WASHINGTON WATCH: A Tale of Two Fleets

By Jeff Vogel

Mixed Government Support for U.S. Shipbuilding.

It has been a busy start to the 116th Congress for the U.S. shipbuilding industry, with three congressional hearings in early March focused on the industry’s role as a critical component of the U.S. national security industrial base. In addition, the Consolidated Appropriations Act, 2019, which was signed into law on February 15, contained mixed news for shipbuilding programs. Through the congressional hearings and enacted legislation, two opposing themes have emerged. First, on the positive side, there is strong support for domestic shipbuilding projects to recapitalize U.S. government-owned fleets. Second, on the negative side, support for commercial projects in U.S. shipyards remains intermittent and falls well short of the support shown by foreign governments for their domestic shipbuilding industries.

U.S. Government Sealift Fleet
Hearings before (1) the House Subcommittee on Coast Guard and Maritime Transportation, (2) a joint session of the House Subcommittee on Seapower and Projection Forces and Subcommittee on Readiness, and (3) the Senate Committee on Commerce, Science, and Transportation, provided opportunities for leadership from the Maritime Administration (MARAD), United States Transportation Command (USTRANSCOM), U.S. Coast Guard (USCG), together with members of the maritime industry, to educate Congress on the strategic and economic importance of America’s shipyards.

A constant theme through all three hearings was the critical need to recapitalize the federal government’s organic sealift fleet, comprised of MARAD’s 46 ship Ready Reserve Force (RRF) and the Military Sealift Command’s 15 ship Surge Sealift Fleet. Disturbingly, as emphasized by USTRANSCOM Commander General Stephen Lyons, 19 of the 61 vessels in the combined fleet (31%) are either “not mission capable” or have lost their USCG Certificate of Inspection. Combined with the demonstrated U.S. mariner shortage, and a continually shrinking U.S.-flag international commercial fleet, the United States is woefully unprepared to meet its military’s sealift requirements.

Maritime Administrator Mark Buzby testified that MARAD has adopted a three-prong approach to recapitalize the U.S. government sealift fleet, which includes the purchase of used vessels from the open market for rebuild in U.S. shipyards, and building new vessels domestically. Continuing his trend as a champion for the U.S. shipbuilding industry, Rep. John Garamendi (D-CA) emphasized the need at both House hearings for U.S. shipyards to have a full role in repurposing any used vessels purchased by MARAD.  

MARAD has taken the first step to implement its plan, issuing a Request for Information (RFI) on February 14 to identify existing RO/RO vessels that could replace its aging RRF capacity.  According to the RFI, the vessels must be available for acquisition between July 1, 2019 and December 31, 2022.  If MARAD follows through on these plans, American shipyards potentially can expect an influx of rebuild work from the federal government in the coming years.  Unfortunately, Administrator Buzby also testified that MARAD is likely five or more years away from pursuing any new build projects to recapitalize the RRF.

However, while new-build RRF ships are unlikely, there are other areas where new build projects will be moving forward.  For example, the Consolidated Appropriations Act, 2019, contained $300 million in funding for the construction of a second National Security Multi-Mission Vessel (NSMV), to replace Massachusetts Maritime Academy’s T/S KENNEDY.  During the recent hearings, Rep. Randy Weber (R-TX) also voiced his strong support for Fiscal Year 2020 funding for a third NSMV to replace Texas A&M Maritime Academy’s T/S GENERAL RUDDER. The Act also included $655 million for production of the first USCG Polar Security Cutter (PSC) and an additional $20 million for long lead time materials for a second PSC. Congress also appropriated $100 million for additional USCG Fast Response Cutters.

In addition to these prospective and funded projects, during the Senate Commerce Committee hearing, Senator Tammy Baldwin (D-WI) voiced her intent to reintroduce the Made in America Shipbuilding Act, which would require all federal government contracts for the construction or conversion of a vessel to be performed in U.S. shipyards. The bill also requires certain enumerated vessel components included in such projects to be constructed domestically. Collectively, it appears that the U.S. government may be an increasing part of U.S. shipyards’ customer base in the coming years.

Support for Commercial Shipbuilding
While the news out of Washington is relatively positive for government projects, support for commercial projects is less encouraging. For example, the Governor of Puerto Rico has requested a 10-year waiver of the Jones Act, arguing the waiver’s necessity to support the transportation of liquefied natural gas to Puerto Rico. Troublingly, the Executive Branch has not yet denied the waiver. Members of the maritime industry testified that a waiver of the Jones Act would (among other impacts) undermine the domestic shipbuilding industry and negatively impact our national security. More to the point, members of Congress and the shipbuilding industry strenuously maintained that there is no national defense basis for the waiver, as required by federal law.

Following the theme of questionable support, the Consolidated Appropriations Act again failed to provide funding for MARAD’s Federal Ship Financing Program (Title XI). The program currently has $32 million in available subsidy, equating to approximately $504 million in loan guarantees. However, with the recent approval of Title XI financing for Matson’s two containerships currently nearing completion at Philly Shipyard, the program is virtually out of money. Accordingly, vessel owners will have to continue relying on the commercial market to finance new vessel construction projects.

The news is not all negative, however, with the Consolidated Appropriations Act providing $20 million in funding for the Small Shipyard Grants program. MARAD issued a Notice of Funding Availability on March 8th, with applications due by April 15th. In addition, MARAD’s two tax deferral programs – the Capital Construction Fund (CCF) and Construction Reserve Fund (CRF) – remain intact despite recent changes to the Internal Revenue Code. When enrolled in these programs, U.S. vessel operators can continue to defer tax on operating income and/or vessel sale proceeds, depending on the vessel operator’s trade, to support shipbuilding projects.  

Thus, what ultimately emerges is a mixed tale of support for the U.S. shipbuilding industry. While the government is taking positive steps to invest in the recapitalization of its own fleets, it is also providing, at best, tacit support for commercial shipbuilding projects. In stark contrast, as Congress heard during recent testimony, countries such as China and Korea are providing billions in subsidies to their domestic shipyards as critical component of their overall national security strategy. Without similar investment, recent Congressional statements about the strategic national importance of our domestic shipbuilding industry are meaningless.    

Jeff Vogel is a Member in Cozen O’Connor’s Transportation & Trade Group.  He can be reached at jvogel@cozen.com.

This article first appeared in the April 2019 print edition of MarineNews magazine.

Marine News Magazine, page 24,  Apr 2019

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