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Ship Breaking

The Ship Disposal Program sponsored by the Navy is a major change in the way contractors interact with the US Government. For the first time, ship dismantling companies would be guaranteed profitability as the SDP provides for cost plus profit plus incentive fees for cutting vessels. Historically, companies were required to purchase the ships, pay for the tow, remediation and cutting costs and bear the risk of profit based on scrap and other sales. This new program is being sponsored by the US Naval Sea Systems Command.

The US Maritime Administration is responsible for the administration and operation of the National Defense Reserve Fleet. As these vessels become obsolete, the US Maritime Administration sells them in accordance with the Merchant Marine Act of 1936 (as amended). Pursuant to the Federal Property Administrative Services Act of 1949 (as amended), the US Maritime Administration is also the US Government's disposal agent for merchant-type vessels of 1500 gross tons or more. The Defense Logistics Agency sells Department of the Navy ships not transferred to the US Maritime Administration.

To comply with the National Maritime Heritage Act (NMHA) of 1994, MARAD has to dispose of certain obsolete, surplus ships by September 30, 2001. In disposing of these ships, MARAD is required to maximize the financial return on the vessels to the United States, and comply with Section 510(I) of the Merchant Marine Act. To meet these objectives, MARAD is compelled to scrap the majority of these vessels because other alternatives, such as transferring the vessels for use as reefs or using the vessels for nontransportation uses, are limited by MARAD's disposal authority.

In late 1997, members of Congress and environmental groups expressed concern over the Department of the Navy's ship scrapping program. The news media described environmental, health and safety violations that occurred in the United States and highlighted poor environmental, safety, and health conditions that exist overseas. On December 19, 1997, the Secretary of the Navy temporarily suspended any efforts exploring options to sell US Navy ships overseas for scrapping.

Prior to 1994, proceeds from the sale of National Defense Reserve Fleet vessels were required to be deposited in the Vessel Operations Revolving Fund and used to maintain and purchase newer vessels for the Ready Reserve Fleet. In October 1991, a US General Accounting Office report, entitled "Strategic Sealift, Part of the National Defense Reserve Fleet Is No Longer Needed," recommended that the US Maritime Administration accelerate its scrapping of older National Defense Reserve Fleet ships. Consistent with the General Accounting Office report, Congress directed the US Maritime Administration through the National Maritime Heritage Act of 1994, to scrap all unassigned obsolete vessels in the National Defense Reserve Fleet by September 30, 1999 (since changed to 2001), in a manner that maximizes the return to the United States. The US Maritime Administration does not interpret the requirement to maximize benefits to the US through these sales as a mandate to consider only price when accepting bids for its vessels.

The US Government has sold many of its vessels at the end of their useful lives for ship scrapping. Because of the value of salvageable equipment and recyclable metals, obsolete vessels have been regarded as assets. In the 1960s and 1970s, the US Government sold hundreds of ships for scrap, relying on the private sector to perform the work. During the 1980s, Department of the Navy ship scrapping ended because of the Reagan era naval build-up. At the same time, the US Maritime Administration continued to sell ships for scrap, most of which were exported by the purchaser.

The Department of the Navy resumed ship scrapping in 1991 to deal with the influx of ships to the inactive fleet as a result of military downsizing. Between 1991 and 1997, only thirty-four US Navy and US Maritime Administration vessels were scrapped domestically. An additional twenty ships sold for scrap had to be recovered by the Department of the Navy due to contractor default. The discovery of regulated polychlorinated biphenyls (PCBs) on vessels in the inactive fleet led to the cessation of exporting ships for scrapping during this time period.

Shipbreaking Environmental Concerns

Ship breaking in the United States was previously conducted in many shipyards on both coasts. Beginning in the early 1980's, environmental regulations slowed this industry considerably, until it actually ceased in the US in the mid-1980's.

Many of the vessels designated for scrapping were built in the 1940s, 1950s, and 1960s using what was then state-of-the-art material in their construction. Many of these materials have since been classified as hazardous, including, but are not limited to, asbestos, PCBs, lead, chromates, mercury, and cadmium. The US Government ship scrapping program came under criticism because some ship scrapping companies violated environmental standards, worker health and safety regulations, and accepted ship scrapping practices. Some instances of illegal dumping of asbestos, PCBs, oil, lead, and chromates, as well as dangerous working conditions, have been reported in the United States.

In terms of international scrapping activity, the export of ships for scrapping from the United States to foreign countries came under criticism in the 1990s. The criticism mainly focused on reports that some foreign scrapping facilities were creating environmental problems due to the poor management of PCBs and other hazardous materials removed from ships, and they are risking the health and safety of their workers. In addition, foreign laws and regulations were viewed as poorly enforced.

The 1990s saw an increase in domestic ship scrapping, due to the willingness of U.S. industry attempts to reconcile US Government needs, requirements, regulations and promises of a steady supply of ships for either domestic scrapping or reutilization. Historically, the Department of Defense sold demilitarized ships to scrap recyclers. The scrap roller dismantled the ship, paying for the purchase and dismantling with proof from (a) equipment resale, and (b) scrap metal sale.

