Military

Good morning, and thank you for the opportunity to testify about the obsolete ships in the James River Reserve Fleet and the Maritime Administration's Ship Disposal Program.

The Maritime Administration (MARAD) serves as the U.S. Government's disposal agent for merchant type vessels of 1,500 gross tons or more. Most of the ships scheduled for disposal are located at MARAD's three anchorages: the James River near Ft. Eustis, VA (JRRF); Beaumont, Texas (BRF); and Suisun Bay near Benicia, California (SBRF). In total, there are approximately 130 obsolete ships in all three fleet sites that make up a portion of the National Defense Reserve Fleet (NDRF).

The NDRF was established for the maintenance of readiness assets, including the Ready Reserve Force (RRF) and other vessels owned or acquired by the United States Government that are determined to be of value for national defense purposes. The NDRF is maintained by the Secretary of Transportation; NDRF ships, especially the RRF component, serve as a reserve of vessels which can be activated to help meet U.S. shipping requirements during a national emergency.

The National Maritime Heritage Act of 1994 authorizes MARAD to dispose of obsolete NDRF vessels, and directs the use of any proceeds derived from disposal. Prior to 1994, MARAD was able to sell obsolete vessels for dismantling to the highest bidder. From 1987 to 1994, MARAD sold for export and disposed of 130 ships at an average price of $108/ton, which netted approximately $80 million. However, as a result of Federal prohibitions on the export of PCBs (polychlorinated biphenyls) found onboard many obsolete vessels, as well as increasing national and international concerns regarding environmental and worker safety issues, foreign sales were stopped in 1994.

With overseas sales curtailed in 1994, and upheld in 1998 as a specific Federal Government moratorium on overseas ship dismantling which expired in 1999, MARAD turned exclusively to the domestic market to sell ships for dismantling. However, only a few domestic facilities expressed an interest in purchasing vessels for dismantling. Since 1994, MARAD has sold 22 vessels, only 12 of which have been dismantled. Of the remaining vessels, the purchasers did not accept the vessels and as a result, the sales contracts were terminated. Marginal profits due to changing market conditions for scrap metals and the high costs for removal and disposal of hazardous material contributed to the decreased viability of the domestic sales program.

When the domestic sales option became less viable in the mid-1990s, MARAD began negotiations with the Environmental Protection Agency (EPA) to allow the export of ships after the removal of liquid and "readily removable" PCBs prior to export. Two agreements were signed: November 30, 1995 and November 10, 1997. The first had unworkable notice language and the second was never put into effect because MARAD agreed to refrain from further pursuing this agreement due to heightened international attention on ship dismantling facilities in the third world.

On September 23, 1998, Vice President Gore, issued a memorandum to then-Secretary of Defense Cohen and then-Secretary of Transportation Slater placing a further interim moratorium on efforts to export vessels for dismantling until October 1, 1999 to ensure that the Interagency Panel on Ship Scrapping recommendations were fully considered.

During this time period, the ship disposal program was suspended. Although no ships were dismantled, vessels continued to arrive at the fleet sites. At this time, MARAD was also prohibited by statute from paying for dismantling services. Thus, a large backlog of obsolete ships was created with the number of obsolete vessels in our fleets increasing by over 60 ships between 1997 and 2000. This critical situation, exacerbated by the deterioration of hulls over time, prompted the Department of Transportation's Office of Inspector General to name the disposal of MARAD's obsolete ships as a Top 10 Management Challenge in 2000 and 2001 for DOT.

The National Defense Authorization Act for FY 2001 contained statutory amendments which gave MARAD unprecedented ability to pay for dismantling services, if necessary. This change, along with $10 million transferred from a DoD appropriation to MARAD for ship disposal, allowed us to begin implementing Federal payment for a ship disposal program. MARAD was instructed by Congress to scrap obsolete vessels at qualified facilities, using the most expeditious scrapping methodology and location practicable. Scrapping facilities were to be selected on a best value basis consistent with the Federal Acquisition Regulation (FAR), without any predisposition toward foreign or domestic facilities. MARAD was also given a September 30, 2006 deadline to dispose of all obsolete vessels, and required to submit to Congress a report detailing its ship disposal program.

MARAD began a program using a time phased and level-funded approach consisting mainly of domestic vessel dismantlement and recycling. Using the $10 million provided in the FY 2001 DoD Appropriation, MARAD was able to dispose of six high-risk vessels in domestic facilities. However, it became apparent that MARAD would not be able to meet the 2006 deadline to dispose of all obsolete vessels without direct appropriations and the use of additional vessel disposal alternatives. The high costs and limited cost-effective capacity of the domestic dismantling industry would make the disposal of obsolete ships a larger challenge than anticipated.

