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80–404 PDF
[H.A.S.C. No. 107–9]









JULY 13, 2001
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DUNCAN HUNTER, California, Chairman
CURT WELDON, Pennsylvania
JIM SAXTON, New Jersey
WALTER B. JONES, JR., North Carolina
STEVE KUYKENDALL, California, Vice Chairman

THOMAS H. ALLEN, Maine, Ranking Member
GENE TAYLOR, Mississippi
ADAM SMITH, Washington
JAMES H. MALONEY, Connecticut

HUGH N. JOHNSTON, General Counsel
GEORGE O. WITHERS, Professional Staff Member
DANIEL T. HILTON, Staff Assistant


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    Friday, July 13, 2001, Fiscal Year 2002 Maritime Administration Authorization Request and Related Matters

    Friday, July 13, 2001

FRIDAY, JULY 13, 2001


    Hunter, Hon. Duncan, a Representative from California, Chairman, Special Oversight Panel on the Merchant Marine
    Allen, Hon. Tom, a Representative from Maine, Ranking Minority Member, Special Oversight Panel on the Merchant Marine


    Carlton, Bruce J., Acting Deputy Administrator, Maritime Administration

Allen, Hon. Tom
Carlton, Bruce J.
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Hunter, Hon. Duncan
Maloney, Hon. Jim

Budget Estimates for Fiscal Year 2002

Mr. Saxton
Mr. Jones
Mr. Taylor


House of Representatives,
Committee on Armed Services,
Special Oversight Panel on the Merchant Marine,
Washington, DC, Friday, July 13, 2001.

    The panel met, pursuant to call, at 8:35 a.m., in room 2212, Rayburn House Office Building, Hon. Duncan Hunter (chairman of the panel) presiding.


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    Mr. HUNTER. [Presiding.] The hearing will come to order.

    My opening remarks will be brief this morning. However, before we address the business before this panel, consideration of the Maritime Administration budget for fiscal year 2002, I would like to extend a warm welcome to our witness today, Mr. Bruce Carlton, acting deputy administrator of the Maritime Administration.

    Based on my review of your budget submission, you will certainly get a chance to earn your pay here today. And I am referring, of course, to the administration's proposal to do away with Title XI loan guarantee, which has been, in my opinion, very essential to a number of ship operators, not to mention the benefits that accrue to our domestic shipbuilding base. And I hope you have a good explanation this morning as to why this is being proposed at this time.

    In fact, when I heard about it initially, I thought that what had happened is what typically happens with administrations in that, at first blush, this looks like a straight subsidy and something that costs the taxpayers money, and it is always the budget cutters. It seems to be with a new administration, a budget-cutting priority but ultimately is resolved after the administration understands a little better what Title XI does.

    Second, on the issue of the proposed transfer of the Maritime Security Program to the Department of Defense (DOD), as you know, I sat on this panel when it was first created in 1995. And it was this panel that drafted the Maritime Security Act, obtained passage in the House and ultimately in the Senate. And I recall that the Senate accepted the House-passed version at that time without amendment, and I thought we had a pretty good package at that time. In fact, I think it was a tribute to your agency that we heard very few complaints about it. And because of that, it is with particular interest that we look forward to hearing the justification for the proposed transfer to DOD.
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    We are also interested in how it is going to be managed and who will manage this program, in fact if it is transferred, and the likely cost savings.

    And, finally, it is of no small consequence that we have yet to see a legislative package that has been approved by OMB, and, as you know, time is marching on. We are getting late in the cycle. So I hope you will address this issue as well, Mr. Carlton.

    So thank you for being with us, and before we turn the floor over to you, I would like to recognize my colleague, Tom Allen of Maine, the ranking member on the panel, for any comments he might wish to make. And then we will recognize Mr. Saxton because he ought to get a door prize for showing up today while everybody else left.


    First, Mr. Allen and then Mr. Saxton.


    Mr. ALLEN. Thank you, Mr. Chairman. I join you in welcoming our witness today.

    And I look forward to your testimony.
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    I want to applaud the Maritime Administration for its role in helping to promote a superbly capable U.S. flag fleet, which is available to our country in times of national emergency. As such, I am very concerned and many of my colleagues are concerned that the future of MARAD and its national security functions not be jeopardized by precipitous changes to two of its core activities: the Title XI Maritime Guarantee Loan Subsidy Program and the Maritime Security Program (MSP).

    The Title XI program has been a crucial factor in the help of several shipyards which would probably face financial ruin if it were not for the shipbuilding activity made possible by the program's loan guarantees. Further, with a lull in military shipbuilding, the critical skills necessary in the shipbuilding industrial base would be lost without the activity that results from the Title XI program. Although at this late date, we still do not have legislative language, it is apparent that the administration wants to do away with the program, and I would have to oppose such an effort in our legislative cycle.

