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STATEMENT
OF
RONALD J. McALEAR,
PRESIDENT AND CEO
KVAERNER PHILADELPHIA SHIPYARD, INC.
BEFORE
THE
HOUSE ARMED SERVICES COMMITTEE
SPECIAL OVERSIGHT PANEL ON MERCHANT MARINE
JULY 23, 2002
Mr.
Chairman and Members of the Committee:
Thank
you for this opportunity to appear before you
and the Subcommittee to present my thoughts
regarding the reauthorization of the Maritime
Security Program (MSP) and the need to continue
and strengthen the provisions that exist in the
current law to encourage U.S.-flag operators to
build new vessels in the United States.
I
am Ron McAlear, and I am President and CEO of
Kvaerner Philadelphia Shipyard (KPSI) the newest
and most technologically advanced shipbuilding
facility in the United States.
We have been open for business for
approximately two years and have completed an
investment of over $400 million in public and
private funds.
We now employ over 900 trained and
skilled workers and have just recently signed a
contract for two 2600 TEU, ocean-going container
vessels for Matson Navigation, a leading
operator in the domestic non-contiguous trades.
We are the only shipyard in the United
States capable of building large vessels that is
focused exclusively on commercial construction.
We have no U.S. Navy work, have not
sought that work, and at this time we currently
do not have plans to construct Naval vessels.
Therefore, our entire future, the investment we
have made and the workforce we have created in
the shipyard and throughout the Delaware River
Valley Region of Pennsylvania, New Jersey and
Delaware depends on our ability to attract and
satisfy commercial customers.
I
support the concept of MSP because as both a
shipbuilder and a former merchant mariner, I
know the criticality and the necessity of
maintaining a strong capability in terms of the
manpower and the vessels that are required to
provide sealift in support of our national
security objectives.
I support the concept of MSP, because it
supports our nation in its role as a world
leader. And I support the concept of MSP because, frankly, the
livelihood of hundreds of thousands of people
depend on the maritime industries of the United
States - operators and shipyards alike -; it
is a critical element of our National Economy
and National Security and if we do not maintain
a program like MSP and other similar programs,
the consequences will be felt for generations to
come and in ways we cannot foresee today.
Despite
the compelling nature of these reasons, and the
sound public policy foundation for maritime
support programs, we must recognize that our
industry continues to shrink, the manpower pool
grows smaller and our U.S.-flag fleet has
diminished to what is now less than one half of
its size twenty years ago. A scary thought
indeed. This
has occurred despite the fact that international
trade has grown, and will continue to grow, and
our entire economy is almost wholly dependent on
imports and exports which, by definition and
geography, must be transported on ships that are
now 95% owned and operated by foreign companies
and flagged in foreign countries.
So,
I think we have reached a point, Mr. Chairman,
where we have to make some important decisions
affecting the maritime industry. We are at a crossroads, and to me the decisions we face are
easy since the alternative is to allow our
maritime industry to continue its decades-long
slide into oblivion and threaten our national
security. You, however, may have a difficult job
of convincing your colleagues, who in some
measure reflect the low level of visibility and
appreciation for the maritime industry, that
these modest investments sought by our industry
are valuable and well worth the cost.
I
think a mistake has been made in the efforts to
craft the next MSP that have been undertaken by
the operators in not reaching out to the U.S.
shipbuilding industry. The old cliché about
either we all "hang together or we hang
separately" applies here, and I fear that some
of the proponents of reauthorization of MSP have
overlooked the fact that the shipbuilding
industry is a critical part of the maritime
industry of the United States, that our industry
strongly supported the original MSP legislation
and that the current law contains provisions
which give a preference for U.S.-built vessels
participating in the MSP program. I would like
to see that preference maintained in the
reauthorization and certain incentives added to
the law to encourage U.S.-flag operators to
purchase qualified MSP vessels in the United
States.
As
you know, a lot of people criticize the U.S.
shipbuilding industry as being inefficient,
non-productive, behind the times, and they even
suggest that the industry either die, or
basically confine itself to Naval construction
and smaller vessels of the types that Mr.