In FY 2002, the Administration requested $11 million for ship disposal, but funding was not appropriated. At a crossroads regarding the ship disposal dilemma, the Agency was left with two approaches. The first approach was to do nothing and wait for future appropriations. To MARAD, this appeared irresponsible. The second approach was to start creating opportunities and seek out all possible no-cost options. In September 2001, MARAD initiated a Program Research and Development Announcement (PRDA). The PRDA is a competitive procurement mechanism allowable under the FAR. This competitive announcement solicited ship dismantling/recycling proposals from the ship dismantling industry both foreign and domestic. The PRDA provided the industry with opportunity to propose feasible and cost-effective solutions to MARAD's ship disposal challenge that were based on their capabilities, methods and innovations and that made sense for their business.

During FY 2002, MARAD received numerous proposals involving foreign vessel recycling facilities, so we began discussions with the EPA regarding possible export options. Through the PRDA process, we began to see opportunities to recycle ships domestically or export ships in a responsible cost-effective manner. MARAD's discussions with EPA have led to a cooperative relationship that is results-oriented in seeking solutions to the challenges of the NDRF. We also began identifying other disposal opportunities, such as artificial vessel reefing and the deep sinking of vessels in conjunction with Navy's SINKEX Program.

In FY 2003, MARAD received, for the first time, a direct appropriation that met the Administration's request for the Ship Disposal Program. This direct appropriation, coupled with additional funding received from a FY 2002 DOD appropriation, has allowed MARAD to maximize the number of vessels disposed. Taking advantage of all possible alternatives and options is critical to the effort of removing ships from the James River Reserve Fleet.

Today, MARAD is announcing the award of one contract for the removal of three high priority vessels from the James River Reserve Fleet. Currently, we are on the verge of closing on another contract that would remove fifteen ships - at once, from the James River Reserve Fleet. Combined, this will be the largest removal of obsolete ships in a single year from any of MARAD's fleets, including the James River Reserve Fleet, since 1993.

The three-ship award is the result of a domestic Invitation for Bid (IFB) that was submitted by ESCO Marine of Brownsville, Texas. ESCO was awarded a contract to dismantle three high priority ships from the James River Reserve Fleet for $2.2 million. This is the second award to a Brownsville, Texas ship disposal facility in 2003. Earlier this year, Marine Metals was awarded a contract to dispose of two high priority vessels from the James River Reserve Fleet for approximately $600,000.

The pending contract that has not yet closed will be the result of a negotiated PRDA. This company will remove a total of fifteen ships from the James River Reserve Fleet site. Thirteen vessels are scheduled to be dismantled at the AbleUK facility in Teesside, England and two will be converted for operation outside U.S. trade.

MARAD employed a variety of procurement methodologies to achieve the best value to the taxpayer and Government in order to remove as many high priority ships as possible from the James River Reserve Fleet. The IFB and PRDA have resulted in best value awards. The ESCO Marine facility, and the PRP proposal that utilizes the Able UK facility, were selected under a best value basis consistent with Federal Acquisition Regulations (FAR).

For the remainder of FY 2003, MARAD expects to continue making awards based on PRDA proposals already received and additional IFBs. Discussions have recently been opened with a domestic company related to their PRDA proposal for the dismantling of additional high risk James River Reserve Fleet vessels. Both domestic and international PRDA proposals that represent best value to the government will continue to be considered. With the initiation of the PRDA process, we have seen more competition and a significant decrease in disposal proposal costs since we first began paying for services in FY 2001.

As you may know, the President's budget includes $11 million to support MARAD's continued efforts to eliminate high risk ships and significantly mitigate the environmental threat of oil discharge at the fleets. Adequate funding and aggressive pursuit of all cost effective disposal alternatives is especially important given the projections that approximately 47 additional vessels will be added to MARAD's fleets as non-retention, obsolete vessels over the next five years.

Our program currently focuses on removing all vessels that have a high or moderate risk as soon as possible. Having all disposal alternatives available to MARAD and the necessary funding in place to ensure that obsolete vessels can be disposed of at a rate greater than obsolete vessels coming into MARAD's fleet will help us achieve these mutual goals. Mitigating the risk by removing the risk is what the Department of Transportation and the Maritime Administration intends to achieve.

Thank you for the opportunity to discuss the disposal of obsolete Government vessels today. I would be pleased to answer any questions you may have at this time.

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