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Thursday, December 14, 2017

Last Port of Call for the U.S. Merchant Marine?

March 1, 2017

Charlie Papavizas is a partner in the international law firm of Winston & Strawn LLP and the chair of its maritime practice group.

Charlie Papavizas is a partner in the international law firm of Winston & Strawn LLP and the chair of its maritime practice group.

Part II in a two-part series, continued from the January 2017 edition of Maritime Reporter & Engineering News. Read Part I here.
 
 
Government Ownership
If reliance on the foreign commercial market is risky because of uncertain reliability, then what of U.S. Government ownership of a fleet of vessels? That has also been on the menu since the early 20th century. President Woodrow Wilson proposed in September 1914 that the U.S. Government acquire commercial cargo vessels. Congress disagreed, which delayed enactment of the President’s proposal until the Shipping Act, 1916. A compromise was struck to permit U.S. Government ownership as a war time measure – but all vessels so acquired had to be sold to private owners within five years of the end of the war.
 
The war time experience did not put President Wilson’s original idea in a favorable light. The rush to build ships at any cost resulted in enormous economic waste and most of the vessels constructed were not finished until the war was over. Moreover, in the immediate aftermath of the war, the cost to the Government to operate the vessels in the commercial market became a pressing economic burden. This led to the Merchant Marine Act, 1920 which laid down the principle that private ownership was preferred over government ownership as noted above.
 
Although U.S. Government ownership was rejected in principle, the U.S. Government practice has been schizophrenic. The heroic World War II cargo vessel building effort resulted in another massive sell off to private owners after the war just as occurred after World War I. Many hundreds of vessels were kept in reserve in a National Defense Reserve Fleet pursuant to the Merchant Ship Sales Act of 1946. Their purpose was to provide a surge capability under U.S. Government control to meet national emergency shipping requirements.
 
This was an easy choice to make in 1945 because the funds had already been expended to build the vessels and it was recognized that there would be a significant surplus of war-built vessels after commercial sales. So, the foundation of the U.S. Government-owned fleet -- 1,421 vessels on July 1, 1945 (growing to a peak of 2,277 vessels in 1950) -- was World War II-built vessels well into the 1970s. That fleet served extensively during the Korean War (778 vessels over an 18-month period) and again in the Vietnam War (161 vessels over a five-year period).
 
However, the fleet aged over time and was not replenished at a rate that would have resulted in a modern reserve fleet. Moreover, the size of commercial vessels increased substantially and new vessel types were introduced (most particularly container and roll-on/roll-off vessels) making the fleet increasingly obsolescent. The reserve fleet has struggled to keep up.
 
To address these issues, the Ready Reserve Force, a subset of the NDRF, was formed in 1976. Maintenance funds would be concentrated on this subset of the most modern and militarily useful vessels. In the deployment for Operations Desert Shield/Desert Storm, “the largest concentrated sealift activity since World War II,” 78 of the 96 RRF vessels were activated.
 
Today, the fleet of RRF vessels is down to 60 surge vessels, 14 operated by the U.S. Military Sealift Command and 46 operated by the U.S. Maritime Administration. In theory the RRF should be a relatively modern group of vessels and particularly vessels that may not have much every day commercial utility. But the theory is being stressed by a lack of resources. The average age of the RRF vessels is over 40 years. The average age of privately owned U.S.-flag roll-on/roll-off vessels in the Maritime Security Program is about 15 years.
 
The obvious advantages of a U.S. Government ready reserve of vessels are that it is absolutely under U.S. Government control and it can be populated with vessels which are particularly militarily useful either as to type or modifications or both. This latter advantage has proven to be difficult to sustain because of a lack of funding. For example, the newer U.S.-flag roll-on/roll-off vessels in the Maritime Security Program each have a capacity of over 500,000 square feet whereas the largest RRF roll-on/roll-off vessels managed by MARAD have about 300,000 square feet (and most have substantially less than that).
 
