Friday, October 19, 2012
Liberty Maritime says proposed changes keep U.S.-owned firms out of MSP.
By Chris Dupin
A New York shipowner says proposed changes in the Maritime Security Program (MSP) would lock in the current participants of the program through 2025, limiting the military and making it more difficult for companies, including his, to compete for contracts under the program in future years.
Philip Shapiro, president and chief executive officer of Liberty Maritime Corp. in New Hyde Park on New York’s Long Island, also said the changes would reverse a policy that’s supposed to give preference to U.S.-owned companies. Today, Liberty has a single roll-on/roll-off ship, Prestige New York, in the MSP program.
Shapiro supports the MSP program but said the changes would keep the vast majority of contracts in the hands of a small number of foreign-owned companies.
The changes Shapiro is concerned about are part of the MSP included in the 2013 National Defense Authorization Act (H.R. 4310), which passed the House on May 18 and in amendments to a Coast Guard authorization bill that was approved by the Senate on Sept. 22.
In a memorandum, Liberty said “the two most significant changes to be made by the pending legislation are grandfathering all 60 of the existing contractors and eliminating the preference in existing law for U.S. citizens as defined in Section 2 of the Shipping Act, 1916… when program contracts are transferred. Both of these changes are problematic.”
(The 1916 Shipping Act is one of the cornerstones of U.S. maritime policy. It created the U.S. Shipping Board, which built over 2,300 ships during and after World War I. Today’s Maritime Administration and Federal Maritime Commission both trace their roots to the board.)
A Senate aide said the Defense Department requested the changes in the legislation.
Constantine Papavizas, an attorney at Winston & Strawn, said for the past decade MarAd has been secretive about the program.
Eric Ebeling, president of American Roll-on Roll-off Carrier, calls MSP “one of the ‘three legs of the stool’ that supports the U.S.-flag merchant marine and U.S.-flag fleet.” The other two legs are the cargo preference laws and the so-called “commercial first policy.”
Cargo preference requires freight funded by government programs, such as food aid and projects supported by the U.S. Export Import Bank – to be carried in part or entirely on U.S.-flag ships. The commercial first policy requires the Defense Department to use U.S.-flag merchant sealift to the maximum extent possible.
If any of those three supports are weakened, “you are really going to see the U.S.-flag carriers struggle,” Ebeling said.
Already U.S.-flag shipping supporters say the industry has been weakened by a provision that was included in the federal highway bill, Moving Ahead for Progress in the 21st Century Act (MAP-21), which will reduce the amount of food aid that must be shipped on U.S.-flag ships from 75 to 50 percent. A MarAd “Information paper on the impact of MAP-21 on the U.S.-flag fleet” said that could result in a loss of four to five vessels and 180 mariner jobs up to as many as 16 vessels and 625 mariner jobs.
Liberty warned “grandfathering 100 percent of the program eliminates competition for the program for an inordinately long time (effectively 13 years). Without competition, the U.S. Maritime Administration and the U.S. Department of Defense cannot be reasonably assured that they will have the best mix of contractors, contractor networks or vessels over the term of the program.”
Shapiro said he does not understand the rush to change the law now, noting it has already been reauthorized from 2015 to 2025.
“What has not been reauthorized is the mix of ships and who the contractors would be,” he added. “And in an attempt to grandfather everyone, the House reauthorization bill proposed to eliminate the Section 2 citizen priority in transfer of contracts, which Congress specifically added in 2006” after many U.S. shipping companies were purchased by foreign firms.
Liberty contends “a significant level of competition can be expected if the grandfather provision is eliminated in whole or in part. In 2004, approximately 20 Section 2 citizen companies offered 75 vessels for 13 available contracts. In 2008, nine companies offered numerous vessels for a single available contract.”
As a compromise, Shapiro wants to see a dozen slots bid out in an “open and transparent competition.”
Without competition, he said MSP will remain over-concentrated in a handful of contractors, virtually all of whom are controlled by foreign ocean carriers.
MSP was created in 1996 and provides an annual subsidy to U.S.-flag shipping companies operating in international trade to help offset the higher cost of operating under the U.S. flag, including the employment of U.S. seafarers.
Currently, the federal government provides a payment of $3.1 million to each ship in MSP, but Congress is proposing increasing that amount to $3.5 million for fiscal years 2019-2021 and $3.7 million in fiscal years 2022-2025.
In 2011, MarAd said in a report the $3.1 million, or $8,500-per-day, MSP payment covered only a portion of the approximately $12,600-per-day difference in cost between a U.S.-flag and foreign-flag ship, leaving an unfunded gap for each vessel of about $4,100 per day.
