Questions Arise on Shipbuilding Payments for Katrina losses

Thursday, December 22, 2005
According to the AP a Navy plan to pay Gulf Coast shipbuilders about $1.7 billion for losses related to damages and construction delays from Hurricane Katrina may overstate the actual costs and could dampen efforts to collect insurance payments, according to a Congressional report. The nonpartisan Congressional Research Service said Northrop Grumman may be able to collect insurance claims for future increased costs related to labor and overhead. If the government pays now, the report said, the company will have little incentive to negotiate with insurers for those payments. The researchers said Northrop Grumman may be covered for losses related to disruption of work caused by the hurricane, and suggested the company could collect for increased labor costs on ship construction that is a year or more down the road. The funding is included in Congress' $29 billion hurricane relief bill. Lawmakers also expressed concerns about the funding, adding language to the bill that requires additional oversight by the Pentagon. It also requires that the Defense Department, 30 days before spending the money, must certify to Congress that the funds are for legitimate costs related to the hurricane and would not be paid by the insurer. Northrop Grumman's facilities in New Orleans and Pascagoula, Miss., where 9 ships are under construction, were heavily damaged in the hurricane. Two other Navy ships were near completion at the time, and both were turned over to the Navy and moved out in recent weeks. Navy Assistant Secretary John Young initially requested $2.7 billion to restore the shipyards, replace lost material and get workers back on the job. The Pentagon later asked for a total of $6.6 billion, including $2 billion for shipbuilding. Congress cut the Defense Department funding back to about $5.8 billion in the bill. The congressional researchers took issue with the Navy's argument that the money is needed immediately, and suggested the government should wait for more accurate cost estimates. Delaying the request, the report said, could also allow insurance negotiations to proceed. The report also said the Navy should have at least considered shutting down the shipyards for six months to a year for repairs. But that suggestion was shot down by both the Navy and the company. The congressional report also took issue with the Pentagon's plans to repair military facilities that are slated for shutdown or realignment under the base closing plan approved earlier this year. The Navy requested $58 million to build new living quarters at Naval Station Pascagoula, which is being closed. And the Pentagon requested nearly $400 million for family housing at bases where efforts are under way to privatize housing construction.

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