Statement of

John E. Jamian
Acting Maritime Administrator
U.S. Department of Transportation
Maritime Administration

Hearing on

Transforming the Navy

Before the

Subcommittee on Readiness
Committee on Armed Services
U.S. House of Representatives

April 6, 2006

Thank you for the opportunity to submit this statement regarding the Maritime Administration.  The mission of the U.S. Department of Transportation’s (DOT) Maritime Administration (MARAD) is to strengthen the U.S. maritime transportation system - including infrastructure, industry and labor - to meet the economic and national security needs of the nation.  MARAD programs promote the development and maintenance of an adequate, well-balanced United States merchant marine, sufficient to carry all of the nation’s domestic waterborne commerce and a substantial portion of its foreign waterborne commerce.  MARAD vessels serve as a naval and military auxiliary in time of war or national emergency.  MARAD also seeks to ensure that the United States maintains adequate shipbuilding and repair services as well as efficient ports and intermodal connections between our water and land transportation systems.

I cannot stress enough the importance of our mission.  The United States, as the world’s largest trading nation, accounts for nearly 20% of the world’s oceanborne trade.  Foreign trade and domestic cargo are conservatively estimated to grow at an annual compounded rate of 3.3%.  This growth in cargo tonnage will double the throughput that the Marine Transportation System (MTS) will be required to handle by 2020.   This is no small amount since the MTS handled nearly 2.3 billion tons of waterborne cargo in 1999, including 1.2 billion tons of international cargo and 1.1 billion tons of domestic cargo.

Thus in today’s world, ensuring the security of American ports is even more important.  This includes maintaining and upgrading our port and intermodal transportation infrastructure to meet the needs of a competitive global industry, by continuing development and implementation of the MTS Initiative, which consists of waterways, ports, and their intermodal connections.  MARAD coordinates its efforts with other Federal entities that have responsibilities for maritime transportation including the Committee on the Marine Transportation System, which is a White House cabinet-level committee.  We are also working very closely with industry to identify system requirements through the MTS National Advisory Committee, which advises the Secretary of Transportation. 

MARAD both serves and defends America.  In this regard, MARAD maintains a fleet of cargo ships ready to serve in case of conflict or national emergency, known as the Ready Reserve Force (RRF).  When activated, these ships operate under an agreement with Department of Defense (DoD).  The Military Sealift Command (MSC) assumes operational control (OPCON) of the vessels on behalf of USTRANSCOM.  OPCON means that MSC controls the ship’s schedule and cargo, MARAD retains management of the vessel through a ship manager contract.  Forty RRF ships supported the initial deployment of our Armed Forces in Iraq, providing nearly 13,000 operational days of service including transporting troops and supplies in support of our military.

Specifically, the RRF is a fleet of documented cargo vessels owned by the U.S. Government and under the jurisdiction of the Secretary of Transportation.  By statute, DOT/MARAD is required to contract with commercial ship managers to maintain, operate and crew RRF vessels.  Pursuant to a Memorandum of Understanding (MOU) with the DoD, the RRF is maintained by DOT in a readiness status to support DoD contingencies.  Ship repairs are acquired by MARAD’s ship managers under approved commercial purchasing systems.  Best value and competition are significant considerations.

In the early 1980s, the U.S. Navy started “Afloat Prepositioning” to improve the response time for the delivery of urgently needed equipment and supplies to a theater of operation.  Since the mid-1990s, MARAD has had as many as 11 vessels supporting the Afloat Prepositioning Force (APF) in locations such as the Mediterranean Sea, Persian Gulf, Diego Garcia, Saipan and Guam.

Some Members of the Committee have expressed interest in the operating procedures of the SS CHESAPEAKE, SS PETERSBURG, and SS CAPE JACOB.  I would like to briefly discuss those procedures.  These three MARAD vessels are part of the APF, are owned and operated by MARAD, and are provided to the DoD under the MOU.

The tankers, CHESAPEAKE and PETERSBURG, are each equipped with Offshore Petroleum Discharge Systems (OPDS) and have unique capabilities not found on commercial tankers.  The OPDS was designed to deliver petroleum products to military forces in areas where port facilities are damaged or nonexistent.  Within 48 hours of arrival on station, OPDS can be installed and begin pumping 1.2 million gallons of petroleum product per day from up to four miles offshore and at water depths up to 200 feet.  The tankers can remain on station pumping continuously for up to 180 days and be replenished by normal commercial tankers.

The CHESAPEAKE and PETERSBURG have provided pre-positioned fuel for the Defense Logistic Agency and, within 24 hours of notification, can be en route to a crisis area with the ability to deploy OPDS upon arrival.  Since being in APF service, these vessels provided support for Operation Iraqi Freedom for approximately 60 days.  Additionally, they are utilized by U.S. and allied forces for military exercises and military training.     

The CAPE JACOB has been with the APF since arriving in Diego Garcia in 1998.  It is the last of four C4-S-1u Class vessels maintained by MARAD.  The primary mission of the CAPE JACOB is as a floating ammunition dump, forward deployed in support of United States Pacific Command (USPACOM).  Its secondary mission is to transfer the ammunition at sea using the Modular Cargo Delivery System (MCDS).  

The MCDS is a mechanized cargo transfer unit that acts as a combination elevator and winch, hoisting pallets of ordnance into the air and then across wire lines strung between two ships steaming side-by-side.  Two MCDS units are installed on the CAPE JACOB.  The ship can also conduct vertical replenishment with helicopters picking up pallets from the "helo" deck and transferring them onto another ship.  In 2003, after supporting the Navy during Operations Enduring Freedom and Iraqi Freedom for 202 days, the CAPE JACOB was deployed to support USPACOM.

It is MARAD’s mission to promote all aspects of the American maritime industry.  Consequently, 95 percent of the repairs to the RRF fleet have been performed in U.S. shipyards.  Federal law requires that naval vessels and vessels under the jurisdiction of the Secretary of the Navy homeported in the United States be repaired in the United States or Guam.  As a U.S. District Court ruled in December 2005, RRF vessels do not fall within the scope of that statute.  Recognizing the importance of the U.S. shipbuilding industry, MARAD’s contracts regarding RRF vessels still require that repairs be made in U.S. shipyards except for emergency, or mission essential repairs, or for pre-positioned ships which are deployed overseas, or for any vessel forward deployed outside of the United States.

For example in 2005, repairs to the PETERSBURG were made in Singapore in order to ensure its continued readiness.  The PETERSBURG, a very large, OPDS tanker pre-positioned in Guam, was dry-docked in Singapore in August 2005.  Shipyards in both Hawaii and Guam were unable to perform the repairs during the required performance period.  Specifically, Guam Shipyard’s dry-dock was unavailable until November 2005 and could not complete work until February 2006, which would have resulted in the PETERSBURG being unavailable for its specialized mission for over five months.  In addition to being unavailable during the required performance period, Guam Shipyard’s bid was three times more than the successful offeror.

In closing, I would like to call to the Committee’s attention the DOT and MARAD’s activation of RRF ships and training ships as part of our nation's response to the devastation hurled at the entire Gulf Coast Region by Hurricanes Katrina and Rita.  This unprecedented activation by Secretary Mineta in concurrence with Secretary Rumsfeld demonstrated that when called, MARAD and our ships were ready.

MARAD's ships provided the people of the stricken Gulf Coast with urgently needed supplies, clean water, electricity generation and oil-spill cleanup assistance, as well as food and shelter for rescue and recovery workers.  In all, 11 MARAD ships provided 270,000 meals and 83,165 berth nights for recovery workers and evacuees. The last of the ships left the Gulf Coast area the first week of March, 2006; some of those ships are already in service supporting our armed forces.  Others have returned to their regular duties as training ships at State maritime academies, while some returned to their homeports to be held in reserve until they are needed again.

Unquestionably, MARAD's RRF has lived up to the term “ready” -- and just as importantly the Ready Reserve Force has proven to be a cost-effective program for the United States.

Thank you for offering me the opportunity to provide this statement for the record.  I am happy to answer any questions the Committee may have.

U.S. DEPARTMENT OF TRANSPORTATION
MARITIME ADMINISTRATION

STATEMENT OF

SEAN T. CONNAUGHTON
MARITIME ADMINISTRATOR

BEFORE THE

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
SUBCOMMITTEE ON COAST GUARD AND MARINE TRANSPORTATION
U.S. HOUSE OF REPRESENTATIVES

ON THE

MARITIME ADMINISTRATION’S BUDGET REQUEST FOR FISCAL YEAR 2009

FEBRUARY 26, 2008

Mr. Chairman and Members of the Committee:

I welcome the opportunity to appear before you today to discuss the Maritime Administration’s budget request for Fiscal Year 2009.

We are seeing important and exciting changes in the U.S. maritime industry, and at the Maritime Administration.  The marine transportation industry is a highly sophisticated, global, intermodal transportation network that is absolutely vital to America’s economy and continued prosperity.  The industry is in a period of renewal and expansion.  The Class of 2007 graduates from the Nation’s maritime academies found many more opportunities for employment in the maritime industry than they have found in years past.  Private industry is pointing the way toward greater use of our waterways to relieve congestion on the landside transportation system.

A half-century ago, the maritime industry pioneered the use of the container, now the standard instrument of trade all over the world.  That paved the way for double-stacked trains and the development of door-to-door logistical operations, software and tracking systems. This evolution transformed the way we think about the business of moving freight and people, and has completely altered the transportation landscape and the role of transportation in our lives.  Marine transportation is now a system of systems—an integrated network, not just within the United States, but around the world. It must operate seamlessly.

The Maritime Administration is developing a framework to help guide decisions on federal, state, local, and private involvement and investment in the overall Marine Transportation System.  To that end, the Maritime Administration has realigned its headquarters offices, and established presence at the major U.S. gateway ports.  These offices, which will eventually be located at 10 of the largest American ports, will identify bottlenecks and ways to improve freight movement.  They will work with all stakeholders, promoting collaboration, and focusing particularly on planning and environmental issues. 

The Maritime Administration’s efforts this year have focused on issues with great possibilities for transforming the maritime industry and the transportation system: greater use of the nation’s waterways, or the Marine Highway; initiatives that provide more opportunities for training and employment of American mariners; and facilitating the upgrading of port infrastructure. 

In order to help ensure continued competitiveness, we must continue to tailor our maritime policy to the challenges of the 21st century.  At this time, I would like to address the Maritime Administration’s operations and training budget, summarize other provisions contained in the President’s budget, and mention some of the Maritime Administration’s accomplishments during the past year.

Operations and Training

The total budget request for the Maritime Administration for FY 2009 is $313,379,000, $117,848,000 of which is for the agency’s operations and training.  Operations and training activities include the costs incurred by headquarters and region staffs in the administration and direction of the various Maritime Administration programs such as the Maritime Security Program; port, intermodal and environmental activities; maritime labor, training and safety activities; monitoring compliance with cargo reservation statutes; administration of capital construction funds; and negotiation of agreements, understandings and arrangements to reduce barriers that restrict American access to foreign ports and markets. 

The operations and training funds requested also include $61,358,000 for the operation of the United States Merchant Marine Academy (USMMA, Academy) at Kings Point, New York, and $10,987,000 for continuing assistance to the six state maritime academies.  In FY2009, funding of $26,794,000 is requested for salary and benefits at the Academy, an increase of $1.1 million.  The funding request for Academy operations is an increase of $3.5 million, spread over several different operational areas.  Some of the areas funded under this budget activity include:  the Academy food service contract; uniforms; medical requirements; IT hardware replacements and improvements; equipment for accreditation; janitorial services; transportation leases; environmental and occupational safety; and maintenance and repair needs.  

The FY 2009 budget request for the Academy proposes funding for the Capital Improvements Master Plan (CIP) in the amount of $8.2 million to support high-priority maintenance and repair projects such as Americans with Disabilities Act renovations; new roofs for Academy buildings; and other priority maintenance and repair projects.  Major capital improvements have been postponed while we reexamine priorities in the CIP and complete resolution of financial management issues with Academy administration.   

The USMMA and the six State maritime schools are the only educational institutions that produce merchant marine officer graduates with a four-year bachelors degree.  These graduates have completed coursework in marine engineering and navigation; obtained a U.S. Coast Guard merchant marine officer’s license; and practical shipboard training.  They have first-hand experience in the mariner’s environment, thus enabling them to enter this professional workforce with confidence and self-reliance.  In peacetime, they create and operate efficient, cost-effective marine transportation systems.  In times of conflict, they crew the ships that support our troops.   

Since we are on the topic of the Academy and State schools, I cannot miss the opportunity to stress the importance of maritime education and training.  In today’s global economy, the maritime transportation system is becoming an even more vital part of our Nation’s prosperity than it has ever been before.  In 2006, foreign trade accounted for nearly 22 percent of our gross domestic product (GDP).  Estimates project that by 2020, foreign trade will account for almost 35 percent of our national GDP.  This will continue to place an emphasis on the marine transportation system as 95 percent of all foreign trade is moved by ship.

With an expanded reliance on foreign trade to the American economy, it is critically important to encourage and sustain American involvement and investment in the marine transportation system.  This is important for the economy during times of peace and a matter of survival during times of war or national emergency. 

Without trained and qualified people, the marine transportation industry cannot perform its essential role in the U.S. economy.  Such a workforce must include licensed and unlicensed seamen, shore side and shipyard workers and managers and operators of ships and facilities.  This need is especially acute given the global shortage of skilled seafarers.

An assessment of the current pool of licensed seafarers shows an adequate supply of officers for the current manning of the U.S. Jones Act fleet as well as the strategic sealift needs of our military.  However, the ability to meet these needs is quickly reaching a critical juncture.  Today, nearly 7,000 licensed American officers exist to crew our Jones Act and strategic sealift fleets with only 3,000 having sailed in the past two years.  The average age of a licensed officer is over 42 years old and the average has gotten older over the past few years.  The average Master and Chief Engineer is 51 years old, while the average Third Mate or Third Assistant Engineer (entry-level positions) is 33 and 35 years old, respectively. 

All of these factors lead to one conclusion; the United States must increase its pool of qualified licensed officers in the next ten years or face drastic repercussions for both national and economic security.  Those repercussions include an inability to move the military in time of war or emergency and the loss of an American presence in the international maritime sector.  The FY 2009 request indicates the Administration’s support for both the USMMA and the State Maritime Schools, and specifically addresses this concern by proposing to enhance the Student Incentive Payments (SIP) program at the State Maritime Schools with an administrative provision that amends the program to increase the annual SIP payment to students from $4,000 to $8,000 per academic year.

Maritime Security Program

The primary purpose of the Maritime Security Program (MSP) is to provide the Department of Defense (DOD) with assured access to commercial U.S.-flag ships crewed by U.S. citizen mariners to support national security requirements during war or national emergency.  DOD recognizes the importance of a strong partnership with the commercial maritime industry to ensure our nation’s defense and transportation needs are met.  The MSP also ensures that the intermodal assets of current U.S.-flag ship operators will be readily available to DOD, and plays an important role in ensuring that our nation has enough mariners.  The MSP fleet contributes approximately 2,400 mariner positions which are critical for national security crewing requirements.  With a diminished U.S.–flag merchant marine, a substantial portion of the pool of U.S.-citizen mariners would disappear, impairing our ability to crew Ready Reserve Force ships and other government-owned ships needed for national security.    

            Recently, MSP ships have contributed greatly to Operation Enduring Freedom and Operation Iraqi Freedom.  A total of 79 U.S.-flag commercial ships (including 63 current or former MSP ships) have either been employed by the Military Sealift Command (MSC) or the Military Surface Deployment and Distribution Command (SDDC) to transport military cargo.  SDDC reports that since September 11, 2001, U.S.-flag commercial ships have delivered over 360,000 twenty foot equivalent units (TEUs) of containerized equipment and supplies to support U.S. troops in Iraq and Afghanistan.  In addition, 34 of the 63 MSP ships utilized by MSC and SDDC also supported the rebuilding of Iraq.   

Under the FY2009 request, the MSP would continue to be authorized at its full funding level of $174,000,000.  The Maritime Security Act of 2003 authorized 60 ships for the MSP with payments up to $2.9 million per ship for FY 2009.  These funds will solely provide for payments to MSP operators for the 60 enrolled ships.  Program administration salaries and benefits are funded by the Operations and Training account.  

            MSP participants signed operating agreements with the Maritime Administration that provide for escalation of MSP payments to $2.9 million per ship per year in FY 2009.  Escalating payments were designed to offset the impact of inflation and to provide incentive for MSP operators to reinvest and upgrade their MSP fleet with newer, more modern and efficient vessels.  Since October 1, 2005, ten MSP ships have been replaced with newer ships and an additional 19 ships currently in the program will be replaced with newer vessels before the MSP authorization expires in 2015.       

Ship Disposal

By law, the Maritime Administration serves as the U.S. Government’s disposal agent for merchant-type vessels of 1,500 gross tons or more, and has custody of approximately 120 obsolete ships owned by the Federal government that are available for disposal.  These obsolete vessels are located at the James River Reserve Fleet site in Virginia, the Suisun Bay Reserve Fleet site in California and the Beaumont Reserve Fleet site in Texas

These vessels pose a risk to the local environment due to the presence of residual fuel, asbestos and solid polychlorinated biphenyls (PCBs); therefore, the disposal of these obsolete vessels continues to be one of the Maritime Administration’s highest priorities.  Our budget contains a request for $18,000,000 in FY 2009 for ship disposal.  Specifically, funding of $15 million would enable the Maritime Administration to dispose of 14 vessels from our inventory and defray costs to develop and implement a risk mitigation plan for compliance with the National Invasive Species Act, and for testing and containment requirements related to the Clean Water Act. 

Funding of $3 million would allow the agency to continue activities required to bring the Nuclear Ship Savannah (NSS) nuclear facilities into conformance with Nuclear Regulatory Commission SAFSTOR standards.  SAFSTOR is the pre-decommissioning condition in which a non-operating nuclear power plant is safely husbanded for the period of time between cessation of operations and dismantlement, disposal and license termination.  The NSS was originally laid-up and placed in retention long before the industry gained any substantial SAFSTOR experience.  As a consequence, it is now known that the NSS requires additional work before it can be considered satisfactory for an additional period of extended retention.  Such work includes the reduction of transient combustibles, reduction of radiological inventory, maintenance of the facility containment structure, and continued routine radiological surveillance and monitoring. 