    The Maritime Security Program is also worthy of support and, I believe, should not be tampered with. I agree with Chairman Hunter that the MSP is a valuable tool in keeping operations under U.S. flags and that it is essential for the assurance of a sustained lift capability in time of war or national emergency. This program has proven to be effective in reducing the overall cost to the Federal Government while providing that crucial national security function.

    Mr. Chairman, I appreciate the opportunity to offer these remarks, and I look forward to the testimony of the administrator. Thank you very much.
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    Mr. HUNTER.Thank you, Mr. Allen.

    Mr. Saxton, are you speechless this morning?

    Mr. SAXTON.The cat has got my tongue.

    Mr. HUNTER.Okay. Well, thank you for being with us.

    And, Mr. Carlton, thank you, and the floor is yours.


    Mr. CARLTON. Thank you very much, Mr. Chairman and Mr. Allen, Mr. Saxton. Good morning. Thank you for those kind remarks about our Maritime Administration.

    It is a pleasure to be here. I have a longer statement which, with your permission, I would like to have submitted for the record.

    Mr. HUNTER.Without objection.

    Mr. CARLTON.Thank you very much.

    I have a very brief oral statement which I will read.
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    I very much welcome the opportunity to discuss the Maritime Administration's authorization request for fiscal year 2002. Throughout our history America's economic prosperity and national security have been closely tied to Marine transportation. The programs which are entrusted to MARAD are an integral part of assuring that the U.S. Marine transportation system continues to support our economic growth and national defense.

    Global economics and the imperatives of international competition have resulted in fewer U.S. flag ships in the foreign trades today than in 1970. However, American vessels and their U.S.-citizen crews have become more productive and more efficient over time. U.S. flag vessels are actually carrying more cargo now in the U.S. foreign commerce than they did 30 years ago.

    Our cabotage fleet and the men and women who work aboard the ships, the tugs and the ferries move more than a billion tons of cargo every year throughout America at very low cost. Another billion ton of U.S. imports and exports move through our nation's ports and waterways each year. Within the next two decades that cargo is expected to double, and that is a very conservative estimate.

    We continue to enjoy the benefits of centers of outstanding Maritime education at the U.S. Merchant Marine Academy at Kings Point and at the six state Maritime academies and our union training schools. Their graduates serve not only on our commercial vessels but on government-owned vessels that support military and humanitarian operations.

    Americans everywhere truly benefit from the unique partnership of government, industry and labor that provides vital and efficient Marine transportation services to our nation.
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    Turning now to our fiscal year 2002 budget for the Maritime Administration, we are requesting $103,032,000. Our budget supports the administration's intent to provide tax relief for American families and pay down the Federal debt, and it contains a single requested program increase for ship disposal.

    To help ensure continued competitiveness, we must tailor our Maritime policy to the challenges of the 21st century. Thus, the administration has proposed to make some changes affecting MARAD. I would like to address these first and then briefly summarize the remainder of our budget request.

    As part of the administration's policy to consolidate the management of like programs and achieve greater efficiencies, the president's budget proposes to transfer the Maritime Security Program, or MSP, and its funding from MARAD to the Department of Defense in fiscal year 2002.

    MARAD is working with the Defense Department to prepare for the transfer of this program, which has been successful in keeping modern liner ships in the U.S. flag fleet. The administration is not proposing to eliminate the MSP, but rather proposes that it be administered by DOD at its full funding level of $98,700,000.

    As part of the administration's policy to reduce corporate subsidies, the president's budget request for 2002 also seeks no new funding for the subsidy cost of the Title XI Ship Construction Loan Guarantee Program. MARAD will use available carryover funds for new projects, and we will continue to manage the existing loan portfolio and the associated financial activity in the program with just under $4 million requested for administration of the program.
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    Our budget contains a request for $10 million in fiscal year 2002 to continue the disposal of vessels in the National Defense Reserve Fleet (NDRF) that pose an imminent environmental risk. The department's inspector general has identified the disposal of obsolete ships in the NDRF as one of the department's top 10 management challenges. MARAD's fleet of obsolete ships has grown to 122 as of today, and we expect to receive up to eight additional obsolete noncombatant ships from the Navy each year in the future.

    If obsolete vessels are not disposed of systematically, we may eventually be forced to dry dock these vessels to prevent environmental damage while they await disposal. Dry docking and fuel removal could cost as much as $900,000 or more per vessel.

    The National Defense Appropriations Act for the current fiscal year gave MARAD the authority to pay for scrapping and included, for the first time, $10 million for scrapping those vessels in the worst condition. I am very pleased to report to the committee that with this $10 million, four ships will be removed from the James River Reserve Fleet as early as this month and a fifth ship has already been scrapped.

    MARAD is absolutely committed to disposing of the fleet of obsolete NDRF ships, giving consideration to safety, cost and environmental protection.

