[Senate Hearing 106-1113]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1113
REAUTHORIZATION OF THE U.S. MARITIME ADMINISTRATION
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MAY 16, 2000
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Republican Staff Director
Martha P. Allbright, Republican General Counsel
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
C O N T E N T S
----------
Page
Hearing held on May 16, 2000..................................... 1
Prepared statement of Senator Cleland............................ 8
Statement of Senator Gorton...................................... 49
Prepared statement of Senator Hollings........................... 6
Prepared statement of Senator Inouye............................. 7
Statement of Senator Kerry....................................... 47
Statement of Senator McCain...................................... 1
Prepared statement........................................... 3
Prepared Statement of Senator Snowe.............................. 5
Statement of Senator Stevens..................................... 4
Witnesses
DeCarli, Raymond J., Deputy Inspector General, U.S. Department of
Transportation................................................. 16
Prepared statement........................................... 19
Hart, Jr., Hon. Clyde J., Maritime Administrator, U.S. Department
of Transportation.............................................. 8
Prepared statement........................................... 11
Holder, VADM Gordon S., USN, Commander, Military Sealift Command,
Washington Navy Yard........................................... 37
Prepared statement........................................... 39
Appendix
Responses to written questions submitted by Hon. John McCain to:
Raymond J. DeCarli........................................... 61
Clyde J. Hart, Jr............................................ 63
Response to written questions submitted by Hon. Max Cleland to:
Clyde J. Hart, Jr............................................ 86
Response to written questions submitted by Hon. Ernest F.
Hollings to:
Clyde J. Hart, Jr............................................ 75
REAUTHORIZATION OF THE U.S. MARITIME ADMINISTRATION
----------
TUESDAY, MAY 16, 2000
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:30 a.m. in room
SR-253, Russell Senate Office Building, Hon. John McCain,
Chairman of the Committee, presiding.
Staff members assigned to this hearing: Rob Freeman,
Republican Professional Staff Member; and Carl Bentzel,
Democratic Senior Counsel.
OPENING STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
The Chairman. This hearing will come to order. Today the
Committee meets in order to fulfill its oversight role of the
U.S. Maritime Administration, MARAD. As MARAD celebrates its
50th year, I want to thank all MARAD employees, past and
present, for their dedication to our nation's Merchant Marines.
Today, we will hear testimony from three witnesses on MARAD's
past performance, as well as issues facing its future. Our
nation's maritime operations face many challenges in the world
economy. While much of U.S. business and industry has had to
make adjustments to adapt to new global markets, such is not
the case with the maritime industry. Maritime transportation
has always, by its nature, operated in a world market.
That is not to say the U.S. maritime industry is not facing
changes. On the contrary, one has just to look at the number of
mergers and sales of U.S. carriers over the last 3 years to
know the industry is undergoing great change, which raises many
important questions.
Why have these companies been sold or merged? Does the sale
of the companies in many cases to foreign ownership impact our
national security or our national commerce and, most
importantly, is our overall national policy on maritime issues
and the many associated problems effective in ensuring that our
nation has a healthy and innovative merchant fleet that is able
and available to meet our national security and commerce needs?
I am increasingly concerned that U.S. maritime interests
rely too much on Government programs that create an environment
of dependance and do not foster investment and risk-taking, and
on Government regulations that protect them from economic
competition. I am aware that MARAD has revised its methodology
in reporting maritime ship statistics, thereby increasing the
U.S. fleet from 280 in 1998 to over 37,000 in 1999, but I am
not convinced that these larger numbers, which represent a
wider range of commercial vessels in both the domestic and
international trade actually present a clear picture of our
merchant fleet's viability to meet the needs of national
defense and our commercial base.
Additionally, with the expiration of the military security
program, MSP, a few years away, it is time to begin to examine
the merits of the program and look for ways to improve it. I
believe that as part of this review we should take a serious
look at overall reform of our maritime policy, with the goal of
formulating a policy that will allow our merchant marine
industry to grow and prosper in today's market.
I look forward to hearing from all of our witnesses on the
status of the U.S. fleet, and especially from Admiral Holder on
his concerns regarding fleet size and the manning of vessels in
the ready reserve fleet.
Additionally, I am very interested in hearing from Mr. Hart
on two issues raised in the Administration's proposal for
reauthorization. The Administration proposal requests a
temporary elimination of the 3-year period bulk or breakbulk
vessels newly registered under the U.S. flag must wait in order
to carry Government-impelled cargo.
This request is almost identical to a measure passed by the
Committee as part of last year's reauthorization. While in
general I do not support cargo preferences because of the high
cost associated with such programs, I hope that agreement could
be reached on needed reform in this area.
Current cargo preference law requires that 75 percent of
U.S. government food aid to foreign countries be shipped under
U.S. flag vessels. Because of this requirement, and a lack of
dry bulk vessels under the U.S. flag, Government agencies have
been forced to use less efficient and more costly vessels to
ship food aid. According to a recent analysis performed by the
Food Aid Administration, if just six new bulk ships had been
available last year, U.S. taxpayers could have saved
approximately $41 million in transportation of government food
aid. I hope that Mr. Hart will be able to provide further
explanation of why this is important not only to taxpayers'
wallets but also to the health of our fleet.
The Administration has also requested an extension in the
statutory deadline for disposal of obsolete vessels in the
National Defense Reserve fleet. As noted by the DOT Inspector
General, in a report issued last month, MARAD has scrapped only
five vessels since 1995 and currently has 115 vessels awaiting
action.
Of those 115 vessels, the IG reports that 41 are both an
environmental hazard and navigational hazard to the waters in
which they are now moored. Further extensions that allow these
vessels to remain a threat to these waters must be justified.
MARAD's inaction in addressing this problem in a timely
manner is inexcusable. I hope that Mr. Hart and Mr. DeCarli
both will be able to provide some new insight into the
difficulties MARAD has faced, and offer recommendations on how
they be addressed. I am also looking forward to hearing from
our witnesses on MARAD's oversight of the Title XI loan
guarantee for the revitalization of Four River Shipyard in
Quincy, MA.
As I pointed out in a hearing 2 weeks ago on the Big Dig, I
am very concerned that the Department of Transportation is
providing poor oversight of how Federal funds are being spent
on this project. I understand that the Department of Justice
continues to investigate certain aspects of the project for
possible criminal activity, and that the U.S. Attorney in
Boston has convened a grand jury to hear testimony on criminal
activity. Until these investigations are completed, I believe
it may not be possible to get a complete picture of what went
wrong on the project and how to prevent further loss of
taxpayer funds, so it may be necessary to hold additional
hearings. However, I would hope our witnesses will shed light
on this matter.
As it stands today, U.S. taxpayers have paid out over $50
million for this project, yet despite that fact, MARAD does not
have complete control of the yard due to the bankruptcy filing
of the project operator, Massachusetts Heavy Industry, and
MARAD does not have cooperation of State and local agencies in
their efforts to have the filing set aside so they can proceed
with foreclosure of the project. This Committee needs an
explanation for what has occurred at the Quincy shipyard.
Again, I look forward to hearing from all of today's
witnesses, and am eager to hear their views on how MARAD is
operating and what we can do to ensure they continue to support
our nation's maritime industry.
Senator Stevens.
[The prepared statement of Senator McCain follows:]
Prepared Statement of Hon. John McCain, U.S. Senator from Arizona
Today the Committee meets in order to fulfill its oversight role of
the U.S. Maritime Administration (MARAD). As MARAD celebrates its 50th
year, I want thank all MARAD employees, past and present for the
dedication to our nation's merchant marines. Today we will hear
testimony from three witnesses on MARAD's past performance as well as
issues facing its future.
Our nation's maritime operations face many challenges in the world
economy. While much of U.S. business and industry has had to make
adjustments to adapt to new global markets, such is not the case with
the maritime industry. Maritime transportation has always, by its
nature, operated in a world market. That is not to say that the U.S.
maritime industry is not facing changes.
On the contrary, one just has to look at the number of mergers and
sales of U.S. carriers over the last 3 years to know the industry is
undergoing great change, which raises many important questions. Why
have these companies been sold or merged? Does the sale of the
companies, in many cases to foreign ownership, impact our national
security or our national commerce? And most importantly, is our overall
national policy on maritime issues and the many associated programs
effective in insuring that our nation has a healthy and innovative
merchant fleet that is able and available to meet our national security
and commerce needs.
I am increasingly concerned that U.S. maritime interests rely too
much on government programs that create an environment of dependence
and do not foster investment and risk taking, and on government
regulations that protect them from real economic competition.
I am aware that MARAD has revised its methodology in reporting
maritime ship statistics, thereby increasing the U.S. fleet from 280 in
1998 to over 37,000 in 1999. But I am not convinced that these larger
numbers, which represent a wider range of commercial vessels in both
the domestic and international trade, actually present a clear picture
of our merchant fleet's viability to meet the needs of national defense
and commercial base.
Additionally, with the expiration of the Military Security Program
(MSP) a few years away, it is time to begin to examine the merits of
the program and look for ways to improve it. I believe that as part of
this review, we should take a serious look at overall reform of our
maritime policy with the goal of formulating a policy that will allow
our merchant marine industry to grow and prosper in today's market.
I look forward to hearing from all our witnesses on the status of
the U.S. fleet and specifically from Admiral Holder on his concerns
regarding fleet size and the manning of vessels in the Ready Reserve
Fleet (RRF).
Additionally, I am very interested in hearing from Mr. Hart on two
issues raised in the Administration proposal for reauthorization. The
Administration proposal requests a temporary elimination of the 3-year
period bulk or breakbulk vessels newly registered under the U.S.-flag
must wait in order to carry government-impelled cargo.
This request is almost identical to a measure passed by the
Committee as part of last year's reauthorization. While in general I do
not support cargo preferences because of the high costs associated with
such programs, I hope that agreement could be reached on needed reform
in this area.
Current Cargo Preference laws require that 75 percent of U.S.
Government food aid to foreign countries be shipped on U.S.-flag
vessels. Because of this requirement and a lack of drybulk vessels
under the U.S.-flag, government agencies have been forced to use less
efficient and more costly vessels to ship food aid. According to a
recent analysis performed by the Maritime Administration, if just six
new bulk ships had been available last year, U.S. taxpayers could have
saved approximately $41 million in transportation of government food
aid. I hope that Mr. Hart will be able to provide further explanation
of why this is important not only to taxpayers wallets, but also to the
health of our fleet.
The Administration has also requested an extension in the statutory
deadline for disposal of obsolete vessels in the National Defense
Reserve Fleet (NDRF). As noted by the DOT Inspector General in a report
issued last month, MARAD has scrapped only five vessels since 1995 and
currently has 115 vessels awaiting action. Of those 115 vessels, the IG
reports that 41 are both an environmental hazard and navigational
hazard to the waters in which they are now moored. Further extensions
that allow these vessels to remain a threat to our waters must be
justified.
MARAD's inaction in addressing this problem in a timely manner is
inexcusable. I hope that Mr. Hart and Mr. DeCarli both will be able to
provide some insight into the difficulties MARAD has faced and offer
recommendations on how they be addressed.
I am also looking forward to hearing from our witnesses on MARAD's
oversight of the Title XI loan guarantee for the revitalization of Four
River Shipyard in Quincy, Massachusetts. As I pointed out in a hearing
two weeks ago on the Big Dig, I am very concerned that the Department
of Transportation is providing poor oversight of how federal funds are
being spent on this project.
I understand that the Department of Justice continues to
investigate certain aspects of the project for possible criminal
activity and that the U.S. Attorney in Boston has convened a grand jury
to hear testimony on criminal activity. Until these investigations are
completed, I believe that it may not be possible to get a complete
picture of what went wrong on the project and how to prevent further
loss of taxpayer funds so it may be necessary to hold additional
hearings. However, I would hope our witnesses will shed light on this
matter.
As it stands today, U.S. taxpayers have paid out over $50 million
for this project. Yet despite that fact, MARAD does not have complete
control of the yard due to the bankruptcy filing of the project
operator, Massachusetts Heavy Industry, and MARAD does not have the
cooperation of state and local agencies in their efforts to have the
filing set aside so they can proceed with foreclosure of the project.
This Committee needs an explanation for what has occurred at the Quincy
shipyard.
Again, I look forward to hearing from all of today's witnesses and
am eager to hear their views on how MARAD is operating and what we can
do to insure they continue to support our nation's maritime industry.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Thank you very much, Mr. Chairman. I am
concerned about the backlog in these applications for loan
guarantees. It is my information that as of May 9, MARAD had 20
applications pending for loan guarantees for a variety of
ships, cargo carriers, barges, et cetera, and I think that may
well be a bottleneck as far as modernizing this fleet, and I am
here to hear that testimony.
Thank you very much.
The Chairman. Thank you, Senator Stevens.
I welcome the witnesses, the Honorable Clyde J. Hart, the
Maritime Administrator, the U.S. Department of Transportation,
Mr. Raymond J. DeCarli, the Deputy Inspector General of the
U.S. Department of Transportation, and Vice Admiral Gordon
Holder, U.S. Navy Commander of Military Sealift Command.
We would like to begin with you, Mr. Hart. Thank you for
appearing before the Committee today.
[The prepared statements of Senators Snowe, Hollings,
Inouye, and Cleland follow:]
Prepared Statement of Hon. Olympia J. Snowe,
U.S. Senator from Maine
Mr. Chairman, I thank you for scheduling this hearing, and I would
like to speak briefly on the Maritime Administration reauthorization
and key maritime issues.
MarAd oversees the operations of U.S. Government-supported maritime
promotion programs, such as the Maritime Security Program, the State
maritime academies and the U.S. Merchant Marine Academy. My home State
of Maine, of course, is a maritime state, and we have a maritime
academy, the Maine Maritime Academy in Castine, which is very important
to the state.
I also have an important shipyard in my state, Bath Iron Works,
which is the largest employer in the state, so I am very interested in
the Title XI shipbuilding loan guarantee program. The program makes it
easier for shipowners and builders to obtain private financing for ship
construction and fleet improvements in U.S. shipyards.
Each Title XI dollar generates an estimated $20 in private capital
for shipbuilding projects. However, only $6 million was appropriated
for these guarantees in FY 2000 and FY 1999. Many in the maritime
industry believe that this level is inadequate. Since it was revived in
1994, the $40 to $50 million-a-year authorization-level program has
generated over $2.1 billion in new U.S. commercial shipbuilding orders,
and some 260 vessels have been built.
In order to remain viable, the shipyards upon which the U.S. Navy
depends must capture commercial shipbuilding orders if they are to
survive to meet the expected future demands for Navy shipbuilding. As
U.S. shipbuilders restructure to capture commercial orders, their first
market focus is construction of ships for the Jones Act trade.
Construction of ships for this trade may enable U.S. yards to establish
a series production so that they can in turn be competitive in building
ships on the international market.
My hope is that as the legislative process continues, we can find a
way to increase the appropriations for the Title XI program.
I also have serious reservations about a provision in this bill
that would waive the current cargo preference 3-year waiting period for
vessels newly re-flagged in the U.S. Current cargo preference law
reserves most food aid to U.S.-owned, -built, and -crewed vessels. It
allows the use of foreign built ships for government-impelled cargo,
such as food aid, but only after a 3-year waiting period.
I am aware that there has been a significant increase in the amount
of U.S. food aid--the Administration announced a large allocation of
food aid for Russia and Indonesia, for example. However, foreign aid
must not come at the expense of U.S. shipyards and their workers.
The waiver in this bill would permit U.S. companies to buy foreign
built ships at rock bottom prices, as a result of the Asian financial
crisis. Asian shipyards are no doubt more than willing to dump their
ships on the U.S. market. A similar ``one year'' waiver in 1981 was
later extended to 5 years and resulted in orders for additional foreign
built ships, so I would urge caution on this matter.
In closing, I am hopeful that the Administration and our witness
panels here today will also comment on what policies or initiatives we
can consider that will grow and incentivize commercial shipbuilding at
our nation's major shipyards, including efforts to incentivize the
development of a domestic cruise industry with cruise vessels built in
the U.S. by American workers. I am very interested in what Congress can
do legislatively to encourage the growth of this industry in such a way
that the benefits, economic and otherwise, accrue to U.S. ports,
shipyards, and workers.
Our nation has always been dependent upon the sea and has enjoyed a
rich maritime tradition. Our merchant marine remains an integral part
of our culture and our economy. Today, one out of every six jobs in the
United States is marine related. America's ports support more than 95
percent of all our overseas foreign trade, and within the U.S., more
than one billion tons of commercial cargo is transported by ship each
year. We must do all that we can to preserve our maritime legacy for
future generations, and programs and issues under MARAD's purview are
key to this.
Again, I thank the Chair, and look forward to hearing from our
witnesses. Thank you, Mr. Chairman.
__________
Prepared Statement of Hon. Ernest F. Hollings,
U.S. Senator from South Carolina
Mr. Chairman, thank you for holding this hearing today to look into
the various maritime programs of the Maritime Administration. As you
know, I am a resident of Charleston, South Carolina, and I have always
been aware of the importance of our coastal resources, and of our
maritime trade. Over 95% of our international trade is carried on
vessels, many of them using ports like Charleston, South Carolina, but
most Americans are not aware of maritime trade. Most of us do not think
about the movement of cargo, and I think that it is a testament to the
efficiency with which the industry moves cargo, and the relative lack
of disruption caused by their business operations.
I would like to take this opportunity to formally welcome Clyde J.
Hart back to this Committee to testify in his capacity as Maritime
Administrator. As many of you know, Clyde worked here on the Committee
as our transportation counsel, and while we may have lost out, the
Maritime Administration has gained a valuable asset to help implement
maritime policy. Mr. Administrator, you have many difficult chores in
front of you, but I for one know that you are up to the task.
Maritime policy is an arcane and difficult area to understand and
master, but it is very important that the world's sole remaining
superpower remain competent and self-reliant on our own maritime
vessels. Even Adam Smith, the great proponent of free trade, identified
one area that should not be considered under the principles of free
trade. Here is what Mr. Smith said in his Inquiry into Nature and
Causes of the Wealth of Nations:
There seems, however, to be two cases in which it will
generally be advantageous to lay some burden upon foreign
government for the encouragement of domestic industry. The
first is, when some particular sort of industry is necessary
for the defence of the country. The defence of Great Britain,
for example, depends very much upon the number of its sailors
and shipping. The Act of Navigation, therefore, very properly
endeavors to give the sailors and shipping of Great Britain the
monopoly of the trade of their own country in some cases by
absolute prohibitions and in others by heavy burdens upon the
shipping of foreign countries.
The principles espoused by Mr. Smith in this paragraph still hold
true today. The United States cannot be put in a position of depending
on foreign nations itself for some important foreign policy objective.
We cannot say to U.S. troops that supplies and weapons will be on the
way, in the event that we can charter foreign tonnage.
I look forward to hearing this morning's testimony, but wanted to
bring up a couple areas of concern. The first I would like to mention
is the Title XI loan guarantee program. I support this program, and
would like it noted that over the history and course of the entire
program the government has made money while generating public sector
economic returns.
Since 1985, after having recovered from over-expansion in oil and
gas and agriculture, MARAD has guaranteed over $7 billion in ship
construction and shipyard modernization, of that amount MARAD has only
had two defaults totaling $56.7 million. During that same time frame,
MARAD collected $110 million in fees which were deposited in the
Treasury, and Congress set aside $260.5 million in appropriated funds
to cover the risk of default. This program helps leverage private
sector funding, and generates huge returns in the shipbuilding and
marine supply industry. This is the sort of heavy industry know how
that we need to maintain a strong industrial base and, as I said, this
program efficiently utilizes federal resources to stimulate the private
sector.
I am also heartened to see Admiral Holder of the Military Sealift
Command here today. He runs the naval transportation system in supply
of our armed forces.
Admiral Holder is the largest user of U.S.-flag vessels, and he is the
largest employer of civilian mariners. He is going to tell us here
today that he is getting to the point where he is short of men and
women capable of working. We need to listen to what he has to say, and
work to ensure that his concerns do not become a reality.
I would also like to touch on the area of research for maritime
transportation. We all talk around here about intermodalism, and about
the need to eliminate bottlenecks in order to have seamless service,
and the need to promote policies that foster intermodalism. The
Secretary of Transportation recognized the need to address this when he
established the Maritime Transportation System Committee, and chartered
it to evaluate what needs to be done federally to accommodate the
projected doubling of trade within the next 20 years. One of the
primary recommendations from that Committee was to increase research.
However, according to a recent publication evaluating the Department of
Transportation's research budget, in FY 2000 we invested $226 million
in aviation research; $257 in surface transportation; and $22 million
in rail, but none in maritime. We need to address this disparity, and
spend some time properly thinking and researching the maritime and
intermodal problems facing us today, before they affect us tomorrow.
Thank you, Mr. Chairman.
__________
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
Mr. Chairman, it is with pleasure that we meet here today to
discuss the Maritime Administration budget for Fiscal Year 2001. This
Maritime Administration is critical to the continuation of a modern
commercial fleet owned and operated by U.S. citizens and crewed by
American seafarers. It also ensures America's economic competitiveness
and national security. I am especially happy to have Clyde Hart here
today testifying. As many of you may know, Clyde, in his previous life,
worked to keep me well staffed, and while I miss him here, I am
heartened to see him at the helm of the Maritime Administration.
The Maritime Administration (MARAD) reauthorization continues very
important programs, and we need to finalize legislation rapidly to
ensure its inclusion in the Department of Defense Reauthorization
conference. I would say that I have some concerns about the level of
funding provided for Title XI loan guarantees. Title XI is a truly
national and international program. Title XI shipbuilders, their
operation and their supplier base, cover almost every State in this
country. Title XI has been vital in assisting our shipyards in
competing internationally. There are a number of worthwhile projects
that should not be precluded from being considered by MARAD for lack of
funds. Not everyone may be aware, but over the entire course of its
history, Title XI has earned the government money.
The reauthorization of MARAD will also include the funds for the
operation of the U.S. Merchant Marine Academy at Kings Point, New York
and continuing assistance to six State maritime academies. It is my
understanding that U.S. Merchant Marine Academy is in a state of
disrepair. We need to make sure the students have the proper facility
for instruction. The U.S. Merchant Marine Academy may very well be one
of the best maritime training academies in the world, but we need to
provide it with the necessary support it needs to flourish. These
students are the future of our country and our merchant marine.
This reauthorization should also recognize the importance of the
merchant marine to our national security by its support for the
recently enacted Maritime Security Program (MSP), a modern commercial
fleet available to provide critical support to the Department of
Defense during war or national emergency.
This year's reauthorization will also contain provisions which aim
to strengthen our U.S.-flag fleet through a much needed infusion of new
tonnage by eliminating the 3-year wait that a newly registered bulk or
breakbulk vessel must currently wait to carry preference cargo. This
opportunity, which would end in one year, would not just improve the
vessel profile of this fleet, but also add U.S. jobs. Vessels allowed
to enter the preference trade would be required to perform shipyard
repairs and other work necessary to bring them up to U.S.-flag
standards in our own U.S. shipyards.
Mr. Chairman, MARAD's budget should recognize the importance of
sealift readiness and a strong U.S.-flag fleet. It should acknowledge
the need for a healthy shipbuilding industry and also provide
assistance for the education of our youth. I look forward to working
with you to ensure that it does.
______
Prepared Statement of Hon. Max Cleland, U.S. Senator from Georgia
Good morning, and thank you for being here today. Administrator
Hart, I would especially like to welcome you back to the Committee. As
former Democratic Staff Counsel to the Committee, it is a pleasure to
have the opportunity to hear your views on matters relating to this
hearing.
Let me turn now to a subject of great interest to me. As a member
of the Armed Services Committee, and as Ranking Member of the Personnel
Subcommittee, I have spoken at considerable length about the urgent
need to address our recruitment shortfalls in the military. One of the
ways I believe we can correct the current situation is by improving
quality of life. I understand that when the term ``quality of life'' is
invoked, all too often it is simply idle rhetoric. But, rest assured, I
am serious about improving the present situation in which our soldiers,
sailors, airmen, and marines find themselves. If we are to encourage
our young men and women to consider a career in the armed services,
they must be assured that their domestic environment is one which will
suit them well.
Having said that, I'll get right to the point. I have heard a good
deal about the current situation of the physical structures,
particularly the barracks, at the U.S. Merchant Marine Academy at Kings
Point. I have received letters from concerned parents of Midshipmen who
are rightly worried about the living conditions for their young sons
and daughters. I have met with various groups of Kings Point Midshipmen
who tell me that much of the potable water does not even meet minimum
EPA safety standards. I have heard from my military academy advisory
board and members of my staff who have personally visited the Academy.
They tell me that these problems, in addition to such things as leaking
roofs, dilapidated furniture, and general infrastructure concerns are
all too common.
As you know, Kings Point, in addition to training officers to crew
our merchant vessels, graduates leaders who enter all branches of our
armed forces--Navy, Coast Guard, Air Force, Marines, even the Corps of
Engineers. Many of these billets are filled by young officers who have
a reputable comprehension of logistics and the know-how to ``get there
firstest with the mostest.'' As an old Army Air Cavalry officer, I can
certainly can appreciate this doctrine. And, I believe Admiral Holder
will share my beliefs not only on the importance of logistics, but also
regarding the significant role of morale in recruiting and retaining
our soldiers, sailors, airmen, marines, and support personnel. Your
views on these issues, Admiral, would be most welcome.
Administrator Hart, I would be pleased to hear your opinions on the
current State of the living conditions at the Academy, and I am most
anxious to hear how the Administration proposes to remedy these
shortfalls. Again, thank you for appearing before us today, and let me
say that I truly appreciate your outstanding work. Each of you should
be commended for a job well done.
STATEMENT OF HON. CLYDE J. HART, MARITIME ADMINISTRATOR, U.S.
DEPARTMENT OF TRANSPORTATION
Mr. Hart. Thank you, Mr. Chairman, Senator Stevens. I
welcome the opportunity to be here today to discuss the
Maritime Administration's fiscal year 2001 authorization
request. Full funding of MARAD's budget request will allow the
agency to address high priority needs such as the renovation of
the Nation's Merchant Marine Academy, as well as fund our
ongoing efforts in the Maritime Security Program, shipbuilding,
the Marine Transportation System Initiative, the National
Defense Reserve Fleet and Ready Reserve Force, and maritime
education and training.
Secretary Slater has made passage of MARAD's authorization
act for fiscal year 2001 a priority. In fiscal year 2001, we
request $98.7 million for the Maritime Security Program. The
request represents payments of approximately $2.1 million each
to 47 vessels with proven national security capabilities. As of
January 1, 2000, all of the 47 ships enrolled in MSP were
participating in the program according to their operating
agreements with MARAD.
Authorization for the MSP ends in fiscal year 2005. This
year, we will conduct an evaluation of the impact of the MSP
and the Voluntary Intermodal Sealift Agreement on the readiness
and capability of the commercial transportation system to meet
national defense needs.
Revitalization of the nation's shipbuilding continues to be
an Administration priority. The Title XI guarantee program is
the centerpiece of our shipbuilding revitalization initiative,
and has been very successful in stimulating shipbuilding
activity.
An authorization request of $2 million would enable MARAD
to provide loan guarantees of up to $40 million based on a 5-
percent loan subsidy rate. $4.179 million for administrative
expenses will enable MARAD to manage both existing and new loan
guarantees.
I must mention that for the first time in nearly half a
century, two large ocean-going cruise ships will be built in a
U.S. shipyard. Title XI loan guarantees of more than $1 billion
have helped make this project a reality, and we hope will
launch a new segment of the industry.
I am aware of your interest in the status of the Quincy
Shipyard Project. As you know, Massachusetts Heavy Industry
failed to make two consecutive payments on its guaranteed
obligations. On February 25 of this year, at the demand of the
lender, MARAD made a payment for $59.1 million on MHI's
defaulted loan. MHI subsequently filed for Chapter 11
bankruptcy, and MARAD is moving to foreclose on the shipyard.
Let me reassure you that MARAD has worked closely with the
Department's Office of the Inspector General throughout this
project. The agency has also kept Members of Congress apprised
of the status of the Quincy Shipyard reactivation and
modernization project at all times. It is our goal to see that
productive use of the shipyard can someday be achieved.
However, there remain both environmental and financial concerns
which must be resolved.
The disposal of obsolete National Defense Reserve Fleet
vessels remains a priority at MARAD. Currently, 112 vessels in
the NDRF are slated for scrapping. It is estimated that this
number will grow to 134 at the beginning of the year 2001 if
additional vessels are not disposed of. MARAD has sought to
scrap the vessels in the domestic market, where environmental
and safety standards are high. Capacity of this market is
limited. MARAD will be unable to dispose of all of the obsolete
vessels in the NDRF by its September 30, 2001 deadline.
Therefore, this year's authorization bill proposes to extend
the disposal date by 5 years. This will provide MARAD with
additional time to develop an action plan and begin to dispose
of this growing number of vessels.
This year's authorization proposal will also provide a
limited opportunity for modern, foreign-built bulk and
breakbulk vessels to register under the U.S. flag and be
immediately eligible to carry preference cargo in international
trade. In return, the vessels would perform any shipyard work
necessary to become a U.S. flag vessel in the United States.
This amendment could improve the vessel profile of the U.S.
flag dry bulk and breakbulk fleets, add jobs for U.S. merchant
mariners capable of crewing sealift ships in a mobilization,
and increase the percentage of U.S. foreign commerce carried in
U.S. flag vessels.
This year's funding request of about $37.2 million for the
Merchant Marine Academy includes a $3.3 million increase over
funds appropriated in fiscal year 2000, including mandatory
Federal salary and related cost increases. The increase will
fund both operational and capital improvements at the academy,
as well as enable the academy to improve existing academic and
administrative programs. An overall facilities master plan is
under development at the academy and is expected to be
completed in July.
In addition to the funding for the Merchant Marine Academy,
approximately $9.5 million is required for financial assistance
to the six State maritime academies.
Congress recognized the importance of the marine
transportation system, or MTS, when, as part of the Coast Guard
Authorization Act of 1998, it tasked the Secretary, through
MARAD and the Coast Guard, to establish a task force to assess
the adequacy of the nation's MTS to operate in a safe,
effective, secure, and environmentally sound manner.
Last September, Secretary Slater released a report to
Congress entitled, ``An Assessment of the U.S. Marine
Transportation System.'' Representing an intense joint effort
by industry, other maritime partners, and Government, the
report will serve as a blueprint for the future of our MTS.
The first MTS council, comprised of representatives from 31
non-Federal organizations, will take place next week on May 24.
Secretary Slater, Admiral Loy and I welcome the opportunity to
provide leadership in this initiative, and we take this
responsibility very seriously. America's marine transportation
system has always delivered the goods, and we intend to help
make sure that this tradition continues.
Among the ongoing efforts at MARAD is the assessment of the
supply of mariners to meet commercial and mobilization crewing
requirements, now and in the future. MARAD is hearing of
recruitment and retention problems in the seagoing work force,
just as every industry is facing labor shortages in this
vibrant economy.
Based on our analysis of maritime data, there are enough
qualified active seafarers to crew the DOD organic fleet for a
short
duration, but however, an extended mobilization of the entire
Government-owned surge fleet would create pressure to rotate
Government and commercial ship crews, by augmenting the pool
with inactive mariners.
There is likely to be a mismatch between available mariners
and the specific skills needed to fully activate the DOD
organic fleet. We are also concerned that shoreside commitments
of some of the inactive mariners, such as work and family, may
also keep them from volunteering to serve, even with
reemployment rights. These uncertainties concern us.
Mr. Chairman, I would like to report that one of your
initiatives is now up and running at MARAD. The administrative
waiver process of the U.S.-build requirements contained in the
Passenger Vessel Services Act for small vessels, which was part
of the Coast Guard Authorization Act of 1998, has been
implemented.
Final regulations were published in the Federal Register on
February 11, 2000. We have received 15 applications to date,
and three applications have been approved, with many others
close to completion.
That concludes my prepared statement. I would be happy to
address any questions you may have.
[The prepared statement of Mr. Hart follows:]
Prepared Statement of Clyde J. Hart, Jr., Maritime Administrator,
U.S. Department of Transportation
Mr. Chairman and Members of the Committee:
I welcome the opportunity to be here today to discuss the Maritime
Administration's (MARAD's) Fiscal Year 2001 authorization request. I
know that I do not need to tell you that MARAD is committed to U.S.
merchant mariners and our maritime industry. The U.S.-flag merchant
marine and the domestic maritime industry perform yeoman service for
America at an affordable price. They deliver a cornucopia of goods to
and from foreign markets. In war or crisis, they have a proven track
record of responding professionally, often in dangerous environments,
to the critical needs of our U.S. armed forces. America's preeminence
in economic and military affairs has been bolstered in no small part by
this industry. May 25th marks the 50th anniversary of MARAD as an
executive agency. All who have had the privilege to serve here over the
years are determined that this year be one that will long be
remembered.
Full funding of MARAD's budget request will allow the agency to
address high priority needs--such as the renovation of the Nation's
Merchant Marine Academy, as well as fund our ongoing efforts in the
Maritime Security Program (MSP), shipbuilding, the Marine
Transportation System Initiative, the National Defense Reserve Fleet
and Ready Reserve Force, cargo preference, and maritime education and
training. The proposal would also provide MARAD with necessary time to
develop a plan to dispose of obsolete government vessels. As a former
staff counsel on this committee, I recognize the inevitable competing
demands for scarce resources. However, we at MARAD strongly believe
that every dollar requested is needed. This budget request in the first
year of the new century will be viewed as an indication of what the
future holds for this industry. Secretary Slater and I have made
passage of the MARAD Authorization Act for fiscal year 2001 a priority.