The Maritime Administration will continue to investigate all alternatives to expedite the disposal of its obsolete vessels at the least cost, and where possible on a cost-recovery basis, while giving consideration to worker safety and the environment.  We intend to continue to utilize domestic recycling as the primary ship disposal method and will dispose of high and moderate priority ships that are available for disposal during FY 2009 through domestic recycling.  Disposals through artificial reefing, deep sinking of ships with the U.S. Navy and donation to not-for-profit groups will also be used to the maximum extent possible.  As opportunities arise, we will also continue to work with domestic and international organizations to accomplish vessel condition assessments, hazardous materials identification, waste stream minimization, and applied technology testing on our obsolete vessels.  We anticipate that in the future these activities could result in improved overseas hazardous materials remediation and ship recycling and lead to additional opportunities for environmentally safe and cost-effective vessel disposal internationally.  Currently, there are no foreign facilities qualified to compete for future ship recycling contracts.

Recently, Congress again stressed the importance of ship recycling in the National Defense Authorization Act of 2008, which requires that within 30 days of enactment, the Secretary of Transportation convene a working group to review and make recommendations on best practices for the storage and disposal of obsolete vessels owned or operated by the Federal Government.  This authority has been delegated to the Maritime Administrator, who will convene the working group.  I have already issued invitations to participate in the first meeting of the working group, which will take place in early March.  Participants will include senior representatives from the Coast Guard, the Environmental Protection Agency, the National Oceanic and Atmospheric Administration, the United States Navy, and other Federal departments, and agencies.  Concerned State environmental agencies may also be requested to participate.  Among the vessels to be considered by the working group are federally owned or operated vessels that are to be disposed of or recycled; to be used as artificial reefs; or to be used for the Navy's Ship Sinking Exercise Program (SINKEX).

The working group will examine current storage and disposal policies, procedures, and practices for obsolete vessels owned or operated by Federal agencies; examine Federal and State laws and regulations governing such policies, procedures, and practices and any applicable environmental laws; and within 90 days after the date of enactment of the Act, submit a plan to Congress to improve and harmonize practices for storage and disposal of such vessels, including the interim transportation of such vessels.  The plan will include a description of existing measures for the storage, disposal, and interim transportation of obsolete vessels owned or operated by Federal agencies in compliance with Federal and State environmental laws in a manner that protects the environment; a description of Federal and State laws and regulations governing the current policies, procedures, and practices for the storage, disposal, and interim transportation of such vessels; recommendations for environmental best practices that meet or exceed, and harmonize, the requirements of Federal environmental laws and regulations applicable to the storage, disposal, and interim transportation of such vessels; recommendations for environmental best practices that meet or exceed the requirements of State laws and regulations applicable to the storage, disposal, and interim transportation of such vessels; procedures for the identification and remediation of any environmental impacts caused by the storage, disposal, and interim transportation of such vessels; and recommendations for necessary steps, including regulations if appropriate, to ensure that best environmental practices apply to all such vessels.

As soon as practicable after the date of enactment of the Act, the head of each Federal department or agency participating in the working group, in consultation with the other Federal departments and agencies participating in the working group, shall take such action as may be necessary, including the promulgation of regulations, under existing authorities to ensure that the implementation of the plan provides for compliance with all Federal and State laws and for the protection of the environment in the storage, interim transportation, and disposal of obsolete vessels owned or operated by Federal agencies.  

The Act requires the Secretary of Transportation and the Secretary of Defense, in consultation with the Administrator of the Environmental Protection Agency, ensure that environmental best practices are observed with respect to the storage, disposal, and interim transportation of obsolete vessels owned or operated by the Department of Defense and that requirements of environmental law are to be complied with in the implementation of Section 3503.

To facilitate taskings of the working group, the Maritime Administration also has undertaken substantial environmental management actions to upgrade its ship disposal program.  For example, the Environmental Excellence Initiative, inaugurated one year ago, includes an interdisciplinary and comprehensive study to recommend best management practices for the fleet for incorporation into our action plan and the Environmental Assessment of fleet management and disposal.  These efforts, as well as closer coordination with other interested agencies, also will facilitate the working group and the adoption of a unified Federal position before various state interests and assist in the resolution of the current lawsuit brought by the Natural Resources Defense Council.

As you can see, Mr. Chairman and Members of the Panel, we have put a great deal of thought and effort into determining the best options for disposing of the backlog of obsolete NDRF vessels.  We are making progress.  Since October 1, 2007, seven vessels have departed the fleet sites – six of those since January 1, 2008.  I appreciate your continued interest and request your support in this matter, and assure you that ship disposal is of utmost importance to the Department.

 The National Defense Reserve Fleet and the Ready Reserve Force

      The National Defense Reserve Fleet (NDRF) was established in 1946 to meet reserve sealift requirements for emergencies and national defense purposes.  NDRF vessels are primarily located at three anchorages:  James River, Virginia; Beaumont, Texas; and Suisun Bay, California.  There are currently 236 ships in the NDRF, 44 of which comprise the Ready Reserve Force (RRF).  RRF ships are maintained in various states of readiness by commercial ship managers and can sail in either 5 or 10 days.   The Maritime Administration also assumed management of 8 Fast Sealift Ships from the Military Sealift Command in FY08.  These vessels will become permanently assigned to the RRF commencing FY09.

      The majority of RRF ships are located at port facilities along the East, West and Gulf coasts of the country in proximity to likely loadout ports established by the DOD.  When activated, RRF ships are fully crewed by civilian merchant mariners working to support DOD missions.  Our RRF ships are called upon to play a critical role delivering supplies to support our troops and to provide assistance during other crises.  In the Gulf War, Somalia, Haiti, Bosnia, and hurricane-ravaged Central America, the RRF carried out DOD support missions.  Ten NDRF vessels participated in relief and recovery efforts during Hurricanes Katrina and Rita, where NDRF vessels served over 260,000 meals and provided 83,165 bed rotations over a six month period. 

      Readiness and reliability of ships in the RRF are carefully measured.  Readiness is demonstrated by conducting maintenance sea trials during the year, and tested by conducting “No-Notice” turbo activations at the order of DOD.  The Maritime Administration’s goal is to successfully activate the RRF ships under no-notice conditions 100% of the time.  In FY 2007, there were 8 such tests with all of them meeting or exceeding their activation timelines.  Consistent, high operational reliability is also essential for effective support of DOD, and the goal is to maintain 98% operational reliability.  During FY 2007, the RRF achieved a reliability of 99.5% with 17 ships being called and operated for 1,711 days with only 8 days of unscheduled downtime.

America’s Marine Highways

      Over two billion tons of goods produced or consumed in the United States move through our nation’s ports and waterways each year.  This volume is expected to more than double over the next 20 years.  The number of waterway recreational users is also expected to grow by over 65 percent to more than 130 million annually in the next 20 years, and high-speed ferry transportation is experiencing rapid growth in response to land-transport congestion.   

      An important element of our Marine Transportation System (MTS) is “short sea transportation.”  The recently-enacted Energy Independence and Security Act of 2007 (Energy Bill) directs the Secretary of Transportation to “establish a short sea transportation program.”  This law represents significant progress for America’s Marine Highway, and provides another valuable tool for the Department’s initiative to reduce congestion.

The primary focus of the Energy Bill is to expand the production of renewable fuels, reduce dependence on oil, and address global climate change, along with increasing energy security and expanding the production of renewable fuels.  When establishing the program, the Secretary of Transportation is directed to designate short sea transportation projects to mitigate landside congestion.  Eight actions will be necessary to implement the bill:    

• Designation of short sea transportation routes as extensions of the surface transportation system;
• Designation of projects if they offer waterborne alternatives that reduce congestion;
• Memorandums of agreement between the Secretary and other Federal entities to transport federal cargoes via designated project services;
• Consultation with Federal, state and local governments to develop strategies to encourage the use of short sea transportation for passengers and cargo;
• Consultation with  shippers and transportation logistics entities to develop proposals for short term incentives;
• Establishment of a board of Federal, state and local governmental entities to identify and seek solutions to impediments hindering use of short sea transportation;
• Conducting research regarding environmental and transportation benefits, technology, vessel design and other improvements to reduce emissions, increase fuel economy and lower costs, and identify solutions to impediments to specific designated projects, and;
• Making Short Sea Transportation vessels qualified for Capital Construction Fund benefits.

The Maritime Administration has already begun work on this important initiative.  We are working with the Department to implement interim regulations by March 16, 2008, as required by the Energy Bill, with final regulations due by October 1, 2008.  A report to Congress is also required by December 19, 2008.  Successful implementation of this program will require both commitment and resources.  I have directed my staff to identify the personnel and funding requirements for submission in future budget proposals.  The President’s 2009 budget includes new funding of $311,000 to further initiatives to relieve congestion at the nation’s ports and to promote short sea shipping.  Examples of specific activities intended to increase use of America’s Marine Highway include helping to identify adequate terminal facilities for proposed operations; bringing shippers and carriers tog ether to generate cargo commitments; identifying appropriate Federal cargoes; and removing other disincentives to the Marine Highway. 

Shipbuilding

      As you know, the Maritime Administration administers a Government guaranteed loan program, commonly referred to as the Title XI program.  Title XI loan guarantees enable shipowners and shipyards to borrow private sector funds on more favorable terms than might otherwise be available.  The Budget requests $3.5 million for administration of this program and to manage the existing loan portfolio. 

Conclusion

Recent years have presented MARAD with significant challenges, which I expect to continue in FY 2009.  I believe that the Maritime Administration is up for these challenges, and welcome the opportunity to continue our role in preserving both economic and national security.  Your continued support will help us to do our part in our mission.  This concludes my prepared statement.  I would be happy to address any questions you may have at this time.

##

Department of Transportation

Statement of the

Maritime Administrator
David T. Matsuda

Before the

Sub-Committee on Coast Guard and Maritime Transportation
United States House of Representatives

On the

State of the United States’ Merchant Fleet in Foreign Commerce

July 20, 2010

Good afternoon, Mr. Chairman and Members of the Committee.  Thank you for the invitation to testify on the state of the United States’ Merchant Fleet in foreign commerce, an industry that is vital to the economic and defense security of our Nation.  The Maritime Administration looks forward to working with the Committee to find ways to strengthen our U.S.-flag maritime industry as a whole, including our Jones Act trade.  It is my hope that our discussions today will lay the groundwork for legislative initiatives and policies that will add new permanent capacity to our Nation’s merchant marine.  

The United States is the world’s largest trading nation and our national policy is to maintain a U.S.-flag merchant marine sufficient to carry our waterborne domestic commerce and a substantial part of our foreign commerce.[1]  The portion of our Nation’s international trade carried on U.S.-flag ships, however, has declined from a high of 92.5 percent in 1826 to 57.6 percent 1947 to a low of less than 2 percent today.  In fact, today there are no U.S.-flag carriers listed among the top 20 global carriers. 

In 1947, the U.S.-flag fleet consisted of around 980 privately-owned vessels over 1,000 gross tons and above, representing over 40% of the world’s shipping capacity.  These large U.S. carriers created many of the technological innovations now used by the rest of the world.  For example, one key innovation from the 1950’s was containerization of cargo, an American idea that completely reshaped international commerce.  However, U.S. maritime programs have not been successful in inducing or even maintaining capacity within the Nation’s domestic merchant marine.

Today, there are 115 self-propelled, U.S.-flag ships engaged in the U.S. foreign commerce.  This fleet is composed of 5 tankers, 11 dry bulk, 28 roll-on/roll-off vessels, 61 container ships, and 10 multipurpose ships.  All of these ships participate in the Federal Government’s cargo preference program.  Twelve of the vessels are Jones Act qualified and do not regularly carry foreign commerce.  Sixty of them participate in the Maritime Security Program, which has been successful in maintaining the required number of militarily-useful ships and their crews that could be called upon to respond to possible military contingencies.

As the U.S.-flag commercial fleet operating in foreign commerce has declined in number, so too have direct shipboard jobs for American workers.  Further, technological innovations such as increased automation, have reduced average crew sizes from 45 to 20 or less per vessel even as typical vessel capacity has increased.  This impact has been felt in the international and Jones Act trade causing the number of U.S. mariners to decrease from about 69,100 in 1970 to about 20,500 in 2009. 

The primary source of personnel to meet military sealift demands is the commercial U.S.-flag shipping industry.  These men and women crew the government’s Ready Reserve Force and surge vessels which are activated for emergencies like the recent one in Haiti.  As a whole, these mariners are part of an aging workforce, with the average age currently over 42 years. 

The ability of the U.S. merchant marine to respond to major military contingencies worldwide is dependent on adequate U.S.-flag active/reserve sealift resources, including  a skilled U.S. maritime labor pool.  In coordination with the U.S. Coast Guard, our mariner outreach program tracks maritime workforce trends.

One method of attracting new individuals to a professional maritime career is through a collegiate maritime program, such as the U.S. Merchant Marine Academy (USMMA) or one of the six state maritime academies located in Texas, California, New York, Michigan, Maine, and Massachusetts.  The Maritime Administration is responsible for directly overseeing the USMMA at Kings Point, New York.  The agency also provides training vessels, student incentive payments, and other support to the six state maritime academies.  These academies offer four-year undergraduate engineering and logistics programs, and their graduates find employment as licensed mariners and in shoreside occupations such as shipyard management and transportation logistics.  Collectively, the USMMA and the six state academies graduate more than 700 highly trained, U.S. Coast Guard licensed deck and engineering officers each year. 

I’d like to take this opportunity to highlight a little known fact about the U.S. Merchant Marine Academy and the state maritime academies – they accepted women earlier than either West Point or Annapolis.   In 1974 the U.S. Merchant Marine Academy became the first federal service academy to enroll women students, two years ahead of the Army, Navy, Air Force or Coast Guard academies. 

The Maritime Administration is also working with 19 maritime high schools around the nation to attract young men and women into the industry by learning about the merchant marine while still in high school.  Last February, I had the opportunity to visit one such high school in Baltimore, Maryland.  I was impressed with the dedication the students at the Maritime Industries Academy demonstrated towards learning about a key component of our nation’s economy: maritime transportation.  These young men and women are the future of this industry and I will be working with the school to help them achieve success.

The Maritime Administration also has a role in implementing international training standards for mariners.  Mariners must receive a significant amount of training to be qualified to work aboard a ship.  In addition, they must receive recurring training to maintain proficiency.  Lastly, the training that mariners are required to have is constantly increasing.  The reason is for this increase is to improve safety, security, and environmental compliance.  

Economic Issues

Our economy depends on the ability of goods, both imports and exports, to move smoothly through the international supply chain.  As President Obama stated on March 11^th, when he launched the National Export Initiative (NEI), the United States exported more than a trillion dollars of manufactured goods in 2008, supporting more than 20 percent of all manufacturing jobs.  There were also exports of nearly $100 billion in agricultural goods.  To facilitate this, the U.S. transportation industry employs millions of people on our ships and tugs, in our ports and shipyards, operating our trucks and railroads, and in related activities.  U.S. trade with the rest of the world is projected to continue growing and reach about 3.2 billion tons by 2038.  Most of these goods, about 75 percent, are now and will continue to be transported by sea.  The Maritime Administration and U.S. merchant marine have a key role to play in the NEI, as the utilization of U.S.-flag ships to carry our commerce is itself a “service export.”

Defense Issues

The U.S. merchant marine has supported every conflict and crisis since our Nation’s founding.  They U.S. mariners are our valuable eyes and ears.  Our national policy calls for a merchant marine capable of serving as a naval and military auxiliary in time of war or national emergency.  Almost 95 percent of our military supplies move by water and over 85 percent of our strategic commodities are imported by water.  Much of this is moved by the military using their own ships or chartered vessels, and under cargo preference laws, a portion is also moved by the merchant marine.  Time and again, the U.S. merchant marine and its citizen mariners have brought the equipment from the fort to the foxhole.  They are among the first into a war zone and the last out.  Of the five Federal service academies, only the U.S. Merchant Marine Academy is entitled to carry a battle flag, as it has sent its students aboard U.S. merchant vessels into every conflict, and many have died in that service to our country.

The Wilson-Weeks Agreement of 1954 and Presidential Directive 28 of 1989 mandate that U.S.-flag merchant marine vessels are given priority to carry Department of Defense (DOD) materiel in times of both peace and conflict.   The Government-owned cargo fleet is sized to provide the capacity that our U.S. commercial fleet cannot provide, such as during surge conditions when a very large amount of cargo must be quickly transported overseas.  The Voluntary Intermodal Sealift Agreement provides DOD with assured access to a global intermodal infrastructure.  Our commercial merchant marine already has access to operations and assets in or adjacent to every country where there might be a threat in the future.

Maintaining the U.S. Merchant Marine

The U.S. merchant marine is among the safest, most secure and environmentally-responsible in the world.  Federal requirements are designed to ensure U.S. crews are trained, vessels are built and maintained to safe operating standards, and operations have no unnecessary adverse impact on the environment. However, operating vessels under the U.S. flag under these requirements imposes higher wage, maintenance, repair, and insurance costs; increased regulatory burden; and tax implications. Transport of commercial cargoes does not generate sufficient revenue to cover the cost of operations under the U.S. flag.

Two federal programs administered by the Maritime Administration are a major reason vessels remain under or seek U.S. registry – the Cargo Preference Program and the Maritime Security Program.  Of the foreign trade currently carried by U.S. flag ships, a significant share is attributable to preference cargoes that provide a revenue base upon which the carriers can build commercial cargo orders. Our latest 5 year data review shows that the program generates over 16 million revenue tons of cargo and over $1.3 billion of ocean freight revenue annually.  Military cargoes represent about 64% of the revenue while food aid is 29% and other programs are 7%.   Preference cargoes provide a minimum revenue base of 5% to 7% of cargoes for liner vessels and over 50% vessels in tramp or charter service. 

The Maritime Security Program provides an annual stipend to partially offset the cost differential of operating under U.S.-flag registry.  The ten year authorization for the Maritime Security Program expires in 2015 and carriers have expressed some concern about the need to take steps to reauthorize the program well before that time in order to maintain some continuity and availability of U.S.-flag ships and the future business prospects for their assets.  Shipbuilding is expensive and investors need to have confidence in order to commit their dollars to building vessels with a 25-plus year life.  The concern that the program may not be renewed, or renewed at a sufficient level, could negatively affect future investment decisions.

At this time, I will be pleased to answer any questions the Committee may have.  Thank you.

