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Testimony of Herschel T. Vinyard, Jr.

Before the Committee on Armed Forces
Special Oversight Panel on Merchant Marine

July 23, 2002

Good Morning. Thank you, Mr. Chairman, for holding this hearing and for your interest in the wellbeing of the U.S. shipyard industry. My name is Herschel Vinyard, and I am Vice President of Atlantic Marine Holding Company. Atlantic Marine is a privately held company that owns and operates shipbuilding and ship repair facilities in Jacksonville, Florida and Mobile, Alabama where we employ approximately 2,000 workers. Atlantic Marine in Jacksonville builds small and mid-sized state-of-the-art vessels and provides high quality commercial and Navy vessel repair. Our Alabama facilities build medium and large commercial ships and barges and as well as repair bluewater commercial vessels, cruise ships and vessels that service the offshore energy industry.

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Mr. Chairman, I am proud of the story that Atlantic Marine has to tell. Since the company was founded in 1964, we have built a reputation throughout the world for high quality workmanship, commitment to excellence and for our ability to deliver vessels on time. Atlantic Marine is currently building large 150,000-barrel articulated tug/barge units (ATBs) and is marketing even larger units with a capacity of approximately 250,000 barrels. Atlantic has also entered into a joint venture agreement with Samsung Heavy Industries and Conoco which will give us access to Samsung's large shuttle tanker design and building technology so that we can build shuttle tankers for Conoco and others to operate in the Gulf of Mexico. We plan to use the experience we've gained from building very large tank barges and the expertise obtained through the Samsung joint venture to enter the large commercial shipbuilding market.

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Atlantic Marine is not alone. There is a highly competitive shipbuilding industry in the U.S. today building small and mid-sized vessels such as workboats, barges, vessels that service the offshore energy industry, ferries and small cruise ships for commercial and government markets. The small to mid-sized shipyards are aggressive, eager and look forward to the opportunity to tackle larger projects.

Unfortunately, the state of the industry with regard to large commercial ship construction in the U.S. is not as bright. Since the United States unilaterally eliminated the Construction Differential Subsidy (CDS) program in 1981, we have seen America's share of the international shipbuilding market drop from 9.5 percent to less than 0.5 percent today. At the same time, America watched the Asian countries increase their subsidization rates and capture 83 percent of the international market share. European countries continue to subsidize their shipyards, but at rates lower than Asian countries. The European market share has plummeted from approximately 30 percent to less than 15 percent today.

U.S. shipyards have built only a handful of large self-propelled commercial vessels in the last twenty years, while shipyards in Korea, Japan and now China have built hundreds of large vessels. The result of this restructuring of the international marketplace has been the loss of our competitive edge in building large commercial vessels. Unless policies are enacted quickly to encourage a revitalization of large commercial shipbuilding and ship repair in the United States, America risks losing this capability forever. This loss would have dire consequences on our national security and on our ability to rebuild our aging domestic fleet at a time in our history when national security is an increasingly critical issue.

Ten or more U.S. shipyard facilities that were building large commercial ships in 1981 have closed their doors since the CDS program was eliminated. Total shipyard employment in the U.S. has dropped from 187,000 workers in 1981 to 91,000 workers last year. Today, there are 25 U.S. shipyards that have the facilities to build vessels greater than 400 feet in length. Of these 25 facilities, only six of them have recent experience in building commercial vessels of that size.

The large commercial ship repair industry in the U.S. is also in serious jeopardy. The U.S. reduced its Navy maintenance budgets and implemented government policies that discourage domestic repair. As a result, commercial ship repair jobs are moving overseas to heavily subsidized foreign shipyards that benefit from less stringent regulatory regimes, favorable exchange rates and cheap labor, which will force additional U.S. shipyards out of business. The situation is critical to our national security. America's entire commercial and naval ship repair base was needed to activate the ships in the Ready Reserve Fleet when the U.S. undertook Operation Desert Storm in 1991. We question whether we could meet a similar need today as America's ship repair capacity has been reduced significantly since 1991.

It will not be easy to revitalize the large commercial vessel construction and repair industry in the U.S. America must overcome 20 years of foreign shipyard subsidization and the construction experience that subsidization provided these shipyards. A 20 to 30-year commitment to shipbuilding by the governments of Korea and Japan have produced outstanding shipbuilding companies that serve an important segment of the world economy. In contrast, America scrambles from year to year to barely keep alive a program such as the Title XI loan guarantee program.

American shipyards also face, in most instances, much more stringent safety and environmental regulations than our foreign competitors. We are not opposed to sound safety and environmental regulations, but we must recognize that there are costs to implement and comply with those regulations that, in the global competitive picture, others don't face. Added to those challenges is the fact that our natural customer base - U.S.-flag operators – is declining in terms of numbers of operators and vessels due to the tax and labor cost advantages enjoyed by their foreign flag competition. U.S.-flag vessels now make up less than two percent of the overall world fleet, the lowest percentage in over a century.

Mr. Chairman, we believe that failure to enact long-term policies to encourage domestic commercial shipbuilding and repair in U.S. yards will lead to further shipyard closings and jeopardize our nation's ability to respond to national emergencies. The challenges are difficult, but they can be overcome by enacting realistic government policies that promote all segments of the maritime industry. We have several specific, cost-effective changes to government policies that should encourage the revitalization of the shipyard industry.