I will now summarize our fiscal year 2001 budget request and note
for the committee the contributions and progress of MARAD programs
during the past year.
Maritime Security Program
The Maritime Security Act of 1996 established a Maritime Security
Program (MSP) with the goal to ensure the continued presence of a fleet
of U.S.-flag vessels engaged in international trade, that is also able
to meet national security sealift requirements in times of war or
national emergency. In fiscal year 2001, we request a total of $98.7
million for MSP payments. The request represents payments of
approximately $2.1 million each to 47 vessels with proven national
security capabilities.
As of January 1, 2000, all of the 47 ships enrolled in MSP were
participating in the program according to their operating agreements
with MARAD. The MSP continues to be a truly innovative program--at
about half the cost per vessel of the Operating-Differential Subsidy
program it replaced. MSP operators, through participation in the
Voluntary Intermodal Sealift Agreement (VISA) program, make not only
each participating vessel, but their state-of-the-art intermodal
transportation system, available to the Department of Defense (DOD) for
sealift support. This program provides essential support to DOD as the
military increasingly relies on the commercial transportation industry
for logistics capability. The MSP is a shining example of successful
partnering between the Government and the private sector.
Mr. Chairman, as you know, authorization for the MSP ends in fiscal
year 2005. During fiscal year 2000, we will conduct an evaluation of
the impact of the MSP and VISA programs on MARAD and DOT national
security goals of increasing the readiness and the capability of the
commercial transportation system to meet national defense needs. This
evaluation is being undertaken as part of our commitment to the
Government Performance and Results Act.
Shipbuilding
Revitalization of the nation's shipbuilding continues to be an
Administration priority. The Maritime Guaranteed Loan, or Title XI,
Program is the centerpiece of our shipbuilding revitalization
initiative, and has been very successful in stimulating shipbuilding
activity. Title XI loan guarantees enable ship owners and U.S.
shipyards to borrow private sector funds on more favorable terms than
might otherwise be available. Government funds are obligated to offset
the credit risk of loan guarantees and for administrative costs. Since
1993, shipyard construction and shipyard modernization projects costing
approximately $6 billion have been approved by MARAD. An authorization
request of $2 million for the cost of loan guarantee commitments would
enable MARAD to provide loan guarantees of up to $40 million based on a
5 percent loan subsidy rate. A carryover of amounts previously
authorized for loan guarantees into fiscal year 2001 will allow for an
appropriate level of loan guarantees. The $4.179 million request for
administrative expenses will enable MARAD to manage both the existing
portfolio of loan guarantees and new guarantees.
Thanks to Title XI funding, 11 new state-of-the-art double hull
tankers have been delivered from U.S. shipyards since enactment of the
shipbuilding revitalization initiative in 1993. These deliveries marked
the first time that an ocean-going petroleum tanker had been built in
the United States in over a decade, and the first ever deliveries of
commercial double hull tankers in this country. Title XI financing has
also been instrumental in the construction of numerous double-hull tank
barges being utilized on the inland and coastal waterways.
This past year, more advances in modern American shipbuilding have
been achieved by the Title XI program. In April 1999, Secretary Slater
announced that two large ocean-going cruise ships will be built in the
United States for the American Classic Voyages Company--the first time
in nearly a half century that large, ocean-going cruise ships will be
built in an American shipyard. The vessels are designed to embrace the
amenities of modern cruise ship luxury, safeguard the environment and
will carry up to 1,900 passengers each. This design was a direct result
of a MARAD administered project under the now terminated MARITECH
program. Construction is scheduled to begin sometime this year. Title
XI loan guarantees of more than $1 billion have helped make this
project a reality and, we hope, will help to launch a new segment of
the industry. MARAD's Capital Construction Fund (CCF) Program has also
made significant contributions to U.S. shipyard activity, such as
facilitating the construction of three double-hull tankers for ARCO
Marine in Louisiana, and two roll on/roll off (RO/RO) vessels for
Saltchuk Resources at NASSCO.
Mr. Chairman, I am aware of your interest in the status of the
Quincy Shipyard Project. As you know, in 1995, Massachusetts Heavy
Industry, Inc. (MHI) approached MARAD regarding a Title XI loan
guarantee to reactivate and modernize the Quincy Shipyard. MARAD
determined that MHI would be unable to demonstrate the economic
soundness necessary to secure a Title XI loan guarantee. Public Law
104-324, the Coast Guard Authorization Act of 1996, directed the
Secretary to waive the Title XI requirements for economic soundness.
Pursuant to that authority, on November 1, 1996, MHI received approval
for a loan guarantee in the amount of $55 million to reactivate and
modernize the shipyard. As required by the legislation, MARAD protected
its security position to the maximum extent possible by obtaining a
first mortgage, instituting strict escrow fund disbursal procedures,
and entering into a favorable intercreditor agreement.
MHI missed a regularly scheduled $1.55 million debt service payment
on June 1, 1999. Upon its request and the concurrence of the lending
institution, Fleet Bank, MARAD deferred the payment until December 1,
1999. However, on December 1, 1999, MHI missed its second consecutive
regularly scheduled payment of $2.1 million on the guaranteed
obligations, as well as the payment owed from June 1st.
MARAD and MHI had continuing discussions in an attempt to provide a
funding mechanism for the December 1, 1999 payment, at the urging of
Fleet Bank. MARAD extended until late February 2000 the date on which
this payment could be made to give MHI the fullest opportunity possible
to make those payments. However, MHI was unable to obtain the necessary
financing--in a form acceptable to MARAD--to make this payment or to
complete the shipyard without substantially impairing MARAD's security
and increasing MARAD's liability under the loan guarantee. Thus, a
demand for payment under the Title XI guarantee was made to MARAD by
the lending institution. On February 25, 2000, the agency honored this
demand by making a payment for $59.1 million on the defaulted loan,
which was the principal amount plus accrued interest. MHI subsequently
filed for Chapter 11 bankruptcy protection and MARAD is moving to
foreclose on the shipyard.
Mr. Chairman, let me reassure you once again, MARAD has worked
closely with the Department's Office of the Inspector General (DOT IG)
throughout this project. On September 15, 1999, the DOT IG recommended
that, until it was clear whether the surety would act under its
performance bond, MARAD freeze funds contained in the escrow fund
established to pay for the reactivation. MARAD subsequently froze the
escrow funds and work at the shipyard, which had been halted in August,
was never resumed as a result of MHI's contract dispute with its
general contractor. These funds, approximately $12 million, were used
to offset MARAD's February 25, 000 payment on the loan guarantee,
thereby reducing our initial losses. At all times, MARAD kept Members
of Congress with an interest apprised of the status of the Quincy
Shipyard reactivation and modernization project.
Mr. Chairman and Members of the Committee, it is our goal to see
that productive use of the shipyard can someday be achieved. However,
there remain both environmental and financial concerns which must be
resolved through court proceedings.
The National Defense Reserve Fleet and the Ready Reserve Force
The National Defense Reserve Fleet (NDRF) was established in 1946
in order to meet reserve sealift requirements for national defense
purposes. NDRF vessels are located at three major sites: James River,
Virginia; Beaumont, Texas; and Suisun Bay, California. There are
currently 257 ships in the NDRF, 90 of which comprise the Ready Reserve
Force (RRF). RRF ships are maintained in various states of readiness,
and can sail in either 4, 5, 10, 20 or 30 days. The majority of RRF
ships are outported to various locations throughout the country in
proximity with likely loadout ports established by the Department of
Defense.
When activated, RRF ships are fully crewed by civilian merchant
mariners working to support DOD missions. From the time of the
Revolutionary War to the present, the American merchant marine has
always played a critical role in the protection of U.S. interests. The
tradition continues today. MARAD's RRF ships played a critical role
during the Gulf War, and have been used to provide assistance during
crises in Somalia, Haiti, Bosnia, and hurricane- ravaged Central
America. Four RRF ships are currently deployed as part of DOD's
prepositioned forces to respond quickly to regional conflicts
throughout the world.
Ship Scrapping
Some NDRF vessels remain idle at Reserve Fleet sites because they
are beyond their useful lives. Currently, 112 vessels in the NDRF have
been determined to be obsolete and are slated for scrapping. It is
estimated that the inventory of obsolete vessels will increase to 134
at the beginning of the year 2001 if additional vessels are not
disposed of.
MARAD's primary means of disposing of obsolete vessels has been to
sell them for scrapping. Under the National Maritime Heritage Act of
1994, the agency is required to dispose of obsolete vessels in the NDRF
by September 30, 2001, in a manner that maximizes financial return to
the United States. However, since 1995, MARAD has refrained from
scrapping obsolete NDRF vessels overseas due to concerns about the
environment and worker health and safety at the foreign scrap sites.
Although MARAD has sought to scrap the vessels in the domestic market,
where environmental and safety standards are high, the capacity of this
market is limited. Moreover, the Department of the Navy, which is
responsible for the disposal of obsolete combatant vessels, has
initiated a pilot program to pay for the costs of disposing of its
obsolete vessels. MARAD has been reviewing bids and performing
increased contract monitoring and oversight. Between 1987 and 1994, 130
vessels were sold to foreign scrappers for $108/ton, but only 10
vessels were awarded to be scrapped domestically in 1997-98 at an
average of $4.60/ton. Last year, 12 vessels were awarded for only 27
cents per ton and three vessels were sold for $10 each, to be scrapped
domestically. Many of the vessels that were sold domestically have not
been picked up by the buyers. One sales agreement for five vessels was
terminated last year because the purchaser did not take possession of
the vessels.
MARAD will be unable to dispose of all of the obsolete vessels in
the NDRF by the September 30, 2001 deadline. Therefore, this year's
authorization bill proposes to extend the disposal date by 5 years to
September 30, 2006. This extension will provide MARAD with additional
time to develop an action plan and begin implementation of the plan to
dispose of this growing number of vessels, given current scrapping
conditions. The objective we all work to accomplish is to scrap vessels
in an environmentally sound and economically reasonable manner.
I am sure that you are aware that about 40 NDRF vessels--containing
PCBs (polychlorinated biphenyls), asbestos, fuel oil and other
hazardous substances--are in extremely poor condition. These ships are
monitored closely by MARAD to prevent sinking or a hazardous discharge.
Nevertheless, they continue to deteriorate. To date, the Department of
Defense has provided the necessary resources to ensure that no
environmental damage occurs.
Cargo Preference
U.S. cargo preference laws are an important part of the overall
statutory program to support the privately owned and operated U.S.-flag
merchant marine. These laws require that a certain percentage of
Government- impelled cargo be carried on U.S.-flag vessels. By
guaranteeing the availability of cargo to U.S.-flag ships, these laws
are important to the financial viability of U.S.-flag vessel operating
companies. The laws ensure that the vessels, trained crews, and vessel
service industries continue to be available to support our nation's
economic and national security. The laws also help protect our ocean
commerce from domination by foreign companies, many of which enjoy
significant tax breaks and direct subsidies. Monitoring compliance with
the U.S. cargo preference laws is essential in encouraging other
Federal agencies to maximize the use of U.S.- flag vessels. MARAD
provides an annual report to Congress on the level of compliance among
other Federal agencies, and is currently updating its cargo preference
regulations.
This year's authorization proposal contains a provision that was
also contained in our Fiscal Year 2000 proposal, to establish a 1-year
waiver of the ``three year rule'' which mandates that foreign-built
vessels brought under the U.S. flag must wait 3 years before carrying
food aid preference cargoes. The proposed amendment provides a limited
opportunity for modern, foreign-built bulk and break bulk vessels to
register under the U.S.-flag and be immediately eligible to carry
preference cargo in international trade. In return, the vessels must
have any additional shipyard work necessary to become U.S.-flagged
performed in the United States. The vessels would not be granted pre-
approval to leave U.S. registry under section 9(e) of the Shipping Act,
1916, or be entitled to any benefit of the Capital Construction Fund,
under section 607 of the 1936 Act.
We expect food aid programs for Russia, North Korea, and the
Administration's recently announced Section 416(b) program, to generate
about 5.2 million metric tons of bulk grain shipments this year,
including the normal flow of aid cargoes to other countries. The
existing U.S.-flag drybulk capacity may not be able to meet the
anticipated need. The waiver would help to ensure that there are enough
U.S.-flag vessels to carry 75 percent of the food aid to these
countries, as required by law.
Most importantly, this amendment could improve the vessel profile
of the U.S.-flag drybulk and breakbulk fleets, add jobs for U.S.
merchant mariners capable of crewing sealift ships in a mobilization,
and increase the percentage of U.S. foreign commerce carried in U.S.-
flag vessels. Additional modern vessels in the U.S.-flag fleet also
would increase the competition for carriage of government-impelled
cargoes. This could result in substantial cost savings to the U.S.
Government. Because these vessels would only be eligible for foreign
trade, this proposal has no impact on the Administration's firm
commitment to the U. S.-build requirement of the Jones Act. Foreign-
built vessels have always been eligible to carry preference cargo after
being registered for 3 years as a U.S.-flag vessel.
We also propose changing the cargo preference year for determining
compliance so that it coincides with the Federal Government fiscal
year. This would simplify record keeping and management of the program
without impact on any involved agencies or shippers. Parties affected
by the change have expressed support for the change.
Maritime Education and Training
A significant portion of MARAD's budget request is intended for
ongoing maritime education and training activities. Our request for
operations and training funds includes approximately $37.2 million to
operate the U.S. Merchant Marine Academy at Kings Point, NY. The
Merchant Marine Academy offers a 4-year undergraduate program that
leads to a Bachelor of Science Degree, and a merchant marine license as
a Third Mate or Third Assistant Engineer, or a dual license. In
addition, the students are enrolled as midshipmen and are commissioned
upon graduation as Ensigns in the U.S. Naval Reserve. The Academy's
significance as a world-renowned institution of maritime education
cannot be overestimated. Not only does the Academy produce highly
qualified officers for the merchant marine, but it is also the largest
single source of inactive duty Naval Reserve Officers. In peacetime,
Academy graduates create and operate efficient, cost-effective marine
transportation systems. In times of conflict, Academy graduates crew
the ships that support our troops.
This year's funding request of about $37.2 million for the Academy
includes a $3.3 million increase over funds appropriated in fiscal year
2000, including mandatory Federal salary and related cost increases.
The increase will fund both operational and capital improvements at the
Academy. The increase for operational improvements, approximately $1
million, will enable the Academy to improve existing academic and
administrative programs, the costs of which have escalated due to
contractual manpower and equipment/supplies cost increases. The
remainder of the program increase requested is designated for capital
improvements to address a serious maintenance backlog at the Academy's
facilities. Because the condition of the utility systems in Academy
buildings affects the health and safety of the students, faculty and
staff, these repairs are a priority. An overall facilities master plan
is under development at the Academy, and is expected to be completed in
July.
In addition to the funding for the Merchant Marine Academy,
approximately $9.5 million is requested for financial assistance to the
six State maritime academies. The State academies, like the Merchant
Marine Academy, offer training for qualified individuals to become
officers in the U.S. merchant marine. A portion of the requested
funding will support the Student Incentive Payment (SIP) Program at the
State academies, which results in a service obligation to the maritime
industry and the Armed Forces reserves for the recipients. The request
will also fund the costs of maintenance and repair for MARAD ships on
loan to the State academies as training ships. Approximately $2.5
million is needed to renovate the New York Maritime Academy's aging
training ship, the Empire State.
Marine Transportation System Initiative
Today, over two billion tons of goods produced or consumed in the
United States move through our nation's ports and waterways. This
volume is expected to more than double over the next 20 years. The
number of recreational users is also expected to grow by over 65
percent to more than 130 million annually in the next 20 years, and
high-speed ferry transportation is experiencing rapid growth in
response to land-transport congestion. Cruise ships anticipate
attracting 6.5 million passengers by the year 2002. Military reliance
on the Marine Transportation System (MTS) for force projection and
sustainment is also expected to grow in the new millenium.
Congress recognized the importance of the Marine Transportation
System (MTS) when, as part of the Coast Guard Authorization Act of
1998, it tasked the Secretary--through MARAD and the Coast Guard--to
establish a task force to assess the adequacy of the nation's MTS to
operate in a safe, effective, secure and environmentally sound manner.
The MTS initiative was launched by Secretary Slater nearly 2 years ago.
Last September, the Secretary released a report to Congress entitled An
Assessment of the U.S. Marine Transportation System, representing an
intense joint effort by industry and Government. Secretary Slater has
made it clear that the report will serve as the ``blueprint'' for the
future of our MTS. On January 13, 2000, MARAD announced the
establishment of the Marine Transportation System National Advisory
Council (MTSNAC). The charter for the Council became effective January
28, 2000. The MTSNAC will advise the Secretary of Transportation,
through MARAD, on current and future matters relating to the MTS--
waterways, ports, and their intermodal connections. The MTSNAC will
address: strategies to ensure a safe, environmentally sound, and secure
MTS that improves the global competitiveness and national security of
the United States; issues and concerns raised by the marine
transportation industry; and other matters at the Secretary's request.
The Council will be composed of representatives from approximately
31 non-Federal organizations, representing a cross section of the
diverse components that comprise the MTS, including private sector
organizations and State and local public entities. The individual non-
Federal participants have been nominated by their organizations. The
first Council meeting will take place next week on May 24th.
MARAD welcomes its continued leadership in this initiative, and we
take our responsibility very seriously. We look forward to continuing
our partnership with the U.S. Coast Guard and others involved in this
important effort. America's marine transportation system has always
delivered the goods and we intend to help make sure that this tradition
continues.
Manpower Needs
Among the ongoing efforts at MARAD is the assessment of the supply
of mariners to meet commercial and mobilization crewing requirements,
now and in the future. Right now, MARAD is seeing and hearing of
recruitment and retention problems in the seagoing workforce, just as
every industry is facing labor shortages in this vibrant economy. Based
on our analysis of mariner data, there are enough qualified active
seafarers to crew the DOD organic fleet for a short duration, but this
could dry up much of the pool. An extended mobilization of the entire
government-owned surge fleet would create pressure to rotate government
and commercial ship crews, by augmenting the pool with inactive
mariners. There is likely to be a mismatch between available mariners
and the specific skills needed to fully activate the DOD organic fleet.
We are also concerned that shoreside commitments of some of the
inactive mariners--such as work and family--may keep them from
volunteering to serve, even with re-employment rights. These
uncertainties concern us.
American Fisheries Act
The American Fisheries Act of 1998 (PL 105-277) assigned MARAD the
responsibility to ensure that proper citizenship standards are adhered
to for ownership of fishing vessels 100 feet or greater. New
regulations will require us to rigorously scrutinize transfers of
ownership or control, with particular attention to leases, charters,
mortgages, and financing arrangements for fishing vessels.
The final rule to implement the new citizenship requirements of the
American Fisheries Act is currently in clearance within the Department
of Transportation and will be forwarded to the Office of Management and
Budget shortly. Because of the complexity of the issues involved,
additional time was required to complete the final rule, which we
expect to publish in the Federal Register in early June.
Administrative Waivers of the Coastwise Laws for Small Passenger
Vessels
Mr. Chairman, I would like to report that one of your own
initiatives is now up and running at MARAD--the administrative process
for waiver of the U.S.-build requirement contained in the Passenger
Vessel Services Act for small vessels, which was part of the Coast
Guard Authorization Act of 1998. Under this provision, MARAD is charged
with establishing and administering a waiver process that allows
vessels carrying less than 12 passengers to engage in coastwise
transportation. Waivers are available to qualified vessels so long as
the intended employment of the vessel would not harm the domestic boat
building industry or the existing business of any domestically built
vessel.
Final regulations were published in the Federal Register on
February 11, 2000. We have received 15 applications to date, and three
applications have been approved with many others close to completion.
We expect to receive about fifty applications each year. We are pleased
to have been selected to administer this program. It offers a fair
alternative to small vessel owners who might otherwise be prohibited
from employing their vessels in coastwise transportation.
Conclusion
Mr. Chairman, the successes that MARAD can claim to date did not
come without help. Committee Members and staff have determined not only
the amounts of our authorizations, but also how we conduct business. I
noted earlier that the year 2000 represents a special one for us, a
year in which we not only wish to celebrate accomplishments but to
reach out as never before to industry and Congress. If we are to create
the domestic maritime industry that will embody the MTS vision
statement in our report to Congress last September, we need your
continued support. We at MARAD welcome the responsibilities and
challenges that have been given to us and pledge our determination to
meet those duties fully as stewards of the public's trust.
This concludes my prepared statement. I would be happy to address
any questions you may have at this time.
The Chairman. Thank you very much, Mr. Hart.
Mr. DeCarli, welcome back.
STATEMENT OF RAYMOND J. DeCARLI, DEPUTY INSPECTOR GENERAL, U.S.
DEPARTMENT OF TRANSPORTATION
Mr. DeCarli. Good morning, Mr. Chairman, Senator Stevens,
Senator Kerry. We appreciate the opportunity to be here today
to discuss the reauthorization of the Maritime Administration.
Our statement today will focus on three issues.
First of all, we will discuss the approval and subsequent
default of the Title XI loan guarantee to Massachusetts Heavy
Industries to rebuild the Quincy Shipyard, then we will talk
about MARAD's growing inventory of obsolete vessels and actions
needed to scrap them, then finally we will talk about the need
for improved controls related to the administration of
contracts for maintaining the Ready Reserve Force fleet.
Let me begin with the Quincy Shipyard, but before we begin
the discussion I think it is important to point out that the
loan guarantee to MHI is not a good example of MARAD's Title XI
program. Of the approximately $7 billion in Title XI loan
guarantees that MARAD has made since 1985, there has been only
two defaults, a vessel for $1.7 million, and the MHI loan.
The goal of the Quincy Shipyard project was to bring the
once-prominent shipbuilding industry back to Massachusetts.
Obviously, this was a noble objective to help rebuild the
nation's shipbuilding capacity and bring jobs back to the
Quincy area.
In 1995, MHI first applied for a $55 million loan
guarantee. Under existing regulations, MARAD was required to
ensure the economic soundness of the MHI project prior to its
approval. In other words, Mr. Chairman, MARAD had to see that
the MHI could produce income necessary to repay that loan. The
loan guarantee request could not pass that test, and MARAD
rejected it at that time.
The following year, Congress passed a temporary amendment
waiving the Title XI economic soundness requirement for closed
shipyards. As a result, MARAD could not apply the repayment
test and MHI's loan guarantee request was approved at that
time. From the time that the guarantee was approved until the
default, MARAD took appropriate actions to protect the
Government's interests, and that was one of the requirements in
the legislation.
Prior to closing on the loan, MARAD identified 28
significant requirements MHI had to complete, and there were
several important requirements in there. First of all, MHI had
to give a first priority lien of all assets to the Secretary of
Transportation, and then MARAD had to exercise control over all
loan disbursements in an escrow account. When it became
apparent that MHI did not have the resources to make its future
payments, once again MARAD acted. MARAD froze the balance in
the escrow account, protecting the remaining $12 million, and
then conducted an inventory of all assets at the shipyard.
In January of this year, after MHI missed its December
payment, the bank made a payment demand on the loan guarantee.
MARAD paid $59 million to settle the guarantee. The ultimate
loss to the Government as it stands right now would be about
$40 million less whatever amount is recovered through the
liquidation process. The pay-off amount of $59 million is
offset by the $12 million that was left in the escrow account,
the $6.6 million subsidy that was provided by the State of
Massachusetts, and the $2.6 million loan guarantee fee paid by
MHI. Future decisions on where this ends up will be dictated by
decisions made in the bankruptcy court.
Let me turn now to the ship-scrapping area. MARAD currently
has 114 obsolete vessels awaiting disposal, and by the end of
2001 expects to have about 155 vessels. The chart in front of
you illustrates the growth trend that exists. MARAD is under a
legislative mandate to dispose of its obsolete vessels by
September 30, 2001. It is required also to do this in a manner
that yields financial benefits, and some of that money goes to
the academy and maritime schools.
MARAD will not meet either of these requirements.
Environmental dangers associated with MARAD vessels which are
harbored in Virginia, Texas, and California are serious. The
ships contain hazardous materials such as PCBs, asbestos, lead
paint, and fuel oil. Some vessels have deteriorated to the
point where a hammer can penetrate the hulls.
The picture we are about to put up shows one of those
ships. This is the 56-year-old Mission Ynez that is at Suisun
Bay, CA. This ship has been awaiting disposal for 25 years. It
has holes in the topside deck. The transformers contain PCBs.
It is covered with lead-based paint.
From 1991 to 1994, 80 ships were scrapped overseas. The
ships were sold at an average price of about $435,000. MARAD
stopped selling ships overseas for scrapping in 1994 due to EPA
restrictions. Since then, MARAD had been relying on the
domestic scrapping market, and quite frankly that has not
worked.
As you can see from the chart, that we are displaying now,
few ships have been scrapped since 1994. Proceeds from sales
have dropped dramatically, and in the United States, ships are
sold for about $100, and what is even more important besides
the low prices, there are few companies that are interested in
buying these ships.
The current approach for selling vessels for domestic
scrapping does not work. Today the Navy is paying contractors
to scrap fleet warships, while MARAD is asking contractors to
pay to scrap its vessels. Furthermore, domestic scrapping
capacity is very limited.
We recently recommended that the Maritime Administrator
seek legislative approval to obtain an extension on the
disposal mandate and eliminate the requirement for financial
returns on vessel sales. We also recommended that MARAD develop
a proposal seeking authority and funding to pay contractors to
scrap vessels and target the ``worst condition'' vessels for
priority disposal.
In its authorization request for 2001, MARAD proposed a 5-
year extension to develop and implement a plan to dispose of
these vessels. In our opinion, Mr. Chairman, the MARAD proposal
to begin disposal within 5 years is unacceptable. Considering
the condition of the vessels, the environmental risks, and the
cost to maintain them, the legislation should require more. It
should not only require MARAD to develop a disposal plan, but
require complete or substantial disposal of all the vessels
within the 5-year period.
Let me turn last to internal controls over the maintenance
contracts for Ready Reserve vessels. For the past several
years, we have been participating with the FBI in a law
enforcement effort. That investigation has focused on bribery,
fraud, and kickbacks relating to the maintenance of both
military sealift command ships and Ready Reserve fleet vessels.
In August 1999, the Department of Justice announced 23
indictments and information as a result of those
investigations. Two MARAD employees pleaded guilty to accepting
unlawful gratuities from contractors, and MARAD took action to
debar or suspend 16 companies and individuals. The MARAD
actions were quite bold.
We subsequently performed an audit to evaluate the adequacy
of MARAD's internal control system for awarding and managing
its contracts. We found that MARAD had effective policies and
procedures related to the award of the new ship's contracts.
However, the administration of those contracts with ship
managers and general agents needed improvement. MARAD has
agreed to strengthen its controls for administering the
contract and now must follow through on the necessary
corrective action.
Mr. Chairman, that completes our statement. I would be
pleased to answer any questions.
[The prepared statement of Mr. DeCarli follows:]
Prepared Statement of Raymond J. DeCarli, Deputy Inspector General,
U.S. Department of Transportation
Mr. Chairman and Members of the Committee:
We appreciate the opportunity to be here today to discuss the
reauthorization of the Maritime Administration (MARAD). Our statement
focuses on three issues:
(1) The approval and subsequent default on the Title XI loan
guarantee for the Quincy Shipyard in Massachusetts,
(2) MARAD's growing inventory of obsolete vessels and actions
needed to scrap them, and
(3) The need for improved controls related to the administration of
contracts for maintaining Ready Reserve Force (RRF) vessels.
Title XI Loan Guarantee to Massachusetts Heavy Industries (MHI)/Quincy
Shipyard Fails
Title XI of the Merchant Marine Act of 1936, as amended,
established the Federal Ship Financing Guarantee Program. Under Title
XI, businesses secure loans in the private sector, and the U.S.
Government guarantees repayment in the event of default.
As of April 2000, Title XI guarantees totaled approximately $4
billion and covered approximately 81 individual shipowners operating
600 vessels and 8 shipyard modernization projects. Of the approximate
$7 billion in Title XI guarantees issued since 1985, MARAD has
experienced only two defaults--a vessel for $1.7 million, and MHI. The
goal of the MHI/Quincy Shipyard project was to bring the once prominent
shipbuilding industry back to Massachusetts.
On December 19, 1995, MHI submitted an application for a $55
million loan guarantee to MARAD to reactivate and modernize the former
Fore River Shipyard in Quincy, Massachusetts. MARAD was required to
ensure the economic soundness of the loan guarantee application prior
to its approval. In other words, MARAD had to see that MHI could
produce the income necessary to repay the loan. Because the application
did not include any firm shipbuilding contracts, MARAD questioned the
economic soundness of MHI's proposal and rejected the application.
As a result of Congressional interest in the MHI/Quincy project,
the Coast Guard Authorization Act of 1996 contained a provision waiving
the Title XI economic soundness requirement for reactivation and
modernization of closed shipyards in the United States. This provision
was enacted only for one year and expired in 1997. Under this
provision, MARAD concluded that the MHI application qualified for a
Title XI loan guarantee. On November 1, 1996, MARAD approved the loan
guarantee and issued a $55 million letter commitment to MHI.
Prior to closing on the loan guarantee, MARAD appropriately took a
number of actions to protect the Government's interest. MARAD
identified 28 significant requirements for MHI to complete, including
granting a first priority lien on all assets to the Secretary of
Transportation and establishing a MARAD-controlled escrow account for
disbursing the loan.
In June 1999, MHI missed its scheduled loan payment and asked to
defer that payment until December 1999. With the lender's concurrence,
MARAD approved the deferral.
MHI made progress on the shipyard modernization until August 1999,
when a dispute arose with the general contractor. MHI had torn down and
refurbished buildings, purchased and began installing equipment, and
made repairs to reactivate cranes. Approximately $47 million was spent
out of the escrow fund to cover these and other expenses. However, the
shipyard is not operational and considerable work remains to be done.
The drydocks have not been repaired, equipment is still in crates, and
machinery has been exposed to the elements. The Environmental
Protection Agency (EPA) has advised MARAD that there are environmental
problems in the shipyard that require remediation. MARAD estimates that
cleanup costs could approach $1 million.
When it became apparent that MHI did not have the resources to make
its future loan payments, MARAD again acted to protect the Government's
interest. In September 1999, MARAD froze the balance in the escrow
account and conducted an inventory of all assets at the shipyard.
In January 2000, after MHI missed its December 1999 payment, the
bank made a payment demand on the loan guarantee. MARAD paid $59.1
million to settle the guarantee on February 25, 2000. However, the
ultimate loss to the Government, and, ultimately the taxpayer, will be
offset by the balance in the loan escrow account ($12 million), the
original subsidy provided by the State of Massachusetts ($6.6 million
plus accrued interest), the loan guarantee fees ($2.6 million), and
whatever amount is recovered through liquidation.
Although MARAD has a first priority lien, the amount that can be
recovered through liquidation cannot be determined at this time. First,
the value of the shipyard and equipment is uncertain so MARAD has
initiated an independent appraisal. Also, the resolution of MHI's plea
to reorganize because of bankruptcy could impact MARAD's ability to
recover additional funds.
Even before the loan guarantee was approved, this Committee asked
us to review MARAD's actions to ensure taxpayer interests were
protected. Since 1997, we have issued four reports related to the loan
guarantee. Our primary concern throughout has been the absence of any
firm contracts to build ships once the shipyard is completed. There was
always a 6-ship foreign deal requiring another MARAD loan guarantee
dangling as a possibility--but it never materialized and always
appeared doubtful as a source of future revenue for the shipyard. MARAD
was responsive to the majority of our recommendations, but stated the
Congressional directive to waive the economic soundness criteria
prevented it from acting on our recommendations to require evidence of
contracts or sources of income.
MARAD's Inventory of Obsolete Vessels Is Growing, A Realistic Disposal
Plan Is Needed
MARAD currently has 114 obsolete vessels awaiting disposal that
require continued maintenance at taxpayer expense. MARAD is under a
legislative mandate to dispose of its obsolete vessels by 2001 in a
manner that will yield financial benefits. MARAD will not meet these
requirements.
Environmental dangers associated with these old, deteriorating
ships increase daily. The so-called ``worst condition'' vessels are
about 50 years old and have been awaiting disposal 22 years on average.
These vessels contain hazardous materials such as PCBs, asbestos, and
fuel oil. Some vessels have deteriorated to the point where a hammer
can penetrate their hulls. In addition, the inventory of obsolete
vessels awaiting disposal is increasing, and MARAD expects to have 155
by the end of fiscal year (FY) 2001.
Vessels Awaiting Disposal at Suisun Bay Reserve Fleet
MARAD stopped selling vessels overseas for scrapping in 1994 due to
EPA restrictions. In 1998, the Administration placed a moratorium on
all sales of vessels for scrapping overseas. Although the moratorium
expired in October 1999, MARAD has refrained from exporting obsolete
vessels.