    Mr. Chairman and members of the panel, this year we are observing the 25th anniversary of the Ready Reserve Force. The RRF reflects the very best tradition of the American merchant marine and U.S. citizen seafarers supporting our armed services. MARAD's goal is to successfully activate the RRF ships under no-notice conditions 100 percent of the time. To date in the current fiscal year, there have been 13 such tests with all of them meeting or exceeding their activation time lines.
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    MARAD also strives to maintain 99 percent operational reliability. Through the first three quarters of the current fiscal year, the RRF has achieved a reliability of 99.7 percent, with 14 ships operating for 1,674 days with only 15 days of unscheduled down time. Results like these are a validation of our commitment to excellence, our partnership with DOD, our reliance on private sector expertise and the skill of the American seafaring work force.

    A significant portion of MARAD's budget request is also intended for ongoing maritime education and training activities. Our total request of just over $89 million for the operations and training account includes $47,822,000 to operate the United States Merchant Marine Academy at Kings Point, New York. That funding request also contains $690,000 as an increase over funds from last year for salary-related increases.

    Included in our request for the academy is $13 million for capital improvements to remain available until expended. These funds will provide much-needed resources for the academy to continue improvements based on the facility's master plan completed in September 2000.

    In addition to the funding for the Merchant Marine Academy, $7.5 million is requested for the six state maritime academies. These funds will provide Federal support for the state academies and supports the cost of maintaining and repairing the school ships that we have on long-term loan to all of the state academies.

    The balance of the request for $33,775,000 is for MARAD operations. It provides professional, technical and administrative support to all MARAD programs.
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    Mr. Chairman, members of the panel, I appreciate your recognition of MARAD's contributions to the vitality of the American maritime industry and to our nation's economic and national security. Marine transportation is a vital link in the intermodal transportation system that moves people and goods in support of the nation's economy and security. Your continued support will help us to do our part in our national mission.

    This concludes my prepared statement. Of course I would be very happy to answer any of your questions.

    [The prepared statement of Mr. Carlton can be found on page 22.]

    Mr. HUNTER.Thank you very much, Mr. Carlton. Thanks for being with us again this morning.

    And what I thought we might do is, why don't we walk down through the main issues that are raised by the budget proposal, starting out maybe with termination of Title XI, then the proposed transfer of MARAD to DOD, and then talk about if anybody has questions on the funding of the disposal of obsolete vessels that has been raised and then any other questions that members might have.

    But we only have a few folks here this morning, so we can have a robust participation by everybody. And I will just tell my colleagues, Mr. Allen and the rest of you, why don't, as we walk down through these issues, why don't we be a little bit informal, and we will scrub these issues pretty thoroughly.
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    So let's just go to Title XI. My understanding of Title XI is that at this point it is rendered a net profit for the taxpayers and that you have very substantial application fees for the loan guarantees and that these, in fact, at this point, amount to more money than losses that have accrued to the Treasury. So you have something which ostensibly at first blush may appear to be a subsidy, but in fact has been an income producer.

    And if you look at the enormous amount of shipbuilding that has been leveraged by this program and place that against the background of an otherwise fairly bleak picture with respect to the shipbuilding industrial base, it would seem to make little sense to scrap this program at this time.

    Have you folks gotten some revelations that we have not observed?

    Mr. CARLTON. Well, whether they are revelations, sir, or not, I am not sure. But if I can offer a comment on your question and remarks, at the present time, the administration is not proposing to end the program.

    You are absolutely correct that the administration is not requesting an appropriation for next year. We have an expectation of some amount of carryover funds from funds currently available.

    Mr. HUNTER. How much?

    Mr. CARLTON. Mr. Chairman, at the present time my analysis of what we are likely to have available at the end of the fiscal year is approximately $5 million. That is a difference from when we submitted our budget. When we submitted our budget, our expectation was approximately $10 million. My new estimate is based on the best information I have available to me as of last night on applications that are pending processing and pending approval by MARAD.
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    Mr. HUNTER. Okay, so you are willing to let the $5 million carry over.

    Mr. CARLTON. Yes, sir.

    Mr. HUNTER. Mr. Allen?

    Mr. ALLEN. Thank you, Mr. Chairman.

    I would like to keep pursuing that. It certainly sounds to me like you are proposing to end the program except for the carryover funds. Is that an accurate characterization?

    Mr. CARLTON. I am not sure how I would characterize it. The administration's justification for this is to reign in, bring under greater control, what have been identified as corporate subsidies. And if I could just take 1 minute to explain what we mean by that.

    The Title XI program does have a measurable monetary effect on the applicant company, the ship owner company, in that, when you compare a loan guarantee offered by the Maritime Administration versus conventional bank financing of a large capital asset, we can offer repayment terms of up to 25 years, and the full faith and credit loan guarantee also results in a measurably lower interest rate on the debt. Those are direct benefits to the ship owner, to the cash-flow, to their debt structure, and that is what is identified by analysts as a subsidy.

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    Mr. Chairman, you are correct that no one gets a free ride when they walk in the door. They pay a $5,000 application fee; they pay an investigation fee; they pay a loan guarantee fee. Those are substantial fees. We do not do the work for free. The examination of the application is a very complex and sometimes long process.