STATEMENT OF

DAVID T. MATSUDA
MARITIME ADMINISTRATOR
MARITIME ADMINISTRATION

BEFORE THE

HOUSE COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
SUBCOMMITTEE ON COAST GUARD AND MARITIME TRANSPORTATION

The Maritime Administration’s Fiscal Year 2013 Budget Request

March 7, 2012

Good afternoon Chairman LoBiondo, Ranking Member Larsen, and Members of the Subcommittee.  Thank you for the opportunity to discuss the President’s Fiscal Year 2013 budget priorities and initiatives for the Maritime Administration (MARAD).  I am pleased to appear before you to highlight how the President’s budget request will support maritime transportation and its contributions to the U.S. economy and to our National security.

MARAD’s statutory mission is to promote and strengthen the U.S. marine transportation system - including infrastructure, industry and labor - to meet the economic and security needs of the Nation. 

That is why the focus of the Fiscal Year 2013 budget is on economic competitiveness, environmental sustainability, and organizational excellence. MARAD’s programs strengthen the U.S. maritime transportation system to foster economic growth and competitiveness and facilitate defense mobilization and emergency preparedness using U.S.-flag ships and U.S. citizen crews.  MARAD continues to address marine transportation environmental sustainability and energy impacts, allowing the maritime industry to increasingly be environmental “good neighbors.”  In addition, MARAD continues to work toward organizational excellence by strengthening our management, internal controls, and accountability. The President’s budget request for Fiscal Year 2013 meets each of these goals by balancing competing priorities in a fiscally responsible manner.

FY 2013 BUDGET REQUEST

The President’s Fiscal Year 2013 Budget request for MARAD is $344 million, which will support the Agency’s coordinated program of activities and initiatives advancing Departmental and national maritime transportation objectives. The budget includes increases for Ship Disposal and USMMA operational requirements.

KEY PRIORITIES

One of MARAD’s key priorities continues to be providing support for the U.S Merchant Marine Academy (USMMA).  Raising the profile and prestige of the USMMA and improving the institution both administratively and academically are MARAD imperatives.  The President’s FY 2013 Budget request for MARAD also supports a structured program of capital reinvestment in campus facilities.

Another key priority for MARAD is fulfilling its role in meeting the economic and security needs of the Nation. Maritime Security Program (MSP) funding is essential for the maintenance of a U.S. presence in ocean-borne foreign commerce. In addition to providing employment for 2,400 U.S. merchant mariners, the MSP fleet also ensures the military’s ability to obtain assured access to commercial vessels and intermodal facilities and mariners.   The President’s FY 2013 budget includes a $10 million increase for MSP.  Along with $2 million from carryover funds, this request will fully fund the MSP program at the authorized level of $186 million for 60 militarily useful ships.

The FY 2013 budget request provides strong support for critical environmental efforts by including a total of $10 million for the Ship Disposal Program.  This is an increase of $4.5 million above FY 2012 enacted levels. As the U.S. Government’s disposal agent for large commercial vessels, the Ship Disposal program provides continued acceleration of obsolete vessel disposal actions, with emphasis on vessels that are a high disposal priority, including those covered by the Suisun Bay Reserve Fleet (SBRF) judicial consent decree.  The budget also requests $3 million for other environmental sustainability efforts such as management of ballast water discharges and vessel air emissions.  MARAD is also exploring the feasibility of a new generation of biofuels for use in marine engines and using Liquid Natural Gas (LNG) for vessels serving the Great Lakes and other marine highways in the future.  

Finally, another priority for MARAD in Fiscal Year 2013 is the continued oversight and stewardship of Recovery Act and TIGER grant funding for maritime projects.

ECONOMY

Maritime transportation is a vital industry, contributing more than $10 billion per year to the national economy.  Maintaining the economic competitiveness and readiness of maritime transportation is the Agency’s core mission, which commands the largest share of the budget request.  Approximately 87 percent of the Fiscal Year 2013 request is devoted to programs supporting economic competitiveness and defense mobilization and preparedness to respond to emergencies.

MARAD’s mariner training activities focus on training individuals for maritime careers while developing and maintaining a vital and viable U.S. merchant marine for commerce, emergency response, and national security.  The USMMA and State Maritime Academies educate and graduate merchant marine officers ready to serve the maritime industry and Armed Forces.  In addition, MARAD’s work with shipping, shipbuilding, and port and vessel operations supports the maritime industry, which comprises more than 260,000 jobs. 

MARAD programs also support defense mobilization and emergency response readiness.  The Maritime Security Program (MSP) helps to protect the Nation through a fleet of commercial U.S.-flag vessels capable of providing global sealift and intermodal capacity to support national security and federal emergency response requirements. 

United States Merchant Marine Academy

The President’s Fiscal Year 2013 Budget requests $77 million for the USMMA.  This request includes a program increase of $5 million for Academy Operations.  The program increase will support enhancements to midshipmen health coverage, Marine Transportation and Marine Engineering academic programs, and much-needed facilities maintenance and repair.  Since 2010, the increase in capital improvement funding in addition to the 2013 request of $10 million will address the most critical facility modernization and restoration priorities which include renovating the pier, the dining hall and the two remaining barracks.  In addition, MARAD has recently begun work on a new strategic plan that will develop long-term objectives and institutional goals.

Providing support and oversight to improve and strengthen the USMMA, both administratively and academically, remains a management imperative.  To that end the budget request supports restoring staffing levels at the Academy.  In fact, since the start of this Administration, nearly 50 percent of MARAD’s new hires are Academy employees.  Of that number, nearly 25 percent are veterans, underscoring our commitment to provide employment for former service members.

The Academy is also making significant progress in implementing management and process improvements responding to recommendations in the 2009 Government Accountability Office (GAO) audit report. Addressing these recommendations remains a top priority of the Academy and MARAD.  Actions we have implemented address concerns GAO expressed about policy, oversight, and governance for Non-Appropriated Funding Instrumentality (NAFI) organizations.  USMMA had 14 operating NAFIs when GAO began their initial audit in June 2008.  Today, only two NAFIs are authorized to continue operations.  The others were terminated or are in the transition process of closing because it was determined that they did not comply with governing NAFI operating principles.  Also, with the funding provided in the Fiscal Year 2011 budget, 87 percent of eligible recipients have received reimbursements of Midshipman Fee overcharges from 2003-2008, and we continue to make progress locating and contacting the remaining eligible recipients.

State Maritime Academies

The President’s FY 2013 budget requests $16 million for the State Maritime Academy (SMA) program. Of the $16 million request:

• $2.4 million will fund the Student Incentive Payment (SIP) program, unchanged from Fiscal Year 2012, enabling enrollment of 300 students to be able to meet identified Armed Forces reserve requirements.
• $2.5 million for annual direct payments to each of the six state maritime academies to provide for operational support; and   
• $11.1 million will fund maintenance and repair costs for Federally-owned training ships on loan to the various state academies.

The state academies regard the SIP program and support for their training ships as among the most important recruiting tools to encourage potential State Maritime Academy cadets to pursue careers as merchant mariners. MARAD anticipates approximately 600 students in the license program will graduate from the academies in 2013.

It is important to note that, under the National Maritime Heritage Act, the recycling of obsolete NDRF ships that result in a sales contract returns 25 percent of net sales proceeds to the Maritime Academies. In the past fiscal year, MARAD has provided more than $500,000 to the State Maritime Academies from the vessel scrap sales.

Maritime Security Program

The Maritime Security Program (MSP) is the Agency’s largest appropriated program.The primary purpose of the MSP is maintenance of a U.S.-flag fleet capable of supporting U.S. presence in foreign commerce, while also ensuring the military’s access to a global intermodal system with sealift capacity and ready U.S. mariners.MSP vessel participants have the global, multi-modal reach that delivers cargoes supporting overseas deployments of U.S. forces.A terrific example of MSP return to the Nation is the Northern Distribution Network supporting operations in Afghanistan, and the fact that MSP carriers have moved more than 90 percent of the commercial U.S.-flag sealift for Operation Iraqi Freedom and Operation Enduring Freedom since 2002.

The President’s Budget includes $184 million for FY 2013, an increase of $10 million from the FY2012 enacted level, for this critical, proven, and cost effective sealift program.  Together with $2 million in unobligated carry-over balances, this request will provide full program funding of 60 authorized U.S.-flag vessel fleet at the authorized $3.1 million payment per vessel.This will achieve more than 19,200 ship operating days for MSP-enrolled vessels.Funding at this level will enable DOT to continue to maintain a U.S.-flag international trade merchant fleet crewed by U.S. citizens to serve the Nation’s economic, homeland and national security needs.

Maritime Guaranteed Loan Program (Title XI)

Title XI offers loan guarantees for shipyard modernization projects and for building vessels in U.S. shipyards for operation under U.S.-flag registry.  The loan guarantees enable applicants with long-term financing at favorable interest rates, sustaining facilities for shipbuilding and ship repair within the U.S., and promoting system capacity and jobs.  The current Title XI subsidy balance for new loans is $27.5 million. The President’s FY 2013 budget requests $3.75 million for administration of the Title XI guaranteed loan portfolio to ensure compliance with the Federal Credit Reform Act.  The current loan portfolio is $2.3 billion, covering approximately 360 vessels. 

America’s Marine Highways   

Ports and Marine Highways are critical to MARAD’s mission and to economic competitiveness.  The Nation’s ports are central to the economy. The America’s Marine Highway Program focuses on increasing the use of water transportation within the U.S. to supplement road and rail where it is feasible.  Demonstration Projects funded in 2010 are beginning to come to fruition.  For example, a Marine Highway grant awarded to expand an operation between the Ports of Norfolk and Richmond in Virginia has doubled their service frequency and volume and sailing full each trip, supporting exports from the region and relieving congestion on Interstate 64. 

To support the Department’s strategic goal for economic competitiveness, existing programs like the Transportation Investment Generating Economic Recovery (TIGER) Discretionary grants and Assistance to Small Shipyard Grants are targeting federal resources to help improve the Nation’s port infrastructure.  The President’s FY 2013 budget requests a total of $500 million for TIGER. To date, TIGER grants have funded 17 port and maritime-related projects, totaling more than $276 million in Federal dollars and supplemented by State and local funds.  Thirteen of these projects are underway, and more than $82 million has already been expended.  These grants are modernizing and adding capacity to ports, improving connections to inland markets such as adding rail lines between the dock and existing corridors, and improving the overall efficiency of freight movement.  A fourth round of TIGER Grants is currently in progress, offering the promise of additional maritime support. In addition, $153 million in Small Shipyard Grants has been awarded to 133 projects across the country to support capital improvements at shipyards, improving their ability to compete for domestic and international ship construction.

ENVIRONMENT

MARAD environmental programs are aimed at reducing pollution and the adverse environmental effects of maritime transportation and facilities on communities and livability; focusing on obsolete vessel disposal, reducing marine air emissions, and treating ballast water.  Approximately 4 percent of the President’s FY 2013 request will fund programs supporting environmental outcomes.

Ship Disposal

The President is requesting a total of $10 million for the Ship Disposal Program in FY 2013.  The request is comprised of $7 million for ship disposal costs and $3 million to support nuclear license management for the Nuclear Ship SAVANNAH.  This is an increase of $4.5 million above the FY 2012 level.  The FY 2013 request will allow continued acceleration in the removal of obsolete ships from the National Defense Reserve Fleet for disposal, with emphasis on vessels that are a high disposal priority, most of which remain in the Suisun Bay Reserve Fleet (SBRF).  There currently are less than 50 total non-retention ships remaining in MARAD’s three fleet sites awaiting disposal, which is a historic low. With the requested funding level, MARAD will be able to continue this disposal momentum with the expedited removal for recycling of up to 15 obsolete ships from all three fleet sites in 2013, which will include approximately six SBRF vessels.  The requested funding level is consistent with the requirements of the court ordered settlement with California. 

Significant costs related to compliance with the National Invasive Species Act (NISA) and Clean Water Act (CWA) will continue into 2013, in particular for removal of SBRF ships that require drydocking for the cleaning of marine growth from the underwater hulls. Due to the presence of onboard hazardous materials such as residual fuel, asbestos and solid polychlorinated biphenyls on these ships, obsolete vessels must be disposed of properly.  Expedited disposal of obsolete ships lessens environmental risk and makes sense not only from the standpoint of avoiding possible harm to the environment, but also in reducing costs. 

The President’s FY 2013 request includes $3 million for the inactive Nuclear Ship SAVANNAH, providing for the continuation of support activities including nuclear license compliance, radiological protection, ship husbandry and custodial care, decommissioning planning and preparation, and historic preservation.  

Maritime Environment and Technology Assistance

Maritime transportation is an energy efficient mode for transporting people and freight; however, for a number of years now, our industry has been faced with substantial environmental challenges that go to the heart of its long-term sustainability.  The most pressing environmental issues facing the maritime industry are invasive species in ballast water, energy use and air emissions.  In the President’s FY 2013 budget, $3 million is requested for environmental sustainability efforts for these areas.  With this funding, we will continue to explore the feasibility of a new generation of biofuels for use in marine engines, with very promising results -- and using Liquefied Natural Gas (LNG) for vessels serving the Great Lakes and other marine highways in the future.

MARAD has been called upon by industry and government agencies to help address these environmental pollution issues, and we recognize that more must be done to transition toward a greener maritime future.  MARAD recently launched a LNG feasibility study and engineering/design study on the Great Lakes to better understand the infrastructure needs, shipboard engineering concerns, safety and real costs of powering vessels with LNG.  In addition to the study on the Great Lakes, MARAD also is working with EPA Region 10 as well as local agencies and industry to support activities associated with LNG use in the Pacific Northwest and elsewhere.

MARAD has been engaged for several years in research and study related to ballast water treatment facilities.  MARAD has provided federal funds to support three facilities to provide the Nation with the capability to test promising treatment technologies to IMO and U.S Coast Guard standards.

In addition, MARAD continues to test alternative fuels for ship use.  MARAD also is working with Canada to update the Great Lakes Water Quality Agreement, looking at governance, toxic substances, nutrients, ship-source pollution, science coordination, aquatic invasive species, habitats and species, and climate change impacts.

The budget request will continue to advance critical research to develop a ballast water discharge standard, advance infrastructure and methodologies for certifying and verifying ballast water technologies, and improve vessel emissions data.

EXCELLENCE

MARAD’s greatest asset is its people who are the cadre of maritime professional experts relied upon by the U.S. maritime industry and government agencies to provide policy, operational, educational and financial services in all aspects of the maritime industry.  The Agency’s expertise in the global logistics and commercial maritime industry, along with industry and international relationships developed over time, has proven invaluable to the operations of the Federal Government. 

Additional services are provided to our Agency partners and the industry using the base of expertise already established at the Agency.  Our core competencies and Agency assets have played valuable roles in the past in enhancing military readiness, providing humanitarian and disaster relief assistance, investigating impacts to U.S. ports and providing training platforms for anti-piracy operations. These services supported by the Agency’s core competencies provide a valuable asset to the country. 

MARAD regards the effectiveness of our support and administrative programs and processes as essential to the effectiveness of our operating programs. Approximately 9 percent of our Fiscal Year 2013 budget request will support staffing of headquarters operating programs and the strengthening of human resource management, information management, financial management, and administrative services.  The Fiscal Year 2013 budget includes investment in the Agency’s workforce, including training, leadership, and succession planning.  We will continue to shape our organization using feedback provided in the employee’s survey, and advance MARAD as an employer of choice. 

MARAD will continue developing our information technology (IT) operating and content environments, strengthen IT security and protection of identity information, and advance e-Government.  In 2013, MARAD will continue to document and improve processes, strengthen internal controls and compliance, and improve financial reporting for use in guiding program development and decision-making.  MARAD will work to resolve identified vulnerabilities and deficiencies, including the GAO recommendations for the USMMA.  MARAD will do all of this with a view toward greater transparency, internally and externally.

Mr. Chairman, I wish to express my appreciation for the opportunity to present and discuss the President’s FY 2013 request for MARAD, and for the Committee’s continuing support for maritime programs.  I look forward to working with you on advancing maritime transportation in the United States, and am happy to respond to any questions you and the members of this Committee may have. 

Thank you.

Department of Transportation

Statement of the

Acting Maritime Administrator
David T. Matsuda

Before the

Sub-Committee on Coast Guard and Maritime Transportation
United States House of Representatives

Hearing on

Foreign Vessel Operations in the U.S. Exclusive Economic Zone

June 17, 2010

Good afternoon, Mr. Chairman and Members of the Committee.  Thank you for the invitation to testify regarding offshore oil exploration, production, and support vessels and the U.S-flag merchant marine. 

President Obama has said that the oil spill in the Gulf Coast is the worst environmental disaster of its kind in our nation's history.  From the start of this crisis the Maritime Administration (MARAD) has supported the ongoing relief effort and monitored the impact on the maritime industry.  MARAD is committed to working with the federal departments and agencies on the front lines of the response effort and providing them with whatever assistance they may need.  We activated our command center as well as provided personnel to assist at the United States Coast Guard National Incident Command center, the Interagency Solutions Working Group, and with Marine Transportation System Recovery Units along the Gulf Coast.  Fortunately, this spill has not significantly impacted the nation’s marine transportation system – commerce and trade have continued, but with a navigator’s watchful eye to avoid fouled Gulf waters.  MARAD continues to monitor the impacts so that our nation’s marine transportation system stays one step ahead of the oil.

I would like to express my condolences to the families of the eleven Deepwater Horizon crew who did not survive the explosion.  We mourn their loss and we, like our sister agencies, are working diligently to make sure that this type of event does not occur again.

The Maritime Administration family was touched first hand by the tragic fire that overwhelmed the Deepwater Horizon.  Two graduates of the United States Merchant Marine Academy were on board and both are heroes. Darin Rupinski, from Stony Point, New York, is a 2008 U.S. Merchant Marine Academy graduate.  He was aboard the Deepwater Horizon when the explosion occurred and he helped lead the evacuation of the platform.   After the fire, he credited the training he received from Kings Point with saving his and the lives of many others.[1]  James Mansfield, who is a member of the U.S. Merchant Marine Academy Class of 2000 from Pipe Creek, Texas, was also aboard and was injured.  Our thoughts remain with him through his recovery.

Among the first vessels to respond to the distress call of the Deepwater Horizon was the Damon Bankston, a vessel that was built in the United States, documented in the United States, and crewed by United States mariners.  As her  crew began pulling members of the Deepwater Horizon’s crew from the Gulf she was joined by other U.S.-flag vessels that battled the blaze and saved a majority of the 126 crew who had to abandon the stricken oil rig.  In the weeks that have passed since the sinking of the Deepwater Horizon numerous U.S.-flag vessels have responded to the crisis. 

