State of the United States’ Merchant Fleet in Foreign Commerce

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.