1. Maritime Security Program (MSP). Under the MSP, the Government contracts with owners of U.S.-flag commercial ships for service when needed for national emergencies or war. This program ensures that sufficient cargo carrying capacity is available to the U.S. Government by contracting with commercial ship operators for this service without having to fund the construction of a fleet of Government-owned vessels. The program serves a vital national security requirement, and we fully support its reauthorization. Nevertheless, the program does nothing to help maintain a healthy shipbuilding and repair industrial base - a national security requirement just as important as maintaining sufficient U.S.-flag vessels and merchant mariners We propose that the reauthorization of the MSP require that all nonemergency maintenance and repair on MSP ships be performed in U.S. yards and that contract payments to MSP operators be modified to meet the additional cost, if any, associated with the domestic repair requirement.

2. Title Xi Shipbuilding Loan Guarantee Program. The Title XI program, originally established in the Merchant Marine Act of 1936, and revitalized in 1993 under the National Shipbuilding Initiative provides government loan guarantees for vessel construction projects at terms more favorable than private lending institutions are able to offer without the guarantee. Financing is the critical variable the shipyard cannot, no matter how progressive, influence or control. Loan guarantees are offered for vessels built in U.S. yards for domestic use or for export. This program enables operators to extend their amortization schedule for up to 25 years, thereby reducing annual operating costs. Title XI loan guarantees have financed over $5 billion in vessel construction projects since 1993; however, recent problems caused in large part by the devastating economic impact on the travel industry by the September 11 attacks and the isolated opposition to funding for the program has jeopardized its future. This program can do much to help U.S.-flag operators to build vessels in U.S. yards; however, the program will never be fully successful until operators can rely on a steady stream of funding to ensure that funds for loan guarantees will be available when their shipbuilding projects mature and until the program is administered in a way that is consistent with procedures and policies used by commercial lending institutions.

3. Cargo Preference Program. Cargo Preference laws require that all or a portion of all government impelled cargo moving in international trade be transported on U.S.-flag vessels. U.S. cargo preference laws are similar to those of other countries and were implemented to help ensure that sufficient U.S.-flag sealift capacity and merchant mariners to operate them are available during times of crisis. Certainly, this program is vital to our national security but, like the current MSP, it does nothing to help maintain the shipyard industrial base. This could be easily modified by requiring that vessels built and/or repaired in the U.S. be given priority status when cargo preference contracts are awarded.

4. Capital Construction Fund (CCF). CCF was established to assist owners and operators of U.S.-flag vessels to accumulate the capital necessary to expand the U.S.-built, U.S.-flag fleet. Currently, only operators of U.S.-flag vessels in the international, Great Lakes and non-contiguous trades can deposit a percentage of a vessel's revenue into a tax deferred account for this purpose. CCF deposits on hand are estimated at $1.4 billion. The idea behind the CCF is sound; however, since the CCF was introduced, no new U.S.-flag vessels in the international trades have been built in the U.S. Congress can, with no government spending, extend eligibility for participation in the CCF to the construction of vessels to be operated in the domestic coastwise trade. This change would greatly enhance America's ability to add vessels to the U.S.-flag fleet and create alternatives to overcrowded rail and highway systems and jump start the lagging petroleum fleet replacement program mandated by the Oil Pollution Act of 1990. In addition, CCF should be changed to allow CCF deposits to pay for vessel repairs in U.S. yards. This modification would also add no additional cost to the Government and help maintain our ship repair industrial base.

5. Military Sealift Command (MSC). The MSC operates a fleet of container, fast sealift, breakbulk and heavy sealift ships used to supply the Armed Services all over the globe. MSC operates 68 active sealift ships, 34 of which were built in foreign shipyards. Moreover, much of the maintenance and repair on those vessels is performed in foreign shipyards that do not have to meet the same quality standards imposed by the U.S. Government on domestic shipyards. Modification of current MSC contracting procedures would provide additional repair opportunities for U.S. ship repair yards and encourage construction of MSC ships in U.S. yards. For example, MSC has awarded to operators with foreign-built ships, short-term contracts with options to extend the contract term. These short-term contracts preclude the possibility of an operator from getting the financing to build in the U.S. a new ship, as lending institutions will not finance new vessel construction without long-term operating contracts. MSC can provide vessel operators with a guaranteed steady stream of income needed to obtain the necessary ship construction financing by awarding long-term operating contracts.

Mr. Chairman, the suggestions above are modest in scope. I am not here this morning asking for government subsidization of the commercial shipyard industry. I am asking only that Government policies recognize that a healthy commercial shipyard industry is an important element of both our economy and national security, and that maritime policies be conceived with all segments of the maritime industry in mind. Short term, piecemeal policies that benefit one segment or another of the maritime industry have proved insufficient to revitalize our blue water, oceangoing industry engaged in the international marketplace. A long-term maritime commitment by the United States is needed to enable the private sector to develop the human capital and physical infrastructure necessary to serve the interests of this great nation.

We are quickly reaching a critical stage. The remaining U.S.-built vessels in our international fleet are approaching the end of their useful lives and the size of that fleet is shrinking every year. The only way to reverse this trend is to enact policies that enable and encourage newly constructed U.S.-flag vessels to compete in the international marketplace and replace aging vessels, including the single hull tank vessel fleet, in our domestic trades. Certainly, the Maritime Security Program should be a cornerstone of those policies, but MSP alone will not ensure the future of the U.S. maritime industry. Policies that enable American shipyards to reenter the large commercial shipbuilding market and maintain our capacity to repair large commercial and Navy ships are also important.

In closing, Mr. Chairman, I want to express my appreciation to you and your staff for your unwavering support for the domestic shipyard industry and the maritime industry in general and to express my commitment to work with Congress, the Administration, vessel operators and maritime labor to enact realistic and comprehensive maritime policy aimed at promoting all segments of the industry.

I will be happy to answer any questions.

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