I want to emphasize that the Administration is committed to making certain that every asset possible is available to address this catastrophe.  As this Committee knows well, the Jones Act requires that all cargoes transported between U.S. points must move aboard vessels that are U.S.-flag, U.S.-built, U.S.-owned and crewed by U.S. mariners.   

Under certain circumstances, exceptions can be made to the Jones Actrequirement.Through the authority of the Secretary of the Department of Homeland Security, U.S. Customs and Border Protection (CBP) is the agency responsible for granting or denying any requests for a waiver to the Jones Act.  This is made after the Department of Defense, U.S. Coast Guard, and Department of Energy determine that it is not against U.S. national security interests to grant a waiver.  As a threshold, however, such a determination is made only after the Maritime Administration finds that there are no U.S.-flagged vessels available for operation.  There are also times during an event such as the Deepwater Horizon oil spill where the United States Coast Guard Federal On-Scene Coordinator can make an exception to U.S. cabotage laws to ensure that specific oil spill response vessels (OSRV) receive urgent attention and processing. [2]

When the Maritime Administration receives notification from either the Coast Guard Federal On-Scene Coordinator or CBP that it has received a request, the agency immediately queries industry for available U.S.-flagged mariners and vessels.  MARAD and CBP are bound by a Memorandum of Understanding that requires MARAD to respond to CBP within 48 hours with a determination on the availability of U.S.-flag vessels. 

In one situation during this oil spill response, a company tried to hire specialized foreign-built barges that could assist in the oil spill response and requested a waiver of the Jones Act.  As is practice in all Jones Act waiver requests, CBP asked MARAD to determine if U.S.-flag barges were available that could meet the requirements of the operator.  MARAD was able to locate many available equivalent U.S. –flag vessels and so informed CBP.

There are more than 100 U.S. firms that own and operate over 1,830 coastwise qualified offshore marine service vessels.  These vessels include crew boats that transport workers to and from the U.S. to the offshore facilities as well as tugs, barges, and supply boats that carry every commodity required to operate and maintain the oil rigs.  According to the Offshore Marine Service Association these vessels employ more than 12,000 U.S. mariners and support the offshore oil and gas industry that has a payroll of over $1.2 billion. 

During the current situation in the Gulf of Mexico, U.S.-flag vessels have been used in every situation where U.S. vessels and crew are available.  Seventy-seven percent of the vessels providing oil spill response in the Gulf are U.S.-flagged.  For example, the extremely large cofferdam containment structure that was lowered in the early attempt to cover the spill on May 7, 2010 was transported to the site by a highly capable U.S.-flag vessel, the Joe Griffin, operated by Edison Chouest Offshore.   

Even though twenty-three percent of the vessels responding to the oil spill are not U.S.-flag, none of these are known to be in violation of any U.S. law or regulation.  Vessels that do not call upon points in the United States are not in violation of the Jones Act.  There are also situations, especially in the energy exploration industry, where a vessel is so specialized and expensive to build and operate that there are only a few in the world like it.  When a U.S.-flag vessel is not available or there is not a U.S. vessel with the equivalent capabilities of a foreign flag vessel, the operator may apply for a waiver of the Jones Act.

Recently, President Obama placed a 6-month moratorium on new offshore oil drilling in waters deeper than 500 feet until we can be sure it can be undertaken safely.  This temporary moratorium will not impact deepwater port facilities licensed by MARAD as they are fundamentally different from the Deepwater Horizon facility.  The Deepwater Horizon facility is an offshore rig intended for domestic oil drilling exploration and production.  Deepwater ports, which are licensed by MARAD, are intended to facilitate the importation of Liquefied Natural Gas (LNG) and petroleum products into the United States by specially designed tankers.  Deepwater LNG ports are not used in the exploration for, or production of, oil, gas or other mineral resources in the Outer Continental Shelf of the United States.

In the past 8 years, three deepwater ports have been licensed and constructed for the importation of LNG.  These facilities have been specifically designed to minimize and mitigate adverse impacts on the marine and air environment.  LNG spill risks are localized and confined to the deepwater port and its immediate surroundings.  The construction of deepwater port terminals enhances safety and security by isolating terminals away from congested population areas and reducing the need for large tanker ships to enter congested land-side port areas.

In closing,  I would like to again commend the work of our nation’s heroic merchant mariners.  Just as the U.S. merchant marine has capably served as a naval and military auxiliary in time of war, the Jones Act has ensured that we have a merchant marine that is capable of responding in time of national emergency in our coastal waters.  While there are foreign-flag vessels operating in the U.S. exclusive economic zone in the Gulf of Mexico due to specific circumstances that require their unique services, they are not in violation of the Jones Act.

Thank you again for the opportunity to testify today.  As always, the Maritime Administration will continue to work closely with the Committee to support the United States merchant marine and provide jobs to U.S. mariners.  I look forward to working with you on advancing maritime transportation in the United States, and am happy to respond to any questions you and the members of this Committee may have.

STATEMENT OF

DAVID T. MATSUDA
MARITIME ADMINISTRATOR
MARITIME ADMINISTRATION

BEFORE THE

HOUSE ARMED SERVICES COMMITTEE
SUBCOMMITTEE ON SEAPOWER AND EXPEDITIONARY FORCES

JULY 14, 2010

Good afternoon Chairman Taylor, Ranking Member Akin, and Members of the Subcommittee.  Thank you for the opportunity to discuss the Maritime Administration’s (MARAD) priorities and initiatives.  I am pleased to appear before you to provide a general update on our activities to sustain a U.S. Merchant Marine, including the Maritime Security Program, the Title XI shipbuilding loan guarantee program, and improvements we are making at the U.S. Merchant Marine Academy.

One of MARAD’s primary missions is to develop and maintain a vital and viable U.S. merchant marine for domestic and international commerce and to support the Nation in times of natural or manmade disasters and threats to our national security.  Specifically, MARAD supports the U.S. military’s sealift needs by administering programs to ensure a readily-available pool of U.S. ships and skilled crewmembers.  The Nation’s sealift readiness is provided through both commercial- and Government-owned vessels that are crewed by civilian merchant mariners.

MARAD’s programs help ensure the readiness of sealift capacity to respond to national and international crises and Department of Defense (DOD) mobilizations.  The Maritime Security Program (MSP) sustains a small U.S.-flag fleet of 60 commercial vessels engaged in international commerce that has proven capabilities to meet national security and emergency response requirements.  The MSP also ensures that we have a pool of highly-trained mariners ready and willing to support the activation of the Government surge fleet.  A companion sealift readiness program, the Voluntary Intermodal Sealift Agreement (VISA), provides assured access to ships and related intermodal infrastructure and qualifies participants for priority award of DOD cargoes over non-participants.  MARAD also owns, administers, and operates the Ready Reserve Force (RRF), a fleet of 49 vessels structured primarily to transport Army and Marine Corps unit equipment and to provide the initial re-supply for U.S. military forces.  The U.S. Merchant Marine Academy and six State Maritime Academies educate and graduate merchant marine officers ready to serve the maritime industry at sea in a wide range of opportunities or in uniforms of the Armed Services.  Finally, MARAD works with the maritime industry to support transport of Government impelled preference cargoes on U.S.-flag ships.

The capabilities supported by these programs were underscored recently with two major emergencies that gripped the Nation this year – the Haiti earthquake and the Deepwater Horizon oil spill in the Gulf of Mexico.  The U.S. maritime industry has responded to both in an unparalleled manner, underscoring the notion that maritime resources matter for disaster response.

MARAD initially activated a total of seven Government vessels in anticipation of providing support to the disaster relief efforts for Haiti, including five RRF vessels and two Title XI-financed high-speed ferries.  Of these vessels, two of the RRF ships and one high-speed ferry were sent to Haiti to provide humanitarian assistance as part of the interagency effort.   Overall, at least 25 U.S.-flag commercial and Government vessels were used to actively support Haiti relief operations by carrying United States Agency for International Development (USAID) food aid and DOD cargo/supplies obtained under the military universal services contract, and by providing ferry service for response workers.  In all, nearly one thousand U.S. merchant mariners participated in the U.S. response effort (Operation Unified Response), crewing U.S. Government and commercial ships.

MARAD has also been active in the Deepwater Horizon oil spill response. Before I continue, I would like to take a moment to express my condolences to the families of the eleven Deepwater Horizon crewmembers who did not survive the explosion. We mourn their loss.  In addition, two United States Merchant Marine Academy graduates, Darin Rupinski and James Mansfield, were aboard.  Both are heroes.

From the beginning of the disaster response, MARAD offered the National Incident Command (NIC) and National Response Team access to our vessels and equipment, and have shared extensive information about industry resources for skimmers, tankers, and the like. Of the estimated 7,000 vessel flotilla involved in the spill response, the vast majority are U.S.-flag commercial vessels with U.S.-citizen crewmembers.  Similarly, of the hundreds of vessels engaged in oil skimming, the vast majority are vessels documented in the United States.  Furthermore, at the center of the response site, at least 18 U.S.-flag ships, assisted by foreign vessels, are combating the spill at the source. 

MARAD today is in close contact with our Federal agency partners as a part of this massive response, completing prompt surveys of the U.S. maritime industry for specific resources needed for the oil spill response effort.  At the local level, MARAD is involved with the Marine Transportation System Recovery Units.  At the NIC level, MARAD assists in legal matters and helps to develop interagency solutions to spill-related requirements and problems.

UNITED STATES MERCHANT MARINE ACADEMY

Improving the profile and prestige of the U.S. Merchant Marine Academy (Academy) is one of Secretary of Transportation LaHood’s top priorities.  This past March, the Capital Improvements Advisory Panel that Secretary LaHood charged with providing insight into the needs of the Academy’s facilities released an in-depth report.  In response to this report and other information, President Obama’s budget proposal requested $100 million for the USMMA in fiscal year 2011, an increase of $26 million above the 2010 level.  This increase will support capital improvements, operational funding for necessary IT upgrades and academic program enhancements, and compensation for Midshipman Fee overcharges.

Of the President’s 2011 request, $15.9 million above the fiscal year 2010 budget is for capital improvements.  These improvements include the priority renovation of the Delano Hall midshipman galley (where the Regiment receives all of its meals) and architecture and engineering studies for future renovation of Cleveland Hall and Rogers Hall (the two remaining Midshipmen barracks in need of major renovations).   In addition, the Academy will install a new tug and barge simulator to improve educational opportunities for the Academy’s midshipmen.  There is also a need for critical IT infrastructure improvements required to meet Federal Information Security Management Act (FISMA) and Clinger-Cohen requirements and to enhance wireless campus capabilities.  Further improvements and enhancements to the Academy’s instruction program are also necessary, including four new instructor positions, upgraded classrooms and learning environment, and an initiative to improve diversity through recruitment.

MARAD is also developing the plan needed to repay students who attended the Academy during the past six years for possible Midshipman Fee overcharges. Through this plan, the Secretary will establish compensation levels that represent fair payments for the affected students and alumni. 

The Government Accountability Office (GAO) released its own report with recommendations for action to correct the financial conditions at the Academy.

Providing support and oversight to restore and strengthen USMMA programs and financial controls is a MARAD and U.S. Department of Transportation (DOT) management imperative.  MARAD is making significant progress in implementing management and process improvements responding to the recommendations from the GAO audit report and from the Advisory Panel.  Our plan is to successfully address all 47 GAO recommendations by the end of FY 2010.  As of June 30, we have completed actions addressing 32 of the recommendations and are on target to implement the 15 remaining recommendations.   We believe the improvements in fiscal management and physical plant at the Academy will help restore the USMMA to its place as a preeminent Federal Academy.

State Maritime Academies

In addition to management of the Academy, MARAD provides financial support and training vessels to the State maritime academies. MARAD’s partnership with the six State maritime academies consists of (1) annual direct payments to each of the academies, (2) the Student Incentive Payment (SIP) program, and (3) payment of maintenance and repair costs for the training ships (school ships) that are on loan from MARAD to the State academies. The State academies regard the SIP Program as an important recruiting tool available to encourage State Maritime Academy cadets to pursue careers in the U.S. merchant marine.  Cadets enrolled in the SIP program receive $8,000 annually, for a maximum of four years, to partially defray the cost of their education.  In return, these cadets commit to the following post-graduation requirements: remain employed in the maritime industry for three years, maintain their U.S. Coast Guard license for six years, become an active member of a U.S. armed forces reserve unit for a minimum of six years, and report annually to MARAD.

MARAD also provides for the maintenance of the training ships in use by the USMMA at Kings Point, New York, and by each of  the six State Maritime Academies (California Maritime Academy, Vallejo, California; Maine Maritime Academy, Castine, Maine; Massachusetts Maritime Academy, Buzzards Bay, MA; New York Maritime College, Fort Schuyler, Bronx, NY; Texas Maritime Academy of Texas A&M University at Galveston, TX; and the Great Lakes Maritime Academy of Northwestern Michigan College, Traverse City, MI).

The level of funding necessary to maintain the schoolship fleet in good repair and in compliance with statutory requirements for nautical schoolships can be expected to increase.  Costs will escalate on the schoolships as they age, as regulatory bodies impose closer inspection requirements, and as new environmental protection processes are mandated.  This will result in components and systems requiring greater maintenance, replacement, and upgrade.  Recapitalization requirements of the training ships will be impacted by safety and environmental systems mandated by the Environmental Protection Agency (EPA), the International Maritime Organization (IMO), the treaty on Safety of Life at Sea (SOLAS), and the International Convention for the Prevention of Pollution from Ships (MARPOL) rules and regulations.  Meeting these requirements will permit the training ships to comply with current IMO, MARPOL, EPA, State and local requirements regarding effluent discharges and air emissions.  Ever-increasing portions of the world’s oceans are now “zero-liquid discharge” and “zero-waste discharge” zones.  Furthermore, MARPOL Annex VI limits sulphur and nitrogen oxide emissions from ship exhaust systems and prohibits the emissions of ozone depleting substances.  Existing diesel engine propulsion and power generation plants will require re-engining with new diesel engines that meet these new standards.  In addition, steam propulsion plants and boilers will require modifications to the fuel oil and storage tank to permit the utilization of low sulfur diesel fuel in order to reduce stack emissions.  As part of these recapitalizations, “Green Initiatives” will demonstrate MARAD’s dedication to environmental stewardship.

The EMPIRE STATE will exceed 50 years of age in 2012.  In the near term, it will not be cost effective to accomplish necessary repairs and overhauls to retain the vessel to safe and reliable service.  To meet the requirements of SUNY Maritime College, a replacement vessel, converted to meet Federal Regulations concerning Public Nautical School Ship requirements, must be identified and converted.  Several potential vessels within the existing Navy and MARAD National Defense Reserve Fleet (NDRF) inventories are currently being evaluated for a replacement vessel with a 750-person capacity to support the school’s requirements.

Maritime Guaranteed Loan Program (Title XI)

Title XI offers loan guarantees for shipyard modernization projects and for building vessels in U.S. shipyards.  This funding supports infrastructure investment and economic growth.  The program provides approved applicants with long-term financing at stable interest rates, sustains efficient facilities for shipbuilding and ship repair within the U.S., improves system capacity, and sustains U.S. jobs. 

The Title XI Loan Guarantee Program sustains jobs because it has the effect of leveraging a relatively small commitment of Federal budget authority ($17.5 million in FY 2009) to generate a much larger amount of direct spending from loans ($310 million in FY 2009).  When added to additional private spending ($44 million in FY 2009) associated with the loan guarantee projects, the FY 2009 Title XI program helped to support a total of $354 million in business for U.S. shipyards – including 2,400 job-years associated with the shipbuilding industry and its suppliers and almost 1,400 job-years occurring within the broader economy.[1]

As of June 30, 2010, MARAD’s current Title XI portfolio was approximately $2.1 billion.  This portfolio consists of 60 loan guarantee contracts for more than 300 vessels and two shipyard modernizations.  All of the outstanding loan guarantees have been approved since 1993, subsequent to the Federal Credit Reform Act of 1990, with 41 of the guarantees issued since FY 2000.  During the last five years (since FY 2005), MARAD has approved only four transactions – Hawaii Superferry in FY 2005, Vessel Management Services and Canal Barge in FY 2009, and Foss Maritime Company in FY 2010. 

MARAD is currently processing six applications for loan guarantees in excess of $1.6 billion in total loan amounts.  The six pending applications involve 11 shipyards in 9 States and are for a variety of vessels and projects including articulated tug barges, shuttle tankers, drill rigs, and platform supply vessels.  MARAD currently has $76.6 million in budget authority to cover the subsidy costs of the above loan requests.  This amount would support approximately $1.1 billion in new loan guarantees.  Should the number of qualifying loan applications exceed this amount, MARAD regulations would require it to give priority to vessels that are capable of serving as a naval auxiliary in time of war or national emergency.  Priority is also given to projects that would finance vessels or equipment less than one year old.  Finally, MARAD cannot lawfully approve an export project if it would deny the funds for a domestic project. 

Since 1993, the Title XI program has experienced a total of 13 defaults, including two defaults in FY 2009 (AQ Boat LLC and Riverbarge Excursions Lines) and two in FY 2010 (Hawaii Superferry, Inc. and AHL Shipping Company).  Over the last decade, DOT and MARAD have implemented various actions to reduce the risk of loan default to the Government.  Among these actions, a Department Credit Council was established in 2004 to provide oversight and policy guidance for all DOT credit programs, including the Maritime Loan Guarantee Program, and to make recommendations as to the financial viability of proposed projects or changes to existing projects.  The Council is chaired by the Deputy Secretary of Transportation. MARAD also receives a first preferred mortgage on the vessels or shipyards as the primary collateral for the Title XI financing, and now requires that additional collateral be provided in the event that the company is not meeting their required financial tests.

Due to the strict financial requirements that applicants must meet, MARAD has found that it is difficult to guarantee the loans of vessels and projects associated with small or new companies that do not have the financial strength of larger companies.  The ability to support these smaller companies could promote innovative services and ensure fairer access to Federal assistance.  MARAD is exploring avenues to provide federal credit assistance for smaller vessel construction projects.

Maritime Security Program

The Maritime Security Program (MSP) is the Agency’s largest appropriated program.  The primary purpose of the MSP is to provide the Department of Defense (DOD) with assured access to commercial U.S.-flag ships and related intermodal systems, as well as a pool of trained U.S. mariners available to support national security requirements during war or national emergency.  MSP vessel participants also deliver cargoes supporting overseas deployments of U.S. forces, and to date 72 MSP ships have contributed to Operations ENDURING FREEDOM/IRAQI FREEDOM. 