    Mr. HUNTER. Mr. Allen, if you would yield, and let's just go around too, guys, and be informal here.

    But is it not true that the application fees, at this point, exceed losses? So if you are looking at this in a business-like way on behalf of the American taxpayer, to date, he has made a profit on this program, not a loss. Is that your calculation also?

    Mr. CARLTON. Mr. Chairman, we do our level best to operate this like a business. We are not in the business of making money. We are a government agency; we are not suppose to make a profit. But we do have the interest of the taxpayer at heart, and we do our best to avoid losses.

    Mr. HUNTER. But my question is to you, and this is a valid question on any loan guarantee program, for example, if you were sitting there representing the student loan guarantee program, you would not be able to say this.

    Mr. CARLTON. No, sir.

    Mr. HUNTER. In fact, the taxpayers have made a profit on Title XI. They receive more money than they have given out, is that not true?
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    Mr. CARLTON. That is correct. We take these fees in order to have funds available for bad debt. We have about a 3 percent overall loan default rate.

    Mr. HUNTER. But the point is, we are not arguing about the fee, and I do not think industry's arguing about it. They are accepting it, and the taxpayers are making a profit. And that would seem to shed a different light on this than the typical loan guarantee where you project an annual loss and you live with the loss because you are achieving some objective.

    Mr. Taylor?

    Mr. TAYLOR. You know, Mr. Carlton, for you to make the statement that the administration is going to end all corporate subsidies, I assume we are also going to bring the troops home from the Middle East who are protecting the oil fields? I mean, who is kidding whom?

    This administration, in my opinion, can be tried for false advertising. When they made all the statements that help is on the way for the Department of Defense and then turn around and ask for five ships for the United States Navy. Five, that is less than Bill Clinton asked for. He asked for seven.

    Then you turn around with the program we invented in 1994—those of us who were here then when the then-Clinton administration was shrinking the fleet down to 10 ships per year, called the Title XI Loan Guarantee Program, actually it was called the National Shipbuilding Initiative, which, for the first time, we took some Department of Defense money, leveraged that money $50 million a year, created $1 billion a year in loan guarantees.
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    We have, to date, as a result of that created $6 billion worth of shipbuilding in America. We kept our six major shipyards afloat, but barely, but we still kept them afloat through this. We are building the first cruise ships in America in over 40 years as a result of this.

    So what you do with a successful program that costs you almost nothing is try to eliminate it. I think this is the utmost stupidity, and I am going to take every occasion to tell you privately and I am going to take every occasion to tell you publicly and I am going to take every occasion to embarrass the administration for trying to kill this program.

    I do have some concerns about the liens on the ship vessels, and I hope you would address them at the first convenience. But I have got to tell you, I think it is the utmost of stupidity to try to eliminate a program that is working and that is keeping America's industrial base going.

    Mr. HUNTER. We will put you down as undecided, Mr. Taylor, on this issue.


    Does anybody else want to talk about Title XI?

    Yes, Mr. Allen, go right ahead. Yes, sir.

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    Let's scrub this issue, and we will move on to the next one after we have thoroughly scrubbed you, Mr. Carlton.

    Mr. CARLTON. Yes, sir.

    Mr. ALLEN. I am just trying to get beyond the label ''corporate subsidy'' to see if there is any other rationale that you are bringing forward. I mean, how does this administration feel about protecting the industrial base? Can you point to another significant shipbuilding country anywhere in the world that does not somehow subsidize its shipbuilding industries? I mean, what is there—beyond the label ''corporate subsidy,'' is there any there there? Is there any rationale or argument that we can get a grip on?

    Mr. CARLTON. I believe that the core of the argument is that, in a complex Federal budget where there are competing priorities and obligation on the part of this administration to pay down the Federal debt, control spending, work with the Congress to do that, that this is one area that was identified where savings could be eased out of the budget.

    Mr. HUNTER. But, Mr. Carlton, I think that is our point, is that on first blush you see this program, it is a guarantee, and if you think about the student loan guarantee program, which is what most Americans think of when they think of loan guarantee, their first question is, how much does that cost in red ink the program each year, because we know there is a loss. But we say there is a nice social objective.

    When you look at this program, as you just acknowledged, it makes a profit. So if this was a terrible program but it made a profit for the Treasury, wouldn't it be beneficial to have it? This cannot be justified on an economic basis. That is something you basically just acknowledged.
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    So at the end, do you simply have a label and we are acting because it has got a label?

    Mr. CARLTON. I take your point, Mr. Chairman. If you would allow me, though, to just clarify that. I would not want to characterize the funds that we take in from applicant companies and the accumulation of those funds as a profit.

    In point of fact, MARAD has returned monies to the Treasury in rather substantial amounts, because, I believe, our staff does a terrific job in ferreting out the bad deals from the good deals. And we try to run this as a conservative banker would run it. Our loan default rate is very low, and we are proud of that record.

