Signed into law by President George Bush in December 2007, the Energy Independence and Security Act of 2007 was to have achieved important, long-sought maritime sector objectives. A national Short Sea Transportation (SST) program was authorized and a detailed outline provided. The Secretary of Transportation was assigned the responsibility for the development a plan for SST implementation, and required to report to Congress by December 2008 on the progress made.
The 2007 Act mandated Secretarial action to create an environment that would attract private sector investment to finance SST requirements. The original House version of the 2007 Act, as reported by the House Committee on Transportation and Infrastructure and passed by the House on January 18, 2007, addressed the need for government-assisted SST financing by extending the Maritime Administration (MARAD) capital construction fund (CCF) tax-deferral program to container and ro/ro services nationwide, and by authorizing $2 billion for the MARAD Title XI program use in attracting private sector financing for SST projects.
Mr. Oberstar and his Congressional co-sponsors of the original maritime sections of the 2007 Act were confident that with their proposals in place, the long-discussed use of U.S. waterways for the transportation of freight (in containers and trailers) and passengers, to mitigate landside highway congestion and reduce petroleum usage, and accomplish multiple other objectives, would be underway.
They were to be disappointed. The $2 billion of Title XI authorization was removed in the Senate. The Secretary’s report, required by December 2008, was not delivered until April 2011 and concluded that without “strong leadership from the federal government . . . the nation’s rivers and coastal waterways will continue to be underutilized for domestic container and trailer freight transportation” without tabling such leadership proposals.
And, after the 2007 Act had become law, when U.S. ferry operators sought to include their vessels that carried passengers as well as ro/ro cargoes, so-called ro/pax vessels, for CCF program “qualified” withdrawals, MARAD refused to approve these withdrawals. MARAD advised CCF program applicants that Congress had intended the 2007 Act extension to apply for only to vessels in ro/ro services engaged in the carriage of freight, and that the carriage of passengers, in so-called ro/pax vessels, was a disqualification. And, CCF program applicants were told that a new Congressional enactment would be required to enable MARAD to include ro/ro vessels that included the carriage of passengers as “qualified” services.
Change of Policy
This MARAD interpretation has been withdrawn. MARAD will now include ro/ro vessels that also carry passengers, ro/pax vessels, as engaged in CCF program “qualified” services. Owner and operator participants in the MARAD CCF program will be now able to use their CCF program deposits to purchase ro/pax vessels, and retire ro/pax vessel debt. And, this will enable shipyards that are building ro/pax vessels to use their CCF program monies as working capital for construction financing for customers (or for their own accounts) and as equity in customer vessel leasing transactions.
The majority of U.S. vehicle ferry services are provided by vessels that carry vehicles and freight loaded by “wheeled transportation technology” and vehicle drivers and passengers being loaded in this same fashion, plus additional walk-on passengers. It was to facilitate the construction of these vessels that the CCF program qualifying service definition was being expanded. This MARAD change in interpretation gives full recognition to the CCF extension that Congress intended in 2007. It is of enormous practical importance.
MARAD CCF Program & Importance
The MARAD CCF program allows participants to defer payment of federal and state income taxes on vessel operations and sales and associated investment income. It provides what is in-effect an interest-free loan of monies that a taxpayer would otherwise pay to settle current taxes in exchange for the taxpayer’s promise to use that money for the construction of vessels to be operated in qualifying services or the payment of exiting or later incurred vessel debt. MARAD currently lists 165 CCF program participants. These include owner-operators such as Crowley Maritime, Exxon Corporation, Matson Navigation and Tote, two shipyards NASSCO and Horizon Shipbuilding, and what are apparently three owner-lessors. As of 2012 year-end, MARAD recorded $2.3 billion of CCF program monies as on deposit. Many of the owner-operator participations date from the 1970s. NASSCO was the first CCF shipyard, entering the program in 1988, and remains a participant today. NASSCO has apparently been able to defer federal and California tax on the profits from almost all of its U.S. new-buildings, and to use these interest free borrowings as working capital in the construction of vessels for customers in the Alaska, Hawaii and Puerto Rico (non-contiguous) trades.
This MARAD program change will allow commercial operators to defer tax and access their CCF monies as working capital for new ro/pax construction. The change will not directly benefit state and municipal owner-operators such as Washington State Ferries that do not need to defer taxation of current income. However, the CCF program can now be employed by the shipyards from which these owner-operators purchase their ro/pax vessels. These shipyards can use their CCF monies as a source of working capital to provide construction period financing, and equity for long term lease financing. And owner-operators like WSF, may be able to obtain CCF program ro/pax long-term charter rates that will be 30 to 40 percent lower than the long-term charter rates that would otherwise be available. This might become a factor in lease vs. purchase decisions for operators like WSF that have substantial fleet replacement needs.
The greatest number of immediate beneficiaries of this MARAD change will be the U.S. citizen shipyards that are engaged in, or are considering engaging in ro/pax vessel construction.
Mr. Cook was the MARAD General Counsel who was responsible for the 1970 Act CCF Program implementation. His work with the Program has included advice for both private sector clients and in U.S. Government projects (in work for MARAD itself and for the U.S. Navy) and is partially detailed at his www.CookMaritimeFinance.com website and in the site’s linked documents.
If you would like a copy of his PowerPoint slide set on “Sheltering Shipyard Profits to Benefit Customers,” or of his descriptive memo hand-out “MARAD CCF: Shipyard Program Use” please email him at Cook@CookMaritimeFinance.com. For more information on the Program, you can also contact Mr. Daniel Ladd, at MARAD’s “Office of Financial Approvals” at 202 366 5737 or Daniel.Ladd@dot.gov.
A follow-on article by Mr. Cook with examples of shipyard and owner-operator CCF Program use is scheduled for the MARINE LOG November issue.