Since 1995, few vessels have been scrapped because there is limited
domestic scrapping capacity. Although MARAD sold 22 vessels to domestic
scrappers, only 7 have been scrapped. Last month two additional vessels
were towed to scrapping sites. The remaining 13 vessels are still in
MARAD's Fleet, and recent contractor defaults raise a question as to
whether these vessels will be removed. This represents a significant
change from 1991 through 1994 when 80 ships were sold overseas at an
average price of $433,000 per vessel. Recent sales yielded between $10
and $105 per vessel.
MARAD Vessels Scrapped
The current approach of selling obsolete vessels for domestic
scrapping will not work in today's marketplace. MARAD cannot compete
with a Navy pilot program that is paying contractors to scrap obsolete
warships while it is asking contractors to pay to scrap its vessels. A
program similar to the Navy's would require about $500 million to scrap
the 155 vessels MARAD expects to have for disposal in 2001.
While MARAD has been pursuing ways to improve scrapping sales, its
ability to explore creative solutions for disposing of vessels is
constrained by the requirement to maximize financial returns. Also, the
programs and alternatives MARAD is pursuing have capacity limitations
and, therefore, do not have the potential to significantly reduce the
backlog of vessels in a timely manner. These alternatives include:
coordinating with the Navy and a west coast company on a proposal for a
potential scrapping site; participating in interagency work groups to
look for innovative ways to improve the ship scrapping process; and
requesting approval from EPA to sell vessels to overseas markets.
We recently recommended that the Maritime Administrator seek
legislative approval to obtain an extension on the disposal mandate and
eliminate the requirement to gain financial returns on vessel sales. We
also recommended that MARAD develop a proposal seeking authority and
funding to pay contractors to scrap vessels, and target the ``worst
condition'' vessels for priority disposal.
In its authorization request for FY 2001, MARAD proposed a 5-year
extension ``to develop and begin implementing a plan to dispose of
these vessels.'' We do not believe it is acceptable to begin disposal
within five years considering the condition of some of the vessels, the
environmental risks, and the costs to maintain them. In our opinion,
the legislation should require MARAD to develop a disposal plan and
substantially dispose of these vessels within 5 years.
Internal Controls Over Maintenance Contracts for RRF Vessels Need to Be
Strengthened
Since 1996, we have participated in a joint law enforcement task
force led by the FBI. The task force investigated bribery, fraud, and
kickbacks involving contracts for vessels in the Military Sealift
Command and MARAD's Ready Reserve Fleet.
In August 1999, the Department of Justice announced 23 indictments
and informations, as a result of the investigation. Two MARAD employees
pleaded guilty to accepting unlawful gratuities from contractors, and
MARAD and the Navy took action to debar or suspend 22 companies and
individuals.
In light of the problems identified in the investigation, we
reviewed MARAD's internal controls for the ship manager program. We
found that MARAD implemented effective policies and procedures relating
to the award of the ship managers' contracts. However, the
administration of these contracts and those covering general agents
needed improvement.
Specifically MARAD:
Advanced $63 million to general agents without supporting
documentation that costs were incurred,
Allowed ship manager contractors to issue numerous
noncompetitive subcontracts without required documentation, and
Did not consistently ensure payments were for actual costs
incurred and were related to the work performed.
MARAD agreed to strengthen its controls for administering ship
managers' contracts. MARAD officials must now follow through on the
actions they agreed to take.
Title XI Loan Guarantee to Massachusetts Heavy Industries (MHI)/Quincy
Shipyard Fails
Title XI of the Merchant Marine Act of 1936 (as amended) authorizes
the Secretary of Transportation to make loan guarantees to finance the
construction, reconstruction, or reconditioning of eligible export
vessels and the modernization and improvement of shipyards. Under this
Title XI program, which is administered by MARAD, businesses secure
loans in the private sector, and repayment is guaranteed by the U.S.
Government. One of the criteria for eligibility for most loan
guarantees is that the applicant's proposed project be economically
sound.
Original Modernization Proposal Did Not Meet Title XI Criteria
On December 19, 1995, MHI submitted to MARAD an application for a
loan guarantee of $55 million to reactivate and modernize the closed
Fore River Shipyard located in Quincy, Massachusetts. The shipyard
historically built military vessels, and MHI was seeking to reactivate
it as an internationally competitive commercial shipyard. Because MHI's
proposal did not include firm shipbuilding contracts, there were
questions as to whether the shipyard would generate sufficient revenue
to repay the guaranteed loan. MARAD concluded that the criterion that
projects be economically sound was not met and rejected this
application.
Congress Waived Economic Soundness Criteria
As a result of Congressional interest, the Coast Guard
Authorization Act of 1996 contained a provision temporarily amending a
key requirement of the Title XI loan guarantee program. Specifically,
the amendment waived the economic soundness requirement for
reactivation and modernization of closed shipyards in the United
States. MARAD concluded that MHI's application for the closed Fore
River Shipyard qualified for consideration under the amendment.
Although the amendment waived the economic soundness requirement,
it required the Secretary of Transportation to ``impose such conditions
* * * as are necessary to protect the interests of the United States
from the risk of default.'' On November 1, 1996, MARAD approved the
loan guarantee and issued a $55 million letter commitment to MHI for
reactivating the closed shipyard.
MARAD Acted to Protect the Government Interest Prior to Loan Guarantee
Approval
The letter commitment contained 28 significant provisions to
protect the interests of the U.S. Government including requirements
that:
1. The State of Massachusetts deposit $6.6 million in cash, bonds,
or a letter of credit to be held in a financing account (this amount
equates to the required subsidy rate of 12 percent);
2. MHI have at least $3 million in capital available to ensure its
ability to operate as a going concern to support normal operating
expenses and routine start-up costs associated with the proposed
project;
3. MHI have $2.6 million of its own funds available for use on the
project to ensure that MHI stockholders have a personal stake in the
project;
4. MHI grant the Secretary of Transportation a first priority lien
on all assets, land, and other real and personal property owned or
acquired by MHI to ensure, in case of default on the loan guarantee by
MHI, that the U.S. Government has the right to assume ownership and
sell the property to recover its funds; and
5. MHI deposit proceeds from the loan into an escrow account
controlled by the Secretary of Transportation.
MARAD Recognized the Loan Guarantee to MHI Was High Risk
In order to limit the Government's potential losses, Title XI loan
guarantee applicants (or in this case the State of Massachusetts) are
required to submit to MARAD, at the beginning of the loan, resources to
cover a percentage of the loan. This percentage, known as the subsidy
rate, depends on MARAD's assessment of the applicant's risk of default.
The higher the risk, the larger the subsidy rate.
MARAD assesses the risk of an applicant's default by assigning
points to 10 different factors, weighted by importance. Also, subsidy
rates can change over the term of the loan guarantee if the risk
changes. To keep the subsidy rate in line with the risk, the Office of
Management and Budget requires reassessments if actual events differ
from the assumptions of the original assessment.
On November 7, 1997, prior to closing on the loan guarantee, we
reported that MARAD had held MHI to the requirements of the letter
commitment and followed applicable Title XI loan guarantee regulations.
Our report recommended MARAD: (1) reassess the risk factor rating for
MHI's application, and when reassessed, take appropriate actions; (2)
require evidence of shipbuilding contracts or alternative sources from
which revenues could be generated to repay the guaranteed loan; and (3)
ensure MHI fulfills the remaining requirements contained in the letter
commitment. While MARAD generally agreed with the recommendations, it
was unable to implement the first two recommendations.
Based on a legal opinion by the Office of the Secretary of
Transportation's Deputy General Counsel, dated November 12, 1997, MARAD
concluded it had no legal authority to reassess the risk factor rating
prior to closing. MARAD also said that the Coast Guard Authorization
Act precluded it from requiring MHI's project to meet the economic
soundness provision and was precluded from requiring evidence of viable
shipbuilding contracts or alternative sources from which revenues could
be generated to repay the guaranteed loans because these requirements
were not stipulated in MARAD's letter commitment.
On December 17, 1997, we reported (Report Number MA-1998-048) our
concern that MARAD was not planning to reassess the risk factor on the
loan guarantee prior to closing. MARAD agreed to reassess the risk but
suggested delaying any reassessment of risk until the last quarter of
1998, thereby giving MHI the opportunity to demonstrate that
modernization is underway and that MHI is ``aggressively marketing its
products.''
In a July 31, 1998 memorandum from the acting MARAD Administrator,
we were informed that MARAD had ``. . . completed a reestimation of the
risk rating of MHI . . . . and can find no basis to change our original
estimate. . . .'' The assessment attached to the memorandum showed that
the loan guarantee was rated as high risk.
MARAD's July 31, 1998 memorandum also stated that ``The only change
in the circumstances underlying our assessment is that MHI has entered
into a technology transfer agreement with South Korea's Halla
Engineering and Heavy Industries, one of the most advanced yards in
Asia.'' This change would enable MARAD to assign MHI more points for
``Historical Experience,'' but the additional points would not be
sufficient to change the overall risk assessment. The memorandum also
stated that MHI was actively pursuing a shipbuilding project with
Intermare, a ship owner.
An application for a Title XI loan guarantee, for the project with
Intermare, was received by MARAD in February 1996. Although there were
major outstanding issues regarding this shipbuilding project, MARAD
stated there was a reasonable basis to conclude that the Intermare
proposal was still viable.
Risk of Default by MHI Materially Increased
In June 1999, MHI defaulted on its $1.55 million ``interest only''
payment owed to Fleet National Bank. A May 27, 1999 letter to MARAD,
from attorneys representing MHI, cited unavoidable delays in
reactivating the shipyard. According to the letter, the delays
increased costs, and funds for the June 1999 payment were used instead
for shipyard construction. MHI's attorneys requested approval from
MARAD to delay the June 1, 1999 payment for 6 months (until December 1,
1999). In a written reply to MHI, dated July 7, 1999, MARAD requested
MHI provide specific additional information demonstrating that the
shipyard will be a going concern after completion of the reactivation.
According to MARAD, this information was needed to assess the
reasonableness of MHI's extension request. MARAD received this
information in late July and early August 1999.
MHI's failure to make the June 1, 1999 payment, the request for a
6-month extension to make the payment, and lack of a shipbuilding
project indicated a major change in MHI's risk of default. On July 20,
1999 (Report Number MA-1999-115), we recommended that MARAD:
1. Reassess the risk factor rating for MHI's loan guarantee as
prescribed by OMB Circular Number A-11, and make the required
adjustment to the subsidy rate.
2. Ensure it has all of the information required by the Title XI
program to protect the interests of the United States from default
prior to making a decision on MHI's request to defer its June 1, 1999
payment.
3. Ensure that MHI provides complete and current information as
required by the Title XI program prior to making a decision on the loan
guarantee application by Intermare.
In its August 6, 1999 response to our report, MARAD advised us that
it would reassess the risk factor rating by December 1, 1999. According
to MARAD, this would ``allow sufficient time for the shipyard
modernization to be completed and for MARAD to determine whether MHI
will be able to finalize the Intermare shipbuilding contract on a
viable basis.''
On July 12, 1999, the mortgage holder informed MARAD that it
intended to make a demand for payment under the guarantee on or about
August 1, 1999, unless MHI's request to defer the missed payment was
approved. On August 6, 1999, MARAD approved the deferral of MHI's
missed June 1, 1999 ``interest only'' loan payment to December 1, 1999.
Work on Shipyard Modernization
On August 17, 1999, MHI's general contractor (and its
subcontractors) for the shipyard modernization project walked off the
job because of payment disputes of $3 million. The general contractor
claimed it had not been paid since April 1999, when only a partial
payment was made. On August 30, 1999, MARAD: (1) declared contractor
default and formally terminated MHI's general contractor for the
shipyard modernization project, and (2) called on the surety company to
perform under the terms and conditions of the performance bond.
In a September 15, 1999 report (Report Number MA-127), we
recommended that MARAD take action to immediately freeze the
uncommitted balance in MHI's escrow account, conduct a physical
inventory of all assets and property owned by MHI, and ensure the
assets and property are safeguarded from loss or unauthorized
disposition. MARAD agreed with our recommendations and took the
necessary actions.
MHI Failed to Make Loan Payments and Bank Called Loan Due
On December 1, 1999, MHI missed its deferred ``interest only''
payment, as well as its regularly scheduled principal and interest loan
payment to Fleet Bank. During the 30-day grace period, MARAD approved
an extension to January 29, 2000 to make the payment. During this
period, MHI continued to request additional extensions. On January 28,
2000, Fleet National Bank made a demand for payment under the MARAD
guarantee.
On February 25, 2000, MARAD paid off the Fleet Bank loan of $59.1
million and ordered MHI personnel to vacate the shipyard. MARAD
immediately recovered $12 million from MHI's escrow account and applied
$6.6 million plus accrued interest that was deposited by the State of
Massachusetts and the $2.6 million in loan guarantee fees to the
payoff, thereby lowering MARAD's exposure to $36.6 million. This
exposure will be further reduced because MARAD has first priority lien
in liquidation proceedings. The value of the shipyard, and equipment in
it, is unknown at this time. On May 8, 2000, MARAD contracted to have
the shipyard real estate and equipment appraised. After paying off
Fleet Bank, MARAD presented a claim to MHI for $47 million, plus
accrued interest, on the principal amount.
On March 13, 2000, MHI sought bankruptcy protection under Chapter
11 of the U.S. Bankruptcy Code. MHI has until July 11, 2000, to propose
a reorganization plan in U.S. Bankruptcy Court. However, MARAD is
scheduled to ask the Court to permit it to foreclose on MHI.
Last week, the EPA advised MARAD that there are environmental
problems in the shipyard that require remediation. MARAD estimates that
cleanup costs could approach $1 million.
MARAD is Making Little Progress Scrapping its Obsolete Vessels
The Merchant Ship Sales Act of 1946 created the National Defense
Reserve Fleet (NDRF), a Government-owned and administered Fleet of
inactive, but potentially useful, merchant and non- military vessels to
meet shipping requirements during National emergencies. MARAD
administers the Fleet, and the Department of Defense provides the
funding to maintain the Fleet. The Federal Property and Administrative
Services Act gave MARAD responsibility for disposing of all Federal
Government merchant-type vessels of 1,500 gross tons or more. The
National Maritime Heritage Act of 1994 required MARAD to dispose of
obsolete vessels in the Fleet by September 30, 1999, in a manner that
maximizes financial return to the United States, but the Act was
amended to extend the original disposal date by 2 years, from 1999 to
2001.
Current Inventory and Age of Vessels
As of April 30, 2000, 114 obsolete vessels were designated for
disposal because the majority of them are no longer operational.
Ninety-one of the 114 vessels are slated for scrapping. The remaining
23 vessels will be disposed of through the fish reef program, used by a
state or Federal agency, or held for useful parts and equipment.
MARAD maintains the inactive vessels in the water at the following
locations:
James River Reserve Fleet (JRRF) at Ft. Eustis, Virginia
(61 vessels);
Beaumont Reserve Fleet (BRF) in Beaumont, Texas (9
vessels); and
Suisun Bay Reserve Fleet (SBRF) in Benecia, California (42
vessels).
The Coast Guard holds two vessels in Mobile, Alabama.
As shown in the following chart, the average age of the 114
obsolete vessels is 48 years. These vessels have been in the Fleet for
an average of 15 years.
Average Vessel Age
Obsolete Vessels Pose Environmental Risk
The 114 obsolete vessels currently awaiting disposal pose
environmental risks because they are deteriorating, contain hazardous
materials, and contain oil that could leak into the water. These
vessels are literally rotting and disintegrating as they await
disposal. Some vessels have deteriorated to a point where a hammer can
penetrate their hulls. They contain hazardous substances such as
asbestos and solid and liquid polychlorinated biphenyls (PCBs). If the
oil from these vessels were to enter the water, immediate and
potentially very expensive Federal and state action would be required.
In 1999, MARAD identified the 40 ``worst condition'' vessels. These
vessels were classified as ``worst condition'' due to their severe
deterioration and threat to the environment. As of April 30, 2000, 3 of
the 40 had been moved out of the Fleet to domestic scrappers.
Worst Condition Vessel Ages
The remaining 37 ``worst condition'' vessels have been in MARAD's
Fleet for an average of 22 years, are in particularly bad condition,
and may require additional or special maintenance. Our inspection of 11
of the original 40 ``worst condition'' vessels revealed corrosion,
thinning, and rusting of the hull; asbestos hanging from pipes below
deck; lead-based paint easily peeled from the ship; solid PCBs (in
cabling); and in some instances, remnants of liquid PCBs in electrical
equipment.
Deteriorating Vessel at James River Reserve Fleet
Costs to maintain these vessels will likely increase due to their
deteriorating condition, leaks, and the need for additional time-
sensitive maintenance. For example, MARAD spent $1.3 million to
maintain 1 of the 40 ``worst condition'' vessels over the past 2 years.
This vessel is over 35 years old, contains hazardous substances
including asbestos, and it deteriorated to the point where oil leaked
into the water requiring costly environmental clean-up. MARAD has
applied over 20 patches to leaks, removed hazardous materials, deployed
containment booms, and pumped oil out of the vessel. The vessel is
disintegrating to a point where it will not be seaworthy much longer.
Monitoring efforts for this vessel are ongoing.
Loss of Overseas Market and Limited Domestic Capacity Reduced
Scrapping Progress
Although MARAD has sold 22 vessels since 1995, only 7 have been
scrapped. Two other vessels have been towed to scrapping sites. The
remaining 13 vessels sold are still moored in MARAD's Fleet, requiring
continued maintenance at U.S. Government expense.
As shown in the following chart, this rate of progress is a
significant change from previous years when vessels were sold to
overseas scrappers.
MARAD Vessels Scrapped
Between 1991 and 1994, MARAD sold 80 vessels overseas for scrapping
at an average price of $433,000 per vessel. During the past year,
vessel sales yielded between $10 and $105 per vessel. On October 25,
1999, MARAD sold three vessels for $10 per vessel. The most recent sale
was for two vessels at $105 per vessel on December 21, 1999.
MARAD suspended the sale of vessels to overseas scrappers in 1994
because the EPA prohibited the export of Government-owned ships
containing PCBs.
In September 1998, an Administration moratorium halted all sales of
Government-owned vessels for scrapping overseas. As a result, MARAD has
been relying on the domestic market, but capacity in the domestic
market is limited. In the 1970s, there were 30 U.S. contractors in the
ship scrapping industry. Over the past 19 months, however, only four
companies have bid on MARAD's scrapping contracts and passed MARAD's
technical compliance review to scrap vessels. Additional companies are
not attracted to this industry because of the low profits currently
available. Scrap steel prices in the United States are low and
contractors must comply with environmental regulations. According to
scrapping company officials, the number of vessels that a contractor
can scrap at one time is approximately 1 to 5 vessels.
The Number of Vessels Awaiting Disposal Is Increasing
The number of obsolete vessels has almost doubled over the last 2
years. MARAD expects its inventory of obsolete vessels awaiting
disposal will increase to 155 vessels by the end of FY 2001, as shown
in the following chart.
Vessels Awaiting Disposal
This projected increase is due to additional vessel transfers from
the Navy, downgrades of other NDRF vessels to obsolete status, and the
inability to sell ships for scrap. Of the 155 vessels, 132 will be
targeted for scrapping. Although the remaining 23 vessels are slated
for other forms of disposal, some of these may be transferred into the
scrapping category in future years if they cannot be disposed of
through other means.
The Navy's Pilot Project May Be a Model for MARAD
The Department of the Navy experienced a similar inability to sell
its combatant vessels for domestic scrapping. In 1998, Congress
authorized and appropriated funding for a Navy pilot project for the
disposal of obsolete warships. Under the pilot project, the Navy is not
subject to a legal requirement to maximize financial returns on its
obsolete vessels. On September 29, 1999, the Navy awarded four
contracts amounting to $13.3 million for the scrapping of four
warships.
The purpose of the Navy project is to quantify the costs associated
with ship scrapping, which could lead to the disposal of 66 warships.
If MARAD were authorized to implement such a project, it could cost as
much as $515 million to dispose of the obsolete vessels that MARAD
expects to have by the end of FY 2001.
Alternatives Offer Potential but Will Not Solve the Problem
While MARAD has been pursuing ways to improve scrapping sales, its
ability to explore creative solutions for disposing of vessels is
constrained by the requirement to maximize financial returns. Also, the
programs and alternatives MARAD is pursuing do not have the potential
to significantly reduce the backlog of vessels awaiting disposal in a
timely manner. We have identified some additional alternatives that
MARAD has not pursued that may have the potential to contribute to the
goal of disposing of obsolete vessels.
Programs to improve scrapping sales and alternatives MARAD is
pursuing include: coordination with the Navy and a West Coast Company
on a proposal for a potential scrapping site; participation in
interagency work groups to look for innovative ways to improve the ship
scrapping process and establish consistent procedures; donation of
vessels designated for disposal for uses such as museums and the fish
reef program, given legislative or executive approval; and coordination
with the Navy on its program to sink vessels in deep water after
hazardous materials are removed.
MARAD may be able to explore alternatives that have the potential
to assist in disposing of some of its vessels such as: selling vessels
to other countries for non-military uses, given legislative approval
and approval from the EPA to sell vessels to overseas markets that are
capable of scrapping them in an environmentally compliant manner.
According to MARAD, selling vessels overseas for non-military uses
would require a change in the law that only allows MARAD to sell
vessels for disposal or non-transportation use. However, legislation
was passed in 1996 for four vessels to be sold on a competitive basis
for operational use. One vessel was sold in 1999 and bids on two
vessels are currently under review. The fourth vessel requires an EPA
approval, which MARAD requested April 1999.
During the moratorium on overseas sales from 1998 to January 1,
1999, MARAD could not request any exceptions for exporting vessels.
However, since January 1, 1999, it could have requested exceptions to
this prohibition through the Chair of the Council on Environmental
Quality. To obtain an exception, MARAD would have to ensure that
vessels sold overseas would be scrapped in an environmentally sound and
economically feasible manner. MARAD, however, has not requested any
exceptions to sell vessels overseas.
Recommendations Based on Recent Audit
In our March 10, 2000 audit report, MA-2000-067, we recommended
that the Maritime Administrator:
1. Seek legislative approval to extend the 2001 mandate to dispose
of obsolete vessels and to eliminate the requirement that MARAD
maximize financial returns on the sale of its obsolete vessels.
2. Continue to pursue programs to improve scrapping sales and
identify alternative disposal methods that can contribute to the goal
of reducing the number of obsolete vessels awaiting disposal, to
include working with the Navy on the results of its studies on the
environmental impact of sunken vessels.
3. Develop a proposal for submission to Congress seeking approval
and funding for a project to pay contractors for vessel scrapping. The
proposal should include a plan to target the ``worst condition''
vessels first, identify funding and staffing requirements, and provide
milestone dates to dispose of all obsolete vessels.
MARAD concurred with our recommendations. In its FY 2001
authorization request, MARAD proposed a ``five year extension [in the
deadline that] will provide MARAD with additional time to develop and
begin implementing a plan to dispose of these vessels.'' Considering
the condition of some of the vessels, the environmental risks, and the
costs to maintain them, we find the MARAD proposal unacceptable. MARAD
must develop and implement a disposal plan for its obsolete vessels
once legislative approval is obtained for an extension.
MARAD also needs to obtain legislative approval allowing it to
eliminate the requirement to maximize financial returns on vessel
sales. This would then allow MARAD to seek funding for a pilot program,
similar to the Navy's, whereby it would pay for vessel scrapping. MARAD
should focus first on disposing of its ``worst condition'' vessels and
so state that in its plan.
MARAD should also continue to coordinate with the Navy on its
disposal programs and seek legislative approval to sell vessels in the
Fleet that are still operational, but will eventually become obsolete,
to overseas companies for continued use. MARAD should also request
exceptions from EPA to sell vessels to overseas scrappers that meet the
environmental standards. A requirement for MARAD to report on its
progress should be included in all legislative mandates.
Recent Legislative Actions Propose Different Solutions But MARAD Has
Yet to Develop a Plan for Either
On April 5, 2000, a Bill was introduced in the House of
Representatives to authorize funding for a ship scrapping pilot project
for MARAD that would allow MARAD to pay qualifying U.S. shipyards to
scrap its obsolete vessels. Such a program would help MARAD dispose of
some of its vessels by generating interest among existing U.S.
companies. Furthermore, this program would provide jobs for qualified
workers in the areas selected. The Navy's current project would provide
a model for MARAD. However, the average time to scrap a MARAD vessel is
4 to 6 months, and additional time would be required to implement such
a program, while these vessels continue to be maintained at Government
expense. MARAD's rate of progress indicates that this would serve as a
long-term solution.
On May 1, 2000, a Bill was introduced in the Senate on MARAD's FY
2001 Authorization, to include a 3-year extension on disposing of its
obsolete vessels and to allow for the disposal of MARAD's 39 ``worst
condition'' vessels in foreign countries. The 3-year extension will
provide additional time for MARAD to develop a plan to dispose of its
vessels, which is a requirement in this proposed bill. As noted
earlier, MARAD did not develop an implementation plan during its
original extension from 1999 to 2001. In a February hearing,
Congressmen noted that MARAD did not prepare a plan to dispose of its
vessels during the original extension, and questioned whether MARAD
would develop such a plan during this second extension.
The allowance for MARAD to again sell vessels overseas for
scrapping would assist in disposing of its ``worst condition'' vessels
that require high maintenance. However, MARAD would still be required
to request approval from EPA to sell these vessels to overseas markets
that are capable of scrapping them in an environmentally compliant
manner. Additionally, the environmental and worker safety and health
concerns in some countries remain and could continue to prohibit this
practice. According to MARAD officials, it has coordinated with a
scrapping company in Mexico that reportedly meets the environmental
requirements and standards for its workers, although MARAD has not
pursued this as a viable option due to the continual environmental and
worker safety and health concerns.
Internal Controls Over Maintenance Contracts for Ready Reserve Force
(RRF) Vessels can be Improved
In 1976, a Memorandum of Agreement between MARAD and the Department
of Defense established the RRF as a component of the National Defense
Reserve Fleet. MARAD is responsible for maintaining the RRF vessels in
a heightened state of readiness so that they can be activated in 4 to
30 days to meet shipping requirements during National emergencies. As
of March 2000, the RRF was composed of 91 militarily useful vessels
with an estimated value of $1.58 billion.
MARAD administers RRF vessel acquisition, upgrade, activation,
maintenance, operations, and subsequent deactivation through ship
manager contracts and general agency agreements. Ship manager contracts
are awarded to ship management companies, through competitive bids, to
maintain vessels in the RRF. General agency agreements are issued to
ship management companies and are usually used when a new vessel is
acquired or a ship manager contract is terminated.
Three MARAD regional offices (Norfolk, Virginia; New Orleans,
Louisiana; and San Francisco, California) administer the ship managers'
contracts and general agency agreements. During the period of our
audit, 57 vessels were maintained under ship manager contracts, and 32
vessels were maintained under general agency agreements. Two vessels,
assigned for training purposes, were not maintained by either a ship
manager or a general agent.
Fraud Identified in Department of Defense and MARAD Ship Managers'
Contracts
The Federal Bureau of Investigation (FBI), Defense Criminal
Investigative Service and the Naval Criminal Investigative Service
initiated an investigation in 1994 to look into potential kickbacks
between ship managers managing Military Sealift Command vessels and
their subcontractors. The FBI named their investigation ``Operation
Octanova.'' MARAD was not the initial focus of the investigation, but
we joined the investigation in 1996 because MARAD and the Military
Sealift Command use the same contractors.
The investigation identified fraud and kickbacks involving
contracts to maintain RRF vessels. In August 1999, the Department of
Justice announced Federal indictments and informations of 2 companies
and 21 individuals, including 2 MARAD employees. One MARAD employee in
Beaumont, Texas subsequently pleaded guilty to accepting a large screen
television and a videocassette recorder from a contractor. The
contractor inflated invoices by the costs of the items given to the
employee. A second MARAD employee in Norfolk, Virginia, also pleaded
guilty to soliciting and accepting over $10,000 from an undercover
agent who he believed was a potential ship repair contractor. The
employee agreed to assist the contractor in being awarded a future
contract. Also, in October 1999, we announced that a former MARAD
employee had been charged for receiving $60,000 in unreported income to
``put in a good word'' for a ship repair company, which was
subsequently awarded Navy contracts. This former MARAD employee also
pleaded guilty.
As a result of the investigation, MARAD and Department of the Navy
took aggressive debarment and suspension actions against 6 companies
and 16 individuals. Also, a ship manager voluntarily withdrew from the
program and numerous ship manager employees were convicted for
accepting kickbacks to influence the award of subcontracts. In many of
the kickback schemes, contractors recouped the money by submitting
fraudulently inflated invoices.
Failure to Implement Controls Over Ship Managers' Contracts Create
Vulnerabilities
During the joint investigation, we initiated an audit on RRF Ship
Managers' Contracts, and in a report issued on May 12, 2000, we found
that MARAD implemented effective policies and procedures relating to
the award of ship manager's contracts. However, this was in sharp
contrast to its failure to implement controls for the administration of
these contracts. We found that MARAD has not adhered to established
procedures and practices for administering the ship managers' contracts
and general agency agreements.
Specifically, we found MARAD was not following existing procedures
to ensure that payments to general agents and ship managers were for
actual costs incurred, related to cited work orders, and did not
duplicate previously paid invoices. For example, MARAD's Central and
Western Regions paid $63.7 million during fiscal years 1998 and 1999 to
general agents without supporting documentation that costs were
incurred. Work orders did not adequately describe the work authorized,
making it difficult for MARAD personnel to validate payments during the
invoice review process. Work orders were not closed timely, allowing
the opportunity for ship managers to use funds from open work orders
for unrelated work.
Finally, we reported that MARAD was not ensuring that ship managers
justified the award of non-competitive subcontracts. We found a high
percentage of subcontractor awards that did not comply with the Federal
Acquisition Regulation. Ship managers often awarded subcontracts non-
competitively, without required documentation justifying awards.
Unjustified non-competitive awards create the potential for improper
business dealings between ship managers and subcontractors and increase
the potential for kickbacks. Therefore, MARAD has limited assurance
that Federal funds are expended in a manner that is most advantageous
to the Government.
When MARAD personnel do not follow existing procedures, they
compromise their ability to ensure that Federal funds are expended for
items received or for work authorized and performed. The control
weaknesses we identified contribute to an environment where there is an
increased risk of fraud occurring.
MARAD Agreed to Strengthen Controls Over Ship Managers' Contracts
In light of the recent joint investigation and audit on MARAD's
controls over ship managers' contracts, MARAD has agreed to strengthen
its procedures and practices for administering ship managers' contracts
and general agency agreements. Specifically, MARAD agreed to:
1. Instruct regional employees on existing procedures for
processing invoices and provide sufficient oversight to ensure that
these procedures are followed.
2. Provide detailed, self-explanatory work statements,
specifications or descriptions on all work orders.
3. Periodically review open and inactive work orders to identify
those that should be closed, and reprogram any remaining funds.
4. Reinstate periodic reviews of ship manager procurement actions,
including documentation justifying sole-source subcontractor awards and
indications of split purchases.
MARAD must now follow through on the actions they agreed to take.
Mr. Chairman, this concludes our statement. I would be pleased to
answer any questions.
______
Attachment
Department of Transportation Office of Inspector General
Summaries of Related Audit Reports
Status Update Massachusetts Heavy Industries, Inc. Title XI Loan
Guarantee
(Report Number MA-1999-127, September 15, 1999)
This report presents our observations on the status of the Maritime
Administration's (MARAD) Title XI loan guarantee for Massachusetts
Heavy Industries, Inc. (MHI).
On August 6, 1999, MARAD concurred with our conclusion that the
risk of default by MHI had increased materially. MARAD suggested
deferring the risk reassessment until December 1999.
Additional significant events recently occurred. Specifically:
On August 1, 1999, MHI missed a payment of $258,880 to the
city of Quincy, Massachusetts. MHI is in arrears on a loan balance of
$7.8 million to the city of Quincy obtained through the Housing and
Urban Development program.
On August 6, 1999, MARAD approved the deferral of MHI's
missed June 1, 1999 ``interest only'' payment of $1.55 million to
December 1, 1999. As a result, MHI will be liable to pay Fleet National
Bank approximately $5.1 million on December 1, 1999.
On August 17, 1999, MHI's general contractor (and its
subcontractors) for the shipyard modernization project walked off the
job because of payment disputes of $3 million.
Based on discussions with representatives of MHI and its
general contractor, MARAD concluded that MHI was unable to resolve its
differences with its contractor. MARAD noted that each of the parties
to the contract had declared the other in default of its obligations
under the contract. Based on information provided by MHI and its
general contractor, MARAD concluded that the general contractor might
be in breach of material contract promises.
On August 30, 1999, MARAD: (1) declared a ``Contractor
Default'' and formally terminated MHI's general contractor for the
shipyard modernization project and (2) called on the surety company to
perform under the terms and conditions of the performance bond. As a
result, work on the shipyard stopped and the estimated completion date
has slipped for an indeterminate amount of time.
As of September 14, 1999, MHI had not provided MARAD any
new or updated applications for shipbuilding projects. The potential
shipbuilding project with Intermare is in question.
These events have reinforced and made more serious our previously
reported concerns. Taken together, these events will delay completion
of the shipyard for an indeterminate period of time and further
increase the risk of default by MHI on the guaranteed loan.