    However, the funds that we do take in, we are holding that—rather than calling that a profit, we hold that as our rainy-day fund for when we make a mistake, because we have made mistakes. And when the treasury has to pay off a defaulted loan guarantee, we have funds to go to.

    I would not want to characterize it as a profit. We hold that money as a risk against bad debt. It is our obligation to make sure that we do not have bad debts, but when it happens that is where that money comes from so that we do not have to go to the Treasury.

    Mr. TAYLOR. Mr. Carlton, let's take a stroll down memory lane. How many ships did this nation have to charter during Desert Storm, a war in which we did not lose a single vessel to hostile action? How many ships did we have to go out and charter just to resupply our troops under absolutely ideal circumstances?
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    Mr. CARLTON. Mr. Taylor, my recollection of that was in the several hundreds of ships.

    Mr. TAYLOR. It was about 90. Where did some of these ships come from?

    Mr. CARLTON. They were available worldwide in the charter market. They came from countries around the world, many of our allies who were together with us in the coalition fighting aggression in Desert Shield-Desert Storm.

    Mr. TAYLOR. Some of them came from former countries of the Warsaw Pact.

    Mr. CARLTON. Yes, sir.

    Mr. TAYLOR. Same folks who were against us in Vietnam, same folks who were against us in Korea and same folks who might be against us in a future conflict.

    We did not do this just for the heck of it. We did several things in response to the, in my opinion, embarrassment of our nation having to go out and rent foreign ships to resupply our troops. One thing was the medium-speed RO/ROs that roll onto those ships that we built and put into the budget, but the other thing was to try to take a look at how we could revive our nation's maritime base, both on the construction and operation side. This program was the direct result of us having to borrow foreign ships in order to resupply our troops.
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    Now, unless you can guarantee me that there will never be another conflict where America has to resupply its troops on another continent, or unless you can tell me that the capacity exists right now and for the foreseeable future for our nation to take care of its own needs and we are not going to need to build anymore merchant ships, I would really like for you to tell this committee of the Armed Services Committee that we do not need a maritime industrial base in this country, that we do not need a maritime fleet. Because if we do not need them, we do not need you. If we are out to save money, might as well start with you.

    Mr. CARLTON. Mr. Taylor, I think I am probably about the last person in this room who would ever look you in the eye and say we do not need a maritime industrial base or a strong American merchant marine. I have been doing work in this field for almost 30 years, and I am a believer that we do, like you, need a strong maritime industrial base.

    Mr. TAYLOR. So what have you identified that you are willing to do to try to maintain that industrial base? Because the only program that seems to be working out there you are proposing to eliminate. So what do you have in its place? The administration has asked for five ships. We are headed toward a 150-ship Navy. Typical ship lasts 30 years. Now, what do you propose in its place, that they just go out of business, that we buy our ships from China?
    Mr. CARLTON. Excuse me, Mr. Taylor, with those nearly 30 years of doing maritime work, I still do not consider myself completely competent to comment on Navy ship-procurement matters.

    But there is no question that America's shipbuilding industry has benefited greatly from the Title XI program. Title XI does make financing easier. Financing is available in Wall Street for large capital asset acquisition programs. The Title XI program makes it easier, and it is that ''easier'' that is the budget analyst's definition of the subsidy involved in this program. And that is what has been zeroed in on in this budget request, or lack of request, for funds for this particular program.
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    Mr. HUNTER. Mr. Allen?

    Mr. ALLEN. I just have a couple more questions. I am be interested in knowing how many applications you have pending at the present time and how much money, the approximate amount of those applications in new ship construction. What is out there ahead of us that would not be benefited if this program were to be ended?

    Mr. CARLTON. Yes, sir. As of July, we have about 25 pending Title XI applications. And if I look at a couple of numbers, the total—these get technical pretty quickly, so let me get past technical. The approximate aggregate cost to the ship owners is just over $5.5 billion worth of ships. And when I say ships, it is everything that you know and I know and recognize: it is tugs, it is barges, ferries, tankers, container ships, high speed cargo ships. It is a rather extraordinary range of the kinds of vessels that populate our fleet.

    Mr. ALLEN. And how far in meeting that need would the $5 million you will have available at the end of this year go?

    Mr. CARLTON. $5 million in Title XI subsidy monies under the formulas that we are required to work with would yield approximately $100 million of new ship construction.

    Mr. ALLEN. Thank you.

    Mr. CARLTON. Thank you.
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    Mr. HUNTER. Okay. Mr. Jones, do you have any questions on this one?

    Mr. Saxton?

    Well, Mr. Carlton, you can understand that we are moving in a different direction than you are on this, and the committee intends to do everything we can to maintain Title XI.

    I think what one of your most important comments on this was the fact that this program has been run in a business-like way with close scrutiny to loan applications, and it has been run effectively and efficiently. Is that a fair evaluation of your comments?

    Mr. CARLTON. That is a fair evaluation, sir.

    Mr. HUNTER. Okay.

    Yes, Mr. Maloney, did you have any?

