRANSCOM, MarAd, other MSP participants and maritime labor unions in the effort to develop a legislative proposal to reauthorize the MSP program that would preserve and enhance the Maritime Security Fleet of the United States. I am very pleased to report that we have reached a strong consensus on the statutory provisions that are required to ensure the viability of the MSP program. To that end, we strongly support an extension of the MSP program for a period of at least 20 years. This extension would give investors and lending institutions more confidence to provide the funds necessary for the replacement of vessels and the expansion of the U.S.-flag fleet. Additionally, we urge the expansion of the MSP fleet to at least 60 militarily-useful vessels. This will bolster the U.S. sealift capability while providing a greater base of employment for American merchant mariners. We further propose that each vessel in the MSP program would be eligible to receive $3.5 million in the first year of the extended program, with annual inflationary adjustments

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thereafter, to more appropriately compensate vessel owners and operators for the increased costs of maintaining vessels under the U.S.-flag.

A complete overview of the provisions that should be included in a reauthorized MSP program are as follows:

Encourage private lending institutions to invest in U.S.-flag vessel operations: It is proposed that the MSP program be extended for a period of twenty years, i.e., to run from October 1, 2005, to September 30, 2025. Financial institutions and the maritime business community require long-term certainty when making capital investment and other economic decisions, especially when the vessel assets involved in such decisions have a lifespan frequently in excess of 20 years. Financial certainty and extended vessel operations require the assured existence of the MSP program for at least a 20-year period.

Enhance the economic and national security benefits to the United States resulting from the MSP program, and provide existing MSP program participants with an opportunity to participate in or increase their participation in the MSP: It is proposed that the MSP program be expanded to authorize 13 additional privately-owned, militarilyuseful United States-flag commercial vessels, providing first priority for the additional 13 MSP operating agreements to "section 2" citizens of the United States. It is clear to TRANSCOM, MarAd and MSP participants that the increasing sealift requirements of the United States military can only be met through an expansion of the MSP program to at least 60 militarily-useful cargo vessels.

Retain the current priority preference for section 2 United States citizen companies for certain purposes: It is proposed that all additional MSP operating agreements, and any other operating agreements which would have reverted to MarAd for any reason, be offered and awarded pursuant to the following priority system: "section 2" citizens have a first priority, followed by "documentation" citizens who have entered into a binding Special Security Agreement with the Department of Defense.

Authorize an MSP payment that better reflects the cost of doing business under the United States-flag resulting from government imposed rules, regulations, and tax obligations: It is proposed that, consistent with all existing operational requirements and limitations, each vessel in the MSP program would be eligible to receive $3.5 million in the first year of the extended program, with that amount to be adjusted annually by the increase in an appropriate and acceptable pricing index beginning with Fiscal Year 2004. The current annual MSP payments of $2.1 million for each participating militarily-useful vessel do not adequately address the differences in operating and other costs between U.S.-flag and foreign flag carriers. Furthermore, the payments have never been adjusted on an annual basis to address the ever increasing operating costs for U.S.-flag vessels. In his testimony before the Senate Seapower Subcommittee, General Robertson, on behalf of TRANSCOM, forcefully stated that "the MSP program as it is currently structured in my view does not adequately

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compensate the carriers who get the MSP funding for what MSP was designed for. In other words, the per ship stipend I think has outlived its value, inflation has outstripped its value, and it needs to be adjusted." Accordingly, increased MSP operating payments are required to partially offset the higher costs of operating vessels under the U.S.-flag.

Increase MSP payments as soon as possible: For purposes of the proposed increased MSP payment, the effective date would be October 1, 2002 – making the increased payment applicable for the remaining duration of existing MSP contracts. Again, the current annual MSP payments for each participating militarily-useful vessel do not adequately compensate for the higher operating and other costs and fees imposed on Central Gulf, Waterman and other U.S.-flag carriers.

Permit parties to an operating agreement to withdraw from the MSP before the end of the program: Because it is proposed that the MSP program be extended for a period of 20 years, it is possible that a contractor to an MSP operating agreement may be obligated to, or decide, to withdraw from the MSP prior to the end of that authorized 20-year time period. The legislative proposal would permit early termination following appropriate notice to the Maritime Administration, and would require the contractor to assist MarAd in identifying applicants to replace the contractor in the MSP.