As of September 14, 1999, approximately $12 million remained in the
escrow account. Of this amount, approximately $5 million is committed
to pay for equipment ordered but not yet received at the shipyard.
According to MARAD, this amount is not in dispute. In the event of
default by MHI, MARAD could use the funds remaining in the escrow
account to reduce the Government's loss on the loan guarantee.
In order to protect the interests of the United States, we
recommended that MARAD immediately:
1. Freeze the uncommitted balance in MHI's escrow account until
negotiations relating to the performance bond are concluded.
2. Conduct a physical inventory of all assets and property owned or
acquired by MHI for the shipyard.
3. Ensure that the assets and property identified in the inventory
are safeguarded from loss or unauthorized disposition. This is
important because, in the event of default on the guaranteed loan, the
United States Government has a first priority lien on all assets and
property owned or acquired by MHI.
Massachusetts Heavy Industries, Inc., Title XI Loan Guarantee
(Report Number MA-1999-115, July 20, 1999)
We prepared this report because MHI: (1) did not make the June 1999
``interest only'' payment on the guaranteed loan, (2) requested
approval of a 6-month extension to make this payment, and (3) has not
secured a shipbuilding project.
Construction and reactivation at the shipyard is proceeding.
However, MHI's estimated completion date for the shipyard has slipped
from November 1998 to October 1999. Initial work completed by MARAD's
Office of Ship Construction estimates the completion date may be later
than October 1999. The only potential shipbuilding project identified
by MHI requires MARAD approval of a Title XI loan guarantee
application.
The risk of default by MHI has materially increased warranting
action by MARAD. The missed June 1, 1999 payment and the request to
defer this payment until December 1, 1999, reflect a major change in
the assumptions underlying MHI's loan guarantee.
MARAD has not made a decision on MHI's request for deferral of its
June 1, 1999 payment, nor has MARAD made a decision on the Title XI
loan guarantee application submitted by Intermare for a proposed
shipbuilding project at MHI, because there are unresolved issues
regarding how MHI will implement the shipbuilding project. MARAD is
reviewing additional information provided by MHI needed to determine
the reasonableness of the deferral request and how MHI intends to
satisfy requirements of the Title XI loan guarantee program.
MHI's failure to make the June 1, 1999, payment, the request for a
six-month extension to make the payment, and lack of a shipbuilding
project indicates a major change in MHI's risk of default. We
recommended that MARAD:
1. Reassess the risk factor rating for MHI's loan guarantee as
prescribed by OMB Circular Number A-11, and make the required
adjustment to the subsidy rate. Ensure it has all of the information
required by the Title XI program to protect the interests of the United
States from default prior to making a decision on MHI's request to
defer its June 1, 1999, payment.
2. Ensure that MHI provides complete and current information as
required by the Title XI program prior to making a decision on the loan
guarantee application by Intermare.
Management Advisory on Massachusetts Heavy Industries, Inc., Title XI
Loan Guarantee
(Report Number MA-1998-048, December 17, 1997)
MARAD provided a status report for three recommendations made in a
Management Advisory Report, Number MA-1998-007, dated November 7, 1997.
1. MARAD did not plan to reassess the risk factor (Recommendation
1) based on a legal opinion made by the Office of the Secretary of
Transportation's Deputy General Counsel, which concluded MARAD has no
legal authority to reassess the risk factor rating for MHI's
application prior to closing. Further, MARAD, not the Commonwealth of
Massachusetts, is liable for additional funds if subsequent
reassessments identify increased risk.
2. MARAD is precluded from requiring evidence of viable
shipbuilding contracts or alternative sources from which revenues can
be generated (Recommendation 2) because these requirements were not
stipulated in MARAD's letter commitment.
3. As of December 11, 1997, MARAD officials indicated that MHI had
substantially fulfilled all of these requirements. The remaining
requirements (13) contained in the letter commitment that were not
complete at the time of the report (Recommendation 3).
Office of Management and Budget Circular Number A-11, Preparation
and Submission of Budget Estimates, paragraph 33.11(e)(1)(3),
recognizes the need to reassess risks ``when a major change in actual
versus projected activity is detected.'' Since the risk would appear to
be greater now than when the original calculations were made, we
believe MARAD must reassess the risk factor immediately after closing
and obtain, from its permanent indefinite appropriation, additional
funds necessary to cover additional risk identified by the
reassessment.
As of December 11, 1997, MARAD officials indicated that MHI had
substantially fulfilled all of these requirements. Other than obtaining
legal opinions on MHI's performance bonds, MARAD needs to finalize
documentation and work out minor issues before closing.
MARAD officials stated they were ``* * * sympathetic to MHI's claim
that it is difficult to obtain customers without the modernization
going forward and being underway. . . .'' MARAD agreed to reassess the
risk but suggested delaying any reassessment of risk until the last
quarter of 1998, thereby giving MHI the opportunity to demonstrate that
modernization is underway and that MHI is ``aggressively marketing its
products.'' We understand MHI's difficulty in obtaining customers
before it has the capacity to build ships. However, in our opinion, the
change in risk, prudence, applicable regulations and circulars requires
a formal reassessment of risk immediately after closing.
Management Advisory Report on Massachusetts Heavy Industries, Inc.,
Title XI Loan Guarantee
(Report Number MA-1998-007, November 7, 1997)
We reviewed the loan guarantee process to determine if (1) MARAD
held MHI to the requirements in the letter commitment and followed
applicable Title XI loan guarantee regulations and (2) the related
tanker construction project qualifies for a Title XI loan guarantee.
On November 1, 1997, MARAD issued a $55 million letter commitment
to MHI to reactivate the closed shipyard in Quincy, Massachusetts.
Twenty-eight of the requirements contained in the letter to protect the
interest of the U.S. Government were categorized as significant. At the
time of the report, 15 of these requirements were completed and 13 were
not complete.
The following requirements were designated as the five most
important. As of November 5, 1997, MHI had not completed these five
requirements.
1. Provide working capital of $3 million--MHI had not demonstrated,
through applicable financial documents, that it had the required
working capital.
2. Demonstrate availability of capital contribution of $2.6
million--MHI proposed using $2.6 million of incurred costs that
included attorney and accountant fees. MARAD contended that the funds
should have a direct impact on the project and should not include costs
such as attorney and accountant fees. We agree with MARAD on this
position.
3. Assign first priority lien on collateral to MARAD--MHI proposed
dividing the shipyard property and providing MARAD with a first
priority lien on area 1. In our opinion, MARAD should require first
priority lien on all of the property.
4. Enter into a reserve fund and financial agreement--MARAD and MHI
have not reached an agreement on the provisions of the financial
agreement. In our opinion, MARAD should not deviate from the standard
financial requirements.
5. Place funds in escrow with specific withdrawal procedures--MHI
proposed making withdrawals for items that have not been fully paid
for, have not been delivered and are still subject to prior claims.
MARAD had not taken a final position on fund withdrawals. In our
opinion, MARAD should not deviate from the standard escrow fund
withdrawal procedures.
MARAD's first estimate of risk factored in a construction contract.
This contract has not materialized and MHI has shown no proof of future
contracts, increasing the cost of default: appraisal values provided to
MARAD by MHI may not represent the amount that could be recovered in
the event of default. Additionally, MARAD agreed in the letter to
assume responsibility for any additional funds needed as a result of an
increase in the risk of default.
We recommendations that MARAD.
1. Reassess the risk factor rating for MHI's application excluding
the related tanker construction project. Based on the results of the
reassessment, take appropriate action within the limits of MARAD's
legal authority.
2. Prior to closing, require evidence of shipbuilding contracts or
alternative sources from which revenues could be generated to repay the
guaranteed loan.
3. Ensure MHI fulfills the remaining requirements contained in the
letter commitment.
Report on the Program for Scrapping Obsolete Vessels Maritime
Administration
(Report Number MA-2000-067, March 10, 2000)
The audit objectives were to evaluate MARAD's progress in meeting
its legislative mandate to dispose of obsolete vessels in the National
Defense Reserve Fleet by September 30, 2001; identify what action MARAD
has taken toward meeting the mandate; and identify potential
alternatives to assist MARAD in achieving its goals. We determined that
MARAD will not meet its legislative mandate to dispose of its obsolete
vessels by 2001 and maximize financial return to the United States.
This is due to the prohibitions on selling vessels overseas for
scrapping, a limited domestic ship scrapping market, and competition
from the Navy's pilot project, which pays contractors to scrap ships.
We found that the obsolete vessels awaiting disposal pose
environmental risks because they are deteriorating, contain hazardous
materials, and contain oil that could leak into the water. We also
reported that the number of vessels awaiting disposal is increasing,
from 110 vessels to 152 vessels projected to be awaiting disposal by
the end of FY 2001 (numbers have increased to 114 and 155, respectively
since this report was published). Although we noted that MARAD had been
pursuing ways to improve scrapping sales, the alternatives do not have
the potential to significantly reduce the backlog of vessels awaiting
disposal in a timely manner. We identified some additional alternatives
that MARAD had not explored that may help to dispose of its obsolete
vessels including: (1) selling vessels to other countries for non-
military uses, given legislative approval; and (2) requesting approval
from the EPA to sell vessels to overseas markets that are capable of
scrapping them in an environmentally compliant manner.
We recommended that MARAD:
1. Seek legislative approval to extend the 2001 mandate to dispose
of obsolete vessels and to eliminate the requirement that MARAD
maximize financial returns on the sale of its obsolete vessels.
2. Continue to pursue programs to improve scrapping sales and
identify alternative disposal methods that can contribute to the goal
of reducing the number of obsolete vessels awaiting disposal, to
include working with the Navy on the results of its studies on the
environmental impact of sunken vessels.
3. Develop a proposal for submission to Congress seeking approval
and funding for a project to pay contractors for vessel scrapping. The
proposal should include a plan to target the 40 ``worst condition''
vessels first, identify funding and staffing requirements, and provide
milestone dates to dispose of all obsolete vessels.
A draft of this report was provided to the Maritime Administrator
on February 8, 2000. MARAD concurred with the recommendations and
indicated the actions planned or underway to implement them.
Report on the Ready Reserve Force Ship Managers' Contracts Maritime
Administration
(Report Number MA-2000-096, May 12, 2000)
The audit objective was to evaluate MARAD's procedures and controls
relating to the requirements, specifications, award, and administration
of the ship managers' contracts. This audit was initiated during a
joint investigation by the Department of Transportation, Office of
Inspector General for Investigations; the Federal Bureau of
Investigations; and the Department of Defense. The investigation
identified fraud and kickbacks involving contracts to maintain Ready
Reserve Force vessels.
We determined that MARAD has implemented effective policies and
procedures relating to the requirements, specifications and award of
the ship managers' contracts. However, we found a sharp contrast
between MARAD's implementation of procedures and controls for awarding
ship managers' contracts and their procedures and controls for
administrating ship managers' contracts and general agency agreements.
We determined that MARAD has not fully adhered to their established
procedures and practices for administering the ship managers' contracts
and general agency agreements. Specifically, we noted that MARAD's
failure to follow internal controls created vulnerabilities for fraud
and that MARAD's lack of effective procedures to ensure ship management
companies justify sole source awards created the potential for
kickbacks.
To address our concerns, MARAD needs to strengthen its controls by
implementing effective procedures and practices for administering ship
managers' contracts and general agency agreements. We recommended
MARAD:
1. Instruct regional employees on existing procedures for
processing invoices and provide sufficient oversight to ensure that
these procedures are followed.
2. Provide detailed, self-explanatory work statements,
specifications or descriptions on all work orders.
3. Periodically review open and inactive work orders to identify
those that should be closed and reprogram any remaining funds.
4. Re-instate periodic reviews of ship manager procurement actions
including documentation justifying sole-source subcontractor awards and
indications of split purchases.
Report on the Audit of Ship Manager Contracts Maritime Administration
(Report Number AV-3-013, August 25, 1993)
The audit objective was to evaluate MARAD's administration of the
ship managers' contracts in the regions using selected items in the
Quality Assurance (QA) Plan. The items selected for review were (1)
initial deliverables, (2) specifications, and (3) invitations for bid.
We found MARAD followed procedures in the Federal Acquisition
Regulations and the request for proposal in awarding the ship manager
contracts. However, there were noted inconsistencies in the
administration of contracts and monitoring of ship managers'
performance in the regions reviewed.
We recommended that MARAD Headquarters:
(1) Require the regions to implement the QA Plan for monitoring
ship managers' performance,
(2) Provide sufficient guidance and oversight of regional contract
administration with emphasis on the use of the QA Plan for monitoring
contractor performance, and
(3) Establish general specifications and invitations for bid to
facilitate the monitoring of ship managers' performance under the QA
Plan. MARAD agreed with the finding and recommendations.
Report on the Audit of Activation of the Ready Reserve Force Maritime
Administration
(Report Number AV-1-034, September 5, 1991)
The audit objectives were to evaluate the availability of (1) crew
members to man the vessels, (2) shipyards to complete the activation
work, (3) tugs to move the vessels, (4) supplies to fill ship stores,
and (5) fuel to power the vessels. Additionally, we evaluated (1) the
ability of the fleet to obtain the necessary certifications from the
American Bureau of Shipping, the United States Coast Guard, and the
Federal Communications Commission; (2) the ability to move vessels to
shipyards in specific timeframes; and (3) the feasibility of performing
dock trials on the vessels during periods of industrial assistance.
As a result of the activation of the Ready Reserve Force in support
of Operation Desert Shield/Storm, we focused on actual activation work
rather than testing the potential activation of the RRF as originally
planned. We found Government and industry personnel associated with the
activation of the RRF vessels achieved the activation requirements
mandated by U.S. Navy's Military Sealift Command. Nonetheless, 78
percent of the vessels were not activated within the prescribed
readiness periods to be available to load cargo in support of Operation
Desert Shield/Storm.
We recommended that MARAD:
1. Amend contractual agreements to require ship managers and
general agents to provide retention crews on selected RRF vessels to
assist in maintenance, activation, and operation;
2. Finalize the reserve concept study and establish competent and
dedicated personnel necessary to operate RRF vessels,
3. Develop a comprehensive plan to systematically activate the RRF
vessels and request appropriate funding for activation,
4. Require newly acquired RRF vessels to be adequately tested in
order to identify and correct mechanical problems prior to placing the
vessels in the fleet.
MARAD officials fully concurred with the finding and
recommendations.
Additional information, including selected audit reports summarized
above, can be found on the DOT-Office of Inspector General website
(http://www.oig.dot.gov).
The Chairman. Thank you very much.
Admiral Holder.
STATEMENT OF VICE ADMIRAL GORDON S. HOLDER,
COMMANDER, MILITARY SEALIFT COMMAND
Admiral Holder. Good morning, Mr. Chairman, Members of the
Committee. It is a pleasure to have the opportunity today to
address the issues related to the U.S. Merchant Marine manpower
needs. With your consent, I would like to submit my written
statement for the record and provide a summation. I would first
provide a brief overview of Military Sealift Command and how
its mission fits into our national maritime strategy.
Sealift Command has four vital global missions. First, we
provide combat-ready logistics ships for the underway
replenishment of fuel, ammunition, and supplies to our Navy
fleets around the world. We also provide ships for related
support services such as hospital ships and ocean-going tugs.
Second, we provide special mission ships to support the DOD
and various civilian agencies in the national security arena,
including oceanographic research, ocean surveillance, missile
tracking, and submarine rescue.
Third, in support of the military services we provide
prepositioned ships which are stationed in three strategic
areas and are combat-loaded for rapid response in any
contingency, and fourth, using specialized ships we provide
ocean transportation strategic sealift of heavy military
equipment to sustain U.S. forces worldwide during peacetime and
in war for as long as operational requirements dictate.
On an average day, approximately 112 ships are deployed and
actively involved with fulfilling MSC's for missions. All MSC
ships, unlike other U.S. Navy ships, are crewed by merchant
mariners. As a result, MSC is the single largest employer of
U.S. merchant mariners. MSC directly employs 3,200 Civil
Service seagoing mariners to primarily operate the combat and
logistics force ships. Our charters and ship-operating
contracts are responsible for the employment of an additional
1,900 private sector merchant mariners.
Numerous international crises in the 1990s have underscored
our vital role as a major contributor in the execution of our
national strategy. During the Persian Gulf War, MSC
distinguished itself as the largest source of defense
transportation of any nation involved. Using more than 230
ships, both U.S. Government-owned and chartered, MSC delivered
more than 12 million tons of wheeled-track vehicles,
helicopters, ammunition, fuel and other supplies and equipment.
Virtually all of these ships were crewed by commercially
employed merchant mariners.
In more recent events, MSC combat logistics ships crewed by
Civil Service mariners supported Navy operations in the Persian
Gulf. Our surge sealift assets provided resupply cargo to
Bosnia and Herzegovina. Two large, medium-speed roll-on, roll-
off ships, LMSR's, carried combat equipment and supplies to
U.S. peacekeeping forces in Kosovo.
The motor vessel Captain Steven Bennett delivered
prepositioned U.S. Air Force ammunition to support air
operations over Kosovo.
Our sealift assets also proved invaluable in recent natural
disasters in humanitarian relief efforts. MSC-controlled ships
transported construction equipment, disaster relief supplies to
the Caribbean after Hurricane Georges.
Four maritime Ready Reserve Force ships transported
construction equipment and supplies needed to rebuild roads and
bridges in Central American regions that were destroyed by the
torrential rains following the aftermath of Hurricane Mitch.
Our success with these humanitarian relief operations
reflects the increased usefulness of the RRF. MSC relies
exclusively on our commercial partners to support our worldwide
transportation requirements in peace and war. In peacetime we
ship more than 1.6 million measurement tons of DOD cargo using
privately-owned U.S. flagships crewed by private sector U.S.
merchant mariners. In wartime, we depend on the private sector
merchant marine work force to crew MSC surge sealift and
prepositioning fleet, as well as the MARAD RRF.
Currently, in addition to our own assets, four RRF ships
are being used as MSC prepositioned assets. The Ready Reserve
Force contains an additional 86 ships maintained in a 4-, 5-,
10- or 20-day readiness status to fulfill part of our surge
sealift requirements. Because of their configurations, these
ships are uniquely capable of handling bulky, oversized
military equipment. Whenever activated, the ships are crewed by
U.S. merchant mariners.
Shipboard automation, increased productivity in modern
container ships, and a decrease in the number of U.S. flag
ocean-going ships have resulted in shrinking numbers of
seafarers in the commercial seagoing industry. The overall
result has been a smaller pool of mariners than existed in the
past.
Given our mission, the issue of merchant mariner
availability has been a concern to me since I took command of
MSC over a year ago. MSC's efforts to improve both recruitment
and retention of mariners led to an expansion of a program for
entry-level Civil Service mariners which provides training to
ordinary seamen so that they can advance to the able seaman
rating. Our effort has resulted in better trained personnel and
higher employee satisfaction, thus aiding in retention of MSC
seagoing work force. This example is just one possible solution
of many solution sets that would help this system.
Because MSC relies so heavily on the commercial Merchant
Marines to meet our mission, I am concerned that MSC's
difficultly in recruiting and retaining a professional cadre of
Civil Service merchant mariners also extends to the commercial
merchant fleet. As we have observed in other areas of our
national workforce, including the military services, the United
States' robust economic environment, and the availability of
employment opportunities in less arduous careers, makes
attracting and maintaining an adequate merchant mariner work
force a significant challenge.
As the executive agent for the National Defense
Transportation Association's Military Sealift Committee, I
worked with the committee to form a working group charged with
assessing our nation's ability to meet the crewing demand
required to support our sealift mobilization. The group,
comprised of ship operators, maritime and labor experts, has
recently completed its study. It identifies the potential of
mariner shortage that are now being analyzed. While the working
group has developed numerous ideas for increasing the
availability of both licensed and unlicensed mariners, work
continues. We are not yet at the point where we can present
coordinated, concrete recommendations.
I am pleased to report that throughout this past year I
have experienced a wonderful and excellent relationship amongst
the Transportation Command, MARAD, the Coast Guard, the
maritime transportation industry, and labor partners as well as
MSC employees. We mutually have a great and correct concern and
commitment to identify the solutions to the Merchant Marine
manning challenge.
Thank you for the opportunity to appear, and I am ready to
answer any questions you might have.
[The prepared statement of Vice Admiral Holder follows:]
Prepared Statement of Vice Admiral Gordon S. Holder, Commander,
Military Sealift Command
Good morning, Mr. Chairman and Members of the Commerce, Science,
and Transportation Committee. I am VADM Gordon Holder, Commander of the
Military Sealift Command (MSC). It is a pleasure to have the
opportunity to appear before you today. Before addressing issues
related to the U.S. Merchant Marine Fleet and manpower needs, I would
like to provide a brief overview of MSC and how its mission fits into
our National Military Strategy.
The Military Sealift Command has four vital global missions:
1st: we provide combat ready logistics ships for the underway
replenishment of fuel, ammunition and supplies to our Navy fleets
around the world--a critical enabler of our Navy's ability to maintain
a combat-credible forward presence in regions of national interest
throughout the world. We also provide ships for related support
services such as the hospital ships and ocean going tugs;
2nd: we provide special mission ships to support DoD and various
civilian agencies in the national security arena, including
oceanographic research, ocean surveillance, missile tracking and
submarine rescue;
3rd: in support of the military services we provide prepositioned
ships which are stationed in three strategic areas and are combat
loaded for deterrence and rapid response in any contingency; and
4th: using specialized ships we provide ocean transportation--
strategic sealift--of heavy military equipment to sustain U.S. forces
worldwide during peacetime and in war for as long as operational
requirements dictate.
On an average day approximately 112 ships are deployed and actively
involved with fulfilling MSC's four missions--providing what we at MSC
like to refer to as ``Logistics . . . From the Sea''.
All MSC ships, unlike other U.S. Navy ships, are crewed by merchant
mariners. As a result, MSC is the single largest employer of U.S.
merchant mariners. MSC directly employs 3,200 civil service seagoing
mariners who primarily operate the combat logistics force ships. In
addition, MSC's ship charters and ship operating contracts are
responsible for the employment of 1,900 additional private sector
merchant mariners.
Numerous international crises in the 1990s have underscored the
vital role of the Military Sealift Command as a major contributor in
the execution of our national strategy. During the Persian Gulf War,
MSC distinguished itself as the largest source of defense
transportation of any nation involved. Command resources were tasked to
deliver more than 12 million tons of wheeled and tracked vehicles,
helicopters, ammunition, dry cargo, fuel and other supplies and
equipment. More than 230 ships, both U.S. government-owned and
chartered commercial vessels, virtually all crewed by commercially
employed merchant mariners, delivered and returned more than 95 percent
of the international arsenal required to meet military requirements in
the Gulf.
In more recent events, MSC's combat logistics ships, crewed by
MSC's workforce of civil service mariners, supported Navy operations in
the Persian Gulf, and our surge sealift assets provided resupply cargo
to U.S. forces in Bosnia and Herzegovina. In 1999, two of MSC's large,
medium-speed roll-on/roll-off ships, USNS Soderman and USNS Bob Hope,
carried combat equipment and supplies for U.S. peacekeeping forces in
Kosovo. Also in 1999, a privately owned ship chartered to MSC, MV Capt.
Steven L. Bennett, delivered prepositioned U.S. Air Force ammunition to
support air operations over Kosovo. All three ships, Soderman, Bob Hope
and Bennett, were operated by commercial mariners.
These operations have highlighted the critical contribution made by
MSC's ships and mariners to our Navy's efforts to operate from the
littoral seas to directly and decisively influence events ashore. These
responses by MSC and Navy units, throughout a spectrum from peacetime
through a crisis and into war, have made a direct contribution to
promoting a framework of regional security and stability that supports
our national interests.
In addition to meeting military contingency and peacekeeping
requirements, our sealift assets proved invaluable in natural disasters
and humanitarian relief efforts by transporting vast quantities of
construction supplies and equipment for victims in stricken countries.
When Hurricane George hit the Caribbean, MSC joined in to help Puerto
Rico and other nearby islands return to normal. We used one of MSC's
Fast Sealift Ships, USNS Algol, and chartered space aboard the U.S.-
flag ship MV Seacor Clipper, to transport construction equipment and
disaster relief supplies. Again, both Algol and Seacor Clipper were
crewed by private sector commercial mariners.
Four Maritime Administration (MARAD) Ready Reserve Force (RRF)
Ships, under MSC operational control, transported equipment and
supplies needed to help rebuild roads and bridges that were destroyed
by the torrential rains following the aftermath of Hurricane Mitch. The
RRF ship MV Cape Vincent was the first to arrive in Corinto, Nicaragua
carrying heavy construction equipment, trucks and tractors. The RRF
ships MV Cape Ducato, MV Cape Edmont and MV Cape Victory carried
additional construction material to the Central America region. Our
success with these humanitarian relief operations reflects the
increased usefulness of the RRF. All of the RRF ships are crewed by
private sector commercial merchant mariners.
We rely extensively on our commercial partners to support our
worldwide transportation requirements in peace and war. In peacetime,
we ship more than 1.6 million measurement tons of DOD cargo using
privately owned U.S. flag ships crewed by private sector U.S. merchant
mariners. In wartime we also depend on the private sector merchant
marine workforce to crew MSC's surge sealift and prepositioning fleet,
as well as MARAD's RRF.
Currently, four RRF ships are being used as MSC prepositioned
assets. They include: SS Gopher State, an auxiliary crane ship with
four 30-ton cranes stationed in Guam; SS Cape Jacob, a breakbulk ship
prepositioned with Navy munitions; and two offshore petroleum discharge
system tankers, SS Potomac and SS Petersburg, which are capable of
delivering fuel from four miles offshore over undeveloped beaches. The
RRF contains an additional 86 ships maintained in a 4-, 5-, 10- or 20-
day readiness status to fulfill part of our surge sealift requirements.
The RRF includes roll-on/roll-off cargo ships, breakbulk ships, barge
carriers, auxiliary crane ships, tankers and two troop ships for surge
sealift requirements. Because of their configurations, RRF ships are
uniquely capable of handling bulky, oversized military equipment. In
both prepositioning status and when activated, these ships are crewed
by U.S. merchant mariners employed by commercial ship operating
companies. The use of ships in these examples, plus the no- notice
activation exercises conducted over the past ten years, has proven the
reliability and readiness of the RRF.
Shipboard automation and increased productivity of modern
containerships have resulted in shrinking numbers of seafarers in the
commercial seagoing industry. Not only has the size of the ships' crew
decreased, but the number of U.S. flag ocean-going ships has also
decreased. The overall result has been a smaller pool of mariners than
existed in the past. Given our mission and operations, the issue of
merchant mariner availability has been a concern to me since I took
Command of MSC over one year ago. MSC continuously looks for ways to
improve both recruitment and retention of mariners. For example, in
September 1999, after evaluating MSC's experience with seagoing
manpower requirements and retention rates, we expanded a program for
entry-level civil service mariners that provides training to ordinary
seaman so they can advance to the able-bodied seaman rating. Our effort
in grooming our entry level seamen for advancement has resulted in
better trained personnel and higher employee satisfaction, thus aiding
in retention of MSC's sea-going workforce.
Because MSC relies so heavily on the commercial merchant marine to
meet our mission, I am concerned that MSC's difficulty in recruiting
and retaining a professional cadre of civil service merchant mariners
also extends to the U.S. commercial merchant fleet. As we have observed
in other areas of our national workforce, including the military
services, the United States' robust economic environment and the
availability of employment opportunities in less arduous careers makes
attracting and maintaining an adequate merchant mariner workforce a
significant challenge.
As the executive agent for the National Defense Transportation
Association's (NDTA) Military Sealift Committee, I worked with the
committee's Chairman, Mr. Jim Henry, to form a working group charged
with assessing our nation's ability to meet the crewing demand required
to support a national sealift mobilization. The group, comprised of
ship operators and maritime and labor experts, quickly started
evaluating the issue and conducted in-depth discussions with the
Maritime Administration and the U.S. Coast Guard.
The study has recently been completed. It identifies potential
mariner shortages that are now being analyzed. Additionally, the
Working Group is reviewing the impact the requirements of the Standards
of Training, Certification and Watchkeeping (STCW) will have on the
training of our mariners to ensure we meet international maritime
standards. This is necessary to improve our professional standards and
enhance our mariner forces. While the Working Group has developed
numerous ideas for increasing the availability of both licensed and
unlicensed mariners, the work continues and we are not yet at the point
when we can present coordinated concrete recommendations.
I am pleased to report to you that we have an excellent
relationship among the U.S. Transportation Command, MSC, MARAD, the
U.S. Coast Guard and our maritime transportation industry and labor
partners. We mutually have the correct concern and commitment to
identify solutions to this merchant marine manning challenge.
Thank you again for this opportunity to appear before the
committee. I am ready to answer any questions you may have.
The Chairman. Thank you very much, Admiral.
Mr. Hart, let us begin with the vessel scrapping issue.
There is the chart there that displays the number of ships
scrapped. I believe there have been two over the last 5 years,
is that correct?
Mr. Hart. I think that is close to correct, yes, sir.
The Chairman. Is one of the major reasons for this because
we are not allowing foreign corporations or companies to
partake in the bidding process to scrap the ships?
Mr. Hart. I would say that is correct, sir.
The Chairman. That moratorium has been in place for how
long, do you recall?
Mr. Hart. I believe that moratorium was originally put in
place around 1998. Prior to that, MARAD had entered into an
export agreement with EPA to find a way to sell ships for
overseas scrapping which was never implemented as a moratorium
was put in place.
The Chairman. We are hearing that--and the information is
more than anecdotal that some of these ships, which are as old
as, I believe, 50 years, are causing some hazard both to the
environment and navigation. Is that the information you have as
well?
Mr. Hart. I do not have any information that they are
posing such a hazard. I certainly agree that it is possible
that they would be a hazard if one of them began to leak. That
would be an environmental hazard. As of now, I am unaware of
any leaks, but it is something we worry about and something we
check for almost every day.
The Chairman. Well, I had a look at this vessel right there
at Suisun Bay Reserve Fleet. That is not comforting. Have you
visited these areas?
Mr. Hart. I have been to all three fleet sites, yes, sir.
The Chairman. Aren't you concerned?
Mr. Hart. Yes, sir.
The Chairman. Just from what you can see visually?
Mr. Hart. Yes, sir.
The Chairman. Mr. DeCarli.
Mr. DeCarli. Yes, sir. The latest problem was with the
Export Challenger, which is down in the James River. That ship
did spring a leak a year or so ago, cost about $1 million to
plug that leak. Part of the concern here is that the ships are
getting so bad that we may have to drydock some of them. If we
do that it is going to cost probably between $800,000 and $1
million to bring it to drydock and put some steel on them and
put them back in the water. We really need to take action to
get rid of them.
The Chairman. Is it not also true that in some cases, Mr.
Hart, we are paying as much as $1 million just to maintain one
or more of these ships?
Mr. Hart. Well, as Mr. DeCarli said, when the Export
Challenger sprung a leak it cost us about $1.3 million to fix
the leak and to remediate the damage that was caused, so that
you could extrapolate from that that every time there is a leak
it could cost us as much as $1.3 million. I have to say that
the Export Challenger leak was not a major leak.
The Chairman. Mr. Hart, I understand the reason the
moratorium was declared and written into law was so that
domestic corporations or companies would have an opportunity to
get into the scrapping business. Wasn't that the reason for it?
Mr. Hart. I do not know why the moratorium was initiated.
That was prior to my assuming my present position. I am not
sure why.
The Chairman. Well, I quoted from a letter somewhere here
in this documentation from Senators saying that that was the
reason for it. Is that your understanding, Mr. DeCarli?
Mr. DeCarli. I think it was twofold, Mr. Chairman. I think
it related to not wanting to get PCBs exported out in the
world, and the conditions of some of the foreign places where
these ships were scrapped, as well as the desire to get some of
our shipyards additional business to scrap ships. Yes, sir,
that was clearly part of the reason.
The Chairman. I guess that leads to the question, Mr. Hart,
have you seen any indication the United States is domestically
developing this capability?
Mr. Hart. I know of one, as was brought up earlier, I think
in Mr. DeCarli's testimony. There is a pilot project that the
Navy has to scrap ships that is beginning. To that extent there
is a startup there. There are a couple of other shipbreakers in
Texas, but the industry is at this point very small.
The Chairman. Admiral Holder, do you have any comment on
this situation?
Admiral Holder. I really am not in this field, sir. I need
to use those ships, but those are not useful. I would tell you
that I know of one, Baltimore Marine Industries, which is
involved with the Navy in a ship-scrapping program that is just
in its infancy. Beyond that, it is out of my field.
Mr. DeCarli. Mr. Chairman, the Navy has a pilot program
going where they are paying scrappers to take these ships. They
have four contractors they are currently using, including the
one in Baltimore. It is costing them approximately $3 million
per ship to scrap them. The Maritime Administration is
currently using four contractors, all in Brownsville, TX, for
scrapping operations, and that is pretty much the extent of the
U.S. capacity presently.
The Chairman. Has the EPA been involved in any way in this
issue, Mr. Hart?
Mr. Hart. Yes, they have. Now that the moratorium is--the
moratorium sunsetted itself October 1 last year. I wrote to the
Administrator of the EPA last month to ask if we could get
together and talk about ways to start scrapping ships in an
environmentally sound manner. I also have had meetings with
Admiral Amerault at the Pentagon, Deputy CNO for logistics
about the same subject.
