Military

STATEMENT OF 
JOHN P. CLANCEY

BEFORE THE 
HOUSE ARMED SERVICES COMMITTEE
SPECIAL OVERSIGHT PANEL ON MERCHANT MARINE

JULY 16, 2002

Mr. Chairman and members of the Subcommittee, it is a pleasure for me to appear before you today to speak about the Maritime Security Program (MSP).   We share the view that the MSP is of extreme importance both to our national defense and to the economic viability of U.S.-flag carriers. 

Background Concerning Our Company

By way of background, most of you are familiar with the Maersk name and logo because you see our equipment and personnel in United States ports and on America's highways.   In 1928, under the name of Maersk Line, cargo liner service linking the United States and the Far East was begun.   Today, these activities continue under the name Maersk Sealand, now one of the largest liner shipping companies in the world. Maersk Sealand is a subsidiary of the A.P. Moller Group, a company that employs more than 60,000 people in a multitude of activities in over 100 countries.   Here in the United States, we generate employment for approximately ­­11,500 Americans, which includes payroll and contractual employees. Our commercial fleet includes more than 250 vessels with a total deadweight of approximately 12 million tons, and more than 800,000 containers. In addition to the above, I am very proud of the fact that 53 ships fly the American flag and are crewed with United States citizens, and that our United States corporate affiliate operating these ships (Maersk Line, Limited) has a top-secret clearance from the Department of Defense. We also own or operate a large number of terminals--on five different continents.   Maersk Sealand's feeder vessels, as well as our trucks and dedicated trains, allow us to provide a global intermodal, door-to-door service to our customers-which includes, most importantly,   the Department of Defense. We have both the resources and experience needed to meet their demands.

Goals and Objectives of the MSP

Maersk is a proud participant in the MSP.   As you know, the Maritime Security Act of 1996 creating the MSP was signed into law on October 8, 1996.   The Act had multiple objectives.   Under the MSP, the government contracts with the owners of U.S.-flag commercial ships to make those vessels available when needed in times of national emergency or war.   This means ensuring that the ships and ship crews, and the global intermodal transportation and communication networks of ship operators, are available for sealift to the Department of Defense (DOD) during a contingency.   This network includes vessels, infrastructure, logistics management services, terminals and equipment, cargo-tracking and other communications networks, providing professional seafarers, and making use of the thousands of shoreside employees located throughout the world. 

Another key objective of the MSP is to assure a continuing presence of U.S.-flag ships in international trade, and to assure that an adequate number of trained and experienced ship crews are available at DOD's request. This is an important component   to the program that we strongly endorse.   

The MSP provided $2.3 million per ship for the first year of the program, and currently provides $2.1 million per ship for each fiscal year through 2005, when the MSP's current authority expires. The Maritime Security Act is authorized appropriations of $100 million each year through 2005, which is enough to fund 47 ships per year.   Funding is subject to annual appropriations, and contracts with ship operators run for one year and are automatically renewed, presuming sufficient funding.

By any measure, the first objective - the national security goal - of the MSP has been a tremendous success.   The Department of Defense United States Transportation Command has estimated that it would require minimum investment of $9 billion to construct--and annual expenses of more than $1 billion to operate and maintain (not including crewing)--a fleet and intermodal infrastructure comparable to that provided by VISA operators.   The Voluntary Intermodal Sealift Agreement (VISA) is a contract between MSP carriers and the Department of Defense. The ocean carrier provides services during a contingency that may arise in any part of the world. This obligation includes operators guaranteeing vessel capacity, providing corresponding intermodal services, and infrastructure supporting capacity commitments to DOD contingency operations.

MSP vessels provide invaluable assistance to DOD.   By way of further example, I am pleased to note that Maersk Line, Limited operated Maritime Preposition Ships were the first ships to arrive in Operation Desert Storm and off-load critically needed Marine Corps supplies and equipment.   The U.S. corporation's parent company-AP Moller-contributed to the effort by providing space on its Danish-flag commercial ships free of charge to the U.S. government so it could load much needed supplies for our troops during the sustainment phase of Desert Storm. This included four different voyages on two container ships that were equipped with critically needed roll-on, roll-off capacity. This space was used to lift tanks, trucks, and other amphibious equipment. Maersk marine terminals and other critical assets were also made available in the United States and in strategic locations abroad to support the sealift effort. More importantly, our commitment to DOD continues to provide transportation of equipment and sustainment cargo to our forces around the world. Maersk is actively involved in providing northern and southern route intermodal services to Afghanistan in support of Enduring Freedom. Our global network of assets, terminals, equipment, and people help enable DOD readiness as missions change in the war against terrorism. This is but one example of the ongoing commitment by Maersk and other carriers to our national security, and the success of the overall MSP.

The other major objective of the MSP - ensuring the continued viability of a U.S.-flag merchant marine - still has not been achieved sufficiently. In short, Mr. Chairman, carriers are losing money today, and in our experience U.S.-flag operating costs are compounded by expenses associated with current section 2 citizen company requirements.   The possible end of the MSP in 2005 also serves to chill investment and growth in the U.S.-flag merchant marine, adding further uncertainty to the presence of the U.S.-flag fleet. 