    Mr. MALONEY. Chairman, I would only say that I certainly strongly concur with Mr. Taylor, Mr. Allen and other sentiment with regards to the Title XI program. I support the program and I think our interests as a nation to maintain the program.

    Mr. HUNTER. Okay.
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    Thank you, gentlemen, for scrubbing Mr. Carlton thoroughly on this issue. As you can see, an important issue to us and really is critical.

    And, incidentally, Gene, I thought a large number of the ships we used in Desert Storm also came from Japan, and Japan did not participate, was not an ally in Desert Storm until it was over and then they voted to support the winner.


    So why do we not move to our next issue. That is the proposal to transfer management and funding of the Maritime Security Program from DOT to DOD. And to some degree, this issue, I think, has been complicated or rendered moot by the fact that Commerce-State-Justice, as of last week, funded the program at DOT.

    But do any members have any questions they would like to ask Mr. Carlton on this issue?

    Mr. Carlton, why don't you give us a basic rationale for this transfer. And tell us, in light of the fact that Commerce-State has already funded this thing at DOT, is this one you folks are willing to drop at this point, is it still an important issue to you?

    Mr. CARLTON. Thank you for that opportunity, Mr. Chairman. I do not actually know the answer to your latter question. I am going to speculate, which is always the wrong thing to do at 9 o'clock in the morning on Friday the 13th.
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    But I am going to guess that, no, sir, we will not drop the proposal, but we will certainly do as directed by the Congress.

    I want to be very, very clear on this proposal. There is no suggestion in our budget request to short cheat this program. There is no suggestion not to fund the Maritime Security Program at a full and robust amount to cover all 47 ships enrolled in the program. It is a management issue only. There is a belief that like programs can achieve some efficiencies in management, at least, by grouping them together.

    And, of course, as this panel knows extremely well, the Maritime Security Program, it's very rationale is one of readiness for national security and the projection of force and specifically to carry what military planners call the sustainment cargoes for a military operation abroad.

    Mr. HUNTER. Okay. Well, we all agree with the need to have the program and the importance of it from a security standpoint. But this change, transferring the program is the issue. And so, I think the first question would arise is, are we saving any money by doing this? Is there a cost savings involved?

    Mr. CARLTON. Mr. Chairman, our analysis of the transfer shows that it would yield no cost savings.

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    Mr. HUNTER. Anybody have any questions on this thing?

    Mr. SAXTON. Is there any change in the relationship with the Jones Act because of the suggested change?

    Mr. CARLTON. No, sir, none that I am aware of.

    Mr. HUNTER. Mr. Maloney?

    Mr. MALONEY. Mr. Chairman, thanks.

    With unanimous consent, I have a statement for the record, but I would like to get to, in effect, a question is a concern that has been raised about the continuing the U.S. citizenship requirement that may have been the import of the prior question.

    This is a program involving national security. This is a national security program. And the fact that U.S. citizenship is a requirement in terms of the crewing of the vessels I think is an important element of providing that national security resource and asset to the country.

    So I have heard some discussion that there is an interest in dropping the U.S. citizenship requirement for the program, and I would appreciate your comment on whether you have heard that or if you know of any plans to that effect or not.

    [The information referred to can be found in the Appendix beginning on page 26.]
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    Mr. HUNTER. In fact, Mr. Maloney, why don't we ask Mr. Carlton to explain to the committee the controversy over the citizenship requirement. It is out there and a lot of focus has been given it.

    Why don't you walk through the controversy, Mr. Carlton?

    Mr. CARLTON. To the best of my ability, I will, Mr. Chairman, Mr. Maloney.

    Citizenship and vessel ownership in the United States is best described as arcane. It is a complex and difficult matter to get your hands on. The law is difficult and complex. You are correct in your observations that there is a discussion going on today about this citizenship issue. Let me just try to summarize by reflecting a little bit on the Maritime Security Act.

    When the Congress passed the act, there was a contemplation that there may be requests to participate from any number of sources of ownership of U.S.-flag vessels. A priority system was built into the Maritime Security Act in which what are called Section 2 companies, and that is a reference to the Shipping Act of 1916, Section 2 companies would have a first priority for enrollment. Budget imperatives limited the funding in a way that only 47 ships were going to end up enrolled in the program.

    Mr. HUNTER. Explain Section 2 companies.

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    Mr. CARLTON. I was afraid you were going to ask me that. Very briefly, Section 2 companies, that definition is that control of the asset is vested entirely in U.S. citizen interests. And I am blanking at the moment on the exact percentages, but what we mean by that is the directors, corporate executive staff, those who actually control the whereabouts and the use of the ship, are American citizens.

    Mr. HUNTER. Okay. Rusty says it is 75 percent.

    Mr. CARLTON. That sounds like the right number.

    Mr. HUNTER. So we do not have enough for those ships. We have a shortfall.

    Mr. CARLTON. There was not necessarily a shortfall when that selection was made. There were more ships that applied for participation than we had budget to absorb. The Maritime Administration worked hand-in-glove with the United States Transportation Command and other elements of DOD to get the best mix for national security purposes.