The Chairman. How many places in America do these ships
reside?
Mr. Hart. Three. James River, Beaumont, TX, and Suisun Bay
in California, west of San Francisco.
The Chairman. Well, to state the obvious, if we do the
math, and we have only done two ships in 5 years, with 114
ships remaining, it obviously means that we are facing I think
severe environmental challenges. It seems to me that we need
to, with some urgency, get together--you need to get together
with the EPA and start resolving this problem. I have not been,
but I intend to go and see some of these ships. When you have
ships in the condition which I have heard descriptions of, this
is a very serious environmental challenge, and when you are
talking about some of the areas where these ships are located,
then that threat becomes even more significant.
So, Mr. Hart, I am not belaboring you here. You did not
pass the legislation that called for a moratorium, but I
believe the intent of the legislation was as Mr. DeCarli
stated. I do not think you disagree with those reasons. But now
we have got, with some urgency, to try to move forward.
I would worry about PCBs being released some place in the
world. I would also be deeply concerned about PCBs being
released in these places where these ships now reside. I am
sure the good people in San Francisco are not too interested in
seeing that kind of problem, as well as Texas and Virginia.
So I would like, if you could, Mr. Hart, and I can write it
into law if you like, but I do not see the point, I would like
for you in about a month or two to give the Committee a full
report as to where we are, what the threats are, and maybe we
will ask for some similar assessment from the EPA so that
perhaps we can get a handle on this and see what we can do to
proceed.
I do believe there is some urgency associated with this
problem. Do you agree, Mr. Hart?
Mr. Hart. Yes, I do.
The Chairman. Mr. DeCarli.
Mr. DeCarli. Yes, sir.
The Chairman. I thank you. There will be another round of
questions.
Senator Stevens.
Senator Stevens. Mr. Chairman, I agree with you. I remember
sitting through at least two previous hearings in the past 30
years on these ships, and it is high time we did it. Will you
add one thing to that request, and that is an estimate prepared
by the Navy of what it would cost to dispose of them in a 5-
year period?
The Chairman. I would be glad to.
Mr. DeCarli. Mr. Stevens, I think the estimate is probably
in the neighborhood of $\1/2\ billion, based upon a $2 to $2\1/
2\ million per piece disposal cost.
Senator Stevens. What is it costing to maintain them now?
Mr. DeCarli. For 1999 it was only $5 million, but there
were no real significant problems, other than the one with the
James River, but the costs are going to go up. The problems are
going to get more severe. These things are deteriorating
constantly.
Senator Stevens. Well, Mr. DeCarli, we are paying out about
$1\1/2\ billion a year right now on restoring formerly used
defense sites. This is no different than that, no different at
all. It ought to be included in that program, as a matter of
fact, and I think the costs ought to be associated with that.
They were used for military purposes in the past, and we ought
to face up to it.
Let me start off, Mr. Hart, with thanking you for your
administration under the American Fisheries Act. I think that
is proceeding as we anticipated, and your agency has played a
key role, and we thank you for that.
Mr. Hart. Thank you very much, Senator.
Senator Stevens. That is very essential to our area for
that act to work. As I said, I am interested in this Title XI
program, and I have got a series of questions. If you do not
have the answers now, we can get them for the record. Do you
know how much carry-over money you have on Title XI at the
beginning of this fiscal year?
Mr. Hart. I believe it was in the neighborhood of $71
million carryover. It is now down to, I think, $45 million.
Senator Stevens. It is down to about $45 million?
Mr. Hart. I believe that is correct.
Senator Stevens. My understanding last time we checked that
about $77 million carried over from 1999 and we had about $42
million left at the beginning of the fiscal year, this fiscal
year 2000, and--will have, rather, at the beginning of the
fiscal year. No, that began last year. I had better get in tune
here.
Mr. Hart. Senator, you are right, it is $45 million.
Senator Stevens. You have committed about $35 million in
the first half of this year, is that correct?
Mr. Hart. Yes, sir.
Senator Stevens. Now, can you tell us what kind of projects
you are approving now under that program?
Mr. Hart. I have a pending list that I could read from.
Senator Stevens. Is it going across the board in terms of
construction? Are there guarantees for all types of vessels, or
is it just one area of the country?
Mr. Hart. No, sir. Reading from the pending list, I have
deck barges that are being done in Louisiana, shipyard
modernization being done in Louisiana, I have an inland double-
skinned heated tank barge in Ashland City, TN and
Jeffersonville, IN, a submersible drill rig in Mississippi, a
power barge in Portland, OR, a seagoing barge in Sturgeon Bay,
WI and passenger and automobile ferry in Panama City, FL, high-
speed container vessels in San Diego, CA, and a deep water
semisubmersible in Brownsville, TX.
There are other projects that are ongoing, but that just
gives you an idea of the States.
Senator Stevens. Can you tell us how much you put out in
terms of loan guarantees in the past 2 or 3 years? Do you have
a schedule for that?
Mr. Hart. Loan approvals in fiscal year 1998 were $734.3
million. In fiscal year 1999, $1.766.9 billion, and to date in
this fiscal year, $398 million.
Senator Stevens. It is my understanding there is about 20
applications pending at this time.
Mr. Hart. I had 19, but 19 or 20.
Senator Stevens. How long have they been pending, do you
know?
Mr. Hart. Well, some of them have been pending for a while.
What happens, Senator, is when someone files a Title XI
application we meet with them, we tell them what is required,
and in some cases they go off and try and meet the
requirements. We just let that application stay there until
they get back to us, and so there may be longer times than
others, but part of that is just the loan applicant trying to
get the paperwork and necessary documentation together.
I cannot give you an average time, but I could certainly
provide one for the record for you.
Senator Stevens. Well, you know I come from a State that
has half the coastline in the United States, and we own the
ferries. We are in the ferry business. I have been doing
ferries. People building ferries come from all over the world
to visit us, and Title XI, you did decide Title XI for the
first time covered an application for ferries at Allen Marina
that has been built in Alaska for the first time, and many of
the ferries being built in Louisiana and Mississippi and on the
West Coast are Title XI-eligible, and I am worried about the
fact that we have such a backlog that we will not be able to
get our ferries done on time.
I am told that you have been notified that there are a
number of additional filings that will be made for Title XI
guarantees. Do you have notice of other guarantees being filed
in the near future?
Mr. Hart. Well, we always hear of potential applications.
We have a number of premeetings with people before they file
their applications. They will come in and say they are
interested in doing Title XI and ask us what is required. We do
not note those until we get a completed application, but we are
always aware of people who want to build under Title XI.
Senator Stevens. Now, there is very little of this
employment that takes place in my State, but the utilization of
many of the vessels takes place in my State. I am told if MARAD
receives just $2 million that is requested by the
Administration for Title XI you would be very limited in terms
of the number of these applications that you could approve, is
that right? How many do you think you could approve with $2
million?
Mr. Hart. With $2 million, based on a 5-percent subsidy
rate, that will give us the ability to approve loans in the
neighborhood of $40 million. That, plus the amount that we have
left, the $45 million we have left, we are talking in the
neighborhood of $940 million worth of loans.
Senator Stevens. How much of the total of those
applications are before you now?
Mr. Hart. Let us see, pending, it does not show. I could do
the math and give you a rough estimate, or provide a more
complete answer for the record.
Senator Stevens. My people have told me that they estimate
it to be somewhere in the vicinity of $4 billion would be
required, $4 billion in loan guarantees, and that would require
some $50 million for each $1 billion, so you would need $200
million for loan guarantees to approve the applications before
you now.
Mr. Hart. I do not know if we need that much, but I would
agree that, if all of the pending applications prove out, and
all of the pending lists are economically sound, then it would
be about a $4-billion price tag.
Senator Stevens. Are you capable of giving us a breakdown
of what that would mean in terms of employment in the shipyards
of the United States?
Mr. Hart. We could probably work on a rough estimate for
that, depending on size of the vessel, how long it takes, and
where exactly it is being built. We could probably work up some
sort of projection.
Senator Stevens. We could get our ferries and our cargo
ships for Alaska built overseas but for the Jones Act. We are
prohibited from going overseas to have them built, and the
reason for that is to maintain shipyard capability in the
United States, so currently we are paying about--well, we are
paying about 50 percent more for our vessels because they are
built in the United States, and we are being held up now
because we do not have enough loan guarantees to build them in
the United States.
Mr. Hart. Well, Senator, I am not sure we do not have
enough to build them. As soon as the application is complete we
make a determination yes or no. There is no hesitation on our
part, or any reason for us to hold up any loan guarantee
application.
Senator Stevens. If you are limited by the $2 million the
Administration has requested, how can you approve them?
Mr. Hart. I understand what you mean, Senator, but that has
not happened yet. We are not there yet. We do have sufficient
money to approve a lot of the applications we have.
Senator Stevens. You just testified you could do about,
what, about a total of $40 million?
Mr. Hart. Yes, sir.
Senator Stevens. With the $2 million you have got now, but
if my information is right you have got over $1 billion, or $4
billion in requests pending.
Mr. Hart. That is right, but a couple of those are very
large, very large projects, and----
Senator Stevens. Well, give us a breakdown. What I am
really looking for is what do you need in funds to keep a
reasonable program going as far as this concept is concerned?
You also put them in. Can you do that for the record, give us a
breakdown?
Mr. Hart. Yes, I will.
[The information was not provided.]
Senator Stevens. You also put these in some sort of a
priority, do you not?
Mr. Hart. If there is not going to be enough money to do
all of the applications, we do domestic over foreign, we do
militarily useful over not military useful, and the third
category is, we do the newer ships first.
Senator Stevens. Why isn't there a priority for those ships
that cannot be built overseas, the Jones Act vessels? Why
shouldn't they come first? If we are required to build in the
United States and cannot build out of the United States, why
shouldn't we have a priority for those that are required by the
national law to be built in this country?
Mr. Hart. Senator, honestly, that is a good idea.
Senator Stevens. I hope you will look at it.
Mr. Hart. I will.
Senator Stevens. Thank you very much, Mr. Chairman.
The Chairman. Senator Kerry.
STATEMENT OF HON. JOHN F. KERRY,
U.S. SENATOR FROM MASSACHUSETTS
Senator Kerry. I just want a clarification. I am a little
confused. Obviously the ships that are sitting there are an
enormous hazard--or disaster waiting to happen. I understand
some of the hulls are sufficiently weak that you can just hit
them with a hammer and put a hole in them. Is that correct?
Mr. Hart. That is correct.
Senator Kerry. Some are filled with asbestos, PCBs and so
forth.
Mr. Hart. That is correct also.
Senator Kerry. I am troubled. I understand that generally
speaking we have looked at the foreign market in order to scrap
these. Given that potential disaster for Texas or Virginia, why
is there not some more focused intergovernmental effort to
either have one of our military entities, or to create some
kind of entity? It would seem to me in the value of the scrap,
et cetera, there ought to at least be a cost neutrality there,
is there not?
Mr. Hart. It depends on the kind of ship. Generally,
warships are more valuable to scrappers than commercial ships
because of the steel used.
Senator Kerry. But taken as a whole, this disastrous fleet
that is sitting there waiting to cost us an awful lot more. If
there is a spill the Federal Government is involved, correct?
Mr. Hart. Correct.
Senator Kerry. We will have to come in and clean it up.
What is the cost of that? What is the cost of the PCBs that we
are going to spend countless amounts of dollars in remediation
on, correct?
Mr. Hart. Correct.
Senator Kerry. Has that been cost-valued into the
comparative cost? That is a liability we are going to assume if
we do not scrap these.
Mr. Hart. Senator, we at MARAD have been working with the
Pentagon and the DOD to try and come up with a joint response
to the scrapping that we both face.
Also, I might add that we are working with the IMO, the
International Maritime Organization, because not surprisingly
foreign shipowners are having the same problems scrapping
ships, so we are on the same page of the hymnal, so to speak,
trying to come up with a unified response to the scrapping
problem.
Senator Kerry. What is the difficulty?
Mr. Hart. Well, the difficulty is just coordinating three
or four different agencies and trying to get together and come
up with a uniform program that works. The Navy pilot program
which they just put into place does show some promise, but
again it is fairly expensive, and it is fairly limited. Right
now you can only scrap so many ships at a time, but we are
trying to put that together.
The Chairman. With all due respect, if I could interrupt,
you are talking about 5 years now. You have been talking 5
years now.
Mr. Hart. Yes, 5 years since MARAD stopped scrapping
overseas.
The Chairman. You have had two ships in 5 years.
Mr. Hart. We have had nine ships, sir. I just got an
updated figure, but your point is correct. There has not been
enough ships scrapped, and we need to scrap more, and we need
to scrap them as quickly as possible, both warships and
commercial.
Senator Kerry. I am just perplexed. I mean, either this is
one of those things that gives Government a horrendous name, or
there is a turf struggle that I am not aware of, or there is a
cost struggle as to who is assuming this, and nobody wants to
make a cut on it, but it just sounds like bureaucracy, frankly,
at its worst.
We are sitting around with this disaster waiting to happen.
Mr. DeCarli. Senator Kerry, if I can, we could sell these
ships overseas as we did back in the early 1990s. The problem
over there is the environmental problems.
Senator Kerry. I know, we are being responsible. I
understand.
Mr. DeCarli. In doing so, MARAD is locked into legislation
that basically requires them to sell the ships. They have got
to get actual money back from selling the ships. Nobody in
today's market is interested in buying these ships. That is why
the Navy has this pilot program where they are actually paying
contractors to take them.
The Navy is paying about $3 million a ship currently to get
the contractors to take these ships on a pilot basis. Then the
Navy is sharing in the proceeds from the scrapped materials,
from the steel, from the aluminum, from the brass, and so----
Senator Kerry. Does this cost get amortized in our
expensing when we put a ship price down?
Mr. Hart. No.
Senator Kerry. I think we ought to start measuring that.
Mr. Hart. Frankly, some people agree with you in the
industry that we should start taking into account how much it
takes to take a ship apart when you are trying to put one
together.
Mr. DeCarli. If you are going to do this domestically you
are going to have to pay. Probably there is enough ships out
there that MARAD needs flexibility in their reauthorization to
do both. They probably need flexibility to pay some contractors
to take several of these ships off their hands and scrap them,
and they also need the authority to get rid of some of these
ships overseas when they are in such condition that they are
going to be hazardous to the United States, and I think we need
a combination.
Senator Kerry. Well, that is our responsibility
legislatively to adjust that, and I think we ought to try to do
it in quick order. I think it is appropriate for us to be
concerned about the environmental conditions under which this
takes place.
I think it is irresponsible for us to find some Third World
country where they are willing to dispose of the ship, but it
is in the worst ways that they do it, and we know that is
happening, and obviously that is what we are trying to avoid.
That is something we have an obligation to do.
Mr. Chairman, you have asked for some analysis here. I
would like to see if that analysis cannot give us a comparison
of the value of the ship in scrap versus the cost of scrapping
it and see what the differential is. Maybe we can find some
more efficient way of getting that differential picked up so
there is less of an Alphonse and Gaston routine here. I think
that part of the reason it is taking so long, is--everybody is
afraid of being the one that is holding the bag. It is musical
ships, rather than musical chairs.
Mr. Chairman, thank you.
The Chairman. Thank you. Senator Gorton.
STATEMENT OF HON. SLADE GORTON,
U.S. SENATOR FROM WASHINGTON
Senator Gorton. Thank you, Mr. Chairman.
Administrator Hart, one of the small shipyards in my State,
and some of the operators of smaller vessels, have asked me to
prepare legislation to make Title XI more sort of user-friendly
for smaller shipyards, and vessel owners. I have not made a
decision on that yet, but perhaps you could enlighten me on how
much use these smaller yards get out of Title XI at the present
time and whether there is a way, either by a new bill or
internally, to make the changes more usable and more widely
usable by small shipyards.
Mr. Hart. Thank you, Senator. Let me start this way. We
know at MARAD that there is reluctance on the part of some
people to come in and take on a Title XI application, and the
reason we hear over and over again is because we are not user
friendly. It takes too long, too much paperwork. We want too
much documentation.
We constantly struggle with that. We are trying to
streamline the process. We are trying to make it more user
friendly, and that is an ongoing effort. I would love to sit
down with your staff and kick around some ideas and maybe
legislation to make it more user friendly. We see ourselves
basically as a bank, and so we take seriously our
responsibility to ensure that the projects have some hope of
repaying the loan so that everybody goes home happy. It is
something we struggle with constantly, how to make it more user
friendly.
Senator Gorton. Well, you are entirely right, and other
matters before the Committee indicate that the bank made bad
loans, or bad guarantees, and we certainly do not want you
doing that, but I take that invitation seriously, and we will
try to submit to you some of the questions and some of the
proposed legislation, because there is a balance. You do have
to be secure, but Title XI, if it is to do our shipyards any
good, has got to be used by small ones as well as large ones.
So thank you. Thank you for that commitment, and if we can
help with legislation that is still responsible and protects
your security, we definitely want to do it.
Mr. Hart. Thank you.
Senator Gorton. I am not sure whether you are the proper
person for this question, or Mr. DeCarli is, but what is going
to happen with the creditors of Massachusetts Heavy Industry,
Inc. who have not been paid their bills?
Mr. Hart. Well, now that MHI has gone into bankruptcy
court, they have gone in under Chapter 11 for the authority to
reorganize and take another shot at being a shipyard. The
creditors will, like all creditors in most bankruptcies, line
up and if there is something there after it is over, the
bankruptcy court will apportion whatever it can among those
creditors.
Senator Gorton. You have paid all your loan guarantee? You
do not have any more left?
Mr. Hart. Well, we have paid out the loan guarantee we were
required to pay out to Fleet Bank, yes, sir, so that commitment
is done. Now our commitment is to try and recover as much as we
can.
Senator Gorton. Where do you stand in comparison with these
other creditors?
Mr. Hart. We are first.
Senator Gorton. So you are going to get your money back
before these creditors get their money back?
Mr. Hart. I am going to get some of my money back before
the creditors get any of their money back, yes.
Senator Gorton. Thank you. That is a very clear answer.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Mr. Hart, I would be glad to get you a letter along with
one to the EPA to try to get a handle on this scrapping issue.
Mr. Hart. Thank you.
The Chairman. Obviously, it is going to require
coordination. I think it is clear the moratorium was wrong. I
think there are other ways of addressing concerns about what
would happen in foreign shipyards, besides prohibiting any
foreign entity from being able to at least attempt to qualify
to engage in this activity. I intend to vigorously oppose an
extension of the moratorium, because apparently we may
experience the same virtual halt to the scrapping program.
Mr. Hart. Sir, may I add one thing? On your opposition to--
opposing an extension, let me just say, and this is where the
IG and I disagree on the scrapping issue, I am not sure that if
we had unlimited money and/or unlimited authority to scrap
foreign, that we could scrap enough of the ships overseas
within 5 years. That is because we are on the back of a long
line of both the military and also foreign shipowners who now
have the same problem.
The Chairman. Mr. Hart, I do not disagree with that, but
there certainly is a dramatic difference from what was taking
place from 1991 to 1995 and what has taken place since. That
kind of progress, I think we would agree, would be
unacceptable.
Mr. DeCarli. Mr. Chairman, our problem with the legislation
is the word, begin, because as it is currently written the
Administration proposal says, begin scrapping within 5 years,
and we think that it ought to be substantial, or if we cannot
get it done completely, we ought to get quite a bit of progress
in that 5-year period, not just a beginning.
The Chairman. Well, I do not claim to be an expert on this,
but from anecdotal media reporting and from information
provided to this Committee from our sources, we have got a very
serious environmental problem here, and what we have done in
the last 5 years is clearly not sufficient to address it. We
are in agreement with that. Now let us start moving forward as
vigorously as possible.
You know, Mr. Hart and Mr. DeCarli, please do not take my
comments as gloating, because I am very sorry about what has
happened here. On February 4, 1997, I wrote a letter to the
Secretary of Transportation, Secretary Pena.
In that letter I said, I wish to express my deep concern
about a letter of commitment by the Maritime Administration to
guarantee a loan for the reactivation of a shipyard in Quincy,
Massachusetts. I am concerned that a Title XI loan guarantee
for the Quincy Shipyard activation project will subject tens of
millions of taxpayers' dollars to an unacceptable level of
risk. I understand that the Maritime Administration has
assigned a relatively low-risk factor to this project despite
the absence of shipbuilding contracts with the shipyard. I am
concerned that, et cetera, taxpayers' dollars should not be
placed at undue risk.
I guess I should ask you, Mr. Hart and Mr. DeCarli, was I
right?
Mr. DeCarli. I would say yes, you were right. Clearly the
Maritime Administration was not in a position to look at
whether or not the shipyard, once completed, would be able to
repay the loan, and that was a problem. Without being able to
take that into consideration, MARAD had to look to see how it
would best protect the taxpayers' interest, and when they
issued that letter of commitment they had 28 conditions in
there. Some of them went probably about as far as they could
conceivably go to protect that interest.
Giving us first right to the property if there was a
default was something that MHI absolutely objected to.
Controlling all of the funds through the escrow account was
something they objected to. Having them put up $3 million in
operating capital they did not want to do.
So given the constraints that MARAD was under, they did
quite a bit to try to protect the interests, but it clearly was
a risk. You know, Title XI loan guarantees are a risk to start
with. If there were good commercial investments you would be
able to go to the bank and get a loan without a guarantee, so
you have got an inherent risk in the Title XI program, and then
when you take the economic soundness criteria off of that, you
obviously increase the risk.
Mr. Hart. If I might just say that I agree with Ray's
statement, and just to add that we knew that it would be a
risk, so you were right.
The Chairman. Well, I believed it was an unacceptable risk.
I believe most objective observers agreed with that, and while
we are not gifted with any clairvoyance on this Committee, it
was clear to me that this was an incredibly high, if not
unacceptable risk. I not only wrote the letter, I called and I
consulted with people. I called directly the Secretary of
Transportation in voicing my strong opposition to moving
forward, and apparently the taxpayers are out about $50
million.
In response to Senator Gorton's question, I am not sure how
much we are even going to get back of what is remaining.
I guess one of my--Mr. Hart, over a period of 2 years the
IG reported four times the risk factors for the Four Rivers
Shipyard project were extremely high and circumstances had
changed significantly. The IG recommended that MARAD should
reassess the risk and adjust the subsidy rate accordingly.
On each occasion, MARAD responded that it did not agree and
put off a reassessment. How do you justify not even making a
reassessment?
Mr. Hart. Well, I did not know that at the time of those
reports. The time when we had our first inkling that this was
not going to bear fruit--the MHI renovation was probably the
first clear indication--was probably in June 1999. Before then,
we knew they were falling behind on their work. It was only May
1999 when we were approached with a deferral of the interest
payment that was due in June 1999 that the alarm bells started
to sound in MARAD that this could possibly go south.
So I am not sure of the timeframe of the IG's reports, but
from our perspective it was May 1999 when we started to really
look at this as not coming to fruition and us having to step
in.
The Chairman. So in July 1999 you granted a 7-month
extension on the payments?
Mr. Hart. That is right, with the concurrence of the
lending institution, Fleet Bank. They agreed. They were on
board with it.
The Chairman. Did anyone at MARAD ever suspect there could
be criminal activity associated with the project?
Mr. Hart. Not to my knowledge, sir.
The Chairman. In August 1999 you approved the termination
of the general contractor on the Four Rivers Shipyard at the
request of MHI. Why did you agree to the termination?
Mr. Hart. Well, the information we had at the time showed
that there was a major dispute between the two parties. In
order to continue the work and possibly get this resolved, to
get the work done, I thought it best to allow that termination
so that a new general contractor could come in and perhaps
finish the shipyard. Then Alberg & Sons would be in court, so
we could handle it on a two-track basis but the work would
still hopefully continue.
The Chairman. I will submit some of these questions to you
in writing, but obviously there was a Price Waterhouse Coopers
audit that indicated that there were serious problems there as
well.
So I guess my question to you, Mr. DeCarli, is what is the
future of the Four River project?
Mr. Hart. I would like to see us foreclose on the yard and
perhaps get another operator in there to try and finish the
yard. Absent that----
The Chairman. What are the prospects of that?
Mr. Hart. Candidly, Senator, I would not assign a numerical
value to it, because I am just not sure if there is a need for
another shipyard of that type in the United States. I do not
know the answer to that.
The Chairman. Have you heard of anyone?
Mr. Hart. I have not.
The Chairman. Let us assume there is not someone to take
over the shipyard. Then what is going to transpire?
Mr. Hart. If we are allowed to foreclose, then we will sell
the equipment for what we can and then sell the land for what
we can also and recoup our moneys that way. As I said, we are
having an appraisal done now to give us an idea on what the
range of monetary recoupment would be.
The Chairman. Obviously, you have some legal problems right
now with the State of Massachusetts and other entities, but is
there not also significant environmental cleanup that needs to
be carried out?
Mr. Hart. We have been informed by the EPA that there are
environmental issues and environmental problems at the yard. I
think the best estimate we have for cleanup right now is in the
range of about $1 million.
The Chairman. Mr. DeCarli.
Mr. DeCarli. Yes, Mr. Chairman. The basic problem comes
down to, if this thing is going to be an operating shipyard,
which everybody hoped, certainly, that it would be when they
made the loan, and would even hope so today, there has to be
some interest in building ships there. Right from the beginning
of this loan there was this six-ship deal coming out of Europe,
dangling in front of us as a possibility, but that deal would
have required another Maritime Administration loan of about
$250 million, of which somebody would have had to come up with
about $30 to $40 million in order to put up the equity in it,
and there was nobody willing to step up to the table to put
that money up, so this deal was always out there, but it never
did materialize.
In order for Quincy to become an operational shipyard we
have to find somebody who is interested in building ships
there. Senator Gorton just talked about the need for a ferry.
Well, if there is some company that is willing to step forward
and wants to build ferries up there, that is certainly a
possibility, but the yard has a lot of work to be done to it
before it can become operational.
The drydocks have not been touched. The buildings are wide
open on some ends. There is equipment there that has not been
protected, and it is probably going to have some problems with
it when it gets going. There are problems that we need to take
care of regardless of what we do, so we do not know whether it
will ever operate as such. We do not know at this point in time
whether the bankruptcy court will give it to MHI under a Title
XI reorganization, or whether the Maritime Administration will
take title to it.
There is some very good equipment there, as I understand
it. We have a Coast Guard facility at Curtis Bay that is quite
old. Maybe some of that equipment could be used by the Coast
Guard at its facility, but clearly somewhere between less than
$40 million will be the ending number, or around $40 million or
less, because the difference between 59 and 40 we have pretty
much covered, but we do not know where it is going to end in
terms of loss to the taxpayers at this point.
The Chairman. At least $40 million?
Mr. DeCarli. Yes, sir. Well, I say at least $40 million,
exclusive of what we end up getting out of the yard. It could
be reduced by whatever we get out of the yard.
The Chairman. Obviously, Mr. Hart, you have been tracking
the Philadelphia Naval Shipyard, or former Philadelphia Naval
Shipyard project.
Mr. Hart. I have.
The Chairman. What is your prognostication there?
Mr. Hart. I know that there is a contract to build three
vessels at the Philadelphia Shipyard. I understand that the
State of Pennsylvania and the city of Philadelphia are quite
happy with their position with that shipyard, and quite happy
with those who are contracted to build those ships. I have not
visited that shipyard in some time, but I understand it is
going, and they are planning on building the contracted-for-
three ships.
The Chairman. Mr. DeCarli, have you been?
Mr. DeCarli. I have not been to the Philadelphia Shipyard,
sir. I am not familiar with it.
The Chairman. Would you do me a favor and check up on that
project, both of you, and give us a report on it? I understand
that there may be a problem with the market for those ships if
they are constructed, and that there is not a contract for the
purchase of those ships. Do you know if that is true or not?
Mr. Hart. I do not know.
The Chairman. If you could provide me with whatever
information you can.
I guess finally, Mr. Hart, I guess the former president, or
former CEO of the corporation that was operating at Quincy is
now residing in Greece.
Mr. Hart. That is my understanding.
The Chairman. So that obviously would complicate any effort
we might make in order to achieve a full accounting.
Mr. Hart. Yes sir, it might.
Mr. DeCarli. I think that is correct, sir. We have some of
the records from MHI. There have been two break-ins at the
shipyard since the time that MARAD took possession of it. A
computer has been stolen with a hard drive, and we do not know
what was on that computer. You are right, it will be difficult
to figure out.
The Chairman. That is remarkable. Two break-ins, and a
computer was stolen.
Mr. DeCarli. Yes, sir.
The Chairman. These are interesting times.
Senator Kerry. Thank you, Mr. Chairman. Let me try to get
some clarification here on some things I am a little personally
puzzled about.
First of all, in 1993 the Congress in the defense
authorization bill passed something called the national
shipbuilding initiative, did we not?
Mr. Hart. Yes, sir.
Senator Kerry. So Congress in that initiative declared that
there was a forecast that commercial shipbuilding needs were
increasing, and in order to compete with foreign yards the
United States needed to increase capacity, is that correct?
Mr. Hart. I believe that is correct, sir.
Senator Kerry. I will say that I know it is. That is
exactly what the DOD authorization set out to do, and so the
Title XI loan guarantees were to be used according to that
policy to either modernize or reopen shipyards.
Mr. Hart. Correct.
Senator Kerry. Quincy was designated in 1993 as a pilot
project in that initiative, I believe.
Mr. Hart. Yes, sir.
Senator Kerry. Now, Quincy had a 100-year history supplying
and building ships for the U.S. Navy, all the way up until
1986. At that point in time there was a very short gap between
its operational capacity and the new initiative to try to
create shipbuilding.
It is my understanding that there was some entity, prior to
MHI, that did not work out. Then MHI appeared on the scene.
Now, first of all, the U.S. Government is not yet out of money
at this point in time. We have taken out a loan, but we hold
assets, is that not correct?
Mr. Hart. Yes, sir.
Senator Kerry. The assets the U.S. Government holds, it is
my understanding the yard when completed was estimated to be
worth $100 million to $150 million at completion, and it is 80
percent complete today.
Mr. Hart. Yes, sir.
Senator Kerry. Now, that estimate was based on the sale of
other shipyards. In fact, in a letter to Senator McCain the
Acting Maritime Administrator said, ``the fair market value of
the currently enacted yard is $122 million.'' Once this yard is
rebuilt, its value should be substantially higher as the most
technologically advanced yard in the United States.
So that was your position, or MARAD's position, at least,
as to the evaluation and capacity of the yard.
Mr. Hart. Yes, sir.
Senator Kerry. Now, if it is proceeding along--and this is
what I do not understand. If it is proceeding along, paying out
money, and it is only up to the $40 million level, and has a
guarantee up to $59 million, why suddenly--what was the
problem, that suddenly it ground to a halt? Was this more of a
dispute in the contract between the person renovating the yard,
or what fell apart here?
Mr. Hart. What fell apart, Senator, was the prospect of,
after having expended $40 million and with $12 million left to
go, when you look at what needed to be done, $12 million was
not going to cover it. There were significant concerns--I will
just give you one example. The drydock requires a huge set of
doors which are very big, and need several weeks to install.
Those doors had not been ordered. Things like that.
There was equipment that seemed to be exposed to the
elements rather than being covered. It just seemed--and my
Deputy and my Chief of my Title XI program were up there
several times and did their own inspection.
Senator Kerry. So basically you are saying MHI was failing
to perform, was falling short on its capacity to do what it had
said it was going to do in that span of time.
Mr. Hart. Yes, sir.
Senator Kerry. Now, I have serious questions about MHI.
Lots of representations were made, lots of analysis was made,
and I assume the bona fides were checked out.
Mr. Hart. Well, I will say we did check out the bona fides
as much as we could. I cannot sit here and tell you that we had
questions about the bona fides beyond those that have already
been raised.
Senator Kerry. I remember there were the six contracts on
the ships. Were those contracts viewed?
Mr. Hart. We never saw those contracts. That was one of the
things that seemed wrong about that part of the project. Those
six ships which were supposed to be built in the yard, we never
really saw contracts, what we would call contracts.
Senator Kerry. I understand, they were contingent upon the
completion, contingent on the granting of the guarantee itself.
Mr. Hart. All right, yes.
Senator Kerry. But what I am trying to get at is, MHI's
working capital and capacity to complete that task I assume was
on the table.
Mr. Hart. Yes, sir.
Senator Kerry. Was MHI paying itself during the course of
this process?
Mr. Hart. There were a couple of bills that we saw where
MHI was paying itself, or a couple of its subsidiaries.
Senator Kerry. Does that raise any questions? I mean, it
does to me.
Mr. Hart. It certainly did to us also.
Senator Kerry. When did that flag go up?
Mr. Hart. I think that flag went up about June 1999. It
seems to me that is the first time I remember hearing from
anybody that MHI or a subsidiary of MHI had put itself in for
payment.
Senator Kerry. Now, who is being contacted? Who is one
dealing with with respect to MHI at this point in time?
Mr. Hart. From MARAD?
Senator Kerry. Yes.
Mr. Hart. The Deputy Administrator, Mr. Graykowski.
Senator Kerry. Is dealing with MHI?
Mr. Hart. With MHI.
Senator Kerry. Who is it specifically that is representing
MHI right now?