The DOD Surface Deployment and Distribution Command reports that since September 11, 2001, U.S.-flag commercial ships have delivered more than 500,000 twenty foot equivalent units (TEUs) of containerized equipment and supplies to support U.S. troops in Iraq and Afghanistan.  MSP ships have also supported the rebuilding of Iraq.  For fiscal year 2011, MSP will fund 60 ships in the MSP fleet at the authorized level of $2.9 million per ship.  MARAD’s MSP program enables the industry to maintain a U.S.-flag international trade merchant fleet crewed by U.S. citizens to serve the Nation’s national security needs. 

Since 1996, the MSP fleet has adapted to meet changing DOD sealift requirements while expanding from 47 to 60 ships.  The commercial industry has answered the call to provide DOD with access to more roll-on/roll-off (RO/RO) vessels, tankers, and heavy lift ships. The RO/RO fleet has grown from 3 to 18 RO/ROs, adding more than 2.7 million square feet of cargo capacity.  The number of MSP containerships has grown from 36 to 38 with an additional 13,000 TEUs of capacity. 

MSP vessels are held to strict age requirements and MARAD has leveraged that program feature to increase military usefulness of the fleet.  Since reauthorization of the MSP in FY 2006, the industry has replaced older MSP vessels with 28 newer and more efficient ships, resulting in an increase of more than 756,000 square feet and 400 TEUs.  In addition, a number of commercial operators have added non-MSP vessels to the U.S. registry using procedures established by MARAD and the U.S. Coast Guard, under which ships determined to be MSP-eligible are given expedited consideration for reflagging to U.S. registry.  A benefit to the Government from this reflagging procedure is a commitment to enroll those vessels in the VISA program with a pledge to apply for any future MSP vacancies.  This benefit has resulted in 12 vessels entering the fleet.  Those vessels employ more than 500 U.S. citizen mariners.

READY RESERVE FORCE

The Ready Reserve Force (RRF) was initiated in 1976 as a subset of the NDRF to support the rapid worldwide deployment of U.S. military forces.  The RRF is a key element of strategic sealift and MARAD’s strategic mobility responsibility in DOT.  The RRF is specifically structured to transport Army and Marine Corps unit equipment and to provide the initial re-supply for U.S. military forces deploying anywhere in the world during the critical period before adequate numbers of commercially available ships can be marshaled to deliver equipment to the zone of action.  The RRF is owned, administered, and operated by MARAD under the terms of a Memorandum of Agreement between DOT/MARAD and DOD’s U.S. Transportation Command (USTRANSCOM).  It is funded by the National Defense Sealift Fund, which is administered by the Navy.

The RRF is maintained, crewed, and operated by nine commercial firms which compete for multi-year ship manager contracts.  Most of the 49 vessels assigned to the RRF are maintained in Reduced Operating Status (ROS), which requires activation within five days at their outport layberth sites.  Two lower priority ships are maintained without crews in a ten-day readiness status. 

As a result of the lessons learned during Operation Desert Shield and Operation Desert Storm, substantial investments in the RRF were made to improve readiness and reliability and to increase capacity.  The RRF began its highest operational tempo in its 30-year history supporting Operations ENDURING FREEDOM and IRAQI FREEDOM (OEF/OIF) beginning in October 2002.  Since then, the RRF has accumulated almost 14,000 ship operating days at 99 percent reliability.  The initial wave of OEF/OIF activations and deployments involved 40 RRF ships.  Over the years there were numerous repeat activations bringing the total RRF ship activations to 118.  The initial activation included all 27 current RRF RO/RO ships and the activations in subsequent years mostly involved RO/ROs.

The investments made in RRF readiness and capacity have proven to be highly valuable, while maintaining the most cost effective source of Government-owned sealift.  MARAD and USTRANSCOM have discussed the need to acquire newer ships for the RRF program, so it can continue to meet strategic mobility needs in the future.  USTRANSCOM finished the Mobility Capabilities Requirements Study this year, and the study results identify a continued requirement for the RRF and in particular for RO/RO ships, thereby suggesting a need for cost effective recapitalization of the RRF.

One recapitalization option being explored involves designing a dual-use vessel for strategic mobility and commercial use.  These concepts come together well in MARAD’s America’s Marine Highway initiative where DOD enhancements to small vessels can be used for military contingencies.  In the future, this concept could help to provide a limited portion of RRF recapitalization capability.

MARAD also maintains two ships in RRF-like condition for the Missile Defense Agency (MDA).  The PACIFIC COLLECTOR and the PACIFIC TRACKER were converted from NDRF ships awaiting disposal into cost effective platforms for the MDA. 

MARITIME INDUSTRY AND THE ECONOMY

Maritime transportation contributes more than $10 billion per year to the national economy, and the industry comprises more than 265,000 jobs.  This includes economic activity related to both U.S.- and foreign-flag ships.  MARAD’s work with commercial shipping, shipbuilding, port operations, and vessel operations supports the maritime industry.  MARAD’s Title XI and Small Shipyard Grant (Assistance to Small Shipyards) programs provide loan guarantees and grants, respectively, supporting the industry, which can be an engine for efficiency and capacity improvements and economic growth.  America’s Marine Highways help to move freight more efficiently and contribute to reducing transportation’s environmental footprint.

Assistance to Small Shipyards

A strong shipbuilding industry is the backbone of sea power. To support capital improvements to qualified shipyards, Congress created an important new program, the Small Shipyard Grant Program, in the National Defense Authorization Act of 2006.  Congress first funded the program with $10 million through the Consolidated Appropriations Act of 2008, followed by $117.5 million in funding through the Omnibus Appropriations Act of 2009 ($17.5 million) and American Recovery and Reinvestment Act of 2009 (ARRA) ($100 million), and $15 million in funding in the Consolidated Appropriations Act of 2010.  This program is intended to improve the ability of domestic shipyards to compete for domestic and international commercial ship construction.  In FY 2010, MARAD received about 160 applications and awarded 17 grants covering the coastlines of the United States.  Overall, for the three years of the program, MARAD has awarded a total of 120 grants to 105 different shipyards.  These shipyards are located in 28 different States plus one U.S. territory. Grants have been used to fund floating drydock construction and modernization, acquisition of large Travelifts (up to 1,000 tons), material handling equipment such as cranes and forklifts, steel working machinery, shipyard infrastructure improvements, and training of shipyard employees.

America’s Marine Highway

Another of MARAD’s goals is to help make our national transportation system more environmentally sustainable and economically competitive. For too long, America has overlooked the economic and environmental benefits of moving domestic goods on the water – but, we are changing all that with our America’s Marine Highway Program initiative.  As reported in May by Secretary LaHood, we are currently in the process of identifying marine highway corridors and project designations. Congress has provided strong support for this initiative in the Energy Independence and Security Act of 2007, the National Defense Authorization Act for Fiscal Year 2010, and the Consolidated Appropriations Act of 2010.

MARAD has completed several major steps in implementing the America’s Marine Highway Program in FY 2010.  On April 9, MARAD published the Final Rule for the program, superseding the previous Interim Final Rule published in October 2008.  On April 15, 2010, MARAD issued a formal call for Marine Highway Project applications by public agencies.  MARAD will issue a Notice of Funding Availability for eligible Marine Highway Project’s in a separate Federal Register notice to be published in July 2010.  This latter notice will implement a new initiative, “America's Marine Highway Grants” as authorized under the National Defense Authorization Act for Fiscal Year 2010.  The initial $7 million funding for the grants is provided in the Consolidated Appropriations Act of 2010.

On February 17, 2010, the anniversary of the ARRA, DOT announced $1.5 billion in Transportation Investment Generating Economic Recovery (TIGER) Discretionary grants for fiscal year 2010.  Of this amount, $120.4 million has been designated for seven seaport and maritime-related projects, most of which will be supplemented by State and local funds.  MARAD will administer these seaport-related grants under the oversight of the Office of the Secretary.  These grants will support new marine highway services, add capacity to ports, and improve shoreside linkages to inland markets. 

ENVIRONMENT

MARAD environmental programs are aimed at reducing pollution and the adverse environmental effects of maritime transportation and facilities on communities and livability; focusing on obsolete vessel disposal, reducing marine air emissions, and treating ballast water. 

Environmental Programs

The impact of marine transportation on the human and natural environment has become more evident in port and coastal communities, which chiefly incur the environmental quality impacts from marine transportation activities.  At the same time, marine transportation is expected to grow considerably due to increased use of our nation’s waterways for freight and passenger movement.  Marine-related environmental impacts will therefore become more significant unless actions are taken in a timely manner to mitigate their adverse impacts, potentially affecting the Nation’s economic growth and the quality of life of our seaport and seaside communities.

The three most pressing environmental issues facing the maritime industry are invasive species in ballast water, energy use, and air emissions.  MARAD has been called upon by industry and Government agencies to provide technical advice and expertise, data, and assistance for the development of policy, regulation, research, and studies in these areas. MARAD, working closely with other DOT operating administrations and the Environmental Protection Agency, will continue to support industry efforts toward improving the environmental sustainability of the maritime industry.  The MARAD environmental program promotes critical multi-modal transportation research to reduce environmental pollution, advance a ballast water discharge standard, infrastructure and methodologies for certifying and verifying ballast water technology, improve vessels emissions data, and reduce MARAD’s carbon footprint.

Ship Disposal

MARAD continues to work on disposal of obsolete ships in the National Defense Reserve Fleet.  The President, Secretary LaHood, and I are committed to the proper disposal of these ships.  In fiscal year 2009, for the first time in three years, ships began to leave the Suisun Bay Reserve Fleet in California and even more have left this year.  The latest non-retention ship to leave Suisun Bay for recycling is the TALUGA, which left on July 1, 2010 – this is the 10^th ship to have departed the fleet this year.  MARAD plans to continue this work over the next year towards the goal of removing an additional 15 ships from the inventory, utilizing domestic dismantling contracts, artificial reefing, deep sinking, vessel sales, and donation opportunities.

Mr. Chairman, I wish to express my appreciation for the opportunity to present and discuss MARAD’s programs and for the Committee’s continuing support for MARAD and the U.S.-flag maritime industry.  We will continue to keep this Committee apprised of the progress of our programs in these areas in the coming year, including our efforts to improve processes and internal controls at the USMMA. 

I will be happy to respond to any questions you and the members of this Committee may have.  Thank you.

Department of Transportation

Statement of the
Maritime Administrator
David T. Matsuda

Before the

Sub-Committee on Coast Guard and Maritime Transportation
United States House of Representatives

On the

State of the United States’ Merchant Fleet in Foreign Commerce

September 29, 2010

Good afternoon, Mr. Chairman and Members of the Committee.  Thank you for the opportunity to testify before you today on the state of the United States’ Merchant Fleet in foreign commerce.

Three weeks ago, the President laid out a bold vision for renewing and expanding our Nation’s transportation infrastructure – in a plan that combines a long-term vision for the future with new investments today.  The President has called for a 6-year authorization of surface transportation programs and, with the current state of the economy in mind, the Administration proposes that $50 billion – a significant share of the new investments – be frontloaded in the first year.  The new transportation program envisioned by the President needs to be part of a long-term framework that reforms the infrastructure investment process and expands our levels of investment so that we can have a truly world-class transportation system. 

On July 20th, we met to begin to discuss the major challenges facing our ships operating in foreign trade and the requirements of U.S. registry.   As I testified then, the state of the U.S. flag fleet in foreign trade has decreased over time – from 980 ships in 1947 to just 115 today.  It is clear these challenges have existed for many years. 

At the request of the Subcommittee, I have focused my testimony today on a continuing examination of U.S.-flagged vessels in U.S. foreign trade.  I will particularly discuss the challenges of operating under the U.S.-flag, and the Maritime Administration’s implementation of Congressional mandates to support U.S.-flag ships operating in foreign trade.

Our foreign trade fleet is subject to the full range of applicable U.S. laws covering business, financial, environmental, and employment regulations. 

The Maritime Administration (MARAD) administers the laws enacted by Congress to support the continued existence of a U.S.-flag fleet in international trade.  The major programs affecting the foreign trade fleet are the Maritime Security Program (MSP), Voluntary Intermodal Sealift Agreement (VISA), and Cargo Preference programs.  These programs support the U.S.-flag fleet, providing the Department of Defense (DOD) with assured access to the sealift capacity essential to support ongoing mobility requirements.

The MSP program sustains militarily useful vessels, while cargo preference covers a broader range of vessels.  The MSP and Cargo Preference fleets combined carry about two percent of U.S. foreign trade.  These ships employ approximately 5,000 mariners.   In 2008, in addition to the commercial cargoes that support our economy, under cargo preference requirements, these vessels carried over 1 million metric tons of petroleum for the military; delivered over 8 million tons of general and containerized cargo for DOD; approximately 84,000 military household moves; over 60,000 military privately-owned vehicles; and about 2 million metric tons of humanitarian food aid worldwide.

For various reasons that we are exploring, U.S.-flag operations is more expensive than foreign operations.  Investors who are considering the costs and benefits among the various vessel registry alternatives can find better opportunities using international and open registries.  Today, over 80 percent of the ships in international commerce fly open-registry flags.  Although open registries differ in their requirements, common elements are that there are generally no taxes on profits or no fiscal controls and  the shipping company is free to recruit its crews internationally, although these elements are not the only ones that affect the differences in the cost structures compared to the U.S.-flag fleet.

Challenges of Operating Under the U.S.-Flag

Many of the challenges facing the operators of U.S.-flag ships are due to the higher costs of operating ships under the U.S.-flag.  First, there are higher costs for ship operations.  Based on rough estimates, we believe that overall, U.S. costs are approximately three times higher than the global maritime fleet average.  The range of cost differences vary primarily by ship type, age, and other factors. 

The greatest difference in operating costs is accounted for by mariner labor costs.  U.S.-flag ships must use U.S. crews, including riding gangs.  For several reasons, wage costs for mariners are significantly higher in the United States than many other countries that provide mariners to the world fleet.  For example, under U.S. law, companies hiring U.S. mariners pay the cost of payroll taxes, medical, pension, and other benefits.  In addition, the salary and benefits packages must be competitive with shore-side positions, and also provide for training and certification requirements and compensation for the sometimes dangerous conditions and arduous work schedules that we expect of our mariners.  Open-registry ship operators generally pay lower wages, and often are not required to provide for continuing training and education of mariners. 

Further, wages paid to U.S. mariners are subject to U.S. income tax.  In other countries, such wages are often exempt from taxation.  Several proposals have been made to address this difference.  Legislation to exempt a portion of mariner wages from income tax was introduced by Chairman Oberstar in 2001, but was not enacted by Congress.  Similar legislation was considered by the Senate in 2004, but did not become law.  H.R. 1798, the Working American Competitiveness Act, introduced by Congressman Gregory Meeks, would amend the IRS code to exempt from taxes foreign earned income by a broad group of qualified individuals. 

Beyond vessel operating costs, there are other U.S. requirements that result in increased costs for U.S.-flag carriers.For example, carriers that repair their vessels in foreign shipyards are required by federal law to pay a 50 percent ad valorem duty on those repairs before entering a U.S. port.The amount that is added varies, based on the cost of the repair.Another major area of cost differential is potential exposure to legal liability, which U.S.-flag carriers have identified as one of the most significant differences in separating U.S.-flag from non-U.S.-flag costs. Potential exposure to personal injury and environmental claims is generally higher in the United States, as the rights of injured victims and level of expected environmental responsibility are generally more rigorously enforced in the U.S. than in many other countries.This may also impact insurance rates for U.S.-flag vessels.

We have limited information submitted by carriers on their operating costs.  We do not have comprehensive, consistent information on the broader range of impediments to the use of the U.S.-flag registry.  In order to further expand our basis for analyzing the factors that limit the attractiveness of the U.S.-flag registry, the Maritime Administration is undertaking a study to survey a sample group of carriers and strengthen our analytical assessment of the U.S. flag fleet. 

MARAD Administration of Congressional Mandates

The Maritime Administration manages the programs enacted and funded by Congress to support the U.S. foreign trade fleet.  As previously mentioned, the three major program areas we administer, the MSP, VISA, and Cargo Preference, are interlocking mechanisms to sustain a fleet aligned with military sealift requirements, Government-financed export cargoes, and commercial cargo.  U.S.-flag operators have consistently emphasized the importance of these programs, and their reliance on these programs to alleviate some of the differential between U.S. and foreign flag operating costs.  

Maritime Security Program   

One of my primary goals as Maritime Administrator is to strengthen the Merchant Marine to better align our sealift programs with the needs of our country.  The MSP program goes a long way toward that goal with enrollment of over half of the U.S.- flag ships in foreign commerce.

Each MSP Operating Agreement specifies that the vessel covered by that agreement must operate in U.S. foreign commerce for not less than 180 days in any Fiscal Year.  Carriers must have sufficient cargo to operate competitively in U.S. foreign commerce. 

The MSP provides the United States with a core privately-owned and -operated U.S.-flag fleet in international trade that is also available to support U.S. national security requirements.  The MSP was established as a ten-year program in 1996 and reauthorized for another ten years from 2006 through 2015.  To assure retention of these ships under U.S-flag and their immediate availability for defense purposes, carriers in the program receive an annual retainer fee, not a differential subsidy.  The amount of the payment, currently $2.9 million per ship per year, is set by Congress.  This subsidy does not cover the per ship crew costs for an average containership in the program, which are on average $4.5 million higher than similar open registry containership.

With the MSP, the U.S. gains assured access to a vast global network of support and infrastructure, including logistics and operational expertise.  The benefits of this enhanced readiness have been most notably demonstrated in the Northern Distribution Network that three MSP carriers established to support the transportation of goods and supplies to Afghanistan in support of military operations.  The MSP carriers established a custom door-to-door intermodal transportation service to streamline the delivery of military goods and supplies across multiple borders and difficult terrain.  One DOD study estimated that the complete replacement of the MSP fleet with Government-owned assets would cost in excess of $7 billion for initial construction and would require an annual expenditure of $1 billion for operation and maintenance of the fleet.  However, this estimate does not address whether the current set of programs is the most cost-effective way to achieve national security objectives related to the merchant fleet.