    I was about to say that the act also provided for a slight variation on what I have just explained in terms of Section 2 companies, and it recognized that there might be some companies which have a long-term relationship with the Department of Defense by operating vessels on their behalf, by husbanding their vessels, by acting as their agent, if you will. And the Maritime Security Act, if I remember correctly, provided for up to five vessels for such a company that might not otherwise be qualified as a Section 2 company, but up to five vessels from that company would be eligible. There was only room for four of their ships, as I recall.
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    So they were given a statutory priority-one level, and they did end up participating. We then ran out of budget. We never got to a lower priority, and the lower priority does contemplate a more direct foreign interest or control over the ship, so-called ''documentation'' citizen as opposed to a Section 2 citizen. But we simply ran out of money.

    Mr. HUNTER. Okay. Why don't you walk that up through the present controversy?

    Mr. CARLTON. My understanding, sir, of the present controversy is that some parties would like to, in essence, trigger the documentation citizen capability to participate or, alternatively, to expand upon that other priority-one matter that I raised, wherein the company may not have Section 2 citizenship control but does have a long-term relationship with the Defense Department because they have operated vessels, including top-secret missions.

    You have correctly characterized this as a controversy. There are parties who feel very strongly about this issue on both sides of the issue. I have no doubt that it will be brought to your direct attention as legislators.

    Mr. HUNTER. Okay, let me suggest something to the panel. Basically, what you are saying is, there is an initiative to take further exception to the citizenship requirements for a number of reasons.

    Mr. CARLTON. Precisely.
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    Mr. HUNTER. And just to lay out, first, my inclination is always to have, not speaking for the whole panel but just for myself, is to have very strong citizenship requirements.

    There are some elements of this discussion that we need to take up, I think, in a classified setting. So why do not we agree in the next week or two to have a little classified briefing on this? Because I think we are going to need to get into this in some depth.

    Mr. CARLTON. Mr. Chairman, let me just offer on behalf of the Maritime Administration, if we may be of service in that, we would be more than pleased to do this.

    Mr. HUNTER. Okay. Is that agreeable, Mr. Allen?

    Mr. ALLEN. Yes.

    Mr. HUNTER. Okay, let's do that.

    Mr. ALLEN. Mr. Chairman?

    Mr. HUNTER. Yes, sir, Mr. Allen?

    Mr. ALLEN. I just want to be clear about the rationale for the proposed change. What I hear you saying is that the rationale for the transfer for the Maritime Security Program is that like programs can achieve some efficiencies in management when grouped together. But I also hear you saying whatever efficiencies are there are so small or unmeasurable that we cannot identify any cost savings.
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    Is there any other rationale? I mean, anything else you would like to bring to our attention as a reason? Because on the face of that argument, it does not work very well from my point of view. But is there anything else that we are missing?

    Mr. CARLTON. Mr. Allen, I really have no other remarks other than to say that there is a belief in the administration that a program that is designed for national security support would be better placed in the Defense Department.

    Mr. ALLEN. Thank you.

    Mr. CARLTON. Thank you.

    Mr. HUNTER. All set, Mr. Taylor?

    Mr. Maloney, anything? All set?

    Mr. Jones also has some questions on the academy that he would like to submit for the record.

    [The information referred to can be found in the Appendix beginning on page 199.]

    But, Mr. Jones, too, if you would like to discuss any issues with respect to the academy, have at him.
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    Mr. JONES. Well, with your permission.

    Mr. HUNTER. Absolutely. In fact, I will ask you, if I could, Mr. Jones, if I could impose on the panel. I have to leave for another task force briefing on the famous Salton Sea of Southern California and the big water transfer. So if you could take the chair?

    Thank you, Mr. Carlton, for being with us, and thanks for laying out the administration's position. As you can see, we take strong exception to a number of areas, and we are going to have to do some further work on this. And we do need to have this classified briefing on this one aspect of the Maritime Security Program.

    Mr. TAYLOR. Mr. Jones?

    Mr. Carlton, one thing has recently come to my attention. I had the good fortune to attend a graduation at Kings Point recently and was very much impressed with the program there, but also walked away knowing that we are going to maintain that academy, on the verge of spending a lot of money to do so, because those things that were thrown up, a Russian World War II, are wearing out now.

    About, I guess, 20 miles from the academy, the Nation has a substantial investment in a place called Governor's Island, which my ship also had the good fortune to visit, was a Coast Guard base. It was a very, in my opinion, a very modern Coast Guard base ideally located, but the decision was made to close it.
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    Is anyone from Kings Point knowing the huge amount of money that has to be spent to upgrade, what is, you know, physically a very small place? Has anyone from Kings Point even bothered to take a look at possibly relocating to Governor's Island? It is paid for. Many of those buildings are in excellent condition. It was a training installation for the Coast Guard. There are barracks; there is housing. The key word here is it is already paid for.