Vinyard's shipyard constructs. The primary
evidence cited to prove all these propositions
is the disparity in prices between foreign-built
vessels and those built in U.S. Shipyards.
I believe that these same critics either
don't know, or don't care about some of the
realities of the world that we in the
shipbuilding industry face in each and every
day.
It
is true that vessels cost more here. We pay
higher wages than other shipbuilding nations
(although the gap is narrowing); our regulatory
requirements are far more burdensome than
elsewhere; our tax structure imposes greater
costs on U.S. businesses; and other nations
subsidize their industry to a degree not
available in the United States.
In this way, however, shipbuilders are no
different from the U.S. flag commercial vessel
operators, whose costs are far above those of
their foreign flag competitors. Everyone in the
maritime industry faces the same problems of
cost differentials and foreign subsidies.
This
is not a new phenomenon, and the effects of
these disparities have produced a decline in the
U.S. share of world commercial shipbuilding from
almost 10% in 1979 to 0.4% in 2001.
Over the same period, total shipyard
employment has been cut by close to 50%; and
many shipyards with long histories and proud
galleries of vessels constructed over the years
are now out of business.
Again, Mr. Chairman, not unlike what has
occurred in the international liner trades.
The
crucial differences between the U.S.-flag
operators and U.S. shipbuilders are: (1) the
degree of support rendered by foreign
governments; (2) the fact that our industry has
effectively been out of the commercial business
since the abrupt termination of the Construction
Differential Subsidy (CDS) program in the early
1980s; and (3) the inescapable fact that we
cannot simply "re-flag" our shipyards in
order to survive and continue in business.
We either make it with our facilities or
we don't.
We have no other options!
I've
been in the marine industry for over thirty
years and in shipbuilding for twenty years, and
I have been involved in marketing both
commercial vessels and naval support vessels. I
have associations with shipyards throughout the
world and it has always struck me, as I observe
the business practices of the shipyards in
Japan, Korea, and China, that shipbuilders in
those nations operate with the full confidence
that their governments see the shipbuilding
industries as a critical element of their
industrial base.
Public and private resources in all of
these nations have been specifically allocated
to support shipbuilding, and as a result over
the last twenty years the market shares of the
U.S., Europe and Asia have reversed. In 1979,
Asia maintained a 38% share. By 2001 Asian
Builders increased their share to 80% of all new
vessel construction.
Europe, despite its subsidy regimes, has
declined from a 39% market share to 14% today.
In that same period, we have seen China
progress from a virtual non-entity in the
shipbuilding world to one of the top three Asian
players, now producing good vessels at
extraordinarily competitive prices with Korea
and Japan.
In
my view, the pricing of ships in the world
markets has very little relationship to the cost
of producing the ship.
In my work previously with Avondale
Industries in New Orleans La., and now with
Kvaerner, I have the ability to obtain accurate
international pricing information on all of the
components for vessels. In many areas, I am purchasing exactly the same materials as
the shipyards in China, Korea and Japan.
So I know what the parts of a vessel
cost, and yet I see vessels being sold at prices
that are well below my cost of
materials.
Certainly
I recognize that we need to improve our
productivity. We in the U.S. have been working
hard for a number of years to do that, and we
have made progress to that end.
All of us here have made tremendous
capital investments in new technologies and
processes. But how can anyone expect us to
become "competitive" with foreign
shipbuilders when faced with these impediments
to fair competition, and when confronted with
the reality that since 1981 we have built
precious few commercial vessels in the United
States? Our
U.S.-flag international liner companies, which
were our reliable partners and customers, have
not placed an order for any vessels in the last
twenty years in the United States.
The last container ship ordered, prior to
the two-ship Matson contract I signed on May 29
was in 1992, again by Matson, which is not an
MSP recipient. The last Roll On/Roll Off vessels were constructed in the
mid-1980s. NASSCO currently has the TOTE
program, again a Jones Act operator which does
not receive MSP.