There are currently 60 ships in the MSP.  The program is fully subscribed.  Since the program was reauthorized for the ten-year period of fiscal years 2006 through 2015, companies participating in the program have replaced some of their MSP ships with newer, more modern, and more capable ships that are available to meet national requirements.  For example, in the last five years (2006 – 2010), 36 vessels have utilized the “expedited” MSP flag-in process, which also gives them immediate access to Government sponsored cargoes.  Twenty-four of these vessels are currently receiving MSP payments.  Twelve vessels are MSP-eligible and are currently registered as U.S. documented vessels, but are not receiving payments since the program is already fully subscribed. 

This fast track to gain access to Government-impelled cargoes provides an alternative to the three-year wait under the Cargo Preference statutes.  It is an example of how the MSP, as leveraged by the Maritime Administration, DOD, and the industry, can provide a dynamic and forward-looking environment to encourage additions to the U.S.-flag fleet, and avoid the negative impact of policy disparities that may result from the provisions of other statutes.

During the same time period, 18 MSP or MSP-eligible vessels have flagged out without needing to request further MARAD approval.  Fourteen of these vessels were previously in the MSP, but were allowed to transfer to foreign flag after being replaced in the MSP with newer and more efficient vessels.  Four MSP-eligible vessels were returned to foreign registries.

The MSP is making available crews, containerships and Roll-on/Roll-off vessels.[1]   The Maritime Administration ensures that the intermodal infrastructure DOD needs is also available, as required by law.  A 2009 evaluation of the MSP stated that the commercial shipping and inland commercial transportation in the Middle East has been crucial for execution of Operations Enduring Freedom and Iraqi Freedom.[2]

President Obama’s FY11 budget proposed that the MSP should be extended through 2025.  In May 2010, Representative Ike Skelton, recognizing the importance and effectiveness of the MSP, introduced HR 5136, the FY 2011 DOD Authorization Bill, which included extension of the MSP under Title XXXV from FY 2016 through FY 2025.  The Maritime Administration has already made significant progress this year in working with stakeholders and our Federal partners to gather information on the future needs and potential of the program.

In anticipation of the end of the current program authorization, MARAD, the United States Transportation Command (USTRANCOM), and the maritime industry have had several discussions on a follow-on program.  There are indications from USTRANSCOM that the size of the MSP fleet may need to be increased by four to six ships to meet new requirements identified by DOD this past year.  

Voluntary Intermodal Sealift Agreement Program

The U.S. commercial emergency preparedness sealift program, VISA, is sponsored by the Maritime Administration and DOD and was implemented in 1997.  This program provides DOD with assured access to U.S.-flag vessel capacity in the event of war or other national emergency.  MSP companies are required to commit all of their MSP dry cargo vessel capacity to VISA.  Non-MSP ship operators also commit capacity to the VISA program in order to receive priority consideration for DOD peacetime and wartime cargoes. 

During Operations Iraqi and Enduring Freedom, 124 VISA vessels including 78 current and former MSP vessels supported U.S. military operations and Iraqi rebuilding efforts.  The VISA fleet has delivered over 500,000 twenty-foot equivalent units of containerized cargoes to support U.S. troops since September 2001.  As of September 1, 2010, 49 U.S.-flag operators were enrolled in the VISA program.  The VISA fleet currently includes 135 ships and 213 barges, tugs, and other miscellaneous vessels.  Over 165,000 twenty-foot equivalent units and 3.9 million square feet of capacity are committed to the VISA program.  The MSP fleet commits approximately 75 percent of the total capacity to VISA.

Cargo Preference

The Government’s cargo preference programs ensure a certain amount of cargo can be competed for by U.S. vessels, helping them to remain under U.S. flag.  The Maritime Administration implements the Cargo Preference programs for civilian agencies.  In addition, MARAD has provided information to DOD to assist them in enforcing the Military Cargo Preference Act of 1904.   For example, MARAD assisted DOD in taking enforcement action in Guam that resulted in a construction company receiving the equivalent of a $380,000 penalty for shipping crushed rock from South Korea to Guam on a foreign-flag ship when a U.S.-flag ship was required for the DOD project. 

Since 2000, GAO has prepared several reports on U.S. Food Aid Programs including ones that examine the impact of Cargo Preference laws.  These reports have generally noted that while there is continued support for cargo preference, however, it makes sense as part of the ongoing policy review to look at ways to make the program more cost-effective and to reduce its impact on Federal deficits.  There are ongoing discussions among Government agencies and the carrier community about how greater efficiencies might be achieved.  Among the improvements that should be considered is the modernization of ocean transportation.  The Government agencies continue to work on achieving consensus on these complex matters. 

Cumulative Effect of MSP, VISA and Cargo Preference on the U.S.-Flag Fleet

The interlocking MSP, VISA and Cargo Preference programs help to retain, and even attract, ships to the U.S.  Each of the programs provides an element of the base cargo that carriers rely upon in their aggressive pursuit of commercial cargoes for their ships.  Without this base, carriers simply cannot survive in an international marketplace dominated by open registries.  Although MSP is essential, by itself it is not sufficient to support an active, privately-owned U.S. flag commercial fleet.  The VISA program, with its guaranteed access to Government cargoes, is an incentive for ships, which are principally those in the MSP program, to remain under U.S.-flag.  The Government Cargo Preference programs provide an important source of income.  With the expected decline in DOD shipments after the withdrawal of combat forces in Iraq and Afghanistan, carriers have expressed to you, and to us, that they need more cargo to try to remain competitive in international trade. 

Additional Initiatives to Leverage Program Results

Although the foreign trade fleet is the focus of this hearing, I want to mention how a primarily “domestic” program is being maximized to also support DOD sealift requirements.  Recently, MARAD awarded a contract to further develop the design of ships particularly suited for use in the American Marine Highway system.  The study will include identifying owner’s requirements through discussion with perspective marine highway owner/operators, surveying the current status of marine highway design development, and the development of a matrix of concept designs covering a range of marine highway ship design solutions.  Particular emphasis will be placed on developing ship characteristics and design features that will enable a vessel to be attractive for DOD sealift needs.  The study is being conducted in coordination and with cooperation of the U.S. Navy as part of the interagency Dual Use Vessel Development plan.

Developing a robust U.S.-flag fleet in domestic trade is a fundamental underpinning of a strong U.S.-flagged fleet in the U.S.-foreign trade.  A solid domestic fleet of U.S.-flagged vessels can provide the home-grown mariners we need for international trade.  It can also help revitalize our U.S. shipyards, whose specialized industrial base is essential for the construction and maintenance of our military fleet of ships and U.S. commercial vessels vital to our military sealift capacity.  This U.S. fleet can also provide jobs that by law cannot be outsourced, through direct employment in marine transportation and shipbuilding, as well as other industries that support our marine transportation system.  Additionally, ensuring that we have a robust domestic fleet that utilizes America’s Marine Highway system will also assist our efforts to stop the decline in vessels engaged in foreign commerce.  These domestic vessels perform the valuable function of moving inland export cargoes to our seaboard ports, and making them available for vessels engaged in foreign commerce.    

Two weeks ago, Secretary LaHood announced Marine Highway Grant awards for specific projects and studies.  These funds are being maximized to ultimately place more vessels into service and increase the capacity of several Marine Highway operations. This will trigger limited shipyard activity, create jobs afloat and ashore, and long-term employment potential for our maritime workforce. 

MARAD also plays a key role in the application of uniform laws and policies to protect the environment, and has been actively involved in the areas of invasive aquatic species and air emissions reductions.  MARAD partners with other Federal agencies through policy efforts, research, and practical technology applications, as well as with international organizations to help achieve sound environmental stewardship.

Testing of ballast water treatment technologies takes place aboard MARAD vessels, and has grown to a multi-state and multi-agency cooperative effort that includes the development of protocols for technology testing and verification, and the development of independent testing facilities to provide data for certification of technologies to International Maritime Organization  and U.S. Coast Guard standards.  We have also provided ship platforms for testing, as well as scientific, technical, engineering, and marine architectural support and year-end funding in this area, and worked to coordinate development of facilities for testing and verification of technologies.  

MARAD has also played a role in decreasing port and vessel air emissions.  Our cooperative efforts have included testing of fuel switching technologies for low sulfur fuel, air emissions treatment technology testing on vessels, port and vessel air emissions technology evaluation and transfer with Pacific Rim ports such as Shanghai; development of standards for natural gas fuel on ships; developing models for analyzing and comparing air emissions of vessels, trucks, and trains to allow for various multi-modal freight analysis and planning; and cold ironing and shoreside power. 

Piracy

I would now like to turn to an area of great concern to the U.S. merchant fleet in foreign commerce:  Pirate attacks in the Horn of Africa (HOA) waters off the coast of Somalia.  These attacks threaten commercial shipping transiting vital trade routes.  Over the past year, Somali pirates have unsuccessfully attacked the HARRIETTE, the LIBERTY SUN, and the MAERSK ALABAMA (twice).  At any given time, approximately six to eight U.S.-flag ships are in the region, of the approximately 200 that are in the area, on average. These ships are carrying DOD cargo bound for Operations New Dawn and Enduring Freedom or humanitarian cargoes destined for East Africa. 

Together with the USCG, MARAD leads Working Group 3 of the Contact Group on Piracy off the Coast of Somalia.[3] The Working Group focuses on shipping self awareness and interaction with industry.  MARAD is uniquely qualified for this role because of the agency’s specialized knowledge of sealift vessels; our established relationships with the shipping community, maritime unions, the marine insurance community, and global maritime industry associations; and our oversight of Government impelled cargoes transiting the Horn of Africa.  We have been a leader in promoting international action to combat the piracy crisis.  Since 2008, we have conducted outreach and interaction with industry and other Federal agencies, and focused on best management practices to counter piracy and on industry concerns.  Although the number of U.S.-flag vessels transiting the HOA region is relatively small, the potential for risk to our ships and seafarers demands that we take effective action to ensure our fleet is well protected. 

The Working Group has been involved in the development and dissemination of Best Management Practices (BMPs) on self-protection measures that ship owners can incorporate into their operations.  In addition to continual refinement of BMPs, the Working Group plans to focus on anti-piracy training and other issues related to human factors.

This MARAD initiative, and the dedication of the global maritime industry and their governments, has successfully diminished successful attacks on ships and the implications for freedom of navigation in the HOA.  We will continue our commitment to help assure the safety of our vessels and mariners transiting the area.

I am dedicated to achieving the strongest and most viable U.S. flag fleet possible.  Our statutory authority and resources drive our efforts to achieve an effective maritime policy and a fleet that meets our national security needs and supports our economic interests.  I pledge to you that I will do my utmost to ensure that our policies and programs are effective.

At this time, I will be pleased to answer any questions you may have.  Thank you.

DEPARTMENT OF TRANSPORTATION

STATEMENT OF

MARITIME ADMINISTRATOR
SEAN T. CONNAUGHTON

BEFORE THE

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
SUBCOMMITTEE ON COAST GUARD AND MARITIME TRANSPORTATION
OF THE
UNITED STATES HOUSE OF REPRESENTATIVES

ON

MARINER EDUCATION AND WORKFORCE

OCTOBER 17, 2007

Good morning, Mr. Chairman and Members of the Subcommittee.  It is indeed a pleasure to be here today to discuss an issue as important as mariner education and workforce.  The Maritime Administration appreciates the opportunity to discuss the challenges and opportunities facing the maritime industry in the recruitment, training and retention of qualified mariners.

This is an issue I am familiar with. I graduated from the U.S. Merchant Marine Academy at Kings Point, New York almost 25 years ago.  I still remember the excitement of passing my license exam and looking forward to graduation.  After four years of school, my fellow classmates and I were anxious to graduate and sail on our merchant marine licenses.  However, there turned out to be one significant problem with this expectation: there were almost no seagoing jobs available due to a downturn in the U.S. economy and maritime industry.  As a result, I, along with many others, either entered the service or sought whatever maritime-related positions were available.

A tremendous amount has changed since then.  Now, U.S. maritime employers are actively recruiting and hiring new graduates from Kings Point and the state maritime academies at California, Great Lakes, Maine, Massachusetts, New York, and Texas.  Salaries are up and many seafarers are receiving multiple job offers.  Employment opportunities are particularly robust in the offshore energy industry, the inland river system, and in the coastwise trades. The largest single employer of American mariners, the Military Sealift Command, is also aggressively seeking seafarers. 

Only months since graduation, approximately 85% of the USMMA and state schools’ Class of 2007 is either employed afloat or in the Armed Services and another 12% is employed in the maritime industry.

This is positive news but we are aware that the industry is still facing challenges in recruiting and retaining personnel.  Addressing these challenges as well as taking advantage of the opportunities being presented in the international arena are the dual challenges before us today.

Current Maritime Administration Programs

The education of merchant mariners is an essential Maritime Administration responsibility.  We must provide the highest quality personnel possible for the complex responsibilities of vessel operations and the demands of economic competitiveness in world shipping, as well as to meet national security needs and to maintain defense readiness.  The Maritime Administration meets that need by educating and training young men and women for service in the U.S. merchant marine, in the U.S. Armed Forces, and in commercial activities related to intermodal transportation.  The Maritime Administration has several maritime education and training programs.

The Maritime Administration operates the U.S. Merchant Marine Academy (USMMA).  USMMA is located at Kings Point, New York.  With a total student body of approximately 1000, USMMA graduates around 210 entry level deck and engine merchant marine officers a year.  Graduates are obligated to maintain a license as an officer in the merchant marine of the United States for at least six (6) years following the date of graduation from the USMMA as well as serve in the foreign or domestic commerce and the national defense of the United States for at least five (5) years following the date of graduation from the Academy.

In addition, the Global Maritime and Transportation School (GMATS) at USMMA is an education and training arm of the Maritime Administration and a U.S. Department of Transportation (DOT) Learning Center.  The mission of the school is to provide advanced education and training for professionals from the maritime community, private sector, government and military. GMATS provides significant Army and Navy training, including the simulation center for the Navy’s surface warfare officers. No appropriated funds are used for GMATS; rather, fees are charged for the courses and the school is self-supporting.

The Maritime Administration also supports mariner training at state maritime academies.  These schools are located in California, Michigan, Maine, Massachusetts, New York, and Texas. These schools produce a steady stream of almost 700 new licensed officers a year, a number that could grow to take advantage of the increased demand for seafarers. The Maritime Administration provides training vessels to each of the state maritime academies for use in at-sea training and as seagoing laboratories.  The Maritime Administration also provides direct financial support to the state maritime academies for their operations and Student Incentive Payments (SIP) to those students willing to undertake service obligations similar to those of graduates from USMMA.

The Maritime Administration owns and operates a Fire Training Facility in Swanton, Ohio.  This facility is available for use by the industry and government entities for basic and advanced firefighting training.

Growing Demand for Mariners

There are reasons for a growing need for mariners.  First and foremost is the strong American economy, which continues to need the raw materials, energy and manufactured goods the maritime industry transports so cheaply and effectively.  That strong economy has created tight labor markets nationwide and drawn mariners ashore. 

We are also experiencing a major recapitalization in practically every segment of the U.S. merchant fleet.  The new double-hulled tankers and tank barges, offshore services vessels, ferries and cruise ships, and inland tugs and barges require personnel with advanced training and certifications.  This has contributed to increased demand for trained and licensed seafarers to operate these vessels.

While our Nation has a large pool of highly trained licensed and unlicensed mariners, the towing, passenger, and offshore “brown water” operators are reporting shortages of mariners who are qualified and willing to work in these sectors of the industry.  However, despite this increased demand, experienced mariners are also retiring or leaving the mariner workforce at a rapid rate due in part to the rising costs imposed on them to upgrade their licenses or advance their qualifications.  The passenger industry is also reporting personnel shortages due to the rising costs (merchant mariner documents, drug tests, physicals) of entering the industry as well as from the exodus of qualified mariners who cannot justify the costs of remaining in a heavily regulated industry. 

This labor market imbalance is not unique to the United States.  The rapid growth in global trade has dramatically increased the worldwide demand for seafarers.  Shifting demographics and decreasing interest in sailing have limited the number of new officers from Europe, Korea and Japan.  Some industry associations estimate that the licensed officer shortage is currently at 10,000 and will grow as more ships enter the marketplace. Even India, a traditional source of licensed officers for the world’s merchant fleets, is examining the use of foreign officers for its domestic fleet because of an acute officer shortage.   This international demand has a dual impact on the available mariner labor pool in the United States. On the one hand, it provides new opportunities for U.S. mariners. We want U.S. mariners to be regarded as the best qualified in the world and to be sought after, as they should be.  On the other hand, worldwide mariner demand can attract U.S. mariners away form domestic employment.

Maritime Administration Initiatives

The Maritime Administration is taking action to identify the magnitude of the mariner shortage problem. We are going to conduct a survey of the entire U.S. vessel operating industry to determine where shortages exist. This will serve to verify the anecdotal information we have received and will identify the specific sectors where we need to focus our attention.  We are currently awaiting approval to send the survey to the industry for response.

In 2006, the agency established the Mariner Outreach System (MOS), which provides a systematic way to monitor the adequacy of our nation's deep sea qualified merchant mariner pool and to track and maintain contact information and qualifications of mariners. The Maritime Administration has partnered with the U.S. Coast Guard National Maritime Center (NMC) to utilize data from the USCG Merchant Mariners Licensing and Documentation (MMLD) system which is critical to analyze and monitor trends in the mariner population.  MOS is an invaluable tool that enables the Maritime Administration and its partners to make valid vessel and human resources projections, identify potential mariner shortfalls, and facilitate crewing of vessels should a mariner shortage occur.

Over 41,000 licensed and unlicensed U.S. mariners have consented to participation in MOS.  Additionally, MOS now provides the following capabilities:

We intend to expand MOS to include other industry sectors in addition to deepsea. This will enable us to better track mariner availability and qualifications in the brownwater area and to disseminate information and communicate with mariners in that sector.

We are also meeting with industry groups to hear firsthand their labor experiences.  In fact, we just conducted a meeting with the Offshore Marine Services Association (OMSA). They shared their assessment of the current labor situation and their forecast of future demand in the offshore sector. OMSA is very concerned about mariner shortages and welcomed the opportunity to discuss possible approaches to this issue with the Maritime Administration. On our part, we appreciated their insights and will add their information to our ongoing analysis of the potential shortage problem.

As a related matter, the shipbuilding industry is also experiencing significant labor shortages. The same industry recapitalization with new vessel construction that is creating a demand for mariners is also creating a demand for shipyard workers. The Maritime Administration held a conference in July to which it invited every shipyard in the United States. The attendees overwhelmingly identified worker shortages as a major issue. In response, we reached out to the Department of Labor (DOL) to obtain information about apprenticeship programs and other forms of assistance. We then facilitated a meeting with DOL, the Shipbuilders Council of America and the American Shipbuilding Association. As a result, we are hopeful that the shipbuilding community has a promising avenue to explore which will assist them in meeting their workforce challenges.

