Page 8: of Maritime Reporter Magazine (March 2003)

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News Analysis

Title XI: Left Out in the Cold

Congress discontinues the credit insurance program relied upon by U.S. shipowners for more than 65 years

By H. Clayton Cook, Jr.

Title XI Credit Insuranee Discontinued

When the Conference Report for the Omnibus

Spending Bill, which provides funding for the federal government through September 30, 2003, was released on the February 13, 2003. it was there for all to see.

The House and Senate Conferees had zeroed out appropriations that would have allowed MarAd to con- tinue a 65-year old program to assist U.S. shipowners in seeking private sector debt financing for new vessel construction.

The Title XI Program

The MarAd Title XI program was enacted in 1938 to provide a way for U.S. flag shipowners to borrow money in the private sector to build ships to meet national transportation needs. It was not a government "grant" or "give away." The shipowner purchased a

MarAd contract to insure payment of the shipowner's debt to the private sector lender in the event the shipowner defaulted. MarAd "mortgage insurance" was changed to a Treasury "guarantee of payment" in 1972. The language change was cosmetic. Treasury "guarantee of repayment" had more appeal than

MarAd's "insurance of repayment."

From 1938 through 2002 the owners of more than 90 percent of our new Blue Water and Great Lakes com- mercial vessels have relied upon this MarAd program of repayment guarantees so that the ship owner could borrow in the private sector at reasonable interest rates and with debt maturities matched to vessel economic lives. Year in, year out, in most but not all years.

MarAd earned a profit on these insurance/guarantee transactions. And in recent years. MarAd has been required each year to pay this profit over to the

Treasury. MarAd must now obtain a yearly appropria- tion to fund the actuarial risk associated with Title XI guarantees. Yes, MarAd must turn its profit over to

Treasury each year, and then (without regard to these profits) it must seek a yearly appropriation, through the

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H. Clayton Cook, Jr., BS

Princeton University, LL.B

The University of Virginia, is a Senior Counsel in the

Washington, D.C. offices of

Fulbright & Jaworski L.L.P.

Mr. Cook served as

General Counsel of the

Maritime Administration during the Nixon and Ford

Administrations and over- saw the implementation of the Capital Construction

Fund provisions of the Merchant Marine Act of 1970, and the drafting of the Federal Ship Financing Act of 1972. He has had more than 30 years of experience in advising domestic and foreign clients on the construction and financ- ing of U.S. flag vessels in transactions totaling more than $3 billion. Mr. Cook's email address is [email protected]

Congress. For FY 2002 the Bush Administration's budget as submitted to Congress provided "0" for Title

XI, and this was so for FY 2003, and for FY 2004.

OMB has stated that it intends to terminate the Title XI program. OMB wishes to hold the line on "nonessen- tial" expenditures and this program is corporate wel- fare. The action of the Omnibus Spending Bill

Conferees suggests that OMB may have finally won its battle to terminate Title XI. The Shipbuilders Council of America (SCA) has acted to organize a meeting of shipowners and other private sector interested parties to explore what can be done to resuscitate this worth- while program.

National Transportation Needs

As the U.S. Department of Transportation and

Congress work to develop transportation policies to meet 21st Century needs, perhaps the most difficult problems are those associated with traffic congestion on the Interstate highways parallel to our Atlantic,

Pacific and Gulf coasts. Interstate 95, 1-5 and I-10 carry traffic far beyond their design capacities. In met- ropolitan areas, which these highways intersect, the combination of long distance and local traffic slows vehicle movements to a crawl. More traffic is on the way. Additional highway lanes and intersections will not solve these problems. Properly fashioned water- borne trailer and container services and passenger ferry operations can and should. MarAd sponsored a pro- gram on these Short Sea and ferry solutions in New

York City in November 2002. Presentations on the merits of these waterborne solutions were convincing.

But no one spoke to their financing. Perhaps one should not be surprised. The problem is a difficult one.

Maritime transportation projects have only infrequent- ly provided security sufficient or returns adequate to attract substantial private sector equity or long term debt financing. The vessels to be built to these coast- wise services will have useful lives in excess of 25 years. Commercial asset-based vessel financing, if

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