Mr. Hart. There were several people. There is a Mr. Dunkel,
who is, I believe, one of the lawyers. There is a list of
people that any time we had a meeting----
Senator Kerry. What about the principal, Mr. Emmanuel? He
was certainly present and accounted for during the course of
this earlier period. Is he present and accounted for now?
Mr. Hart. No, he is not. I met Mr. Emmanuel once, I think
in February, or January of this year for the first and only
time.
Senator Kerry. Well, does that raise questions at this
point in time?
Mr. Hart. Well, that raised questions beforehand, and
certainly raises questions now.
Senator Kerry. It is my understanding that the assets that
you hold at this point in time are valued at a higher amount
than the amount of money that has thus far been paid out.
Mr. Hart. Sir, the problem with that, we are really not
sure about that. That is why we are having an appraisal.
Senator Kerry. I understand you are doing an appraisal now,
but we are certainly not looking at the $50 million, $59
million, quote, lost that I keep reading about in the paper.
Mr. Hart. I do not believe so. As Mr DeCarli said, right
now the possible high-side number seems to be $40 million,
because we have got the $12 million that we did not disburse,
and we have got the $6 million.
Senator Kerry. But the $40 million you are talking about is
without any asset sale, without any asset disposition.
Mr. Hart. That is correct.
Senator Kerry. So we are looking at, even if you discount
it by 50 percent you are looking at considerably less than
that.
Mr. Hart. That is correct.
Senator Kerry. There is no reason at this point in time to
make the judgment that you have to do that discount. You do not
know, is the simple answer.
Mr. Hart. That is right.
Senator Kerry. Now, is there any common sense at all in
believing that some other builder of some kind, either for
ferries or for smaller vessels or repair or other kinds of
potential might, in keeping with the other--with the level of
investment that has been made, is there some exploration going
on with respect to other people who might have some subsidiary
operation there that might, in fact, give value that way?
Mr. Hart. We are looking, Senator, to see if there is
someone or some entity who would want to take over all or part
of the yard. I want to say we are limited in how much we can
do, it seems, because we are in the middle of the bankruptcy
proceeding and we do not want to taint that in any way. But we
are looking to see what or who would be willing to take over
all or part of the yard.
Senator Kerry. Well, I certainly want to work with you and
with Senator McCain to see what kind of answers we can get in
terms of MHI, because certainly countless numbers of people,
the mayors, the Governor of the State, all Senators, Members of
the delegation, everybody proceeded in good faith on the
representations that were set forth during the course of this,
and it troubles me greatly if, indeed, MHI may not have been
dealing on the same plateau, let us say, and I think that is
worthy of your further analysis and of ours.
Mr. Hart. Yes, sir.
Senator Kerry. I intend to see that we continue to do that.
I do not have anything to the contrary yet, I want to say that,
but I just want to make certain that everybody is on an even
keel here.
Mr. Hart. If I may, as Senator McCain noted earlier, I
understand that the U.S. Attorney up in Massachusetts is
looking into this and I think that the Inspector General at DOT
is also maintaining an active file on this, and of course we
cooperate with both entities as much as possible.
Senator Kerry. Well, that is worthy and important, because
everybody deserves an answer as to what the facts are with
respect to that basis.
With respect to the contract, do you know what happened
with the contractor who was doing the work itself? There seemed
to be sort of a growing dispute there.
Mr. Hart. There was a dispute by--Alberg and Sons was the
contractor. When they were removed, they immediately went to
court, and as I understand it they got a judgment, a default
judgment against MHI for $2.1 million, I believe, and that is
where that remains. My understanding is they got a default
judgment because nobody for the other side bothered to answer
the summons.
Senator Kerry. But certainly the concept itself on which
this was based, i.e., if you have six ships, and if you are
going to have that job completed, that would, in fact, be a
sound business venture.
Mr. Hart. Clearly, if you have a revenue stream, and the
building of those ships would be a revenue stream by which you
could repay the loan for building the ships, or for
revitalizing the shipyard, yes.
Senator Kerry. Fair enough. Thanks.
Mr. DeCarli. Senator Kerry, if I could add, the $55 million
loan guarantee was originally intended to put together a fully
operational shipyard. I visited the shipyard up there in
December, and I think everybody would agree that in terms of
the Alberg work that it is 80 percent done. I am not sure that
everybody would agree that a fully operational shipyard is 80
percent done. As I said, the drydocks have not been touched,
and there are a lot of things that have not been done.
As a matter of fact, when we visited the facility last
December the pitch was really not to build a fully operational
shipyard, but to spend the rest of MARAD's money to basically
complete a steel fabrication and piping facility.
Senator Kerry. Who pitched that?
Mr. DeCarli. That was Mr. Sotiris Emmanuel at the time.
Senator Kerry. When was that?
Mr. DeCarli. Last December.
Senator Kerry. I would assume that----
Mr. DeCarli. I think that same proposal was made to MARAD.
Mr. Hart. Yes, it was.
Senator Kerry. No kidding. That is interesting. I would
assume that set off some more alarm bells.
Mr. Hart. Yes, certainly coming in December, when another
interest payment was due in December at about the time that
this second proposal showed up, and of course we refused to
grant them a second loan deferral.
Senator Kerry. So what percentage of an operational yard,
as opposed to the work, would you say has been done?
Mr. DeCarli. I cannot answer that. I do not know.
Mr. Hart. I am not sure that there is a quantifiable number
I could give you, 50 percent of a real shipyard, a complete
shipyard is there, or 60 percent.
Mr. DeCarli. One additional point I would make. In order to
complete this deal to fabricate, to make a fabricating facility
and a piping facility, one of the proposals was to get
commercial financing and the MHI wanted to go out in the market
and get additional financing.
In order to do that, one of the requirements would have
been for the U.S. Government to subordinate its first lien
priority against the property and give equal footing to whoever
provided that loan. That loan was for about, I think somewhere
around $15 million.
If the yard is, in fact, worth $100 million and the U.S.
Government's interest in it is only $40 million at this point
in time, that would tell somebody in the commercial market we
have a $60 million asset out there available, and you would
wonder why they would need first priority, why they would not
take equal, or why they would not take second footing for the
remaining $60 million.
Mr. Hart. Why the new lender would not take second priority
if there is an asset that is there net $60 million.
Senator Kerry. I follow you completely, and obviously the
Government will hold the position--one of the good things that
I think we did do was put in those 28 conditions, which was
part of the discussion back then. I think it was an important
part of it.
But the value of the yard in 1986 when it was sold to
Massachusetts for sludge disposal was $49 million. That is the
1986 price, and since 1986 there has been considerable asbestos
and other kinds of cleanup there as well as building rehab, so
I would assume if it had that value back in 1986, given
appreciation, one would hope that it would be more valuable
than $50 million today.
Mr. Hart. If I could just--my only caveat with that is that
there are significant items that were required in a shipyard
that are not there. Drydocks----
Senator Kerry. I am not talking about for a shipyard. I am
talking about for whatever industrial use there may or may not
be, and the point is, it is geared for industrial use, and it
found other than shipyard use and valuation in 1986 of $49
million.
So, given land values and given its location and other
kinds of industrial opportunity, I am saying I would hope--I
have nothing to base this on except the valuation price of the
sale in 1986--in the year 2000 you are in for $40 million and
it is, I hope, worth more than $40 million since it was worth
$49 million back in 1986.
Mr. DeCarli. We would certainly hope you are right. The $49
million was based on a specific--it was needed for a specific
use. I think subsequently it was sold for about $10 million.
Senator Kerry. That was the transfer to the State as a part
of this deal, that is correct, and I think that was
Massachusetts trying to chip in its part to try to help bring
shipbuilding back to a community that had a long history and a
great deal of pride in shipbuilding, so that was not, ``fair
market value.'' That was the Massachusetts contribution to the
effort to try to make this work.
I think it is appropriate that the U.S. attorney is looking
at this, and I have great confidence in Don Stearn. He will do
it properly.
I am concerned about MHI's role in this, and that is
something that is harder to have control over, but I am deeply
concerned about it, and I think we need to understand it
better.
Thanks, Mr. Chairman.
The Chairman. Thank you, Senator Kerry.
In 1997 we looked at this deal. We saw it was no good. I
tried to stop it. It went through. $55 million of taxpayers'
money was devoted to it, and now they are going to lose about
$40 million. I predict again--I predict to you now, just as I
predicted this project would fail, that they will lose at least
$40 million on this deal. Watch. I think it is disgraceful. I
think it is reprehensible. I think that when we allow something
like this to happen with a project that is simply by any
objective observer--and I am not an expert on shipbuilding.
We looked at it and other objective observers looked at it.
We saw it was doomed to failure, and yet we went ahead and
earmarked $55 million. We now have pollution problems. Never in
my experience has there been a cleanup accomplished according
to the original estimates. You say there are $1 million in
cleanup costs, Mr. Hart?
Mr. Hart. That is our estimate, sir. That is our estimate
as of right now, but it is only an estimate.
The Chairman. I have never, ever seen a time when an
environmental cleanup did not exceed its estimates, and never
once have they come in under those estimates. I hope that
another project will go there. I hope they build highrises. I
hope they do something that will restore not only employment
but everything else to the area.
This was a doomed project from the beginning. It is a
doomed project now. We are subject now to a situation where the
former person who ran it has fled to another country, or is
residing in another country and refusing to return to help us
resolve this mess, and I think that all of us, including this
Committee, bear responsibility for a huge waste, as I say, of
tens of millions of taxpayers' dollars. I will watch with great
interest and care as we proceed with new ideas and new ways to
address what is clearly a debacle.
So it is not that the signs were not there. It is not that
there were not some of us who said this project will fail. We
should not put $55 million in taxpayers' money into it. So this
is one of those cases where at least some of us were fully
appreciative of the risks here which far exceeded the prospects
of success, and again it is my taxpayers' dollars that went
into it as well. I will continue to do everything in my power,
and I hope the next time one of these schemes comes up and we
waive requirements, that the Congress will exercise its
responsibility and not allow that to happen.
This hearing is adjourned.
[Whereupon, at 11:10 a.m., the hearing was adjourned.]
A P P E N D I X
----------
Responses to Written Questions Submitted by Hon. John McCain to
Raymond J. DeCarli
Question 1a. In your statement, you note that MARAD acted
appropriately to protect the Government's interest.
Is there anything else you think MARAD should/could have done?
Answer. Prior to closing on the loan guarantee, MARAD took a number
of actions intended to protect the Government's interest. MARAD
identified 28 significant requirements for MHI to complete, including a
first priority lien on all assets to the Secretary of Transportation
and establishing a MARAD-controlled escrow account for disbursing the
proceeds from the guaranteed loan. After MHI defaulted on its June 1999
payment, questions arose as to whether it would be able to make
subsequent loan payments. MARAD could have denied MHI's request to
defer its missed June 1999 loan payment, thereby triggering actions to
protect the Government's interest sooner. In agreeing to the deferral
of the missed payment, MARAD noted that the lender was supporting MHI's
request for deferral. The lenders' views should have carried little
weight because the Government guarantee assured that, regardless of the
ultimate outcome, the lender would receive all principal as well as
additional interest.
Question 1b. Do you think the shipyard could be used to scrap
vessels?
Answer. Yes, the shipyard could be used to scrap vessels. However,
it would have to be set up as a scrapping facility. This would involve
accommodations for the removal and disposal of hazardous materials and
wastes; complete dismantlement of ships; recycling and disposal of
materials from ships; and a system to sell the scrap material and
reusable equipment.
Question 2a. According to your testimony, MARAD has the
responsibility of overseeing approximately $4 billion in loan
guarantees.
Based on your review of their actions at Quincy, should this
Committee be concerned about MARAD's performance in overseeing these
loans?
Answer. No. This loan guarantee is not a good example of MARAD's
Title XI program. The Quincy shipyard is the only Title XI loan
guarantee that contained an amendment which removed the economic
soundness requirement for reactivation and modernization of closed
shipyards.
Question 2b. Do you have any legislative recommendations for the
Committee to consider that would improve upon MARAD's oversight of
Title XI loan guarantees and better protect the interest of the United
States?
Answer. The legislative provision that required MARAD not to
consider economic soundness lasted for only one year and has expired.
We would recommend that a similar provision not be adopted in any
future legislation.
SHIP SCRAPPING
Question 3a. As you noted in your testimony, your office, in a
report issued last month regarding scrapping of obsolete vessels in the
NDRF recommended that MARAD seek elimination of their statutory
requirement to maximize financial returns on the sale of obsolete
vessels.
Why do you believe that to be necessary?
Answer. The current approach is not working. The Navy is paying
contractors to scrap obsolete vessels while MARAD is asking contractors
to pay to scrap its vessels. And, domestic capacity is very limited.
MARAD will not be able to dispose of its obsolete vessels under the
current legislative mandate requiring it to gain financial returns on
the sale of these vessels. Also, MARAD's recent rate of progress in
scrapping its vessels and the price at which its vessels are being sold
indicates a need for a change to allow MARAD to pay for vessel
scrapping.
Question 3b. How would the removal of this requirement affect
MARAD's ability to dispose of obsolete vessels?
Answer. Removal of this requirement would allow MARAD more
opportunities to dispose of its environmentally dangerous vessels. It
would allow MARAD to participate with the Navy's pilot project and may
be the incentive needed by entrepreneurs to develop additional capacity
in the U.S. Although MARAD is currently exploring alternatives that
have the potential to assist in disposing of some of its vessels, it is
still constrained in the domestic market by the requirement to gain
financial returns on its vessel sales.
Question 3c. If Congress does not act to remove the requirement
that MARAD maximize financial returns on the sale of obsolete vessels
will they be prevented from disposing of all obsolete vessels within
the time frame presented in the Administration's reauthorization
submission?
Answer. If that requirement stays in place, it is unlikely that
MARAD will meet an extended deadline of September 30, 2006. MARAD would
not be able to compete with the Navy's program, and the domestic
scrapping capacity is very limited. Language in MARAD's authorization
request stated that the extension would allow MARAD time to develop and
begin implementing a plan to dispose of these vessels. However, our
position is that it is not acceptable to simply begin disposal within 5
years considering the condition of some of the vessels, the
environmental risks, and the costs to maintain them. The scrapping job
for ships currently in the inventory should be substantially complete
or fully complete by 2006.
Question 4. Why can't MARAD send these vessels overseas for
scrapping?
Answer. MARAD stopped selling vessels overseas for scrapping in
1994 due to EPA restrictions. In 1998, the Administration placed a
moratorium on all sales of vessels for scrapping overseas. Although the
moratorium expired in October 1999, MARAD has refrained from exporting
obsolete vessels. Based on a 1997 agreement between MARAD and EPA,
MARAD is required to request EPA's approval to sell vessels to overseas
contractors that can scrap them in an environmentally-compliant manner.
The agreement requires MARAD to ensure that all liquid PCBs in
transformers, capacitors, hydraulic and heat transfer fluids and that
all ``readily removable'' solid PCBs are removed prior to exporting
these vessels. This agreement also requires EPA to notify countries of
import that they will be receiving vessels and that these vessels
contain PCBs. To date, MARAD has not requested EPA approval to sell any
of its vessels awaiting disposal to overseas scrappers. MARAD can now
sell vessels overseas for scrapping, but it must meet the requirements
of the EPA/MARAD agreement.
Question 5. Since the overseas market has been basically
unavailable, how has MARAD fared in the domestic market?
Answer. MARAD has not fared well in the domestic market. Since the
restrictions began on selling these vessels overseas in 1994, MARAD has
sold only 22 vessels for scrapping. Of those, only 7 vessels have been
scrapped. During the past year, vessel sales yielded only between $10
and $105 per vessel. MARAD has experienced numerous problems with its
contractors, including a recent default on a contract to scrap 5
vessels, and continuous delays and requests for extensions for towing
vessels (already under contract) to sites for scrapping.
SHIP MANAGERS' CONTRACTS FOR MARAD'S READY RESERVE FORCE
Question 6. The DOT IG participated in a nation-wide five-year
joint cover investigation known as ``Operation Octanova,'' which was
conducted by the Federal Bureau of Investigation (FBI), Defense
Criminal Investigative Service, and Naval Criminal Investigative
Service and focused on the Military Sealift Command and the Maritime
Administration (MARAD) ship repair industry to identify fraud and
kickbacks. The investigation was made public at a joint press
conference in August 1999, when the initial indictments of 21
individuals and 2 companies were announced.
Is the investigation complete and do you expect any additional
MARAD employees to be indicted or charged?
Answer. The undercover phase of the investigation was concluded in
August 1999. Since that time, the investigation has focused on leads
generated by that operation and remains ongoing. At this time, we do
not anticipate any additional MARAD employees being charged.
Question 7a. Your office recently completed an audit on the ship
managers' contracts for the RRF and concluded that MARAD implemented
effective policies and procedures relating to the award of ship
managers' contracts. However, you stated that this was in sharp
contrast to its failure to implement controls for the administration of
these contracts. What control weaknesses did you identify during your
audit?
Answer. We found that MARAD has not adhered to its procedures and
practices for administering the ship managers' contracts. Specifically,
MARAD:
Paid contractors over $63 million before they incurred
costs and delivered services;
Allowed ship managers to issue numerous noncompetitive
subcontracts without good reason; and
Did not perform adequate reviews of invoices to ensure
payments were for actual costs incurred; the work related to the work
orders; and the invoices had not been already paid.
Question 7b. What action, if any, has MARAD taken in response to
your audit?
Answer. In our May 12, 2000 audit report, we recommended MARAD:
(1) Instruct regional employees on existing procedures for
processing invoices and provide sufficient oversight to ensure that
these procedures are followed.
(2) Provide detailed, self-explanatory work statements,
specifications or descriptions on all work orders.
(3) Periodically review open and inactive work orders to identify
those that should be closed and reprogram any remaining funds.
(4) Re-instate periodic reviews of ship manager procurement actions
including documentation justifying sole-source subcontractor awards and
indications of split purchases.
MARAD concurred with our findings and these recommendations. MARAD
must now follow through on implementation of the recommendations.
Question 8. On June 12, 1998, the Secretary of Transportation
announced the award of 39 performance-based contracts to 10 American
ship owning and operating companies to manage 89 RRF vessels which
stand ready to support America's armed forces. The total estimated
value of the contracts for five years was $1.1 billion. However, on
July 2, 1998, MARAD rescinded these contracts. Why were these contracts
rescinded?
Answer. The ship managers' contracts that were awarded in June 1998
were rescinded because of a technical error made by MARAD. A ship
manager sent MARAD a letter outlining the terms for which it would
accept a ship manager contract. This letter, however, was ``lost''
while MARAD determined the awards. Subsequently, MARAD made an offer to
the ship manager that did not meet the criteria specified in the
letter; thus, the contract was not valid. MARAD decided to rescind all
ship managers' contracts so that awards could be re-evaluated.
Question 9a. On April 28, 2000, MARAD awarded new ship managers'
contracts to nine ship management companies at an estimated cost of
$1.1 billion. This is nearly 22 months after the 1998 ship managers'
contracts were rescinded.
Is your office aware of the reason why there was a 22-month delay
in awarding these contracts?
Answer. MARAD delayed the awarding of the new ship managers'
contracts in part because of the ongoing criminal investigation. MARAD
was extremely concerned about issuing a contract to a ship management
company who subsequently would be indicted as a result of the ongoing
investigation. Legal actions against MARAD from the first contracts
awarded also contributed to the delay.
Question 9b. What steps, if any has MARAD taken to ensure that
improved oversight controls were included in the new ship managers'
contracts?
Answer. MARAD is changing the procurement section in the new ship
managers' contracts to include instructions to regional employees on
administering ship managers' contracts, which should go into effect by
June 2000. MARAD is also developing a training session for all
headquarters and regional personnel who are responsible for
administering the new ship managers' contracts. These sessions will
instruct the employees on existing procedures for processing invoices
and provide oversight to ensure that these procedures are followed.
__________
Responses to Written Questions Submitted by Hon. John McCain to
Clyde J. Hart, Jr.
Question 1a. Over a period of 2 years starting in 1997, the
Inspector General (IG) reported four times that the risk factors for
the Fore River Shipyard project were extremely high and circumstances
had changed significantly. In the reports, the IG recommended that
MARAD should reassess the risk and adjust the subsidy rate accordingly.
On each occasion MARAD responded that it did not agree and put off a
reassessment.
Why didn't MARAD follow the Inspector General's recommendations to
reassess the risk factor rating for MHI's application in a timely
manner?
Answer. MARAD initially proposed reassessing the risk factor for
the MHI project in the last quarter of 1998, rather than immediately
after the Title XI guarantee closing in 1997 as recommended by the IG,
because it was reasonable to give MHI a chance to get the yard up and
running and to finalize a shipbuilding contract before concluding that
the project risk had increased significantly.
MARAD did reassess the risk in July 1998, less than a year after
closing, and concluded that there was no basis at that point to change
the original estimate. MHI was actively pursuing the Intermare
shipbuilding project and MARAD had engaged in discussions with
Intermare's counsel. Although there were major outstanding issues
regarding the Intermare project, the project was still considered
viable.
In August 1999, MARAD advised the IG that it agreed with the need
for a reassessment and proposed to complete one by December 1. MARAD
believed this would allow sufficient time for the shipyard
modernization to be completed and for MARAD to determine whether MHI
would be able to finalize the Intermare shipbuilding contract on a
viable basis. On December 1, 1999, MARAD reassessed the MHI project
risk on the basis of the greatly increased likelihood of default since
the yard had not been completed and there had been no progress on
finalization of the Intermare contract.
Question 1b. When finally reassessed, did MARAD take appropriate
action to adjust the subsidy rate and increase the amount held in
reserve to protect against excessive loss to the Federal Government?
Answer. In February 2000, a final reassessment of the project risk
was determined resulting in the re-estimate subsidy rate being adjusted
to 60.5 percent. Accordingly the additional funds were subsequently
transferred into the reserve account.
Question 1c. In doing the risk assessments, what factors were
considered?
Answer. In doing risk assessment, the following factors are used in
every Title XI project. These factors were established in conjunction
with and approved by the Office of Management and Budget:
Guarantee period
Percentage of requested financing
Financial position of company
Project guarantee
Employment of equipment
Market segment
Collateral
Historical experience
Country risk
Construction period financing
Question 2a. We heard from Mr. DeCarli in his testimony that
``MARAD believes the Congressional directive to waive the economic
soundness criteria prevented it from acting on our recommendations
related to firm contracts.'' However, the same measure that waived the
economic soundness requirement directed [that] ``The Secretary shall
impose such conditions on the issuance of a guarantee to a commitment
to guarantee under this section as are necessary to protect the
interest of the United States from risk of a default.''
Did MARAD follow this statutory directive throughout the life of
the project?
Answer. MARAD did follow this statutory directive throughout the
life of the project. MARAD ensured that strong and meaningful
conditions attached to the commitment to guarantee that was issued on
November 1, 1996 and to the issuance of the guarantee on December 17,
1997. As a result of this statutory directive, MARAD required MHI to
grant MARAD, among other things, a first mortgage on the Shipyard
properties, a security interest in all of the shipyard equipment, and a
co-obligee, loss payee status on the surety bond for the main
construction contract. MARAD also protected the interests of the United
States by binding the MHI companies and their other lenders to strong
Inter-creditor agreements and Subordination Agreements. During the life
of the project, MARAD exercised diligent oversight over MHI's proposed
changes in shipyard construction plans, the release of proceeds from
the Escrow Fund, and requests for deferrals and release of MARAD
collateral. As Mr. DeCarli, the Deputy Inspector General of the U.S.
Department of Transportation observed at the hearing on May 26, 2000,
before this Committee, when MARAD ``issued that letter of commitment,
they had 28 conditions in there, some of which went probably about as
far as they could conceivably go to protect [the taxpayers']
interest.''
Question 2b. What other shipyards have received Title XI loan
guarantees for revitalization and what is the status of the projects?
Answer. Section 1139 of the Coast Guard Authorization Act of 1996
established a new temporary, 1-year Title XI program to reactivate
closed shipyards (the ``Reactivation'' program). This is the statute
that waived the economic soundness test and the statute pursuant to
which MHI applied for Title XI guarantees. No other shipyards have
received (or applied for) Title XI Reactivation loan guarantees under
the provisions of section 1139.
Since 1994, MARAD has had a shipyard modernization program. Section
1112 of the Merchant Marine Act, 1936, as amended (the
``Modernization'' program), which requires, as a precondition to the
issuance of a commitment to guarantee, that the agency make an economic
soundness determination.
In 1995, MHI applied under the Modernization program and was
informed that the agency could not approve its application because of
the applicant's inability to demonstrate economic soundness.
Under the Modernization program, MARAD has approved a total of
seven shipyard Modernization projects. The approved Modernization
applications were from National Steel & Shipbuilding Company, Avondale
Industries, North American Shipbuilding, T.T. Barge Services, HAM
Marine, Inc., Bender Shipbuilding & Repair, Inc., and Eastern
Shipbuilding Group, Inc. These seven projects are all on time and
current with their debt service payments.
Question 2c. Has MARAD held other shipyard revitalization projects
to the same standards as it has the Fore River project and if so,
should we be concerned about the future of these projects?
Answer. It is difficult to compare the Modernization projects to
the Reactivation project. Although applicants in both programs are held
to a high standard, to ensure protection of the interests of the United
States, MARAD can show more flexibility in structuring collateral
packages for companies that have a backlog of contracts and a
demonstrated record of success in the market place. At present, we see
no reason to be concerned with the future of any of the Modernization
projects.
Question 3a. In a July 20, 1999 report, the IG in expressing
concern about the risk of default by Massachusetts Heavy Industry
(MHI), noted that MHI still had not demonstrated that they had a source
of income from contractual work or elsewhere that would allow them to
repay the loan secured by the Federal Government. Yet MARAD, under your
direction, granted what amounted to a 7-month extension on payments.
What was MARAD's rationale for granting the extension?
Answer. Representatives of MHI, the obligor, and Fleet Bank, the
guaranteed obligee, requested that MARAD approve their proposal to
defer the $1.55 million payment due on June 1, 1999, under MHI's Note
to Fleet for 25 years. At that time, MHI was obligated to pay Fleet
$56.55 million in principal and accrued interest under the Note.
Representatives of MHI contended that MARAD's collateral would be
substantially enhanced if MHI were permitted to complete the shipyard.
In letters of July 16, 1999 and July 31, 1999, Mr. Sotiris Emmanuel,
President of MHI and Mr. James Dunkel, MHI's Chief Financial Officer,
on behalf of MHI, assured MARAD that it was their belief that the
shipyard would be completed in October 1999. In conjunction with this,
they assured MARAD that once the shipyard was a reality, they would be
able to obtain sufficient numbers of shipyard contracts.
In reliance on MHI's assurances, MARAD partially approved the
deferral request, granting a deferral until December 1, 1999, the date
of the next debt service payment. MARAD's rationale for granting the
extension was that if the yard were completed before the December first
payment was due, this would increase MARAD's collateral value and give
MHI the opportunity to demonstrate the truth of its contention that
once the shipyard was completed they would obtain the necessary
shipbuilding contracts.
Question 3b. What documentation was available to make MARAD believe
MHI's financial problems would allow them to complete the shipyard?
Answer. At the time of the MHI deferral requests in May, June and
July 1999, MARAD had reason to believe that the money in the Escrow
Fund (maintained by MARAD in the Treasury Department) would be adequate
to complete the shipyard. Although MARAD was aware of some contractual
difficulties between MHI and its contractor, O. Ahlborg & Sons, at the
time MARAD granted approval to the deferral, August 6, 1999, there was
no reason for MARAD to believe that MHI would not complete the shipyard
in the October timeframe.
Question 3c. How much was paid out of the escrow account between
July 1, 1999 and February 28, 2000?
Answer. Between July 1, 1999 and February 28, 2000, MARAD paid out
$3,137,490.19 from the MHI Escrow Fund to MHI's vendors and as
emergency payments to protect the assets at the shipyard.
From July 1, 1999 until MARAD froze MHI's accounts on September 17,
1999, MARAD paid out $2,805,211.13 to MHI vendors.
Of this amount, MARAD was required by contract to release
$720,378.13. MARAD released the remaining $2,084,833 in the belief that
Ahlborg's Surety would complete construction of the shipyard pursuant
to the Performance Bond. MARAD hoped that the construction would not be
delayed. When it became obvious that the Surety was likely to study the
issues closely, MARAD, at the recommendation of the Department's
Inspector General, froze the Escrow Account, except as requested by MHI
to meet exigent circumstances. After MARAD froze withdrawals from the
Escrow Fund, MARAD released $332,279.06 from the Escrow Fund at MHI's
request to pay for such items as insurance, security guards, and
electricity.
Question 3d. If MARAD had taken action earlier to foreclose on the
loan and take possession of the shipyard, would the Federal Government
still be out $50 million?
Answer. Given the refusal of Fleet Bank to call on MARAD's
Guarantee until sometime in August, MARAD would have had to pay out in
excess of $57.25 million instead of the $59.1 million it ultimately
paid. Pursuant to statute and contract, MHI's default of June 1, 1999,
did not ripen into a callable Default until July 1, 1999, and the
obligee Fleet Bank had 60 days to decide whether or not to call a
Default and make a demand under the Guarantee. Thus, the amount of
guaranteed interest could have continued to increase for an additional
90 days. MARAD may not foreclose until it has paid the obligee under
the Guarantee. Had MARAD not granted the deferral, the earliest MARAD
could have begun foreclosure would have been in late August 1999. The
commencement of the foreclosure at an earlier date would not have saved
the original $55 million in principal guaranteed by MARAD.
Question 4a. As I mentioned in my opening statement, the Committee
is aware that the Department of Justice, as well as the U.S. Attorney's
Office in Boston, is looking into accusations of criminal wrong doing
associated with the project.
Did anyone at MARAD ever suspect that there could be criminal
activity associated with the project, and if so, what action was taken
with regard to these suspicions?
Answer. Yes. Referrals were made to the Department's Office of
Inspector General.
Question 4b. How often did officials from MARAD meet with MHI to
review progress on the project and what was the nature of the meetings?
Answer. There was frequent communication between MARAD officials
and MHI officials, especially between representatives of MHI and
MARAD's Office of Ship Construction regarding MHI's submissions of
invoices in support of withdrawals from the Escrow Fund and information
concerning the extent of construction. A MARAD representative
periodically visited the shipyard to examine the extent of construction
progress.
Question 4c. Should MARAD have been more vigilant of its oversight
role in light of these investigations?
Answer. We believe that MARAD was sufficiently vigilant in its
oversight of MHI's construction efforts.
Question 5 a-d. In August 1999, you approved the termination of the
general contractor (Ahlborg) on the Fore River Shipyard revitalization
project at the request of MHI. Why did you agree to the termination? At
that time, how far behind was the project? In approving the
termination, how did you believe the project was going to be completed?
After agreeing to terminate the contractor, did MARAD seek enforcement
of the performance bond against the Surety, and if not, why not?
Answers. The answers to these questions involve issues that are the
subject of pending or threatened litigation by and among MHI, Ahlborg,
MARAD, and other parties. Accordingly, MARAD believes that the answers
to these questions should be made in the first instance to the courts
that will address these issues.
Nevertheless, we would be happy to provide you and your staff with
a briefing of pending matters related to the above referenced
questions.
Question 6a and b. At the same time you approved the termination of
the contractor, you froze $12.4 million that remained in the escrow
account. What was the impact of freezing those funds? Did freezing
those funds prevent MHI from moving forward with the project?
Answers. The answers to these questions involve issues that are the
subject of pending or threatened litigation by and among MHI, Ahlborg,
MARAD, and other parties. Accordingly, MARAD believes that the answers
to these questions should be made in the first instance to the courts
that will address these issues.
Nevertheless, we would be happy to provide you and your staff with
a briefing of pending matters related to the above referenced
questions.
Question 7a. During the 1980's, there were a large number of
defaults on Title XI loan guarantees. As a result, were there any
changes made to regulations to reduce the number of defaults?
Answer. Yes, in 1985 MARAD modified the Title XI regulations to
strengthen the criteria for approval. For example, MARAD established
specific objective criteria in analyzing a project's economic
soundness.
Question 7b. What is the overall default rate of the Title XI loan
guarantee program?
Answer. Since the inception of the program in 1955, MARAD has
issued approvals for approximately $16.7 billion. The program has
experienced defaults in the amount of approximately $2.7 billion. This
default level does not include any money that MARAD recovered from
selling the defaulted vessel/assets.
Over the entire history of the program, the cost of defaults has
been less than 2 percent of the total guarantees. Program receipts from
recoveries, fees and other sources total $2.5 billion, which have
helped offset the default losses of $2.7 billion.
Question 7c. What is the total risk, in dollars, to the government
for the whole of the Title XI loan guarantee program?
Answer. The program's current portfolio is slightly over $4
billion.
Question 7d. In the case of default, does MARAD have the ability to
sue to recover lost funds from the company involved and its parent
company, and if not, why not?
Answer. Yes, MARAD has the legal right to seek recovery from the
defaulting Title XI company. Depending on the structure of the
transaction, MARAD may also have the right to seek recovery from the
parent of the Title XI company.
Question 7e. As part of the risk assessment, does MARAD consider
whether or not the Federal Government will be able to recover the
funding in the case of default?
Answer. Yes, In structuring the transaction MARAD seeks to obtain a
collateral package that will minimize any loss to the government in the
event of default. The expected recoveries from the collateral package
are also considered in calculating the subsidy cost of the loan
guarantee.
