OCTOBER 19, 2016 — Has the container shipping market bottomed out? Global shipping consultancy Drewry thinks so. It says that the Hanjin Shipping receivership marks the trough of the market. Its latest
OCTOBER 13, 2016 — With ships being being equipped with larger propellers that rotate at lower speeds, engine strokes have become longer and therefore crank throws — a key component in marine
It was a nasty winter, even by Alaskan standards. The city of Nome, Alaska was in trouble. A late November storm blocked a scheduled shipment and the city was running out of fuel. In an Arctic winter, fuel is as precious as blood. It powers more than cars and trucks, it runs generators to light up the 24 hours of darkness and it burns in boilers for heat when the outside temperatures regularly hit -50 degrees. Without fuel, all human life stops; and Nome’s tanks were running dry. The solution to the crisis lay in the belly of a Russian ice-strengthened tanker sailing just offshore. The problem was that her cargo of life-sustaining gas and diesel was loaded in Dutch Harbor Alaska, and a U.S. law designed to protect domestic shipbuilding was preventing her from completing the mission. Recognizing the urgency, Secretary of Homeland Security, Janet Napolitano, issued a one-time waiver of the Jones Act and the Renda steamed into Nome Harbor to deliver the fuel.
As changes in Arctic continue to unfold, incidents such as the one in Nome will become more common. In addition, the pace of change in Arctic has found the U.S. unprepared to assert her claims and to defend fragile ecosystems and populations. The Nome incident illustrates a stark choice for the U.S.: change how the country protects its domestic shipbuilding, or cede the Arctic to its geopolitical rivals.
The Jones Act requires that any ship carrying passengers or cargo between two U.S. ports must be built in the U.S., crewed by U.S. nationals, and owned by a U.S. company. The Act dates back to the 1920’s but the idea of protecting a domestic shipbuilding industry from foreign competition is as old as the country itself. The First Congress of the United States levied heavy tariffs on goods delivered on foreign ships. The Act serves that important role today; however, the economic reality is that Jones Act compliant ships are expensive to build and expensive to operate. So to maximize profits, large ships in the international trade are flagged in countries with favorable laws and tax treatment. Such “flags of convenience” create strange outcomes as cruise ships that pick up vacationers in Miami must first stop somewhere outside of the U.S. before discharging their passengers. Foreign flagged tankers, loading crude in Valdez may take that crude to a foreign port where it is pumped ashore, modified slightly, then reloaded on to the same ship before that ship sets sail for a U.S. refinery.
Opponents of the Jones Act point out the inefficiencies created when non-compliant vessels seek to skirt the law. They argue that the trade protection measure makes coastwise shipping prohibitively expensive as shipbuilders in the U.S. must operate under more expensive environmental and labor regulations. Similarly, the U.S. ownership requirement cuts off sources of capital to build those ships. Without the Jones Act, the argument goes, we could use international competition and realize benefits and efficiencies of moving freight over water. For example, we could put containers on barges that service coastal cities, thereby removing thousands of trucks from the already choked and crumbling interstate highways.
Proponents of the Act cite jobs and national security interests. During World War II the U.S. shipbuilding industry saved the world from fascism by building Liberty Ships faster than German submarines could sink them. Today, the market for Jones Act compliant vessels supports thousands of good paying jobs and preserves skills that would desperately be needed should the world face a similar crisis. The decline in domestic manufacturing under the auspices of free trade serve as a warning to those looking to open U.S. shipbuilding to foreign competition.
The Arctic presents a different problem. As the ice recedes, human demands in the Arctic will increase. Just this year, 1,000 passengers aboard the cruise ship Crystal Serenity sambaed and bunny hopped their way through the once impassable Northwest Passage. As a result of increased economic activity, settlements in the Arctic will grow. More people in the Arctic means more demand for ice class ships to resupply villages and outposts. More shipping also means increased demand for search and rescue and spill response. As demand for icebreakers and ice class ships increases, there are few Jones-Act certified ships to fill the need. In contrast, countries such as Finland have an excess of icebreaker capacity. Those ships, however, cannot operate between U.S. ports in the absence of a Jones Act waiver from the Department of Homeland Security.
