Ship finance guarantees

MARAD administers the program, which authorizes the secretary of transportation to guarantee and to enter into a commitment to guarantee the payment of interest on an unpaid balance of principal of any obligation which is eligible to be guaranteed under title XI of the Merchant Marine Act, 1936. Except for some recent cases, MARAD has not issued any new title XI guarantees for United States ship construction since 1988. Such guarantees were not issued because of market conditions, and the fact that the limited number of proposals submitted did not meet tightened eligibility requirements.

Section 4115(f) of OPA 90 specifically amended title XI by adding a section 1104B. Congress prescribed that the secretary may guarantee obligations which aid... in the financing and refinancing... of a contract for construction or reconstruction of a vessel or vessels owned by citizens of the United States which are designed and are to be employed for commercial use in the coastwise or intercoastal trade or in the foreign trade... if:

A) the construction or reconstruction by an applicant is made necessary to replace vessels, the continued operation of which is denied by virtue of the imposition of a statutorily mandated change

in standards for the operation of vessels, and where, as a matter of law, the applicant would be denied the right to continue operating vessels in the trades in which the applicant operated prior to the taking effect of the statutory or regulatory change;

B) the applicant is presently engaged in transporting cargoes of the type and class that will be constructed or reconstructed under this section as replacements only for vessels made obsolete by changes in operating standards imposed by statute;

C) the capacity of the vessels to be constructed or reconstructed under this title will not increase the cargo-carrying capacity of the vessels being replaced; and

D) the secretary has not made a determination that the market demand for the vessel over its useful life will diminish so as to make the granting of the guarantee fiduciarily imprudent...

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On the surface, this OPA 90 amendment demonstrated Congressional intent that the title XI program be used to assist in vessel construction and reconstruction necessitated by OPA 90. For several reasons, however, the benefits of section 1104B may be difficult to realize.

First, what Congress appears to have given with one hand, it may have taken away with the other. On November 5, 1990, less than three months after OPA 90 was signed into law by the president, Congress enacted the Omnibus Budget Reconciliation Act of 1990 (Public Law 101-508). Within this massive act, Congress substantially revised the method by which most federal credit programs operate. The Credit Reform Act of 1990, enacted by section 13201 of Public Law 101-508, essentially put most credit programs "on budget" and subject to the annual appropriations process. Generally, any loan guarantee commitment issued after September 30, 1991, must be supported by budget authority contained in an appropriation act, with an appropriation to cover the subsidy cost of the loan guarantee, as well as an appropriation of administrative expenses to cover the cost of administering the loan guarantee program. The subsidy cost of a loan guarantee is, in essence, the risk factor involved in a given project.

Second, even though Congress intended section 1104B to be a source of guarantee authority, it may never be used due to the constraints placed on applicants. Under section 1104B(a)(3), the total capacity of the replacement vessels can have no greater carrying capacity than the vessels being replaced. This precludes an owner from building a more efficient, larger capacity carrier. (It may be possible to replace two smaller carriers with one tanker having the same total cargo-carrying capacity.)

Third, section 1104B(a)(2) provides that the applicant must agree to use the replacement vessel only to replace a vessel made obsolete by OPA 90 standards. In addition, section 1104B (a)(1) allows assistance only if the applicant would otherwise be denied the right to continue operation in trades in which the applicant operated before the statutory or regulatory changes. These conditions raise a question about whether the replacement vessel might only be able to be used in the same trades as the one being replaced. If so, these conditions might prevent an owner from reacting to changing market opportunities to use the vessel in the most efficient and needed trades.

Because of these constraints, the present usefulness of section 1104B is considerably diminished. In essence, this section was unnec

essary since an applicant has to meet nearly the same economic soundness conditions that apply to the existing title XI program, which has been determined to be subject to the funding con-straints of the Credit Reform Act.