Scrap metal prices have not kept pace with inflation, reducing the revenue available to the scrap metal recyclers. Stringent health and safety regulations require the institution of practices that substantially slow the ship scrapping process and increase costs. Environmental laws and regulations require similarly stringent materials management and disposal practices that further increase the cost of ship scrapping activities. Based on our preliminary estimates of military ship scrapping activities, as much as two-thirds of the cost of ship scrapping activities are associated with environmental health and safety requirements. As a result of these factors, scrap recyclers can no longer pay the DOD for ships. Instead, the DOD must compensate a recycler for the cost of proper environmental health and safety management. No company had been able to scrap a military ship in accordance with applicable laws and regulations without losing money.

Shipbreaking Industry

There is little doubt that shipbuilding and repair yards have the technical capability to scrap ships. Many yards have established, experienced worker health, safety and environmental personnel and programs that address many of the same hazardous materials abatement, handling and disposal issues faced in ship scrapping (e.g., respiratory protection, confined spaces, etc.). In addition, because the job skills required and the equipment used to perform scrapping operations do not differ significantly from those necessary for ship repair or building, little if any additional training is necessary. Many also have cranes and other heavy equipment necessary to handle scrap metal and slips and dry-docks in which scrapping could take place.

Some US yards have made or considered forays into the ship scrapping market. Unfortunately, they have generally found it unprofitable to purchase and scrap vessels under a sales process. Some yards may find it difficult to compete with domestic scrapping operations and foreign bidders. Many have cited the environmental, health and safety costs and risks as significant factors as well as the uncertain supply of vessels. Other factors may include labor costs; difficulties in balancing and coordinating the processing of scrap vessels with other yard activities; location and associated towing costs; lack of access to and knowledge of markets for scrap material; and competition with more profitable uses for facilities. Although some domestic repair yards continue to express an interest in ship scrapping, they have not participated in recent solicitations.

According to a 1997 MARAD study, the ship scrapping industry is a risky, highly speculative business, and domestic ship scrapping companies tend to be thinly capitalized. Despite efforts by the Navy and MARAD to dispose of ships domestically, there appear to be only a few qualified domestic scrapping firms.

In mid 1997, seven ship scrapping entities reportedly existed in the United States - six private and one public (Puget Sound Naval Shipyard, which recycles naval nuclear-powered vessels). Some private facilities have had serious environmental, health and safety problems. While new ship scrapping ventures appear regularly, most have little track record scrapping vessels in the United States.

Historically, Navy ships have been sold for scrapping by its sales agent, the Defense Reutilization and Marketing Service (DRMS). As of May 1999, DRMS no longer sold Navy ex-combatant ships for scrapping, but continued to administer the existing sales contracts for scrapping these ships. DRMS continued to sell Navy service craft and boats for scrapping as appropriate.

Shipbreaking Reforms

As of early 1998 there were over 180 vessels under Department of the Navy and US Maritime Administration control that were designated for scrapping. These vessels are being stored at several locations around the United States. The Department of the Navy's vessel storage facilities are near capacity, requiring some ships to be berthed at US Maritime Administration facilities on a reimbursable basis. Some US Maritime Administration ships are in such poor condition that they will soon require dry-docking for repairs, without which they would sink in place, potentially causing pollution in US waters or creating navigational hazards.

As of September 1999, the Navy had 63 ships designated for scrapping and MARAD reported having 113 ships available for scrapping. Also, the U.S. Coast Guard (USCG) and NOAA reported having several ships available for scrapping -- 14 and three, respectively. The combined weight of the Navy and MARAD surplus ships was approximately one million tons. If not scrapped, the storage, maintenance, and security of the surplus ships would cost the government approximately $58 million between fiscal years 1999 and 2003. Some MARAD surplus ships are in very poor condition and may need repairs to stay afloat. MARAD estimated that its annual dry-docking and repair costs could be as high as $800,000 per ship.

Congress authorized the Ship Disposal Pilot Project for the U.S. Navy in 1998. This Project will test new methods of ship scrapping as well as quantify the costs associated with ship scrapping. On 29 September 1999, Navy awarded four Indefinite Delivery/Indefinite Quantity (IDIQ) contracts under Phase One of the Ship Disposal Project (i.e., the pilot phase). NAVSEA awarded a $ 3.81-million contract to Baltimore Marine Industries Inc.; a $ 1.81-million contract to International Shipbreaking LLC; a $ 3.7-million contract to Ship Dismantlement & Recycling Joint Venture; and a $ 3.34-million contract to Metro Machine Corp. The initial task order under each of these contracts is to dispose of one ship under a Cost Plus Incentive Fee structure. The contracts provide for cost plus incentive fees which rewards for superior contractor performance. If the contractors are successful in scrapping the first four vessels, they will be given the opportunity to scrap up to 66 other vessels. MARAD is unable to participate in the Navy's current Pilot Project since it is required by law to sell its obsolete vessels and gain the maximum financial return.

As of 2000 federal agencies had approximately 250 ships located throughout the United States awaiting scrapping or some other method of disposal (e.g., such as donating them to an organization or using them for experimental and training purposes). The Navy and MARAD own the majority of these government ships.

As of 2004 there were six ship recycling facilities operating in the United States, four in Brownsville, TX, one in Philadelphia, PA and one in Norfolk, VA.. Of these facilities, four can take ships simultaneously, including the International Shipbreaking facility that can accommodate nine vessels simultaneously. All of these facilities have long met MARAD shipbreaking requirements and two have been operating under the more stringent Navy standards for five years.



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