We also plan to expand our discussions with DOL into the mariner arena in order to address brownwater shortages. We believe that training opportunities can be developed which could not only reduce the cost to companies for entry level employees but also significantly reduce the cost burden to a mariner of acquiring additional necessary skills.

As a proactive step to address the brownwater mariner demand, we have instituted a policy allowing our maritime academy graduates to fulfill their service obligations to the Government in the brownwater sector of the industry. Previously, service in this sector of the industry did not meet the service obligations for maritime academy graduates.  By changing this policy, we have increased the pool of mariners available for service in the inland and offshore industries.

We are active participants in major working groups that focus on mariner issues. For example, we participate in the NDTA working group on unlicensed engineers and various USCG advisory committees that address a myriad of mariner issues facing the industry.  We are also exploring an initiative to work with USCG to obtain credit for Navy sailors for their Navy training which will allow them to transition easily into a merchant marine career once they retire from the Navy.

We have embarked on an effort to increase cadet billets on vessels.  These billets are essential to our training programs because without sufficient sea time cadets cannot take the examination to become a merchant marine officer.  This last Monday, I signed, on behalf of the Maritime Administration, an agreement with Overseas Shipholding Group, Inc, (OSG) that will provide training opportunities for American maritime academy cadets on board OSG’s international vessels.  This public-private partnership is the first formal agreement to make available on-board training billets in the international commercial fleet for U.S. maritime academy cadets.  Under the terms of the agreement, cadets from the U.S. Merchant Marine Academy and all six state maritime academies will be able to obtain work experience and training on board OSG vessels.  OSG is a market leader in global energy transportation services for crude oil and petroleum products in the U.S. and International Flag markets.  OSG’s owned, operated and newbuild fleet totals 144 vessels.

In its recently completed realignment, the Maritime Administration created the Office of Maritime Workforce Development.  This office is responsible for the management and development of policy and plans for the recruitment, training and retention of maritime workers both ashore and afloat. As well as working with DOL on programs to alleviate the current shortage of shipyard workers, the office is developing secondary school programs to introduce young Americans to the opportunities presented by a career in the maritime industry.

I would like to address this further. It is important to recognize that career opportunities in the maritime industry are not widely known among youth and young adults.  Therefore, the Maritime Administration has embarked on a campaign to raise awareness about career and employment opportunities in the industry.  Through the years, we have developed and implemented initiatives with a youth and young adult focus to familiarize them with maritime career paths, educational institutions, and potential resources in order to attract them to career opportunities in the maritime industry.  To achieve this, we participate in a number of school events and activities, including career fairs and trade expositions. 

Most recently, my staff participated in a discussion group at the Baltimore City Maritime Industries Academy.  Chairman Cummings and representatives from various maritime industry organizations were also there. The group came together in June of this year to discuss ways to best structure the USMMA’s curriculum with a specific focus on maritime related studies.  As a result, Maritime Administration staff members as well as members of the maritime community will serve as guest speakers through the 2007-2008 school years to raise awareness among students about the importance of the maritime industry and the employment and training opportunities for U.S. merchant mariners.  As members of the maritime community, we are committed to further assist the Maritime Industries Academy, in coordination with Chairman Cummings’ office, in formalizing the Academy’s structure to support a strong maritime curriculum for our future young leaders.

The Maritime Administration has also been involved for many years in supporting the interest and training of young men and women who desire to go to sea as a career after high school.  A number of new programs and training institutions have developed around the country to train and assist younger students in pursuing maritime careers.  The agency is supporting the Ship Operations Cooperative Program in its research study to identify middle and high school maritime institutions and programs around the world to document the successes and failures of various programs, develop best practices and link industry, government and local schools for future support.

The Maritime Administration also plays a major role in the development and certification of mariner security training standards which have become so critical as part of the war on terror.  Training courses for security must be approved by the Maritime Administration, and we regard this as a vital part of our responsibilities.

Most recently, we have begun to develop proposed revisions to the regulations governing the USMMA and the state academies. These regulations have not been updated in over 20 years, and we expect to propose significant changes, particularly in allowing graduates to meet their service obligations in the brownwater sector.

LNG Opportunities

I’d now like to focus on a specific area of opportunity, the expanding Liquefied Natural Gas (LNG) market and highlight some recent successes we have experienced.  By the year 2030, the United States’ demand for natural gas is projected to increase by 20 percent to 26.1 trillion cubic feet per year.[1]  Industry analysts also project that as demand increases, domestic production will decrease and account for only 79 percent of consumption.  To accommodate this shortfall, the U.S. will need to increase the amount of natural gas imports to 4.4 trillion cubic feet per year in 2030, an increase of 750 percent.[2]

The importation of LNG will serve to relieve the nation’s growing energy needs by diversifying energy sources.  Deepwater ports are necessary to enhance the nation’s ability to import LNG from worldwide sources by oceangoing LNG tanker vessels.  Notably, advances in LNG tanker size, the increased number of LNG carriers in the worldwide fleet, and improvements in LNG transfer technology have made importing LNG increasingly more efficient and cost effective.  Increased consumer demand for LNG will clearly require new and expanded terminal infrastructure as well an increase in the nation’s pool of U.S. mariners to serve on these sophisticated vessels.

Strong competition from China, Japan, and Korea for both energy resources and mariners has led to intense competition within the LNG industry.  It has also led to the lack of a single U.S.-flagged LNG vessel.  Consequently, few U.S. mariners have the opportunity to gain vital hands-on experience in this growing industry.  Recent industry reports have concluded that the number of mariners with LNG experience is rapidly declining.  It is estimated that as many as 3,700 to 5,000 additional mariners may be needed by the year 2008.[3]  If the shortage of mariners is not addressed, the magnitude of this problem could negatively impact the LNG industry’s excellent safety record. 

This shortfall problem is not unique to the LNG shipping industry, but is rather a reflection of the manpower crisis which faces the global shipping industry that I referred to earlier.  Analysts have further asserted that the loss of experienced LNG officers is expected to be a worldwide problem by 2010.  This loss of experienced mariners coincides with the growth of the global LNG carrier fleet.  Over the last 5 years, the LNG carrier fleet has grown by 73 percent, from 128 to 222 vessels[4]; and by the year 2010, an approximate 130 additional LNG vessels are scheduled for delivery to service the global LNG trade industry.[5]  This expanded fleet will require as many as 10,000 additional seafarers, of whom almost 3,000 will be licensed officers.[6] 

The world’s maritime community must meet this growing challenge without compromising safety and competency levels.  The competence level of mariners is the most critical element in the transportation of LNG.  As such, there is an immediate need to educate and train qualified U.S. LNG officers to meet the demands of this expanding industry.

Recognizing the need to increase the presence of U.S.-flag vessels and U.S. mariners in our worldwide LNG industry, Congress amended the Deepwater Port Act through the Coast Guard and Maritime Transportation Act of 2006, directing the Secretary of Transportation to develop and implement a program to promote the transportation of LNG to the United States on U.S.-flag vessels.  Under this amendment, the Maritime Administrator, by delegated authority from the Secretary, must give top priority to all deepwater port applicants that commit to utilize U.S.-flag vessels in their port operations. The Maritime Administration interprets this requirement to include both domestic and foreign-flag LNG vessels providing gas to deepwater port facilities licensed by the Agency.

The Maritime Administration supports the premise that U.S. mariners should play an integral role in the importation of LNG to ensure and provide the highest level of safety and security to our nation’s ports.  Because of this, and in response to these legislative directives, the Maritime Administration has developed a voluntary Deepwater Port U.S. Manning Initiative to encourage the employment of highly trained and skilled U.S. mariners to meet the current and forecasted demand for professional mariners in the international LNG shipping industry.  The agency strives to ensure that reliable supplies of U.S citizen mariners are available to serve on LNG vessels calling at all U.S. ports. 

Currently, the Maritime Administration is working with the USMMA, state maritime academies, and other training facilities to develop and expand innovative educational programs for U.S. mariners.  The goal is to provide immediate employment opportunities for entry-level mariners, both licensed and unlicensed, into the LNG industry upon graduation, and to participate in course development for the retraining and/or recertifying of current mariners who are sailing on vessels other than LNG – thus enabling the transition into LNG service.

Over the past year, we have begun to see tangible results from our efforts to establish innovative public-private partnerships with deepwater port license applicants.  In December 2006, the Agency announced a partnership with SUEZ Energy – the first official collaboration of its kind in the international LNG industry.  Under this agreement, SUEZ committed to train and employ U.S. citizen officers, cadets, and unlicensed mariners aboard their tanker fleet and at both their planned deepwater ports proposed for construction and operation off the coasts of Boston and Florida.  Another recent deepwater port applicant, Excelerate Energy, entered into a similar agreement for its planned Northeast Gateway deepwater port to be located in Massachusetts Bay, and its existing LNG deepwater port, Gulf Gateway, located in the Gulf of Mexico.  Additionally, Excelerate has established a partnership with Texas A&M University to place students and instructors on Excelerate Energy's ships for training and educational purposes.  Further, in January 2007, the Louisiana-based applicant, Freeport-McMoRan Energy, committed to work with the Maritime Administration to develop programs to train and employ U.S. mariners on LNG vessels that will service the Main Pass Energy Hub port planned for construction and operation off the coast of Louisiana.

More recently, the Maritime Administration entered into an agreement with Woodside Energy to register two new LNG regasification vessels under the U.S.-flag national ship registry.  Although the vessels will be constructed overseas, they will be fully manned with U.S. citizen crews upon delivery to the United States.  These vessels will service the OceanWay deepwater port terminal planned for construction and operation off the coast of Southern California.  More than 90 American officers and crew will be employed on each of the vessels calling at the OceanWay port.  Woodside Energy has also made additional commitments to provide training and employment opportunities for U.S. officers, cadets, and unlicensed mariners aboard their entire tanker fleet.

It is important to note that from an economic and competitive perspective, the growing worldwide shortage of trained and qualified LNG ship officers has created an opportunity for U.S. officers to work aboard foreign-flag LNG vessels.  International vessel operators are dramatically increasing the wages and benefits offered to foreign officers to keep or attract their services, thus narrowing the gap between the wages and benefits paid to Americans and those paid to their foreign counterparts.

The Maritime Administration will continue to reach similar voluntary agreements with our pending and future deepwater port applicants and all energy companies serving the nation’s international maritime markets.  It is our ultimate goal to provide adequate job opportunities for Americans while ensuring the safe, secure and efficient importation of LNG to our Nation’s shores.

Conclusion

Mr. Chairman and members of the Subcommittee, we are now seeing a perfect storm in which the demand for mariners, particularly those who are licensed, is increasing while the supply may not be keeping pace.  This provides incredible opportunities to the young men and women who are just beginning their careers as well as those who are already in the industry.  We welcome the career paths open to our young people but, at the same time, recognize that they may contribute to shortages in industry sectors such as brownwater 

The Maritime Administration stands ready to pursue other initiatives to address mariner issues such as developing training courses necessary for brownwater operation and analyzing the tax inequities facing U.S. mariners in the international trade

I look forward to assisting you in addressing an issue that is vital to our economic and national security.  I would like to thank the members of the Committee and Chairman Cummings for your leadership in recognizing the importance of this issue and in holding this hearing today.  I will be happy to answer any questions that you might have.

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DEPARTMENT OF TRANSPORTATION

STATEMENT OF

MARITIME ADMINISTRATOR
SEAN T. CONNAUGHTON

BEFORE THE

SUBCOMMITTEE ON SEAPOWER AND EXPEDITIONARY FORCES OF THE
COMMITTEE ON ARMED SERVICES
UNITED STATES HOUSE OF REPRESENTATIVES

ON THE

TITLE XI PROGRAM

MARCH 15, 2007

Good morning, Mr. Chairman and Members of the Committee. It is indeed a pleasure to be here today to discuss the Title XI program, which is administered by the Maritime Administration (MARAD).

As most of you know, the Title XI program provides for a full faith and credit loan guarantee by the federal government of private sector debt incurred for the construction or reconstruction of ships in United States shipyards. Loan guarantees can also be issued for the modernization of American yards to make them more competitive. The Government can provide a guarantee up to 87 ½ percent, depending on the type of project.  Companies must provide equity for the remainder and security to the Government. The company has to meet strict financial requirements and the project has to be economically sound.

The Title XI program was created to promote the growth and modernization of the U.S. merchant marine and U.S. shipyards by enabling eligible companies to obtain long-term financing on terms that would otherwise be available only to the most creditworthy concerns. The term of a Title XI loan guarantee can extend to 25 years and the Government backing of the financing makes it possible for a company to lock in an attractive interest rate for this period.

At this time, the Administration does not request funding for Title XI because it believes this program is a form of corporate subsidy, and that shipowners and shipyards should rely on their own creditworthiness to obtain financing in the private sector. Further, the taxpayers should not bear the risk of default by private companies.

However, I want to emphasize at this point that our position on the Title XI program should in no way be misconstrued as a lack of support for the U.S. shipbuilding industry or U.S. shipowners. This Administration is on record as staunchly championing the Jones Act in order to protect their interests. We simply believe that Title XI is an unwarranted intervention in the credit market.

Although the Administration has not requested funding for new loan guarantees since 2001, Congress has periodically appropriated money for this purpose. In implementing Congressional direction, we have used these funds to finance projects that we believe will yield the greatest benefits to our economic and national security. The most recent project we approved was two passenger and vehicle fast ferries for Hawaii SuperFerry. The total cost was $180 million for both with Title XI guarantees at $140 million. The ferries are under construction at Austal Shipyard in Mobile, Alabama. The first will be delivered at the end of this month and the second in February of 2009. We financed a similar vessel, which began operating in 2004 across Lake Michigan.

These ferries are state of the art and highly suitable for use on America’s Marine Highway system. In choosing to finance the ferries, MARAD is promoting a vessel type that can be used to relieve highway congestion by providing an attractive marine transportation alternative. The ferries are also militarily useful and TRANSCOM has expressed an interest in them. The Hawaii SuperFerry vessels will be offered for enrollment in the Voluntary Intermodal Sealift Agreement, or VISA, program.

At present, we have an outstanding portfolio of $2.9 billion in loan guarantees covering the modernization of American shipyards as well as a wide variety of vessels: ferries, tankers, drill rigs, passenger vessels, dredges, supply vessels, tugs, RO/ROs, containerships, tugs and all kinds of barges. Title XI is represented in just about every market segment in the maritime industry.

We are very proud of the fact that we have notably improved our management of the Title XI program since audit reports were issued in 2003 and 2004 by the General Accounting Office, now the Government Accountability Office, and the Department of Transportation’s Office of the Inspector General. MARAD has taken the steps we believe are necessary to address the audit recommendations. Let me highlight some of the major areas of improvement:

We have established requirements for an independent outside application review when necessary;

We have instituted a formal financial monitoring process with a credit watch report for regular financial monitoring of Title XI borrowers;

We have developed a regular physical condition report system for Title XI vessels;

We have revised our credit risk methodology;

We have tightened our fund disbursement procedures; and

We are in the process of implementing an electronic financial monitoring system, which will significantly enhance management of the existing portfolio and future financing activities in the Title XI program.

In addition to the steps MARAD itself has taken, the Department of Transportation has instituted a Credit Council to provide financial oversight for all of the Department’s credit programs, including Title XI. This has provided another valuable avenue of review for loan guarantee applications, significant financial transactions with existing borrowers, and portfolio monitoring.

We are very pleased to report that our program improvements have been recognized. In his November 15, 2005 report on the top management challenges facing the Department of Transportation, the DOT Inspector General stated that the "Title XI loan guarantee program is functioning effectively." He went on to note that MARAD now systematically monitors its loan portfolio and that creditworthiness overall has improved.

In addition, the Title XI program went through a PART assessment last year, as mandated by the Office of Management and Budget.  PART stands for Program Assessment Rating Tool, and is a stringent diagnostic process that OMB uses to assess the performance of Federal programs. Title XI received a final PART score from OMB that indicates that the program is considered to be moderately effective.

In conclusion, the DOT Inspector General’s comments and the PART score clearly demonstrate MARAD’s diligence in implementing recommendations for improved program management.  Moreover, I am confident that MARAD is now positioned to continue to administer the program in such a way as to maximize the benefit to our national and economic security while protecting the Government’s financial interest.

I want to thank the Members of this Committee and Chairman Taylor for holding this hearing today. I will be happy to answer any questions you might have.

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DEPARTMENT OF TRANSPORTATION

STATEMENT OF

MARITIME ADMINISTRATOR
SEAN T. CONNAUGHTON

BEFORE THE

SUB-COMMITTEE ON COAST GUARD AND MARITIME TRANSPORTATION OF THE
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
UNITED STATES HOUSE OF REPRESENTATIVES

ON THE

DEVELOPMENT OF SHORT SEA SHIPPING

FEBRUARY 15, 2007

Good morning, Mr. Chairman and Members of the Committee.  It is indeed a pleasure to be here today to discuss the Department of Transportation’s efforts to build a public-private maritime partnership that will both improve our transportation efficiencies and grow our economy.  Today’s hearing initiates a dialogue that will lead to the expansion of the Nation’s marine transportation system.  I think that it is fitting that my first Congressional hearing as Maritime Administrator is on the topic of short sea shipping[1] or, as I have begun to call it, America’s Marine Highway.  I believe this term more accurately describes the nation’s waterborne transportation system and the promise of its extensive capacity.  

I would first like to provide you with some of the history of America’s Marine Highway initiative, and discuss with you some of our plans for the future.  Early this decade, the Department of Transportation’s leadership recognized the need to address landside congestion through the expanded use of waterborne transportation alternatives, specifically through the use of the marine highway.  When moving high volume and bulk freight, short sea shipping is more cost effective, is more fuel efficient per cargo ton mile, and is a vital alternative transportation mode in a natural disaster.  When fully integrated into the Nation’s transportation system, the marine highway will facilitate enhanced freight flow, expand freight capacity, reduce congestion, and improve air quality. 

As a former County Executive in Northern Virginia, I am keenly aware of how surface transportation congestion adversely impacts our daily lives.  The impact on our productivity is enormous.  We lose 44 billion person hours a year due to transportation delays[2] – translating into billions of dollars of lost productivity.  And, I also know first hand that we cannot pave ourselves out of this situation.  