In August 1991, Crowley Maritime Corp. applied to MARAD for title XI guarantees totaling $450 million for the construction of ten 42,000 dead weight ton, double-hulled tankers. Crowley saw opportunities for such tankers because of OPA 90 and other market developments. As these were not replacement tankers, the application was based on section 1104A rather than the OPA 90-created section 1104B. Crowley withdrew its application apparently due to the constraints of the Credit Reform Act and a lack of will to endure the legislative process of the agency obtaining appropriations.

Thus if OPA 90 induces vessel owners to seek title XI financing, it likely will occur not because of section 1104B, as created by section 4115 of OPA 90, but because the deal is one that qualifies under the traditional title XI program.

The constraints imposed by the Credit Reform Act make planning all the more difficult, since each new loan guarantee commitment requires budget authority, and MARAD currently has no budget authority for new title XI commitments for fiscal year 1992 and none requested for fiscal year 1993. Unless the annual budget cycle anticipates a certain amount of OPA 90-induced construction or reconstruction for which loan guarantees are sought, it may be difficult for both government planners and business people to rely upon the title XI program for assistance to meet any construction demands arising from OPA 90. Of course, Congress could reinforce its intent to make title XI assistance available for construction and reconstruction undertaken for environmental reasons by exempting the title XI program from the Credit Reform Act.

Subsidies

Perhaps the greatest perceived impediment to domestic shipbuilding is direct and indirect subsidies provided by foreign governments to their shipyards. These direct construction subsidies, grants, customs duties exemptions, research and development aid, investment aid, government equity infusions and aid to shipowners (including credit facilities, interest-free loans, loan guarantees and tax conces

sions) conspire to undermine the ability of United States shipyards to be commercially competitive.

The United States has not provided direct construction subsidies and has not issued any new operating-differential subsidy contracts since 1980. However, some indirect subsidies remain, such as build United States for domestic shipping under the Jones Act and related laws. The remaining subsidies are minor compared to those provided by foreign governments.

The Jones Act, section 27 of the Merchant Marine Act of 1920, requires that merchandise being transported by water between points in the United States be carried on United Statesbuilt, United States-citizen owned and United States-documented vessels.

As a result of a petition by the shipbuilders' council, the United States trade representative elected to solve the subsidy problem on an international rather than unilateral basis. The council withdrew its petition to enable the representative to negotiate an end to worldwide shipbuilding subsidies.

For more than two years, representatives of the United States, Japan, the European community, South Korea and the Nordic countries have been negotiating an international agreement to phase out these subsidies. The United States has not had an especially strong bargaining position due to having discontinued direct construction subsidies in 1981. (The United

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States shipbuilding industry has likened the termination of construction differential subsidies to unilateral disarmament.) In addition, the United States has been unwilling to agree to phase out the domestic building requirements of the Jones Act and related legislation.

Thus far, the negotiators have arrived at a broad agreement on a list of prohibited practices, and have made some progress on a phase-out schedule for these practices. At least three major issues are unresolved. Most significantly, the issue of "injurious pricing" (antidumping) has imposed a roadblock to settlement. The treatment of home credit schemes and the Jones Act also remain areas of contention.

At a negotiating session in December 1991, the delegates became deadlocked and unable to reach an agreement. Success appears to be more elusive than the United States trade representative had hoped.

Other ways to deal with the subsidy issue include the revival of the shipbuilders' council petition and unilateral action by Congress. Proponents of Congressional action have introduced H.R. 2056, which was reported out of the House Committee on Ways and Means on November 4, 1991, and referred to the Committee on Merchant Marine and Fisheries. The Committee on Ways and Means also requested the InternationTrade Commission to investigate the likely economic effects of the enactment of H.R. 2056, and to report to the committee by April 27, 1992. The bill, known as the "Shipbuilding Trade Reform Act of 1991," would require subsidy certifications for vessels visiting the United States, and the repayment of subsidies before a vessel could call at United States ports. The responsibility for subsidy repayment is -placed upon the shipowner rather than the shipyard where the vessel was constructed. This bill reflects Congressional impatience with the international negotiation process, and further action on it and similar legislation can be expected. It is apparent there is great uncertainty about when, if ever, foreign shipbuilding subsidies will end.