Like most government programs MSP faces the possibility of seeing its budget slashed if under the “sequestration” mechanism for across-the -oard budget cuts that was agreed to in the 2011 Budget Control Act. According to the White House’s Office of Management and Budget, the program faces a $17 million reduction under sequestration.
Originally the program had 47 ships, but it was expanded to 60 vessels in 2005. A MarAd brochure says the program provides about 2,400 mariner positions for U.S. deepwater seafarers.
Liberty said many of the 60 MSP ships are controlled by U.S. subsidiaries of companies based overseas and that too few are controlled by Section 2 citizen companies whose ultimate parent is a U.S. firm.
Shapiro has raised similar concerns about MSP in the past. For example, he testified in 2010 before a House subcommittee, stating the program was originally designed as a U.S. citizen program when it was created in 1996, but said MarAd in the late 1990s “diluted the U.S. citizen content Congress expected.”
A wave of mergers resulted in a number of U.S. shipping companies holding MSP contracts becoming part of foreign-owned companies: Singapore’s Neptune Orient Lines acquired APL in 1997, Denmark’s Maersk bought Sea-Land Service in 1999, the English-Dutch firm P&O Nedlloyd acquired Farrell Lines in 2000 (then P&O Nedlloyd was subsequently acquired by Maersk), and Lykes Lines was acquired by Canada’s CP Ships, which was later swallowed up by TUI AG and merged with Germany’s Hapag-Lloyd.
Rep. Tim Bishop, D-N.Y., who represents a district on Long Island, echoed Liberty’s concerns at a hearing of the House Subcommittee on Coast Guard and Maritime Transport earlier this year.
“We all agree this is a very cost-efficient way for the U.S. government to sealift the assets that it must in time of war or national emergency,” Bishop said. “I am, however, concerned about the level of foreign involvement in the maritime security program. My understanding that 49 of the 60 maritime security program contracts are controlled by foreign companies and it is my further understanding that this is clearly at odds with congressional intent.”
Shapiro noted Maersk Line, Ltd. (MLL) controls 27 ships in the program and asked “what government program puts that kind of overconcentration in one foreign company’s hands?”
Shapiro said his firm had two pure car/truck carriers, the Liberty Pride and Liberty Promise, built at a Daewoo Shipbuilding yard in Korea in 2009 in response to requests from the U.S. Transportation Command for more roll-on/roll-off ships, but now is unable to get MSP contracts for the ships.
In March, Bishop asked Maritime Administrator David Matsuda what his agency was doing to assure that U.S. companies have greater access to the program.
Matsuda said there was no requirement in the law that the companies be U.S.-owned, noting they are all incorporated in the United States and hire U.S. mariners. But he said if vessels “fall out or are no longer able to fulfill its commitment, we do offer a preference to U.S. companies.”
Holders of MSP contracts today include:
While critical of what he sees as the overconcentration of MSP contracts in Maersk’s hands, Shapiro’s firm cooperates with Maersk and Hoegh Autoliners, of which A.P. Moller-Maersk owns 39 percent.
- A.P. Moller-Maersk - 27 ships. (Its U.S. subsidiary Maersk Line, Ltd. holds contracts for 24 of the ships, 19 directly and five through MLL’s subsidiary Farrell Lines. It also has two ships, the Maersk Alabama and Maersk California, which use MSP contracts held by the Waterman Steamship subsidiary of International Shipholding Corp. Another license is held by Argent Marine.)
- APL Marine - nine ships.
- Hapag Lloyd America subsidiary - five ships.
- Fidelio Limited Partnership and American International Shipping – seven ships. (The MSP contracts are operated by American Roll-on, Roll-off Carrier (ARC), and American Shipping & Logistics Group. Norway’s Wilh. Wilhelmsen describes the companies as being established on a joint venture basis with Sweden’s Wallenius. Fidelio also has another contract that is used by one of the U.S.-flag heavy-lift ships, Ocean Freedom, in the fleet of Houston-based Intermarine.)
- Intermarine – two ships (using contracts held by Patriot Shipping).
- Two subsidiaries of Mobile, Ala.-based International Shipholding Corp. (Central Gulf and Waterman) – eight ships. (These include the two used by Maersk Alabama and Maersk California, as well six used by its own vehicle carriers.)
- Overseas Shipholding Group - two product tankers.
- Liberty – one ro/ro ship.
The Prestige New York is part of the Alliance Navigation liner service that operates between the United States and Middle East. The other four ships, which are part of the Hoegh Autoliners fleet, have their contracts from Maersk Line, Ltd., Farrell and Argent.
Bishop wanted to know why, when the number of ships in the MSP program was expanded from 47 to 60, the 13 contracts did not all go to U.S. companies, but Matsuda said “we also need to take into account the military usefulness of the types of vessels that are offered.”