    Mr. CARLTON. Mr. Taylor, that is an excellent question. I really do not have an answer. I know that I personally have never thought of that. You have asked if anyone has at the academy, I would be very happy to make some phone calls this morning and see if anybody has.

    Mr. TAYLOR. Would you, please?

    Mr. CARLTON. Yes, sir.

    Mr. TAYLOR. Because the best offer we have thus far for Governor's Island is $1 from the city of New York. So if Kings Point would entertain an offer better than that, I think, that the Nation would be well-served.

    Mr. CARLTON. Thank you.

    JONES [Presiding.]: Thank you.

    Mr. Carlton, I guess, since I have been on this panel for about 5 years now, that I certainly appreciate the budgeting that the president's recommended for the academy. And I know that we as a panel have talked about before, going up and actually seeing the facility.
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    And I think I have said this just about every year. Of all of the pleasures a Member of Congress has, at least speaking for myself, is to call a young man or woman to say, ''You will be receiving an appointment from the Air Force Academy, the Naval Academy or West Point.''

    I must tell, maybe it is my own fault, I do not have that same type of thrill for that child or young person when I call to tell them that they will receive an appointment to the academy, Merchant Marine Academy. And that is simply because we as a Congress and we as an administration, whether it be Democrat or Republican, in my opinion, have not given the attention that needs to be given to that academy to keep it equal, as much equal as possible to the other academies.

    Would you agree with my statement from the standpoint of it needs more attention from this Congress?

    Mr. CARLTON. If you will allow me to say that the academy does a tremendous job with the resources that it has. It is an old facility, the chairman correctly pointed out. It as put up in a hurry at the early years of World War II, and we have some serious wear and tear.

    In the previous administration, the academy was directed to prepare a master plan, a 10-year master plan to deal with the infrastructure. And they did a very good job of that. They used outside consultants to do that because it is a large undertaking, and the administration has come back with a plan. $13 million was provided by the committee last year in the Congress. We are requesting another $13 million this year. My hope is that that is a long-term gradual improvement in the physical plant.
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    I must point out, though, to the panel that there is a substantial difference between the Merchant Marine Academy and the uniformed services academies. Those academies are also active duty military bases for the Army, the Navy, the Coast Guard and the Air Force. Because of that, they have access to other resources which this civilian-based academy does not. It is difficult to make an apples-to-apples comparison.

    Certainly when you look at Annapolis or the Air Force Academy, for example, there are active duty officers onboard as instructors. There are other military personnel there. There are other military activities associated there, which enrich those campuses and do a wonderful job.

    We have a very narrow roadway, and budget constraints do not allow us to expand much beyond what we are doing. We have pretty robust request before you this morning for the academy, and we are very hopeful of your support.

    Mr. JONES. Well, let me say in closing, and I appreciate your statement. I agree that maybe the missions and the support that you were saying that are at the service academies versus the Merchant Marine academies is all true.

    But if we as a government believe that we do need a Merchant Marine academy, if we do not need it, then we ought not to fund it. But if we believe that we need an academy, then I think that it should be seen as important to the future of this nation, if we believe need it, especially to the national security. And we should continue, I think, to upgrade it as much as possible, because I have just been amazed by what I have seen. It is unacceptable if we are going to continue, in my opinion, to have these young men and women live at that academy.
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    So with that, does anyone have any other questions?

    This will be my last question, then I think we can adjourn if it suits the committee. This is a written question.

    It is my understanding that because of accounting errors at the Office of the Commander Naval Surface Reserve Force that all recent Merchant Marine Academy graduates and graduates of the state maritime academy who receive student incentive payments are being denied reserve annual training for the remainder of the fiscal year and that the number of man-days allotted for next year will be reduced by almost half.

    Given this unfortunate situation, how are graduates of the United States Merchant Marine Academy going to be able to fulfill their obligation to the taxpayers to do annual training every year?

    Mr. CARLTON. Mr. Jones, I was not aware of that miscalculation, misestimate. There is no easy answer. If the Navy forgot to ask for enough funding for active-duty training, reserve training for these young men and women, it is extremely unfortunate.

    All of our graduates from the Merchant Marine Academy and all of the so-called student incentive payment graduates from the state academies have a military obligation. It is a reserve obligation, and they are expected to drill on active-duty training 2 weeks every year. That is a pay status, and you have just described an unfortunate situation. I am not sure there is an easy answer.
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    I will tell you, sir, though, that I will go back and make some phone calls with CNET and the other entities that we deal with out of the Defense Department to see if we can remedy the situation in this short run.

    We take those obligations very, very seriously, and we know that our graduates do as well. We want them to perform, they need this training, and I will definitely look into this matter.

    Mr. JONES. Would you please let the committee know your findings as you look into this matter?

    Mr. CARLTON. Yes, sir.

    Mr. JONES. And would there be any other questions?

    We will adjourn. Thank you very much.

    Mr. CARLTON. Thank you.

    [Whereupon, at 9:31 p.m., the subcommittee was adjourned.]

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