MSP
recipients have either run their existing
vessels well past the normal operating lives of
comparable vessels or purchased their vessels
abroad. One thing that has not happened in the
MSP program is any effort by MSP recipients to
build new vessels in the United States.
And as I look ahead, we in the
shipbuilding industry don't have any assurance
of consistent fleet replacement orders from
U.S.-flag operators. Consequently we will not
have the opportunity to further reduce costs
through series construction.
We
have the opportunity now, Mr. Chairman to give
the U.S. shipbuilding industry a chance to
approach U.S. operators as partners, to craft
financial incentives that make good business
sense, and to support them to buy ships in the
United States. While the National Shipbuilding
Initiative was a worthwhile endeavor, we still
haven't had a real chance to build for our own
citizens and that, in part, is why the
shipbuilding industry is struggling as it is.
I
am suggesting that you include in the MSP
reauthorization a continuation and strengthening
of the preference for U.S.-built vessels found
in Section 652(o)(4) of the current law.
Section 652(p) of the current law also
contains a notice provision to U.S. shipbuilders
before MSP operators can contract for new
vessels in a foreign shipyard.
I would urge you to retain this provision
but modify it to require MSP operators to notify
U.S. shipbuilders sufficiently far in advance of
contracting with a foreign shipyard to give us
an opportunity to put together a deal, but I
would also ask you to consider strengthening the
notice provision by including recently built
vessels (e.g. less than two years old or under construction).
At the very least, I believe MSP operators
should be required to provide U.S. shipbuilders
with a genuine opportunity to see if a deal can
be made to work before they get a "green
light" to purchase new vessels outside the
country. In
order to enforce this provision, I would suggest
that MSP operators be required to certify to
Marad which U.S. shipbuilders they have
contacted, the dates of those contacts and the
results of those contacts before Marad permits
them to bring a foreign-built vessel into the
MSP program.
I
would also suggest that you consider coupling
the U.S.-built preference with a larger MSP
payment for a U.S.-built vessel to take into
account the difference in capital costs between
U.S. and foreign-built vessels.
While the amount would have to be worked
out among your colleagues, and would be
dependent on budgetary constraints, I would
anticipate a differential of approximately $4-5
million per year, per U.S.-built vessel over the
life of an MSP contract would create a financial
inducement to purchase a vessel in the
U.S.
It
seems to me that if we combined the statutory
preference for U.S.-built vessels, higher MSP
payments for the U.S.-built vessel, Capital
Construction Fund (CCF) tax benefits and Title
XI guarantees this would significantly reduce
the net cost of the vessel for the operator and
would provide good jobs for American citizens
and help to revitalize an important National
Security industry.
I
also believe that the CCF program should be
opened to domestic operators who must build
vessels in U.S. shipyards.
The prohibition appears to me to be an
historical anomaly that is restricting
recapitalization of the domestic fleet, and
possibly stifling the creation of a coastwise
container service.
Venture capital is scarce in the maritime
world, and ships are expensive.
Why not utilize a proven mechanism to
allow the domestic operators to build up the
funds necessary to re-build their fleets?
The
Jones Act is indispensable to our survival as
shipbuilders, as evidenced by the customers that
all of us see as our "core" business. I
know, Mr. Chairman, you are a strong supporter
of the Jones Act, I thank you for that and I
know you will prevent any weakening of its
U.S.-build provisions from occurring.
Finally,
the continual battle over funding for Title XI,
which is the only federal program that supports
all owners to build vessels in the U.S., must
end. We
need a Title XI program that operators know will
be in existence over the next ten years, which
is funded adequately, and on which they can
depend as a stable source of financing.
Mr.
Chairman, we are truly one industry, and I would
urge you to approach this matter in a way that
insures all parts of this industry; operators,
builders and labor alike are supported.
That is the way our country has operated
for many years, the Merchant Marine Act of 1936
is explicit in citing shipyards along with labor
and operators as co-equal parts of the maritime
industry and I see no reason why that should
change today.
Thank
you for your time and I will be happy to answer
any questions you might have.
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