Reauthorization Needed Now

I urge the Congress to reauthorize the MSP as early as possible.   As I noted above, current law provides for the MSP to extend through Fiscal Year 2005.   Given that, some may question why we need to reauthorize the MSP now. Let me answer that question: it is critical that we preserve the important U.S. maritime industrial base and American jobs.   Removing any uncertainty about the extension of the MSP will be very helpful in that regard. Therefore, we and other advocates of a viable U.S.-flag presence propose that the MSP be extended for an additional 20 years - through Fiscal Year 2025. This will provide certainty and stability for the defense and commercial shipping objectives of the MSP. This will encourage private lending institutions to invest in U.S.-flag vessel operations and provide needed certainty over the long term to vessel owners and operators, as well as labor interests, about the continued allocation of resources to the MSP. 

Corporate Citizenship Requirements

The Maritime Security Act provides for participation in the MSP/VISA programs by U.S. companies qualified under section 2 of the Shipping Act, 1916 and by those meeting the separate requirements of chapter 121 of title 46, U.S. Code - often referred to as Documentation Act citizens. For example, many of the vessels currently enrolled in the MSP are   operated by section 2 citizen companies, but are time chartered to   Documentation Act U.S. shipping corporations for operation in foreign trade as part of the international liner fleets of their   foreign parent companies.   Others are operated directly by Documentation Act companies such as Maersk Lines Limited. The flexibility inherent in these arrangements works to the overall benefit of the program, and ultimately, of the U.S. military who rely on those ships for sealift.   

In order to enhance efficiency to the Department of Defense, the industry proposes that this requirement be changed so as to permit those documentation citizens which have a Special Security Agreement with DOD the right to operate vessels in the MSP. We have made a substantial investment in ship owning and ship management capabilities for programs associated with the Military Sealift Command. This change, however, combined with our investments in ships, terminals, containers, chassis, and cargo tracking systems will enable us to provide added strategic sealift value to DOD. It is therefore the documentation citizens who are signatory to the VISA who provide the actual equipment and services to lift critically needed military equipment during contingencies. Within the broad guidelines offered by the statute, it should be the international liner carrier working in concert with its U.S. partners that determines which operating arrangement provides for the greatest efficiency and cost effectiveness based on their own unique situations.

In order to strengthen the national security aspects of the program, the industry proposes that the citizenship requirement be changed so as to require those documentation citizens seeking to operate vessels in the MSP to enter into a Special Security Agreement with DOD.    Because the process by which the DOD approves Special Security Agreements with carriers is very thorough and careful, these Agreements provide a guarantee that-along with existing U.S. law-will require the VISA assets needed for national security to   be available when called upon by the U.S. government during a contingency.   

Expansion of the MSP 

We also need to expand the current size of the MSP, for it is not adequate to satisfy the increasing military needs of the Nation.   Therefore, the industry proposes that the MSP be expanded in several ways.   First, we suggest that Congress authorize a fleet of thirteen privately owned, militarily-useful U.S.-flag commercial vessels beyond those presently funded through the MSP.   These additional operating agreements, should be awarded first to section 2 citizens, and thereafter to documentation citizens with a Special Security Agreement.   The expanded MSP will add to our ability to satisfy national security needs.

In addition, MSP payments must better reflect the costs of doing business under the U.S.-flag resulting from government imposed rules, regulations and tax obligations.   Therefore, consistent with all existing operational requirements and limitations, each vessel in the MSP should be eligible to receive up to $3.5 million in payments. The effective date of this increased payment should be October 1, 2002, making existing MSP contracts eligible for the increased payments.   Because MSP payments have not kept pace with inflation since the program was begun, I suggest also that payments be increased annually by the rise in the Consumer Price Index beginning in Fiscal Year 2004.   These increased payments will go a long way toward helping existing carriers meet their costs, and encourage continued participation in the U.S.-flag program.

Maintenance of Existing Collective Bargaining Relationships

We have discussed that another objective of the MSP is to ensure that DOD has available a manpower pool of trained, professional seafarers to operate ships in times of national emergency.   In general, the carriers and the union representatives have worked well together to ensure that the MSP is a success.   If the MSP is extended and enhanced as I have suggested today, I can state today that it is our intention to honor all union contracts.   Maersk has maintained a constructive dialogue and effective working relationship with the unions represented on our ships, and we will continue to do so.

No Effect on Jones Act Trade 

Finally, Mr. Chairman, I state clearly that the changes that I have proposed today would have absolutely no effect on the Jones Act trade.   These changes to the MSP will have no impact whatsoever on the corporate citizenship requirements of the domestic trade.    The extension of the MSP or these changed provisions will not hurt the Jones Act trade in any way.

Summary

By all accounts, the MSP has been successful, but it needs to be modified to achieve its goals more completely.   Bringing stability to the MSP through long-term, dependable extension will help the MSP to ensure our national security and economic vitality objectives. Clarifying the roles of Documentation Act citizen companies will also provide incentives and the possibility of further growth.   Increasing the amount of payments indexed to inflation will also make the costs of operating under the U.S. flag more comparable to those of our foreign competitors. It is important that these changes be adopted now, to ensure the continued availability of these vessels for our national security and commercial well-being.   

Thank you for this opportunity to appear here today and present these comments.   Of course, I am pleased to answer any questions you might have on this matter.