A robust U.S. economy depends on the efficient movement of freight to stimulate domestic production and satisfy consumer demand.  Consider these facts – since 1995, container growth has increased by at least 10% every year and this growth is expected to continue.  By 2020, every major U.S. container port is expected to double the volume of cargo it must process, with East Coast ports tripling in volume and some West Coast ports quadrupling in volume.  The United States is expected to import 30 million containers in 2010 and 40 million in 2020.  The domestic tonnage of freight carried by all U.S. systems will increase by 67%, while international trade is expected to at least double. Presently, this domestic freight is carried almost exclusively by road or rail -- coastal shipping handles only two percent of our domestic freight, even though coastal counties hold more than half of the Nation’s population.

This massive growth means that our Nation must expand its overall port volume capacity by 10% yearly just to sustain this expected growth – an annual capacity growth greater than the overall size of the ports of Seattle and Tacoma combined.  As Maritime Administrator, I am one of the people responsible for finding a solution to our growing congestion problems and I look forward to working with the Committee to determine “where we go from here” in our quest to find solutions to a capacity crisis that threatens to overwhelm our existing transportation system.    

Clearly, the Nation’s marine highway can help mitigate this congestion.  The world’s waterways are an infinite system, and our marine highways have infinite capacity.  Unlike rail and roads, there are no fixed infrastructure costs to develop transportation routes, and ships can carry more cargo per dollar than any other method of transport.  The full scope of America’s Marine Highway – a system that includes not only our coastal waters, but our inland waterway system and the Great Lakes, is enormous – and, if properly utilized and integrated, can help us expand our way out of the crises before us. That is why I am here today and, why I am so pleased that the Members of this Committee have made the decision to investigate the advantages of our marine transportation system.

It is my hope that your discussions will lay the groundwork for legislative initiatives that will add new, permanent capacity to our Nation’s freight delivery systems and grow our economy.  Now, I am not naive enough to think that our marine highway will solve our congestion problems overnight – after all, much of the vessel capacity we will need to accommodate our projected trade growth is still on the drawing board.    \

However, a minimal reduction in the anticipated growth of trucks on highways can make a significant difference.  For example, one 80,000 pound tractor-trailer truck does as much damage to pavement as 9,600 cars.  Alternatively, the use of America’s Marine Highway would reduce the costs of road maintenance and possibly extend the Present Serviceability Rating (PSR) of roadways.  Accordingly, this will benefit the public, as well as State and Federal entities – and assist our transportation planners to properly allocate vital public resources.

America’s Marine Highway has existed since our Nation’s founding.  It is used today to transport over 1 billion tons of domestic cargo on an annual basis, and clearly has room to grow.  Transporting freight by water has traditionally been for the movement of bulk commodities such as coal, petroleum, grain, and lumber. Current waterway operations thrive along the Mississippi and Ohio River systems, across the Great Lakes, through the St. Lawrence Seaway, and along some coastal routes.  They already accommodate 13% of the national cargo tonnage for less than 2% of the national freight bill.

An excellent illustration is the use of barges in the Mississippi River system. The river transports over 312 million tons of cargo per year between its upper reaches in Minnesota and its lower parts into the Gulf of Mexico.[3]  If this system had to be replaced, it would require over 12.4 million semi-trucks or 3.12 million rail cars to make up the capacity difference.[4]  Annually, in rail capacity alone this would consist of 31,000 trains pulling one hundred cars each.[5] 

In an attempt to develop our own water transportation initiative, we looked to Europe.  The European Union (EU) moves approximately 40% of all its freight on the water.  The EU Commission has vigorously supported the concept of an integrated marine highway system for over twenty years, and has recently set aside over one hundred million euros in a multi-year program to provide incentives to shift freight from the congested landside modes to the water.  In October 2006, the Commission awarded 16 projects totaling 21.7 million euros in an effort to divert truck growth (134,000 truck loads) to the water.

As educational tools to facilitate a public dialogue on the issue of increased waterborne freight movement, the Maritime Administration (MARAD) has sponsored annual industry-wide conferences and initiated or participated in a number of studies to examine the viability of alleviating surface transportation congestion through increased waterborne freight movements.  Three major short sea shipping conferences, sponsored by MARAD, were designed to create awareness and open opportunities for the commercial industry regarding the use of the marine highway. The 2002-2004 conference series emphasized the advantages of short sea shipping to transportation planners and the maritime stakeholder community as a means to accommodate trade growth.  The conferences catalogued the business dynamics of successful and failed domestic waterborne services.  The meetings also addressed issues of facility design, workforce development, the identification of potential research and development needs, expanded freight planning, integration of short sea shipping services into the transportation planning process, and public awareness. 

In 2003, as a direct result of stakeholder requests made at the Agency’s first Short Sea Shipping Conference, MARAD founded the Short Sea Shipping Cooperative Program (SCOOP).  SCOOP is an industry-centered organization which provides a forum for industry, labor, government, and related transportation stakeholder groups to share resources and information in the development of the Nation’s marine highway services.

In September 2006, MARAD, in cooperation with SCOOP, hosted the first in a nation-wide series of domestic shipper and short sea shipping operator workshops.  The workshop facilitated opportunities for discussion among domestic shippers, third party logistics companies, truckers, and domestic marine operators to engage in dialogue regarding the feasibility and development of specific short sea shipping services in the United States.  Another in this series of workshops is scheduled later this month in St. Petersburg, Florida.  

One outcome of this series is the realization that large shippers are currently not in a position to utilize inter-coastal shipping as those services are currently configured.  Transportation cost and “just-in-time” delivery have been a major deterrent to any real commitment to the use of waterborne transportation by the Nation’s shipper community. But, while time sensitive performance is important, it was determined that shippers will utilize water transportation alternatives as long as the marine operator can meet pre-agreed delivery times at a lower cost.  (Generally, smaller niche market shipping companies handle less time sensitive cargo, such as hazardous materials, more suitable to waterborne transportation services.)  

Therefore, workshop participants have suggested an expanded outreach emphasis on attracting mid-sized shippers to inter-coastal marine operations.  Participants also had a clear understanding that freight congestion will ultimately require a larger share of the nation’s freight to move from the surface transportation system to water.   The workshops are generating a greater interest by industry in the mitigation of congestion, improving safety, and the development of greater efficiencies within the transportation system.  It is important to note that the workshop series is also attracting significant interest by the nation’s marine operators.  The ultimate goal of this effort are successful shipper-operator business arrangements that more fully utilize the promise of our marine highway – business arrangements that begin to break the shipper “truck addiction.”

In the spring of 2006, the Maritime Administration and Transport Canada jointly sponsored the North American Short Sea Shipping Conference in Vancouver, Canada.  At this meeting, our NAFTA trading partners expressed interest in viable alternatives to reduce congestion, improve reliability, increase capacity, efficiency, economic performance, and extend the environmental sustainability of the transportation system.  A Trilateral Declaration was signed at the Vancouver Conference among Canada, Mexico and the United States, committing the three nations to expand marine highway operations in North America by establishing a Steering Committee focused on the creation of a trilateral strategy. 

The Trilateral Conference participants also agreed to foster the use of short sea shipping operations by developing an interactive website that will provide information and encourage business communications among North American shippers and marine operators. To this end, MARAD is developing the North American Short Sea Shipping Electronic Information Clearinghouse (Clearinghouse), an interactive website, to provide information and encourage business communications between shippers and operators.  In addition to providing updates on current short sea shipping events, and other useful information links, the Clearinghouse will permit shippers to electronically request assistance in locating qualified marine carriers for the movement of domestic freight.  When fully operational, the webpage will be available to thousands of North American shippers and marine operators to facilitate the increased utilization of waterborne transportation sources in the movement of freight. 

Since 1999, MARAD has initiated or participated in studies to examine the condition of the Nation’s marine transportation system (MTS) with the prime purpose of addressing surface transportation congestion through the development of waterborne transportation alternatives for the movement of freight.[6]   The input for this particular report came from regional listening sessions, a National Conference on the Marine Transportation System, and through the MTS Task Force.  The “needs assessment,” the first of its kind, and the regional listening sessions, laid the groundwork for the creation of the Secretary of Transportation’s Marine Transportation System National Advisory Council (MTSNAC) and the overall MTS initiative.  The MTSNAC provides a structured approach for non-Federal stakeholders to provide input on national-level issues.[7] 

The U.S. Chamber of Commerce (Chamber) released a study in March 2003, which outlined the ability of the national transportation system to respond to changing and increasing trade patterns.  This study was one of the first to call for a national freight policy within the Department to include a national intermodal planning and development initiative, a coherent environmental regulatory process, up-to-date freight data collection, and the integration of the modes and labor into the planning equation.[8]   The Chamber report was also one of the first studies to clearly document the dangers of ignoring the dramatic increase in trade and the resulting impact on the Nation’s transportation system.  The study clearly supports the conclusion that the Nation cannot build itself out of this impending capacity crunch.  

In 2005, the Government Accountability Office (GAO) submitted a report recommending that the Department of Transportation and MARAD “develop a more thorough understanding of short sea shipping issues before defining a Federal role involving substantial investment and, to encourage other public-decision makers to use a systematic approach to investment decisions involving freight mobility projects.”[9]  The study, produced at the request of the ranking Members of both the Senate Commerce and House Transportation and Infrastructure Committees, essentially recommended further analysis of the issue of short sea shipping before significant public resources were committed to the development of this type of marine transportation system.[10]  Our efforts to investigate and promote the idea of short sea shipping have not required a large expenditure of public monies.   MARAD has, instead, focused on the development of a public-private partnership to investigate, educate, and recommend proposals to ease our growing freight capacity issues. 

By way of example, MARAD, in November 2005, consulted in the production of the I-95 Corridor Coalition’s “Short Sea-Study and Coastal Shipping Options Study.”   The I-95 Corridor Coalition is a public-private partnership composed of State DOT agencies and transportation planning organizations along the Eastern seaboard, and the study assessed commodity flows and attempted to determine the viability and sustainability of a short sea shipping service along the Maine to Florida transportation corridor. 

Phase II of the study commenced in late 2006 and sought to incorporate the participation of metropolitan planning organizations (MPOs) to bring water-based transportation, especially short sea shipping services, into the overall local transportation planning process. 

The Coalition study found:

The I-95 Northeast and Mid-Atlantic corridor is physically suited for short sea operations.[11]  Congestion drives the business model for short sea shipping.[12]  In less than 15 years, the Corridor transportation system will be strained beyond capacity -- truck traffic on the I-95 Corridor is expected to increase from 32,000 trailers daily in 2004 to 58,000 trucks per day by 2020.  State and MPOs must play a critical role in waterborne transportation development.[13] 

Additionally, the Department’s Office of the Secretary (OST) recently completed a study assessing the feasibility of short sea shipping operations along four potential domestic U.S. traffic lanes or corridors and determining if such services could serve as an economically viable alternative to overland freight transportation.  The study was specific to the U.S. domestic market and excluded Canada and Mexico water transportation routes.  The study found that the primary economic advantage of short sea shipping is its ability to generate significant economies of scale by moving large numbers of highway trailer-loads on a single vessel providing numerous labor, energy, environmental, and infrastructure advantages. 

The OST study found:

There are significant perceived opportunities for short sea services in the domestic freight transportation market.  Short sea shipping, as MARAD defines it, is currently in operation in the contiguous domestic trade. Short sea shipping can be particularly competitive for heavy and/or hazardous shipments currently moving over the road such as chemicals (a recurring finding in many studies). There are also significant interregional container flows (10 million container shipments per year from the Gulf to the New York region).  Interviews with truckers revealed “interest with healthy skepticism” about short sea shipping, but ports and vessel operators were “supportive” or expressed “strong interest” in the concept.

Of the corridors studied, short sea shipping appears to be competitive with other modes for service across Lake Michigan (above Chicago), and from the Gulf to the East coast, especially for chemical and bulk products.   The study concluded by recommending that DOT encourage and facilitate short sea shipping by taking on a role similar to that of a “business development” department in a large corporation (e.g., market research and strategic plan development).

If the right incentives are offered to the maritime industry and its supporting agencies, every citizen from our dockworkers to the American consumer will benefit.  Removing a significant portion of container freight from the highways and railroads would have the effect of increasing capacity on our surface modes as they exist in their present size and operating methods. 

Coastal shipping operators and those contemplating start-up services have identified the Harbor Maintenance Tax (HMT) as a major impediment to profitable domestic waterborne freight movements (notably goods moving in containers).  The maritime industry has consistently pointed out that the HMT is particularly burdensome for container feeder services since the tax is assessed twice, once for the international movement and again on the domestic waterborne leg of the trip.  Trucks and trains do not pay the HMT.  As such, potential marine highway operators envision themselves at a competitive disadvantage when considering a new service (since any potential business plan must include the payment of a tax that may or may not be ultimately collected).  Further, the elimination of the HMT for the domestic movement of cargo containers would have negligible impact on our nation’s Treasury.  A SCOOP commissioned study dated October 2005, ”Short Sea Shipping and the Harbor Maintenance Tax” found that domestic container HMT movements only yielded the Treasury $1.7 million - $1.9 million per year.[14] 

As you know, legislative proposals to waive the HMT have been introduced in Congress.  In the last Congress, Congressmen Philip English (R) of Pennsylvania, Chris Shays (R) of Connecticut, Dave Weldon (R) of Florida, and Congresswoman Stephanie Jones (D) of Ohio introduced legislation to exempt either truck cargo, containerized cargo carried between mainland U.S. ports or certain geographic areas from the tax.  No committee action was taken on any of these proposals.  However, Congresswoman Jones re-introduced HMT exemption legislation this week.    

Recent interest in eliminating the Great Lakes region HMT is shipper and port driven due to the desire to stimulate cross-lake services that avoid the additional hours necessary to move cargo around the Lakes on a crowded surface transportation system.   This type of industry interest and activity may serve as a catalyst for Congressional action, especially if a possible proposal can be crafted to carve-out an affordable “first step” in eliminating the HMT for a specific market.  Any related development of new Great Lake marine highway services will ultimately provide this Committee with a “test case” model to gauge the impact of HMT relief on industry growth.  The expansion of marine highway services on the Great Lakes will ease surface congestion, improve “just-in-time” delivery, and grow the Midwest economy.

A related effort to eliminate certain customs fees to achieve some type of modal shift in the Gulf of Mexico might also serve as a stimulant for start-up cross Gulf marine services. 

Any new proposal to eliminate all, or a portion, of the HMT will require significant stakeholder support to achieve ultimate passage.  Waiving the HMT, in specific markets, as well as eliminating certain custom fees, will clearly encourage greater use of the marine highway, reduce landside congestion, and ultimately enhance just-in-time delivery.

The Maritime Administration seeks a larger role in the development of new North American marine highway services designed to mitigate congestion (especially border and corridor related congestion).  Expanding waterway use is the only policy choice that offers this unique and direct outcome, short of constructing new capacity. Accordingly, the Maritime Administration seeks to identify and catalogue obstacles to waterborne trade and explore viable legislative and policy proposals for the elimination of those obstacles.  We will also seek to integrate the marine highway into the national, state, and local transportation planning process.  Specific efforts are underway to facilitate a series of national “one on one” dialogues between transportation users and providers in an ongoing effort to, identify impediments to the expanded utilization of waterborne transportation, accelerate the modal shift from surface to waterborne transportation, and build consensus support for a policy reform package.

MARAD is also actively working to highlight existing marine highway services that illustrate, in a practical way, the promise of the marine highway.  For example, Columbia Coastal Transport is a reliable U.S.-flag barge operator that works in close cooperation with carriers, ports, and labor to provide essential containerized cargo feeder services linking ports in North America.  Its five barge services link the ports of New York, New Jersey, and Boston; New York, Baltimore, and Norfolk; Norfolk and Baltimore; and, Charleston, Savannah and Miami.  Recently, the company announced a new service linking the ports of Baltimore and Philadelphia.  They offer complete transportation services for project cargo including: heavy lift truck hauls; rail coordination; lift-on/lift-off service; roll-on-roll-off barges with access to shallow and undeveloped ports; and, a full array of port logistics services.  Columbia Coastal services by-pass much of the I-95 surface corridor and offer shippers a reliable, cost-effective, and environmentally-friendly transportation alternative to a congested surface transportation system. 

Osprey Lines is another prime example of a marine operator that plays a vital transportation role, in this case moving agricultural products in the country’s heartland.  Osprey first initiated services between Memphis and New Orleans in 2004.  The company now offers container-on-barge services to ports in the Gulf of Mexico and along the U.S. inland waterway system including Houston, Lake Charles, New Orleans, Baton Rouge, Memphis, Chicago, Pascagoula, and Mobile.  Its primary customers are ocean carriers who use Osprey’s container on barge services to re-position containers for their customers at various locations on our Nation’s inland waterways.  These containers are then loaded mostly by agricultural shippers who use Osprey’s services to return them to deep water ports in the Gulf of Mexico.  Osprey, like Columbia Coastal, uses the marine highway to offer a low-cost transportation alternative to product providers and shippers – and, to the benefit of the American consumer. 

The increased use of water to move cargo is evident along many crowded coastal transportation corridors and border crossings.  Cargo ferry services are coming on-line to avoid choke points along the coasts and in the Great Lakes.  These services have sprung up out of economic necessity to avoid land-based obstacles that inhibit the timely and cost efficient movement of cargo and passengers.  I believe it is the role of government to provide these emerging services with the tools to succeed and expand.  It is clear, that given the proper tools, many other successful niche market marine services can emerge, not only as a solution to some of our freight flow and congestion issues but, as a catalyst for the development of our Nation’s underutilized port capacity. 

Maritime community stakeholders have sent the message that the time for talk is now at an end.  They want affirmative action that focuses on the expansion of America’s marine highway -- action to achieve a true modal shift that will ease landside congestion problems, improve transportation efficiencies, and grow our economy.  Clearly, our freight congestion problems will not be solved without an active public-private partnership that focuses on initiatives designed to eliminate obstacles to the expansion of our transportation choices -- a marine stakeholder driven partnership that begins at the local level and ensures an integrated transportation planning process.  This partnership will build on the successful marine highway services I have discussed before the Committee today and fulfill the vision of a truly intermodal National transportation system.  Congress plays an integral role in this partnership – the way forward in solving our freight congestion problems begins here in this Committee.

I stand ready to assist you in addressing an issue that is vital to our continued economic security – the development of America’s marine highway.   I want to thank the Members of this Committee and Chairman Oberstar for their leadership in holding this hearing today.  I will be happy to answer any questions you might have.

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