In addition to support for economic activity, presence in the Arctic is critical for political reasons. Conditions in the Arctic are changing faster than most expected and wherever the ice recedes, it leaves behind a geopolitical vacuum. As the ice pulls back from the shore, it will expose trillions of dollars in natural resources. More importantly, it will uncover fragile and delicate ecosystems and leave indigenous populations exposed to potential exploitation. Russia has already staked its claim to a vast undersea territory stretching almost to the North Pole. In the last few years, Russia has been quietly rebuilding its fleet of Soviet era icebreakers. Today, Russia has scores of ice class ships, six nuclear powered icebreakers, and three more heavy crushers on their way. China, with no territory in the arctic, has two icebreakers with a third on the way. The United States, a country with the world’s most powerful and well equipped military, has one heavy icebreaker, and it is 40 years old. Congress has allocated funds for a second ship, but construction will not start until 2020 and the ship will not see ice until 2025. Protection of the environment and native people in the Arctic will require a U.S. presence and a U.S. presence will require icebreakers now.
Typical Jones Act problems involve competition between foreign and U.S. flagged ships. But with little or no U.S. ships to fill the need, the Jones Act forces a choice between using a foreign flagged vessel or nothing at all. As the situation in Nome demonstrated, that is not a choice when lives, the environment, or a critical national interest is at stake. The current administration can fix this. The Secretary of Homeland Security, using executive authority, can and should grant a temporary waiver for all ice class vessels operating from the Aleutian Islands in the south to the Canadian border in the north and in all U.S. points above the Arctic Circle, until such time as an equivalent Jones Act compliant vessel becomes available. Such a rule would allow the U.S. to immediately defend her geopolitical interests by freeing up the one available icebreaker. While the waiver is in place, existing foreign vessels could develop and test markets for commercial shipping with ice breaking capabilities. If it appears the market will bear the increased cost of a U.S. flagged ship providing those services, U.S. shipbuilders will build a ship and enter the market. When the U.S. ships move in, the waiver is lifted and the U.S. will protect that market under existing law. In this way, the rule would actually promote domestic shipbuilding by allowing other countries to highlight areas for growth while minimizing risks. Such a rule would also encourage efficiency and innovation without compromising or threatening existing jobs.
As President Lincoln said in his 1862 address to Congress “the dogmas of the past are inadequate to the stormy present.” The Arctic presents opportunities and challenges not seen by western countries since the days of Columbus. In times of crisis, we can, and should, look critically upon institutions fostered in a different time and for a different reason. The Secretary of Homeland Security recognized this crisis and granted a waiver for Nome. The Secretary should now do the same for the rest of the Arctic.
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 [email protected]. 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 [email protected].
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.
SEPTEMBER 29, 2016 — Hyundai Merchant Marine has expanded its longstanding relationship with ocean shipping electronic marketplace INTTRA by adopting the INTTRA eVGM Service as a channel to facilitate compliance with the
SEPTEMBER 29, 2016 — The ITF (International Transport Workers’ Federation) yesterday described the refusal of shore leave to seafarers on board Hanjin ships in the U.S. as a denial of human rights.
SEPTEMBER 28, 2016—Yesterday, General Dynamics NASSCO, San Diego, CA, delivered the 50,000 dwt Bay State, the fourth vessel in a series of five ECO Class product tankers under contract with American Petroleum
SEPTEMBER 27, 2016 — U.K.- based Harris Pye Engineering Group reports that it is actively working globally with more than ten companies and shipyards on a variety of waste heat recovery (WHR)
SEPTEMBER 26, 2016 — Xeneta, a benchmarking and market intelligence platform for containerized ocean freight, is looking to bring a new understanding to the world’s biggest container shipping market by opening its
SEPTEMBER 22, 2016 — A.P. Møller-Mærsk A/S is to reorganize the Maersk Group’s businesses into two divisions: an integrated Transport & Logistics division and an Energy division. The main growth focus going