Question 8a. Shortly after MARAD started foreclosure proceedings at
the shipyard, MHI filed for bankruptcy protection under Chapter 11.
What is the status of those proceedings?
Answer. MARAD did not have an opportunity to start foreclosure
proceedings before MHI filed for bankruptcy protection under Chapter 11
. In the bankruptcy proceedings, MARAD has moved for relief from the
stay so that it can convene foreclosure proceedings. A hearing of the
motion took place on July 18, 2000, and the court gave MHI until August
23, 2000 to make substantial progress toward obtaining new financing.
Question 8b. What plan does MARAD have for the future of the
shipyard and recovery of the Federal funds paid out on the loan
guarantee?
Answer. MARAD would like to work closely with the local authorities
and investors to find a productive use for the property which would
produce jobs and tax revenue for the communities and which would repay
the monies paid out by MARAD under its guarantee of MHI's defaulted
debt to Fleet Bank.
Question 9. On April 15 , 1999 MHI was required to submit an
audited Financial Statement. On April 12, 1999 MHI requested an
extension for filing their audited financial statement until May 30,
1999. On April 14, 1999 MARAD approved the extension request. MHI did
not complete the required annual audited Financial Statement until
August 31, 1999. MHI hired Pricewaterhouse Coopers to do the Financial
Statement and at its completion, Pricewaterhouse Coopers said ``Further
operations of the Company are dependent on, among other factors,
completing the renovation of the shipyard and a customer securing the
financing necessary to fund their orders'' (for ships). ``These matters
raise substantial doubt about the company's ability to continue as a
going concern.'' Pricewaterhouse Coopers further determined that MHI
had a deficit accumulated during development stage of $2,520,615.00 as
of December 31, 1998.
Why didn't MARAD raise serious concerns about the financial
stability of MHI after receiving the audit from Pricewaterhouse
Coopers?
Answer. None of the issues raised by the Pricewaterhouse Coopers
audit were new. Initially, in 1995, MARAD had declined to finance MHI
because it had insufficient customers and because it did not own a
functioning shipyard. Congress passed a law precluding MARAD from
taking into account the economic soundness of the venture. As a result
of the passage of this law, MARAD issued, on November 1, 1996, a
commitment to guarantee MHI's obligations. By the terms of this
legislation, MARAD was unable to refuse to close on this financing
commitment merely because the audit disclosed facts which were apparent
to all, namely, that the shipyard had not been built and that the
company had few, if any, genuine customers. The fact that MHI had
invested $2,520,615 during the development stage did not in and of
itself raise any concerns.
Question 10. MHI officials identified Intermare shipbuilding
projects as a potential source of revenue. Why was Intermare's
application for a Title XI loan submitted to MARAD in January 1996 not
approved?
Answer. MARAD did not regard the Intermare contract to be eligible
for Title XI financing because, among other things, (i) the Intermare
company never demonstrated to MARAD that it possessed the minimum
equity required to qualify for the financing (12.5 percent of the
actual cost of the vessel), (ii) there was an absence of market data to
support the required finding that operation of the Intermare ships, if
built at the proposed cost of $40 million each, would be economically
sound, and (iii) MHI proposed to build most of the Intermare ships, if
financed under Title XI, in a Korean shipyard (MHI was repeatedly
informed that this proposal was unacceptable as a matter of law and
policy).
Question 11a. The former Philadelphia Naval Shipyard has recently
reopened and begun construction of several vessels.
Did the Philadelphia yard receive a loan guarantee?
Answer. No.
Question 11b. Did the Philadelphia yard receive any other Federal
funding and if so, what type, how much, and how was it utilized?
Answer. Yes, both the Departments of Labor and Defense gave Federal
funding of $50 million each to be used for job training.
Question 12a. MARAD has a statutorily mandated deadline for the
disposal of obsolete National Defense Reserve Fleet (NDRF) vessels. As
part of the National Maritime Heritage Act of 1994, MARAD is
responsible for the disposal of obsolete vessels in the NDRF, and that
these vessels be disposed of by September 30, 2001. MARAD currently has
114 vessels awaiting disposal, of which 91 are targeted for scrapping.
What is MARAD's plan for disposing of its obsolete vessels?
Answer. The DOT Inspector General's March 10, 2000 audit report
recommends that MARAD ``develop a proposal for submission to the
authorization and appropriations committees in Congress seeking
approval and funding for a project to pay contractors for vessel
scrapping.'' By memorandum dated February 29, 2000, the Maritime
Administrator responded that he fully concurred with this
recommendation.
Question 12b. Does MARAD have a specific plan for disposing of its
37 ``worst condition'' vessels?
Answer. No. MARAD does not have any new plans for disposing of its
37 ``worst condition'' vessels. At this time, MARAD has sold 13 of
these ships, four of them twice (due to the failure by contractors to
take delivery of the vessels they had purchased). MARAD is working with
the contractors to take delivery of these ships. Depending on the
outcome of pending legislation, MARAD will take appropriate action to
dispose of the remaining 24 vessels. MARAD may have the option of
disposing of the vessels either under the current sales program, or
selling them overseas as Senator McCain's amendment proposes, or paying
contractors as proposed in other legislative amendments.
Question 12c. How much will MARAD spend in fiscal year 1999 to
maintain obsolete vessels?
Answer. MARAD spent approximately $2.7 million in fiscal year 1999
maintaining obsolete vessels.
Question 12d. Does MARAD currently have the authority to pay for
scrapping of obsolete vessels?
Answer. No. The National Maritime Heritage Act requires MARAD to
dispose of all vessels ``in a manner that maximizes the return on the
vessels to the United States.''
Question 12e. Is there a market for scrapping of any of these
obsolete vessels that would allow MARAD to maximize financial return to
the United States as directed by Congress in the National Maritime
Heritage Act?
Answer. Only overseas scrapping will allow MARAD to maximize
financial return to the United States. From 1987-94 MARAD sold 130
ships for overseas scrapping at an average price of $108/ton. MARAD has
tried selling ships domestically for the last 3 years and watched
prices received plunge from $10/ton to $10/vessel.
Question 13a. In the Administration's proposal for reauthorization,
MARAD has asked for a 5-year extension to the statutory deadline for
disposal of obsolete vessels. If the Committee acts on the request,
this would be the second time the deadline has been extended.
Why should we believe that another extension is going to result in
MARAD addressing the problem in a decisive manner?
Answer. MARAD has grappled with vessel scrapping since EPA applied
the Toxic Substances Control Act to government-owned vessels in 1994.
This action precluded MARAD from selling ships for overseas scrapping.
The only lawful option available to MARAD at this time is to sell
vessels for scrapping in the United States. To date, this option has
proven unsuccessful and unsatisfactory; only nine ships have been
removed from MARAD's fleet sites for scrapping in the United States.
Because these circumstances, we are requesting additional time to
develop a program to scrap an estimated 172 ships over the next 5
years.
Question 13b. What other alternatives to scrapping is MARAD
currently looking at for disposal of obsolete vessels?
Answer. MARAD has donated 51 ships to coastal states to be sunk as
artificial reefs and plans to continue with that program. MARAD also
donates ships to be used as museums and memorials when specific
legislation is passed. MARAD is also working with the Navy to determine
if any vessels would be suitable for Navy's SINKEX program, a program
in which obsolete vessels are used as targets in live fire exercises.
Question 14. These vessels contain hazardous materials that pose a
threat to the environment. As they age and continue to deteriorate, the
likelihood of an environmental problem increases, as will the costs to
maintain them. What proactive measures has MARAD planned or implemented
to ensure that hazardous materials from these vessels are not spilled
into our waters?
Answer. Various efforts have been initiated to assure that obsolete
vessels that pose the greatest environmental risk are closely
monitored. MARAD is putting cathodic protection on all the vessels at
the three fleet sites to slow the deterioration of steel hulls in
brackish water. We expect this to be completed by mid-FY 2001. In
addition, MARAD has taken soundings of all ships' tanks to verify the
kinds and quantities of liquids on board. MARAD has deployed oil booms
to trap any leakage on suspect ships. MARAD has also conducted market
research on oil consuming microbes and three vessels are being treated
with them; the results are being monitored. MARAD has also gauged the
higher risk vessels' hulls to determine hull metal thickness. In
addition, since Hurricane Floyd, MARAD has spent $3 million shoring up
the anchoring system in the James River Reserve Fleet to protect the
ships from dragging their anchors and possibly sinking during a
hurricane.
Question 15a. In the 1970's, there were 30 domestic ship-scrapping
companies. Today, MARAD considers only four companies to be viable, and
concerns have been expressed regarding those.
What actions has MARAD planned or initiated to draw additional
companies to the ship scrapping industry?
Answer. MARAD has held many meetings with ship scrappers and
visited numerous possible ship scrapping sites, located in Oregon,
Texas, South Carolina, Alabama, New York and Virginia. In addition,
MARAD has conducted debriefings with unsuccessful bidders to explain
where their technical compliance plans were deficient. MARAD maintains
a mailing list to provide information to bidders interested in
scrapping. MARAD advertises its vessels in the Commerce Business Daily
and puts its Invitations for Bid on the Internet. MARAD is also working
closely with the Navy in sharing information.
Question 15b. Why has MARAD granted contractors numerous extensions
for removing sold vessels from the Fleet?
Answer. In the current environment for selling vessels for scrap,
there are a limited number of qualified available scrappers. MARAD has
sought to work with these scrappers by granting extensions in some
cases in order to dispose of as many ships as possible. Nevertheless,
of the 22 ships sold for domestic scrapping since 1997, scrappers have
taken possession of only nine. As a case in point, when MARAD re-
offered 5 defaulted vessels for sale in September 1999, it received
only two bids. Only one of the bidders passed MARAD's technical review,
and only three ships could be awarded to that contractor due to its
capacity limitations.
Question 16a. Current law requires MARAD to sell its scrap vessels.
The Navy, however, recently implemented a pilot project to pay
contractors to scrap vessels.
If MARAD is granted funding and approval for such a project, how
does it intend to solicit contractors to scrap these vessels?
Answer. MARAD is developing an action plan to address this issue.
Question 16b. How does MARAD intend to implement such a project,
i.e., through cost plus contracts, cost sharing, payment for
remediation, etc?
Answer. MARAD is developing an action plan to address this issue.
Question 16c. Is MARAD coordinating with the Navy on its pilot
project and the results?
Answer. Yes. MARAD maintains close contact with the Navy with
respect to their ship-scrapping program. We expect to benefit from
Navy's experience under their current scrapping pilot project.
Question 17. In a Memorandum of Agreement between the Maritime
Administration (MARAD) and the Department of Defense, the Ready Reserve
Force (RRF) was established as a component of the National Defense
Reserve Fleet to meet shipping requirements during national
emergencies. MARAD is responsible for RRF vessel acquisition, upgrade,
activation, maintenance, operations and subsequent deactivation. How
much does MARAD expend annually on maintaining the RRF vessels?
Answer. From FY 1996 through FY 2000, MARAD's budget for
maintenance of the RRF, including ships in the NDRF, has ranged from a
low of $262 million (FY 2000) to a high of $302 million (FY 1998). Of
these amounts, approximately 60 percent is obligated for maintenance,
repair and readiness of the ships; the balance of funding is assigned
to salaries, ship management fees, berthing costs, logistics
provisioning, vessel upgrades, and NDRF fleet maintenance. Our Program
And Objectives Memorandum numbers for FYs 2001 through 2005 are
similar.
Question 18. As a result of a joint investigation by the Department
of Transportation, Office of Inspector General (DOT-IG), Federal Bureau
of Investigation, Defense Criminal Investigative Service and Naval
Criminal Investigative Service involving ship managers' contracts, two
Maritime Administration (MARAD) employees were indicted and charged
with accepting unlawful gratuities from contractors in exchange for
actual or promised favorable treatment on ship repair contracts. What
action has MARAD taken to prevent future occurrences of illegal
activity within MARAD?
Answer. Ship Manager subcontracting procedures have been revised to
increase requirements and controls. The revised procedures set forth
more stringent guidelines for review and issuance of ship manager
subcontracts, tracking of funds obligated for ship maintenance and
repair, and de-obligation of excess funding and contract/task order
closeout procedures. The new procedures will be incorporated into the
2000 Ship Manager contracts upon resolution of a bid protest.
Administrative Contracting Officers have been instructed to
incorporate work descriptions and specifications into the task orders
to facilitate the invoice review and tracking process.
Implementation of the electronic contract writing system at all
MARAD procurement centers in fiscal year 00 provides greater electronic
oversight to ensure that procedures are followed consistently.
The MARAD Office of Acquisition is in the process of acquiring a
2\1/2\ day training course focused on the administration of the 2000
Ship Manager contracts. The training will be available to all
appropriate personnel at MARAD Headquarters and regional offices. Part
of this course will focus on contractual controls and limitation of
authorities for Government employees directly involved with the
contract performance.
MARAD's Office of Chief Counsel will conduct annual, in-person
ethics training to all MARAD employees emphasizing, as appropriate,
recent occurrences.
Question 19a. The DOT-IG recently completed an audit on the ship
managers' contracts for the Ready Reserve Force and identified
weaknesses in the Maritime Administration's controls.
Do you believe that the weaknesses identified contributed to the
fraud and kickbacks found during the joint investigation?
Answer. In Fall 1999 MARAD personnel met with investigators from
the Department of Transportation Office of the Inspector General (DOT
IG), the Federal Bureau of Investigation (FBI), the Defense Criminal
Investigative Service (DCIS) and the Naval Criminal Investigative
Service (NCIS) to discuss the ongoing investigation, and assess what
actions MARAD could take to minimize the occurrence of fraudulent
activity on the ship manager contracts. The FBI agent stated that in
spite of the review processes implemented by MARAD, this type of
wrongdoing could only have been uncovered by the sting operation and
the inside information obtained during it. The agent further emphasized
that the kind of fraudulent activities identified through the
investigation could not have been identified through MARAD's review and
approval oversight processes.
Question 19b. What actions has MARAD taken in response to the IG's
findings?
Answer. Upon receipt of notification of criminal indictments
resulting from the undercover sting operation conducted by the FBI,
DCIS, NCIS, and the DOT IG, MARAD has consistently taken decisive
action within the administrative remedies available under the
regulations. In coordination with the U.S. Navy, MARAD has suspended or
debarred eleven (11) businesses/individuals from Government contracting
and Government-approved subcontracting for a period of up to three (3)
years. Additionally, where improper activity did not result in
indictments, MARAD has notified the individuals' employers in
accordance with the contract provisions, to ensure that they could not
work under a MARAD contract for a period of up to 3 years.
MARAD also took action against two MARAD employees, William Martin,
Ship Operations Maintenance Officer, and Warren Hilton. Both
individuals resigned before termination actions by the agency. The
agency has debarred from government contracting or subcontracting both
individuals for a period of 3 years.
Although MARAD has an extensive oversight system with checks and
balances in the management of the Ship manager program, MARAD has
decided to revise Ship Manager subcontracting procedures in light of
the recent investigative results. The revised procedures are currently
being reviewed and will be integrated in the recently awarded 2000 Ship
Manager contracts.
Question 19c. How does MARAD plan to improve controls for
administering ship managers' contracts and general agency agreements?
Answer. Under the recently awarded 2000 Ship Manager Contracts,
MARAD has contracted with the Defense Contract Audit Agency (DCAA) for
the review of ship managers' Commercial Purchasing System (CPS)
procedures. In response to MARAD's requirement, DCAA has established a
centralized office to coordinate and track all CPS reviews and
incurred-cost audits.
In order to obtain approval of their CPS, ship managers must
demonstrate a separation of duties between the individuals tasked with
identifying the requirement, those writing the specification, and those
soliciting and selecting the subcontractor.
Administrative Contracting Officers have been tasked to conduct
periodic reviews of the ship managers' procedures to ensure compliance
with established and approved subcontracting procedures. A complete CPS
review will be conducted by the DCAA every three (3) years under the
new ship manager contract.
Subcontracting procedures have been revised to establish more
stringent requirements and controls. The revised procedures set forth
more stringent guidelines for review and issuance of ship manager
subcontracts, tracking of funds obligated for ship maintenance and
repair, and deobligation of excess funding and contract/task order
closeout procedures. The new procedures will be incorporated into the
2000 Ship Manager contracts upon resolution of a bid protest.
Question 20a. The Ready Reserve Force (RRF) was established as a
component of the National Defense Reserve Fleet in 1976. The Maritime
Administration (MARAD) is responsible for maintaining RRF vessels in a
heightened State of readiness so that they can be activated in 4 to 30
days to meet shipping requirements during national emergencies. MARAD
administers RRF vessel acquisition, upgrade, activation, maintenance,
operations, and subsequent deactivation through ship manager contracts.
In 1998, MARAD awarded ship manager's contracts and then rescinded them
20 days later. The ship managers' contracts were not awarded again
until April 28, 2000. Has the delay in awarding the new ship managers'
contracts had a negative effect on MARAD's ability to meet its
readiness goals?
Answer. The impact of the delay in awarding the new ship manager
contracts on RRF readiness has yet to be determined. Multiple temporary
contract extensions over the past two (2) years have resulted in our
delay of annual ship maintenance work, thereby deferring scheduled
maintenance and upgrade items. No-notice test activations later this
year and next year will indicate whether or not these delays have had
adverse readiness implications.
Question 20b. How much more, if any, did it cost MARAD as a result
of the delay?
Answer. Extensions to existing Ship Manager contracts were made at
the 1998 rates. Consequently there has been no cost impact to the
fixed-price portion of the contracts.
We have no quantifiable data on higher maintenance costs resulting
from the delay in Ship Manager contract awards.
Nevertheless, we believe that doling out work in small increments,
due to the short-term contract extensions granted over the past 2
years, loses any economy of scale to be realized by consolidating work
into larger repair packages. It is not possible to estimate a
meaningful cost associated with this issue.
Question 21a. No dry bulk vessels that would be covered by the
waiver of the 3 year rule as proposed in the Administration's
submission have been built in a U.S. shipyard in the past 20 years, and
none has been built without Federal subsidies. Do you have any concern
that enactment of this temporary amendment to Title XI would adversely
impact U.S. shipyards?
Answer. We do not anticipate any adverse impact on U.S. shipyards.
In fact, enactment of this amendment will have a positive impact on
them. The large U.S. shipyards capable of building dry bulk vessels
have stated they are not interested in the commercial marketplace. They
especially have no desire to build dry bulk vessels, which are the
cheapest and most competitive type of vessel to build. One U.S.
shipyard stated that foreign shipyards are building these type vessels
for less than the cost of materials in a U.S. shipyard. However, U.S.
shipyards would gain new repair business because the vessels would have
any reflagging work and future maintenance and repair performed in U.S.
shipyards.
Question 21b. Do you have any concern that this amendment would
lead to excess U.S. flag tonnage for preference cargo if food aid
levels drop?
Answer. It is possible that some excess U.S.-flag tonnage could
develop if there was a major reduction in U.S. food aid levels. In such
an event, the marketplace would drive down freight rates to a level
where older vessels which are not designed for dry bulk carriage, such
as single hull tankers, or older vessels whose maintenance and repair
costs are excessive, could become non-competitive and effectively reach
the end of their economic lives. In addition, the potential addition of
multipurpose vessels to the U.S. could open up markets not fully served
(i.e. PR-17) by current U.S. flag vessels.
Question 21c. Will this amendment have any effect on the Jones Act?
Answer. No, this amendment has no impact on the Jones Act. It only
affects international trade for agricultural preference cargoes to
foreign nations.
Question 21d. Why does this amendment address only the bulk sector
of the U.S.-flag fleet?
Answer. Only the agricultural sector of preference cargoes is
restricted to a 3-year waiting period before carriage by reflagged
vessels is permitted. The amendment would put the agricultural sector
on the same footing as the military cargoes, at least for the narrow
limited window as proposed by the amendment.
Question 22a. It would seem that older bulk ships could charge the
lowest rates because their capital costs have largely been amortized.
However, the Administration claims that newly built U.S. flag vessel
operators will be able to offer lower rates to government shippers. How
is this possible?
Answer. While it is true that a newer vessel must amortize a higher
capital cost than an older vessel, the newer vessel possesses a number
of operating and cost advantages over the older vessel. As a vessel
ages, it becomes increasingly more difficult to maintain the vessel's
regulatory compliance and seaworthiness, resulting in sharply higher
maintenance and repair costs. As an example of efficiency, the engines
in today's new buildings are far more efficient and can easily cut fuel
costs in half compared to many older vessels. More advanced technical
and operating systems also allow newer vessels to operate with smaller
crews and, in many cases, substantially reduce cargo loading and
discharge expenses. In addition many newer vessels are more
appropriately sized for the trade, further increasing unit efficiencies
Lower freight rates typically follow a period of fleet upgrade. This
occurred during the mid-1980's following the addition of several new
bulkers to the U.S. flag fleet. At that time, freight rates to certain
locations dropped by as much as 50 percent as newer vessels entered the
trade.
Question 22b. How many Federal agencies are involved in the
shipment of government food aid to foreign countries?
Answer. The U.S. Department of Agriculture (USDA), the U.S. Agency
for International Development (AID), the State Department (State), and
the Maritime Administration are the U.S. Government agencies involved
in the shipment of government food aid to foreign countries.
Question 22c. What is the cost to the Federal taxpayer for these
agencies' oversight of food aid shipments under cargo preference
restrictions?
Answer. There is a negligible cost to the U.S. taxpayer for these
agencies' oversight of food aid under cargo preference restrictions.
There are 7.5 persons employed at the Maritime Administration to
monitor the food aid cargo preference programs on a daily basis.
Transportation personnel at USDA, AID, and State would not change since
preference cargo is not the primary focus of their job. With respect to
ocean freight differential costs between U.S.-flag and foreign flag
vessels, the average annual cost for the 3-year period, 1997 through
1999, has been $87 million per year. This is less than one-half of one
one-hundredth of a percent (0.00461) of the value of American farm
exports. Moreover, the average $87 million per year helps maintain a
portion of the U.S.-flag merchant marine which contributes to the pool
of U.S. citizen mariners who crew Government controlled ships in
contingencies.
Question 23a. The mission of the Maritime Administration (MARAD) is
to ``. . . promote the development and maintenance of an adequate,
well-balanced, United States merchant marine, sufficient to carry the
nation's domestic waterborne commerce and a substantial portion of its
waterborne foreign commerce, and capable of serving as a naval and
military auxiliary in time of war or national emergency''. Since we now
carry less than 3 percent of our total seaborne foreign trade tonnage
on U.S. flagged vessels, and our shrinking active commercial fleet is
one of the oldest in average age in the world, it would seem we have
failed in fulfilling that mission. And now, it appears that we may be
well into the beginning stages of a professional seafarer shortage in
this country. What specific policy changes does MARAD believe are
realistically required to save our merchant marine from disappearing
from the seas?
Answer. Our merchant fleet competes globally on a quality basis,
offering premium level service to U.S. and foreign shippers The cost of
their operations reflects the U.S. standard of living and the U.S.
business operating environment generally, including our tax laws,
employment standards, labor laws, environmental protection laws, and
ship construction and operating laws and regulations. The U.S. fleet is
frequently competing with shipowners operating in low cost countries,
including so-called ``open registry'' or ``flag of convenience''
countries with little or no tax burden, and lax requirements on owners
for vessel operations standards. Restructuring U.S. law and regulatory
regimes to meet a ``lowest common denominator'' level of competition
would require extreme reductions in regulatory protections that would
be unacceptable to the American people, and compromise our protection
of the natural environment and our national security readiness.
However, continued full funding of the Maritime Security Program will
help to ensure that a fleet of modern vessels will remain in the U.S.
registry, serving their commercial customers and providing guaranteed
sealift capacity for U.S. national security needs. Moreover, we can
continue to implement significant regulatory reforms to conform
outdated and burdensome U.S. laws and regulations to internationally
accepted norms. In addition, there is merit in examining the various
aspects of the business environment offered by competing nations to
determine which, if any, could be adopted or adapted to the U.S. model.
In the short run, the Maritime Security Program and our cargo
preference programs will help preserve a core of U.S.-flag vessels and
citizen mariners in U.S. foreign trade, while the Jones Act and
Passenger Services Act support the domestic maritime industry. In the
long run, the cost advantages enjoyed by ship operators in other
countries could outpace the modest maritime programs in the United
States.
Question 23b. What new initiatives are required to accomplish this
task, based upon a comparison between the present and historical
maritime performance record of the U.S. and that of other more
successful maritime countries?
Answer. The merchant fleets of all traditional maritime countries
with high living standards, regulatory standards, and tax rates such as
those in the European Union and Japan have been in serious decline as a
result of the same cost and regulatory disadvantages suffered by the
U.S.-flag fleet compared to low cost ``flags of convenience.'' Some
countries such as Denmark and Norway have successfully created national
``second'' vessel registries that exempt or dramatically reduce tax
burdens on their citizen vessel owners and seafarers engaged in
international trade, in addition to other direct and indirect
subsidies. On the other hand, some countries like Singapore have
revamped their national registry to offer the same tax breaks to
carriers and mariners that other countries offer through flags of
convenience.
Some traditional maritime countries also have lowered the
citizenship requirement for crews on their national or second
registry's vessels. Our international security obligations, and our
success in any deployment of military forces, rest heavily on massive
sealift requirements. The Congress and successive Administrations have
underscored the importance of relying on U.S. citizen seafarers to
perform that critical mission. Eliminating the long-term requirement
for citizen crews on U.S. flag ships is not a viable option for the
U.S. We note that some countries that have reduced or eliminated their
citizenship requirements are heavily dependent on the United States for
some of their national and international security needs. Even the
United Kingdom relied on U.S.-flag ships and crews to move its military
equipment for the U.N. peacekeeping mission in Bosnia.
Question 23c. Is it not true that because of problems between MARAD
and the U.S. Coast Guard during the past few years with collection,
organization, coordination, and dissemination of information that we
really do not know with any accuracy the current make-up our
professional seagoing maritime skills base here in the United States?
Answer. The U.S. Coast Guard (USCG) and MARAD are working
cooperatively to improve the Merchant Mariner Licensing and
Documentation (MMLD) system. The MMLD is the primary source of data on
documentation status and qualifying sea service of licensed and
unlicensed mariners. The MMLD system was originally structured as a
system to process applications and to maintain records on U.S. merchant
mariners; the MMLD system has only been automated since 1982 and the
USCG recognizes that the MMLD has some data integrity problems. MARAD
and the USCG are working together to improve the accuracy of the data.
The data problems do not preclude the use of the data to identify
trends and outcomes regarding the overall size and make-up of the
mariner pool.
Question 23d. Has MARAD done anything to identify the extent of the
manning problem and to identify what seagoing professional maritime
skills are at question?
Answer. Yes, MARAD monitors the availability of U.S. seamen in
coordination with the U.S. Coast Guard. Information from seamen's
discharges from the U.S. Coast Guard provides the statistical basis to
determine generic shortfalls or deficiencies in specific skill areas.
The data indicate that at the present time there are sufficient trained
personnel to crew the privately owned, U.S.-flag merchant fleet in
peacetime. However, during an extended full mobilization, the actively
sailing labor force would be hard pressed. to simultaneously meet both
commercial and defense crewing needs in which the RRF and other sealift
assets were activated.
Anecdotal reports from the maritime industry indicate recruitment
difficulties in some mid-level officer and entry-level unlicensed
positions. MARAD is working with industry to discuss long-term
recruitment and retention planning. In this regard, meetings have been
recently held with key members of the National Defense Transportation
Association. MARAD is also working closely with the Coast Guard's
National Maritime Center to improve our capability to determine where
specific deficiencies may first occur if an extended mobilization were
to occur.
Question 23e. Does MARAD know the ages and experience levels of
licensed mariners?
Answer. The USCG's MMLD system is MARAD's primary source of
information on licensed and unlicensed mariners, including data on age
and experience levels. A mariner's experience level is generally
determined by the highest level of license held by an officer, or the
highest rating held by an unlicensed mariner, combined with available
information on afloat employment. Even though there are data integrity
problems with the MMLD, MARAD can use the system to estimate the
number, age, and qualifications (license, rating and sea service) of
U.S. mariners with sufficient accuracy for analyzing trends and
outcomes.
Question 23f. Does MARAD know how many license holders are STCW 95
certified, or how many are planning to allow their licenses to lapse
due to the new certification requirements?
Answer. Yes, that information is available to MARAD in the USCG
MMLD, MARAD's primary source of information on licensed and unlicensed
mariners. The MMLD provides information on the status of documentation
and reported sea service of licensed and unlicensed mariners. In
addition to maintaining grades and ratings of licensed and unlicensed
mariners, the MMLD also contains the age of each mariner.
All of the approximately 500 new graduates per year of the USMMA
and six State maritime academies who receive USCG third mate or third
assistant engineer licenses are STCW 95 compliant. All mariners sailing
in deep-sea trades are required to have STCW 95 certification by
February 2002. Due to the variety of opportunities to obtain
certification, the costs and the time involved, it is not possible to
predict the number of individuals who will allow their licenses to
lapse because of the certification requirements.
Question 23g. How many of the license holders are actually
professional mariners earning their living aboard ship?
Answer. MARAD estimates that approximately 7,100 licensed and
11,200 unlicensed civilian merchant mariners were employed on large
merchant ships and vessels in the DOD organic fleet in the deep-sea
trades in 1999. These estimates represent those mariners who are
qualified and experienced on the types of vessels that are used in
military sealift operations and do not include mariners employed on the
inland waterways or Great Lakes.
Question 23h. What is MARAD doing to enhance the attractiveness of
professional shipboard employment for the well-educated mariners who
are making present and future career path decisions?
Answer. MARAD's chief activity in this regard is our operation of
the world's leading maritime academy, the U.S. Merchant Marine Academy
at Kings Point, New York, and our assistance to the six State maritime
academies. Employment aboard modern, technologically advanced ships is
a demanding but rewarding occupation, with high levels of
responsibility and excellent remuneration. Yet, as waterborne shipping
has evolved over the past decades with increased emphasis on technology
and speed of delivery of commodities over the water, the historic
attraction of a career at sea has diminished for some mariners. Faced
with a number of career possibilities in today's job market, many
highly qualified mariners may choose shoreside employment as an
alternative to the seafaring lifestyle. The historic attraction of a
career at sea is not likely to return. However, MARAD is providing the
best possible education for maritime officers and is working with
industry to provide supplemental training. In addition, MARAD's
participation in the Department of Transportation's Garrett A. Morgan
Technology and Transportation Futures Program provides mentoring and
inspiration to help interest students of all ages in marine careers.
Through these training programs that emphasize safety and human
performance and interest in the maritime industry, MARAD helps to
ensure that working conditions on U.S.-flag vessels are among the best
in the world.
Question 23a. The current U.S. merchant marine presents a bleak
picture of old ships and a declining billet job base. The taxation and
regulation of companies and seafarers is now to a point that we cannot
economically compete with our international shipping company
competitors. In spite of this, it would appear that our maritime
education programs have all but been ignored. As you mentioned in your
opening statement, Mr. Hart, the U.S. Merchant Marine Academy is in
need of major repairs. MARAD is responsible for a $450 thousand dollar
contract with Grumman Samson Architects for a report outlining a
Facilities Master Plan for the United States Merchant Marine Academy at
Kings Point, NY that was due May 15, 2000. What is the status of this
report?
Answer. Work on the Master Plan began in 1999 and is near
completion. The Plan will contain a prioritized list of repairs,
building upgrades and construction with cost estimates itemized for
each activity. It will also provide a recommended schedule for
completion of each activity over the next several years, with an
itemized total for each year beginning with fiscal year 2001. The Plan
will contain a description of facility repair, renovation, and campus-
wide improvements recommended by the contractor. The Plan will also
reflect potential new/expanded building projects.
Question 24b. Given the very strong shore side economy, what are
your suggestions to attract and retain Americans to a professional
career in our present U.S. Merchant Marine?
Answer. The decline in the number of large oceangoing U.S.-flag
vessels and reduction in crew sizes due to increased shipboard
automation and productivity have reduced shipboard jobs for U.S.
mariners. This, coupled with the expansion of new technology-based
careers, has attracted even some of those trained as mariners to seek
careers in other industries. In addition, with unemployment at
historically low levels due to the strong U.S. economy, many
industries, not only maritime, have reported difficulties in finding
the desired number of qualified employees.
In order to attract and retain mariners, it is important to
continue operation of the world's leading maritime academy, the U.S.
Merchant Marine Academy at Kings Point, New York, and our assistance to
the six State maritime academies. Employment aboard modern,
technologically advanced ships is a demanding but rewarding occupation.
MARAD is providing the best possible education for maritime officers
and is working with industry to provide supplemental training. In
addition, programs that provide mentoring and inspiration, such as the
Department of Transportation's Garrett A. Morgan Technology and
Transportation Futures Program, are important to help interest students
of all ages in marine careers. Through these programs that emphasize
safety and human performance and interest in the maritime industry,
MARAD helps to ensure that working conditions on U.S.-flag vessels are
among the best in the world.
Responses to Questions Submitted by Hon. Ernest F. Hollings
to Clyde J. Hart, Jr.
Question 1. Mr. Administrator, can you tell me how much
``carryover'' funds were available for the Title XI loan guarantee
program? Can you tell me how much is currently available?