Bishop asked the subcommittee to look further at the issue, though Committee Chairman Frank LoBiondo said jurisdiction over the program may be with the House Armed Services Committee.
Liberty emphasized the “Section 2 citizen preference in existing law when contracts are transferred was enacted by Congress in 2006 to prevent perpetuation of foreign dominance of the program.”
While Section 2 citizenship requirements don’t appear to have been a problem for foreign shipping companies in MSP, it has been an issue in other contexts. For example, Maersk Line, Ltd. lost a protest in June when MarAd denied the company’s ability to bid its ship manager services for three Ready Reserve Force vessels.
Lynn H. Gibson, general counsel for the Government Accountability Office, said while Maersk argued the Section 2 citizenship requirement set forth in MarAd’s regulations is not authorized by the 1946 law that established the National Defense Reserve Fleet, GAO concluded the Section 2 citizenship requirements in its regulations was reasonable and based on a permissible construction of relevant statutes.
In 2010, Maersk Line, Ltd. was told it could no longer operate Fast Sealift Ships when they were transferred from the Military Sealift Command to MarAd’s Ready Reserve Fleet. Yet Maersk continues to be a major operator of ships for the command.
Clint Eisenhauer, vice president of government relations for Maersk Inc., said the preference for awarding MSP contracts to Section 2 citizens has not gone away entirely. “The first cut is going to be TRANSCOM’s choice of vessel, and then the next consideration will be Section 2, so it reverses the order of those priorities,” he said. “The reason it was done that way was so the military gets the asset that they want.”
Ebeling said the proposed MSP language is “spearheaded by DOD and DOT/MarAd – it’s their bill, and they support the language.”
He said all the industry and maritime labor support the language with the sole exception of one carrier.
A MarAd spokesperson said “the proposed National Defense Authorization language is similar to language supported by the administration, which strengthens the program's effectiveness and supports long-term fleet capital reinvestment by operators. Prior to proposing the legislation, MarAd held meetings with labor, DOD including U.S. Transportation Command, and all of the MSP carriers to discuss how the program should operate going forward. The administration's proposed legislation reflects what was conveyed in those meetings.”
“This is not a ‘competition’ issue,” Ebeling said. “The proposed language is recognition by DOD/TRANSCOM and DOT/MarAd of those carriers who have been in MSP for the past decade and who have delivered.
“These carriers have done the heavy lifting providing ocean and intermodal services in Iraq and Afghanistan,” he said. “To the extent that there is a fairness issue, I think it is fair to recognize those carriers who have made the investment of hundreds of millions of dollars in the form of ships and intermodal systems over the past decade.”
Ebeling noted TRANSCOM and MarAd “seek to balance military utility with commercial viability – having militarily useful ships has been essential as demonstrated in the Iraq and Afghanistan conflicts in order to meet the sealift and intermodal requirements of the warfighter.”
But he added “as Iraq is now finished and Afghanistan is winding down, commercial viability is becoming increasingly important due to the much-diminished preference cargo markets.”
“It’s a bit of a cliff that is kind of looming on the military and preference cargo,” he said.
Ebeling said more U.S.-flag heavy-lift vessels have been brought into the fleet because of the increase in Export-Import Bank financing.
Going forward is there enough cargo to support 60 ships?
“In short, no,” Ebeling said. “In regards to the 60-ship fleet, one can reasonably argue that this is a fleet sized for wartime.
“It is in everyone's interest—Congress, the military, operators, maritime labor, indeed the nation as a whole—to maintain this incredibly cost-effective program, the militarily useful ships it provides, the critical intermodal systems, and the manpower pool of maritime labor (who are in turn available to crew government reserve vessels), but hard decisions loom in the next couple years,” he said.
“Given the rapidly declining military cargo volumes and other types of cargo preference, as well as lingering uncertainty over cargo preference enforcement, there is a risk that without a properly sized and compensated MSP fleet, MSP participants may be forced to consider changing the makeup of their fleets and/or decreasing the size of their fleets, and in the extreme case perhaps their participation in MSP altogether,” Ebeling explained.
“Potential solutions to this dilemma include an increased MSP stipend, elimination of cargo preference ‘leakage,’ expansion of the available cargo preference pool, DTS (Defense Transportation System) expansion, and a decrease in the size of the fleet (with the ‘savings’ spread across the remaining fleet- i.e. an increase in the stipend by other means).
“In all likelihood, there will need to be a combination of these options to preserve and protect the existing fleet,” he said.
“There is little that is new or different regarding this scenario as compared to the winding down of past wars. That is why one often sees important maritime legislation in the near-term aftermath of the nation's wars,” Ebeling said.