Grant documentation citizens with a Special Security Agreement the right to operate vessels participating in the MSP program on September 30, 2005 directly under any extended MSP: It is proposed that consistent with all existing age and other eligibility requirements for MSP vessels contained in the existing law, each of the 47 United States-flag vessels in the MSP program as of September 30, 2005 would be automatically enrolled in the reauthorized program provided the entity applying for the MSP operating agreement in the extended program is, as of October 1, 2005, a "section 2" United States citizen or a "documentation" citizen with a Special Security Agreement with the Department of Defense. Accordingly, for the specific, limited purpose of awarding operating agreements under the extended program for the existing 47 ships in the MSP program, this legislative proposal would treat "section 2" and “documentation” citizen companies with Special Security Agreements as the same with equal and first priority for those vessels, while reserving first priority for "section 2" companies for the new 13 additional vessels in the MSP program.

Allow certain proposed changes to take effect prior to October 1, 2005: For most purposes in the reauthorization of the MSP program, the effective date would be October 1, 2005. However, the proposed legislation would permit the transfer of operating agreements from a "section 2” citizen to a “documentation” citizen with a Special Security Agreement prior to October 1, 2005, but only to the extent consistent with existing commercial contracts or as otherwise agreed by the parties to a commercial contract.

Repeal section 804 of the Merchant Marine Act, 1936: Consistent with the modification in eligibility requirements noted above, section 804 of the Merchant Marine Act, 1936, would be repealed.

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To maintain existing collective bargaining relationships: The legislative proposal would require that, in order to be eligible for an operating agreement, an applicant must agree to maintain the collective bargaining relationships that are in effect for the vessel on the date of enactment of the legislation. Specific terms, conditions or requirements of any such agreement would not necessarily be maintained. U.S.-flag carriers agree that it is important to maintain stability for the manning of the 47 vessels that currently participate in the MSP


Mr. Chairman, as you can see from this review of proposed legislative provisions for reauthorization of the MSP program, hard choices have been made to address the issues and concerns of U.S.-flag carriers, maritime labor and other interested parties. As two of the leading "section 2" citizen companies in the U.S.-flag fleet, Central Gulf and Waterman are keenly aware of, and sensitive to, the associated MSP citizenship issues that have been the focus of much discussion and debate. The legislative compromise discussed above provides for the necessary U.S. citizenship involvement for participation in the MSP program, and further ensures that at least 60 active, militarily useful, privately-owned U.S.-flag vessels will be readily available to the Department of Defense for the expeditious movement of military equipment and other materiel in time of war or national emergency.

Mr. Chairman, I very much look forward to working closely with you on this matter of vital importance to our national and economic security. Thank you for allowing me to appear before you today.

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Vice President for Government Affairs, APL Limited

Executive Vice President, American Automar, Inc.

I am Roy G. Bowman, Vice President for Government Affairs of APL Limited (“APL”) and Executive Vice President of American Automar, Inc. (“Automar"). APL Limited and American Automar are members of the NOL Group which, through American President Lines, Ltd. and APL Co. Pte. Ltd., performs worldwide container transportation services under the APL brand name, with a fleet of over 70 container vessels and an extensive network of terminals and intermodal systems. American Automar, Inc., which was acquired by NOL in May 2001, provides strategic assistance to the U.S. Department of Defense (“DOD”) by the operation for the Military Sealift Command ("MSC") of four pre-positioning vessels, three of which are owned by Automar subsidiaries and one of which is owned by the Government and operated by an Automar subsidiary. Automar has chartered vessels to the Military Sealift Command for nearly 20 years.

APL is uniquely qualified to comment on the subject of today's hearings, the reauthorization of the Maritime Security Program ("MSP"). American President Lines, Ltd. can trace its history of U.S.-flag service in the U.S. foreign trades to the mid-19th century. It was one of the original operating-differential subsidy (“ODS”) contractors under the Merchant Marine Act, 1936, and performed extensive U.S.-flag service under an ODS contract until 1997. It currently employs in its services 11 modern U.S.-flag container vessels -- nine of them subject to an MSP Operating Agreement, and all of them enrolled in the VISA (Voluntary Intermodal Sealift Agreement) program. As a VISA participant, American President Lines, Ltd. not only commits its U.S.-flag vessels to meet national defense contingency requirements, but also its associated intermodal systems and equipment, terminal facilities, intermodal and management

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