If the playing field should be leveled, there still remains a question about whether United States shipyards can compete on the world market. Philip Loree, chairman of the Federation of American Controlled Shipping, testified that in mid 1990, one of his member companies obtained quotes from both Japanese and American yards to build double-hull crude carriers in three ton

nage categories. The American quotes were two to three times those of the Japanese. Mr. Loree concluded that, even if the subsidy cost were discounted, the American prices would still not be close to those of the Japanese.

On the other hand, the shipbuilders' council believes that the productivity gains achieved by domestic shipbuilders in constructing warships and auxiliaries for the Navy can be transferred to the commercial sector. According to the Department of Defense, these productivity gains translated into more than $5 billion worth of savings to taxpayers in naval shipbuilding programs in the 1980s.

Tanker demand

If subsidies were eliminated and a level playing field achieved, worldwide tanker demand to replace the large part of the world fleet built in the 1970s may support some resurgence of United States shipbuilding. If the subsidies are not eliminated, then, realistically, the primary new building business that United States shipyards can count on as a result of OPA 90 is that required to replace existing tonnage for the Jones Act trade. This assumes that the recent attacks on the Jones Act do not gain momentum and result in its elimination. This is particularly important now because United States-flag tanker operators have expressed interest in building as many as ten tankers in United States shipyards in the near future. However, uncertainty about continued support for the Jones Act is currently holding up the award of contracts for the construction of these tankers.

Due to a reduction in the level of Alaskan North Slope crude oil production, MARAD projects that the demand for domestic trade tankers will decrease during the next ten years. In addition, as United States oil production falls, imports of crude oil and refined products are expected to increase to offset the loss of domestic sources. Refined products are expected to be imported directly into the major consuming regions. Also, coastwise and intercoastal movements of refined products are projected to fall. These factors mean that few product tankers will be needed to carry refined products in the United States domestic trade.

MARAD estimates that no more than approximately 15 tankers totaling about 500,000 dead weight tons will need to be constructed during the next decade. This is only a small portion of the 30 to 50 new commercial shipbuild

ing orders per year that the shipbuilders' council estimates are needed to offset the decline in military orders. If this projection comes true, it can hardly be considered sufficient to inject life into United States shipyards.

If anything, in the near future, the doublehull requirements may reduce new construction due to its increased cost (estimated to be an additional 15 to 20 percent) with the consequent higher charter required to make the replacement economically viable. The ability to contract for replacement construction also presumes that adequate financing will be available.

One possible negative effect of OPA 90 on private sector financing is the uncertainty that this legislation places over possible mortgagee liability for oil spills, and the added jeopardy placed upon the mortgagee's secured interest (the vessel) due to potential unlimited liability and expanded damage claim exposure.

Under certain circumstances, OPA 90 imposes unlimited liability on the party responsible for an oil spill. This liability is not capped at a dollar amount, but a vessel does have a finite value. Obviously, the investment of the mortgagee (the bank which financed the purchase of the vessel) is in jeopardy where the damages exceed the value of the vessel. These are problems that Congress may be faced with in the near future.

Conclusion

Although OPA 90 will alter the way ships trading with the United States are built, it cannot be expected to cure the ills of our shipyards. Continued foreign government shipbuilding subsidies, coupled with the elimination of United States subsidies, and the constraints placed on title XI assistance due to the Credit Reform Act requirements conspire to defuse United States shipyard rebirth on the basis of traditional programs of government support.

As United States shipyards suffer further from the reduction of defense-related construction, they will have to demonstrate their ability to adopt new techniques to adapt to modern commercial shipbuilding practices, and they will have to prove that they can operate at competitive productivity levels.

The challenge is for United States shipyards to undergo this transformation. Their opportunities lie in building new tankers for the Jones Act trade and potentially for the world tanker replacement market for the 1990s.

All photographs accompanying this article are courtesy of the Shipbuilders Council of America, headquartered in Arlington, VA.

CAPT Warren G. Leback is the administrator of MARAD under the Department of Transportation.

Telephone: (202) 366-5823.