Answer. The carryover funds into fiscal year 2000 were $70.8
million. Of this amount $7.6 million is restricted due to the annual
limitation on fiscal year 1997 funds. With the additional $6.0 million
appropriated funds for fiscal year 2000 there was a total of $69.2
million subsidy available for guarantee purposes at the start of fiscal
year 2000. As of July 10, 2000 there is currently $27.9 million subsidy
available for guarantee purposes.
Question 2. What type of projects has MARAD approved over the last
two fiscal years, and what shipyards are handling these projects?
Answer. As per the attached approved list for fiscal year 1999 and
fiscal year 2000 MARAD has approved a variety of vessels at many
different shipyards. MARAD has also approved guarantees for two
shipyard modification projects.
Question 3. What is the total amount of Title XI loans pending, and
what sort of vessels are projected to be built pending the receipt of
approval?
Answer. Currently MARAD has over $4 billion in pending Title XI
projects. The attached pending list shows that the interest in the
program is quite diverse ranging from deck barges to a large passenger
ship.
Question 4. Does MARAD run a risk that they will run out of funds
for Title XI this year?
Answer. There is always a possibility that MARAD will obligate all
of its available subsidy by the end of the fiscal year if several
projects come to fruition. It is MARAD's anticipation that the
available subsidy will be sufficient to cover the rest of fiscal year
2000 and to have a carryover of funds into fiscal year 2001.
Question 5. Mr. Administrator, as a condition to receiving funds
through the Maritime Security Program, U.S.-flag companies are required
to sign an agreement to make their vessels and affiliated
transportation equipment available to the Department of Defense. To
implement these provisions we established the Voluntary Sealift
Agreement, or VISA. How is the progress of this program?
Answer. Since the implementation of the MSP, MARAD has obtained
signed VISA agreements whereby all of the MSP vessel capacity and
associated intermodal transportation equipment and management systems
will be made available to the Department of Defense during a VISA
activation. In addition to the MSP capacity, MARAD has VISA agreements
with non-MSP U.S.-flag carriers. There are currently 48 U.S.-flag
carriers enrolled in the VISA program. These companies have enrolled
115 ships in the VISA program representing over 171,000 TEUs of
committed capacity.
Through the U.S. Transportation Command's components at the
Military Traffic Management Command and the Military Sealift Command,
VISA carriers have negotiated VISA contingency contracts providing the
DOD with push-button readiness to activate VISA capacity when needed to
support a military contingency. These contracts enumerate the terms and
conditions for carrying military cargo and equipment. In meeting the
terms and conditions of these contracts, VISA carriers have negotiated
contingency compensation rates utilizing on the shelf rate
methodologies. These pre-lodged rates will facilitate DOD's access to
VISA capacity and provide for a seamless transition from peacetime to
wartime operations.
Question 6. Mr. Administrator recently MARAD's ship management
program was investigated for criminal irregularities, as a result of
this investigation what steps has MARAD taken to increase control over
the program?
Answer. Ship Manager subcontracting procedures have been revised to
increase requirements and controls. The revised procedures set forth
more stringent guidelines for review and issuance of ship manager
subcontracts, tracking of funds obligated for ship maintenance and
repair, and deobligation of excess funding and contract/task order
closeout procedures. The new procedures will be incorporated into the
2000 Ship Manager contracts upon implementation of the contract awards.
Administrative Contracting Officers (ACOs) have been instructed to
incorporate work descriptions and specifications into the task orders
to facilitate the invoice review and tracking process.
Implementation of the electronic contract writing system at all
MARAD procurement centers in FY 2000 provides greater electronic
oversight capability to ensure that procedures are followed
consistently.
All MARAD Headquarters and Region personnel directly involved with
ship manager contract performance will be required to attend a 2\1/2\-
day training course focused on the administration of the 2000 Ship
Manager contracts. Part of this course will focus on contractual
controls and limitation of authorities for Government employees.
MARAD's Office of Chief Counsel will conduct annual, in-person
ethics training to all MARAD employees emphasizing, as appropriate,
recent occurrences.
Under the recently awarded 2000 Ship Manager contracts, MARAD has
contracted with the Defense Contract Audit Agency (DCAA) for the review
of ship managers' Commercial Purchasing System (CPS) procedures. In
response to MARAD's requirement, DCAA has established a centralized
office to coordinate and track all CPS reviews and incurred-cost
audits.
ACOs have been tasked to conduct periodic review of the ship
managers' procedures to ensure compliance with established and approved
subcontracting procedures. A complete CPS review will be conducted by
the DCAA every three (3) years under the new ship manager contract.
Question 7. Mr. Administrator, are MARAD, Coast Guard and MSC
working together to implement a coherent maritime policy?
Answer. Yes, Maritime transportation is an integral link in the
intermodal National Transportation System, serving the national
interest in three critical aspects: the economy, national security, and
safety. MARAD, USCG and MSC/Department of Defense function in varying
and complementary capacities in implementing U.S. maritime policy in
support of the national interest.
For example, MARAD and the U.S. Coast Guard are working together to
ensure that the Marine Transportation System (MTS) in the 21st Century
continues to be safe, secure, and environmentally sound, and helps the
United States maintain its competitive position in the global economy.
MARAD also works with MSC to assure that U.S.-flag ships and U.S.-
citizen mariners will be available to support national defense sealift
requirements through the Maritime Security Program and the education
and training of officers for the merchant marine.
Question 8. Mr. Administrator, my staff has visited the United
States Merchant Marine Academy and they indicated that the facility is
suffering from neglect and deferred maintenance, what steps has MARAD
taken to address this problem?
Answer. Within the total request for fiscal year 2001 for the
Academy, there is $1.85 million in the base for ongoing facilities
maintenance and repair. Congress provided an additional $2 million in
fiscal year 2000 for capital improvements at the Academy. The fiscal
year 2001 Congressional budget continues the $2 million increase to
continue the focus on addressing capital improvements that are a
concern of both the Administration and Congress.
Work on the Facilities Master Plan began in 1999 and is near
completion. The Plan will contain a prioritized list of repairs,
building upgrades and construction with cost estimates itemized for
each activity. It will also provide a recommended schedule for
completion of each activity over the next several years, with an
itemized total for each year beginning with fiscal year 2002 for items
that have not been addressed using funds provided in fiscal year 2000
and anticipated to be provided in fiscal year 2001. With the assistance
of the Master Plan, future budget requests will be based on a sound
facility review and assessment.
Question 9. Mr. Administrator, the Marine Transportation System
(MTS) report identifies a critical need to conduct maritime research,
to my knowledge the Coast Guard has a small budget of about $16
million, and most of its research goes to help Coast Guard mission
work, and the Maritime Administration has no budget for research. What
are we doing to implement the MTS report recommendations for maritime
research?
Answer. Our budget request includes $500,000 to continue MARAD's
efforts and support of the MTS. MARAD will also have the joint
responsibility with the Research and Special Programs Administration
(RSPA) for developing and managing a University Marine Transportation
research program. A total of $2.5 million is contained in the RSPA
fiscal year 2001 budget request for this research. This program is
proposed as a national cooperative MTS research and technology
development program that would be conducted at leading universities in
the U.S. It is expected that this program would improve the
coordination and enhance MTS-related research by government agencies
and the private sector, and foster and support intermodal MTS
technology requirements that are beyond the scope of individual agency
mandates and the funding priorities and interests of the private
sector. This program will be modeled on the successful University
Highway Transportation research program and the University Transit
research program.
__________
The attached approved list reflects original approvals of
transactions as of the date indicated. Approvals involving refinancing
of existing Title XI are not listed. Information contained in this list
is subject to change and therefore it is advisable to contact the
Maritime Administration to get the most up-to-date information.
Approved Applications.--July 10, 2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Title XI Date
Company Name Shipyard No. of Project Type of Project Project Cost Guarantee** Approved
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 1994
Cenac Towing Company, Inc......... NABRICO (Nashville 40................... Double-Skin 30,000 $51,108,701.00 $44,720,000.00 5/11/94
Bridge Co.). Barrel Inshore Tank
Barge.
Penn Barge, Inc................... Alabama Shipyard, 2.................... Integrated Tug/Barges 35,000,000.00 26,250,000.00 6/22/94
Inc./Halter Marine,
Inc.
Puerto Quetzal.................... McDermott Incorp..... 2.................... U.S.-Flag Power 95,000,000.00 25,000,000.00 5/11/94
Barges.
Global Industries, Ltd............ Aker Gulf Marine..... 1.................... Swath Dive Support 23,711,000.00 20,852,000.00 7/6/94
Vessel.
National Steel & Shipbuilding National Steel & N/A.................. Phase I and Phase II 26,000,000.00 22,700,000.00 7/15/94
Company. Shipbuilding Company. Capital Improvement
Projects.
+Coastal Ship, Inc................ Trinity Marine Group. 2.................... Catamaran-hull RO/RO. 132,472,404.00 115,912,000.00 7/26/94
*Compania de Elecrticidad de McDermott Incorp..... 1.................... Barge Mounted Power 39,551,868.00 34,293,000.00 8/8/94
Puerto Plata. Barge.
---------------------------------------------------------------------------------------------------------------------
Total........................... ..................... 48................... ..................... $402,843,973.00 $289,727,000.00 .........
FY 1995
Avondale Industries Inc........... N/A.................. N/A.................. Shipyard $20,320,000.00 $17,780,000.00 10/24/94
Modernization.
*Fleves Shipping Corporation...... Newport News 4.................... Product Tankers...... 152,620,000.00 133,542,000.00 10/31/94
Shipbuilding &
Drydock Company.
Edison Chouest Offshore........... North American 1.................... Undersea Warfare 13,659,432.00 11,658,282.00 2/01/95
Shipbuilding. surface Support Ship.
Bay Transportation Inc. d/b/a St. Nashville Bridge Co.. 2.................... Stern drive tractor 11,628,540.00 10,174,000.00 2/7/95
Phillip Towing. tugs.
American Heavy Lift Shipping Avondale Industries, 4.................... Double-hulled Product 159,273,686.00 139,364,475.00 2/6/95
Company. Inc.. Tankers.
Surf Express, Inc................. Gulf Coast Yachts, 1.................... Wave Piercer 1,850,000.00 1,480,000.00 2/14/95
Inc.. Catamaran Ferry.
Alpha Marine Service.............. North American 6.................... Tractor-Type Tugs.... 13,484,704.95 11,799,000.00 2/24/95
Shipbuilding.
Canal Barge Company, Inc.......... Trinty/Newpark Ship/ 4.................... Steel Liquid Tank 4,982,452.00 4,359,645.00 4/13/95
Conrad Ind.. 1.................... Barges.
1.................... 260 Deck Barge.......
120 Deck Barge.......
Manson Construction & Engineering Nichols Marine- 3.................... Dump Barges.......... 9,766,976.00 8,544,000.00 5/31/95
Company. Portland, OR.
Maryland Marine, Inc.............. Trinity-Madisonville, 4.................... Double-skill unmanned 5,142,860.00 4,500,000.00 6/14/95
LA. tank barges.
Martin Gas Marine, Inc............ AMFELS-Brownsville, 2.................... Tug/Barge unit....... 17,000,000.00 14,875,000.00 7/25/95
TX.
Great AQ Steamboat Company McDermott-New 1.................... Paddhewheel Steamboat 69,424,647.00 60,746,000.00 7/26/95
(formerly Delta Queen Steamship Orleans, LA.
Development, Inc.).
Alpha Marine Services, Inc........ North America-Larose, 1.................... Deepwater Supply 6,000,000.00 5,250,000.00 8/11/95
LA. Vessel.
Edison Chouest Offshore, Inc...... North America-Larose, 1.................... Self-sustaining 17,000,000.00 12,883,000.00 8/21/95
LA. breakbulk Container
vessel.
---------------------------------------------------------------------------------------------------------------------
Total........................... ..................... 36................... ..................... $502,153,297.95 $436,955,402.00 .........
FY 1996
North American Shipbuilding, Inc.. North American- N/A.................. Shipyard $7,408,519.00 $6,386,000.00 10/23/95
Larose, LA. Modernization.
SEAREX, Inc....................... Gulf Coast-Lakeshore, 4.................... Self-propelled, Self- 60,197,928.00 43,961,000.00 10/28/95
MS. Elevating Vessels.
Great Independence Ship Co........ Newport News-Newport 1.................... Reconstruction/ 46,399,628.00 33,332,000.00 11/16/95
News, VA. Reconditioning of
INDEPENDENCE.
Parker Towing Company, Inc........ Trinity Marine- 20................... Hopper Barges........ 6,709,782.00 5,570,000.00 11/22/95
Nashville, TN.
..................... 1.................... Rake deck barge...... ................. ................. .........
..................... 1.................... Rake deck crane barge ................. ................. .........
Tugz International L.L.C.......... Runyan-Pensacola, FL. 2.................... Tractor Tugs......... 7,426,900.00 6,498,537.00 12/19/95
*Dannebrog Rederi AS.............. Alabama Shipyard- 2.................... Double-hull 16,000 53,274,933.00 46,615,000.00 12/20/95
Mobile, AL. DWT Tankers.
Canal Barge Company, Inc.......... Trinity Marine- 20................... Steel Liquid tank 20,321,280.00 17,781,000.00 12/22/95
Gulfport, MS. barges.
Newport News......... 1.................... 260 deck barge....... ................. ................. .........
*Smith/Enron Cogeneration Limited Trinity Marine- 2.................... Barge Mounted Power 205,000,000.00 50,000,000.00 12/22/95
Partnership. Beaumont, TX. Barges.
Bay Transportation Corporation.... Trinity Marine- 2.................... 6700 HP Stern Drive 12,467,380.00 10,908,958.00 12/29/95
Gulfport, MS. Tractor Tugs.
Hvide Van Ommeren Tankers I-V Newport News-Newport 5.................... Double Eagle Product 246,700,000.00 215,862,500.00 2/9/96
L.L.C.. News, VA. Tankers.
Port Imperial Ferry Corp.......... Gladding Hearn- 5.................... 96-foot Aluminum 6,991,980.00 5,117,000.00 3/7/96
Somerset, MA. Monohull Vessels.
T.T. Barge Services, Inc.......... North American- N/A.................. Shipyard 3,822,000.00 3,057,000.00 3/18/96
Larose, LA. Modernization.
Alpha Marine Services, Inc........ North American- 1.................... Deep submergence 15,640,000.00 13,000.000.00 3/21/96
Larose, LA. rescue vehicle
support ship.
Global Industries, Ltd............ Service Marine-Morgan 1.................... Launch Barge......... 24,590,000.00 19,966,375.00 3/29/96
City.
Bollinger Shipyards- 2.................... Lift Boats........... ................. ................. .........
Lockport, LA.
..................... 1.................... Deck Barge........... ................. ................. .........
***R.S.I. Barge Company, L.C...... Trinity Marine- 90................... U.S.-flag Covered 28,393,940.00 24,844,000.00 4/24/96
Madisonville, LA. Hopper Barges.
*Wak Orient Power and Light Ltd. Marine Energy- 6.................... Electric Power 460,094,591.00 402,582,000.00 6/28/96
(ex Maritime Power & Light (Pvt) Charleston, SC. Generating Vessels.
Ltd. and Orient Energy Ltd. &
Energy Transportation Group, Inc).
Penn ATB, Inc..................... Halter Marine Inc.- 2.................... Integrated Ocean Tugs 49,001,220.00 42,876,000.00 9/24/96
Gulfport, MS. 2.................... Double-hull Asphalt
Barges.
Rowan Companies, Inc.............. LeTourneau, Inc.- 1.................... Self-elevating mobile 174,962,065.00 153,091,000.00 9/30/96
Vicksburg, MS. offshore drilling
unit (Jack-up rig).
---------------------------------------------------------------------------------------------------------------------
Total........................... ..................... 172.................. ..................... $1,429,402,146.00 $1,101,448,370.00 .........
FY 1997
Massachusetts Heavy Industries, Massachusetts Heavin N/A.................. Shipyard Reactivation $62,857,143.00 $44,000,000.00 11/1/96
Inc.. Indus.-Quincy, MA.
*COSCO Line (America), Inc........ Alabama Shipyard- 4.................... 1432 TEU Container 157,356,689,00 137,687,000.00 01/30/97
Mobile, AL. Vessels.
CPD Barge Company................. Trinity Marine Group- 18................... Jumbo Hopper Barges.. 6,173,196.00 5,401,000.00 3/07/97
Gulfport, MS.
+Trailer Bridge, Inc. (ex Coastal) Halter Marine- 2.................... Triple Stack Box 12,018,052.00 10,515,000.00 3/26/97
Pearlington, MS. Carriers.
HAM Marine, Inc................... N/A.................. N/A.................. Shipyard 28,362,434.00 24,817,000.00 5/09/97
Modernization.
Riverbarge Excursion Lines, Inc... Leevac Shipyards- 2.................... Hotel River Barges... 18,218,704.00 15,941,000.00 7/01/97
Jennings, LA.
Mersea Ships I, Inc............... Bollinger Shipyard- 2.................... SWATH 300-Passenger 34,173,445.00 29,901,000.00 08/18/97
Lockport, LA. Commuter Vessels.
Trico Marine International, Inc... Eastern Shipbuilding 1.................... Twinhull Crewboat.... 12,858,317.00 9,643,000.00 09/29/97
Group, Inc.-FL.
*Secunda Atlantic, Inc............ Halter Marine Group- 1.................... 240 Anchor-Handling 19,435,000.00 17,103,000.00 09/29/97
Gulfport, MS. Tug/Supply Vessel.
Cashman Equipment Corporation..... Corn Island Shipyard- 7.................... Single-skin Steel 7,563,924.00 6,612,000.00 9/29/97
Lamar, IN. Flat Barges.
Tidewater Shipyard-
Chesapeake, VA.
Trailer Bridge, Inc............... Halter Marine- 3.................... Triple Stack Box 19,335,869.00 16,918,000.00 9/29/97
Pearlington, MS. Carriers.
---------------------------------------------------------------------------------------------------------------------
Total........................... ..................... 40................... ..................... $378,352,773.00 $329,538,000.00 .........
Sargent Marine, Inc............... Bath Iron Works...... 1.................... Asphalt Vessel....... $18,594,877.00 $13,141,000.00 03/31/97
(approved and withdrawn duuing FY Atlantic Marine......
1997).
FY 1998
Noble Drilling Corporation........ HAM Marine-.......... 1.................... Semi-Submersible $110,733,817.00 $96,892,000.00 10/09/97
Mobile Offshore
Drilling Unit.
Tugz International L.L.C.......... Marco Shipyard- 3.................... Twin Z-drive Reserve 16,033,560.00 14,029,000.00 02/13/98
Seattle, WA. Tractor Harbor/
Escort/Tpwing Tugs.
Canal Barge Company, Inc.......... Trinity Marine Group, 30................... Steel Open Hopper 13,319,076.00 11,654,000.00 02/26/98
Inc.-Madisonville, Barges.
LA.
Halter Marine, Inc.- 2.................... 260 Deck Barges...... ................. ................. .........
Gulfport, MS.
Offshore Ship 10................... 120 Deck Barges...... ................. ................. .........
Builders, Inc.-
Houma, LA.
Attransco, Inc.................... National Steel & 3.................... Tank Vessels......... 71,523,779.00 48,819,622.00 03/16/98
(Refinancing of Title XI Debt).... Shipbuilding-San
Diego, CA.
Western Power Co. (fka Ghana Halter Marine- 2.................... Power Barges......... 68,500,000.00 67,009,000.00 03/19/98
National Petroleum Corp.). Gulfport, MS.
Marine Cranes (A Washington Gunderson Marine, 1.................... Split-hull ABS 4,667,364.00 4,083,000.00 04/23/98
General Partnership). Inc.-Portland, OR. Loadline Hopper
Barge.
Maybank Navigation Company, LLC... Conrad Industries, 1.................... Warehouse Barge...... 5,107,765.00 4,000,000.00 6/17/98
Inc.-Morgan City, LA.
Vessel Management Services, Inc... Nicols Brothers- 10................... Medium-High 86,237,530.00 75,536,000.00 7/02/98
Freeland, WA. Horsepower Tugboats.
*Perforadora Central, S.A. de C.V. TDI Halter-Orange, TX 1.................... Jack-Up Mobile 94,365,698.00 70,774,000.00 07/31/98
Offshore Drilling
Unit.
Astro Offshore Corporation........ Halter Marine Group, 2.................... Platform Supply 35,936,857.00 31,468,000.00 7/31/98
Inc.-Gulfport, MS. Vessels.
Rowan Companies, Inc.............. LeTourneau, Inc.- 1.................... Self-Elevating Mobile 195,437,532.00 171,007,000.00 9/25/98
Longview, TX. Offshore Drilling
Unit.
Lightship Tankers III-V, LLC...... Newport News 3.................... 46,095 DWT Tank 158,886,035.00 139,023,000.00 9/25/98
Shipbuilding & Vessels.
Drydock-Newport
News, VA.
---------------------------------------------------------------------------------------------------------------------
Total........................... ..................... 70................... ..................... $860,749,013.00 $734,294,622.00 .........
FY 1999
*Empresa Energetica Corinto, Ltd.. Todd Shipyard- 1.................... Power Barge.......... $68,700,000.00 $50,000,000.00 12/28/98
Seattle, WA.
Bender Shipbuilding & Repair Co., Bender Shipbuilding & N/A.................. Shipyard 16,684,127.00 14,598,000.00 2/02/99
Inc.. Repair-Mobile, AL. Modernization.
Cashman Equipment Company......... Corn Island Shipyard- 5.................... Steel Deck Barges.... 9,038,931.00 7,887,000.00 2/10/99
Lamar, IN.
*Petrodrill Offshore, Inc......... TDI Halter- 2.................... Semi-submersible 342,638,238.00 299,808,000.00 3/11/99
Pascagoula, MS. Drilling Rigs.
Trico Marine International, Inc... Eastern Shipbuilding 2.................... 230 Supply Vessels... 21,501,005.00 18,867,000.00 4/05/99
Group-Panama, FL.
Torch Deepwater, Inc.............. Dakata Creek-........ 1.................... 300 75 51,948,280.00 45,454,000.00 4/08/99
Multi-Purpose.
DP Vessel............
Project America, Inc. (ex Great Ingalls Shipbuilding- 2.................... U.S.-flag Cruise 1,233,744,415.00 1,079,525,000.00 4/08/99
Hawaiian). Pascagoula, MS. Ships.
Ensco Offshore Company............ TDI Halter-Orange, TX 1.................... Semi-submersible 222,556,179.00 194,736,000.00 6/21/99
Drilling Rig.
EMSCP 7500...........
*Secunda Marine Atlantic Ltd...... Halter Marine Group- 1.................... Multi-Purpose Supply 27,544,232.00 23,963,000.00 7/23/99
Escatawpa, MS. Vessel.
(THEBAUD SEA)........
Canal Barge Company, Inc.......... Trinity Marine Group- 7.................... Asphalt Tank Barges.. 28,922,307.00 26,004,000.00 8/31/99
Ashland City, TN. 15................... Liquid Tank Barges...
Newpark Shipbuilding- 2.................... 180 Deck Barges......
Galveston, TX.
Conrad Industries,
Inc.-Morgan City, LA.
Newpark Shipbuilding
& Repair-Houston, TX.
Eastern Shipbuilding Group, Inc... Eastern Shipbuilding N/A.................. Shipyard 6,898,349.00 6,036,000.00 9/30/99
Group-Panama City, Modernization.
FL.
---------------------------------------------------------------------------------------------------------------------
Total........................... ..................... 39................... ..................... $2,030,176,063.00 $1,766,878,000.00 .........
FY 2000
Rowan Companies, Inc.............. LaTourneau, Inc. 1.................... Jack-Up MODU-GORILLA $211,695,000.00 $185,398,000.00 10/28/99
Vicksburg, MS. VII.
Global Industries, Ltd............ Atlantic Marine Inc.- 1.................... Heavy Lift-Pipelay 120,312,000.00 99,000,000.00 12/17/99
Mobile, AL. Barge.
Ham Marine, Inc.-
Pascagoula, LA.
Carliss Facility-
Manson Construction Company....... Nichols Marine- 1.................... Hydraulic Pipeline 10,200,000.00 8,690,000.00 12/28/99
Portland, OR. Dredge.
Coastal Queen East, LLC/Coastal... Atlantic Marine- 2.................... U.S. Flag Cruise 89,533,448.00 78,341,767.00 3/24/00
Queen West, LLC Jacksonville, FL. Boats.
Port Imperial Ferry Corp.......... Allen Marine, Inc.- 3.................... Coast Guard Certified 6,170,048.00 5,398,000.00 4/06/00
Stika, Alaska. Passenger Catamarans.
Penn Tug & Barge, Inc............. The Red Fox Companies 2.................... Double-Hull Asphalt/ 24,328,052.00 21,287,045.00 4/24/00
of Iberia, Inc.. Residual Oil Barges.
Pasha Hawaii Transport Lines LLC.. Halter Marine Group- 1.................... Pure Car/Truck 80,126,521.00 70,110,000.00 6/06/00
Gulfport, MS. Carrier.
Cal Dive I-Title XI, Inc.......... Amfels-Brownsville, 1.................... Ultra Deepwater Semi- 155,941,542.00 136,448,000.00 6/16/00
TX. Submersible Multi-
Service Vessel.
Maybank Navigation Company, LLC... Bollinger Shipyards 1.................... Roll On/Roll Off 5,903,064.00 5,000,000.00 7/10/00
Lockport, LLC- Warehouse Barge.
Lockport, LA.
---------------------------------------------------------------------------------------------------------------------
Total........................... ..................... 13................... ..................... $704,209,675.00 $609,672,812.00 .........
--------------------------------------------------------------------------------------------------------------------------------------------------------
+Original approval in FY 1994 amended approval in FY 1997
*Export
**Reflects adjustments to originally approved amount as applicable
***Reflects withdrawal in subsequent fiscal year
The attached pending list reflects information contained in
applications submitted to the Maritime Administration requesting Title
XI financing. Information contained in this list is subject to change
and therefore it is advisable to contact the Maritime Administration to
get the most up-to-date information.
Maritime Administration.--September 6, 2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Types of Actual Cost to Orig. Amount of Terms of Arrival
Owner No. of Ships Vessels/Projects Shipyard Owner Loan Guarantee Date
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 2000
Shibley Marine Services 1............... ITB (Oceangoing Trinity Marine $25,000,000.00 $21,875,000.00 25 yrs.......... 8/01/95
Corporation. Tug/Barge Unit). Group-Harvey,
LA.
*Schahin Engenharia e 1............... Semi-submersible Friede Goldman 216,900,000.00 189,787,000.00 12 yrs.......... 2/18/99
Comercio Ltda. Drilling Rig. Offshore-
Pascagoula, MS.
*PQP Limited................. 1............... Power Barge..... Cascade General- 119,388,000.00 73,598,000.00 12 yrs.......... 4/12/99
Portland, OR.
Sea Hotel Company, LLC....... 1............... Seagoing Barge.. Bay Shipbuilding 150,812,000.00 131,960,000.00 25 yrs.......... 5/07/99
Co.-Sturgeon
Bay, WI.
Great Lakes Dredging & Dock 1............... Trailing Suction To be determined 51,822,000.00 45,344,250.00 25 yrs.......... 6/17/99
Company. Hopper Dredge.
McAllister Maritime Holdings, 1............... Passenger/ Eastern 14,941,119.00 13,073,000.00 25 yrs.......... 7/14/99
LLC. Automobile Shipbuilding
Ferry. Group-Panama
City, FL.
FastShip Atlantic, Inc....... 4............... High-Speed National Steel 1,715,000,000.00 1,501,000,000.00 Const. Period 9/22/99
Container and +25 yrs.
Vessels. Shipbuilding-
San Diego, CA.
Sterling Equipment, Inc...... 10.............. Steel Deck ................ 8,661,000.00 7,386,655.00 15 yrs.......... 11/01/99
Barges.
*Geomar Enterprises S.A...... 3............... Passenger Halter Marine 189,000,000.00 165,000,000.00 25 yrs.......... 11/08/99
Vessels. Group, Inc.-
Gulfport, MS.
ACF Acceptance Barge I, LLC.. 11.............. Semi-Integrated, Trinity Marine 16,756,686.00 14,662,100.25 25 yrs.......... 1/11/00
Double-Skin Products, Inc.-
Tank Barges. Ashland, TN.
Vessel Management Services, 3............... 10,000 HP Dakata Creed 45,813,000.00 36,697,000.00 25 yrs.......... 3/21/00
Inc.. Specialized Industries,
Tugboats. Inc..
2............... Line Handling ................ ................. ................. ................ ...........
Boats.
World City America Inc....... 1............... 6,200 Passenger, American 1,508,851,840.00 1,320,245,224.00 25 yrs.......... 11/30/99
Siemens' SSP Flagship
Propulsor- Construction
driven, GE Gas Co.- Cape
Turbine-Powered Canaveral, FL.
Passenger Ship-
American World
City-The Westin
Flagship.
Chiles Rig #14 LLC and Chiles 2............... 350-foot Ultra- AMFELS, Inc.- 235,247,000.00 164,476,000.00 Const. Period 5/22/00
Rig #15 LLC. Premiun Brownsville, TX. +18 yrs.
Cantilever Jack-
up Rigs.
Kvaemer Shipholding, Inc..... 1............... 2600 TEU Kvaemer 80,966,444.00 70,845,000.00 25 yrs.......... 5/30/00
Container Philadelphia
Carrier Vessel. Shipyard-
Phila., PA.
Drilling Productivity 2............... Submersible Conrad 25,852,000.00 21,000,000.00 25 yrs.......... 8/16/00
Realized, L.L.C.. Drilling Rigs. Industries,
Inc.-Morgan
City, LA.
Great Pacific NW Cruise Line, 1............... U.S.-Flag Cruise Leevac 45,600,000.00 39,900,000.00 25 yrs.......... 8/23/00
L.L.C.. Boat. Industries, LLC-
Jennings, LA.
Nichols Brothers
Boat Builders,
Inc-Freeland,
WA.
Cascade General,
Inc.-Portland,
OR.
Alter Barge Line, Inc........ 106............. Covered Hopper Trinity Marine 29,093,500.00 24,834,000.00 25 yrs.......... 8/29/00
Barges. Products, Inc.-
Caruthersville,
MO.
Jeffboat LLC-
Jeffersonville,
IN.
Stolt Marine Tankers II, LLC. 1............... Chemical Tanker. To be determined 25,000,000.00 21,750,000.00 20 yrs.......... 8/30/00
--------------------------------------------------------------------------------------------------------------------------
Total...................... 153............. ................ ................ $4,504,589.00 $3,863,433,229.25
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Export
Responses to Written Questions Submitted by Hon. Max Cleland
to Clyde J. Hart, Jr.
Question 1. As I remarked in my opening statement, I am interested
to hear about the State of the Academy's barracks and the ongoing
effort to restore them to livable conditions. Can you tell me if MARAD
considers this a priority, and if so, how much money did the
Administration request to be appropriated for the renovation of the
Academy's physical facilities?
Answer. The Maritime Administrator and the Academy Superintendent
consider the barracks to be a high priority. This and all facility-
related needs are the subject of the Facilities Master Plan currently
being developed. The fiscal year 2001 Congressional budget contains the
increase of $2 million the Appropriations Committees added in fiscal
year 2000 to address capital improvements. MARAD anticipates presenting
facility needs with the completed and final Master Plan to the
Department in the initial round of the 2002 budget process.
The Academy's most pressing infrastructure problems that require
immediate attention are related to the physical plant that
significantly impacts on the health and welfare of the Regiment of
Midshipmen.
Question 2. It is my understanding that much of the potable water
at the Academy does not meet EPA's minimum standards under the Safe
Drinking Water Act. Can you tell us how many of these buildings fail to
meet minimum safety standards? Has the Administration proposed funding
to bring the Academy's drinking water infrastructure up to compliance
with current law?
Answer. Six Academy buildings fail to meet the EPA's drinking water
standards. Approximately $5,000 for piping and replacement has been
used this fiscal year to replace coolers which were constructed using
lead based solder. Some coolers were also replaced in fiscal year 1999.
All new coolers installed meet EPA standards. The repairs have not
completely alleviated the problem for several reasons. Some coolers and
water fountains still have lead-based solder that must be replaced. In
one building the piping was replaced all the way to the water main and
the water testing still shows water conditions in some areas that are
below the standards. All lead-based solder throughout the facilities
will have to be replaced. Approximately $11,000 will be spent during
fiscal year 2000 for bottled water for affected areas so that all
facilities have safe drinking water. The Facilities Master Plan will
address the full scope of the problem and estimate repair costs.
Continued testing and monitoring of water conditions will continue
until the problem is resolved.
Question 3. I have heard much about the deplorable state of the
furniture in the Barracks. I further understand that this furniture--
desks, bunks, chairs--was acquired from surplus stocks over a decade
ago. I hope you share my views for the need to provide adequate
furniture in order to support a decent environment to study, learn, and
live. Has the Administration proposed funding to replace the outdated
furniture?
Answer. The Academy requires approximately $3.2 million for
midshipmen furniture. The increase requested in the Congressional
budget includes $400,000 for furniture replacement. However, it should
be noted that the Academy had planned to allocate this fiscal year to
purchase furniture, but other critical needs presented themselves,
precluding this initiative.