The disadvantages are that keeping a fleet in standby status is expensive in comparison to subsidizing a fleet of operating commercial vessels and also not as absolutely assured as it might first appear.
 
On cost, the Admin. Jaenichen testified on November 17, 2015 that it costs approximately $390 million per year to maintain 60 RRF vessels in inactive status. In contrast, the Maritime Security Program, which provides stipends to support 60 militarily useful commercial U.S.-flag vessels, cost $186 million in fiscal year 2015 (which is scheduled to grow to almost $300 million in FY 17 as a result of recently enacted legislation). The main difference is that commercial owners have a profit motive to operate their vessels as efficiently as possible. Moreover, the main source of trained U.S. citizen merchant mariners for the RRF are these very same MSP vessels. Without MSP, the cost of having full complement reserve crews for the RRF vessels would increase the cost of the government-owned vessels substantially.
 
Also, the RRF only provides vessels and does not provide a transportation or logistics service. The commercial fleet provides end-to-end transportation because that is what commercial customers demand. So, everything from inland transportation to terminal operations must come from someplace else, at a cost, if the only source of reserve sealift capability is the RRF. Admin. Jaenichen estimated in 2014 Congressional testimony that it would cost the U.S. Government at least $2 billion to replace the 60 privately owned vessels in the Maritime Security Program and more than $40 billion to replace the international logistics capability obtained via the ocean carriers in that Program.
 
On assurance of access, the issues in the past have come in the form of technical vessel break-out problems and lack of available mariners. During Operations Desert Shield/Desert Storm, the first large scale activation of the RRF since it was created, there were significant activation delays for a variety of reasons ranging from inadequate maintenance to a lack of available shipyard capacity to undertake repairs. Similar problems occurred with the NDRF in the Vietnam War – about 70 percent of the vessels activated in 1965 suffered significant lost time casualties when activated. Although improvements have been made in light of the experience, vessels in reserve status are not likely to ever have the same day one reliability as vessels in ongoing service.
 
Assurance is also affected by the availability of trained personnel. One of the primary concerns expressed by MARAD and USTRANSCOM about the declining number of U.S.-flag vessels engaged in the foreign trade is how that reduces the pool of available mariners to man RRF vessels – which both agencies have indicated is currently only barely sufficient. Past manning problems during periods when the manpower pool to draw from should have been sufficient, however, should be cause for additional concern.
 
National Commitment
So, in summary, reliance on the foreign commercial market is risky and uncertain and reliance on U.S. Government ownership is expensive and not necessarily assured – particularly if problems with the commercial fleet are not addressed because it is the source of manpower for the government-owned fleet. That leaves the best choice as the same one the United States has had since at least the early 1900s – and that is to support a privately owned U.S.-flag fleet in foreign commerce for military auxiliary, economic security and mariner training and employment purposes.
 
The U.S. Congress took a significant step in the right direction when it enacted the Consolidated Appropriations Act, 2016, signed by President Barrack Obama into law on December 18, 2015. That Act increased the stipend paid to the 60 U.S.-flag vessels enrolled in the Maritime Security Program from $3.1 million per year per vessel for FY 2016 (increased to $3.5 million in the same law) to $5 million per year per vessel for FY 2017 through 2020 and even more in FY 2021. The dramatic increase is a recognition that the U.S.-flag fleet trading in foreign commerce needs significant help now.
 
But that help alone is not enough. As indicated in a MARAD Report to Congress in April 2015 and by Admin. Jaenichen to Congress on November 17, 2015, the U.S.-flag shrank and is shrinking because of a decline in cargoes reserved to such vessels by U.S. cargo preference laws. According to Admin. Jaenichen, the decline in cargoes has had “the most dramatic effect on the U.S.-flag fleet.”
 
Unless that decline is reversed or other substantial measures are taken to reduce the cost disadvantage faced by U.S.-based ship owners or provide compensating support, the fleet will continue to suffer and decline. A fulsome and substantial strategy is needed taking a lesson from the 1930s.
 
At that time the private merchant marine also faced an existential crisis as the existing support system (mail subsidies) was rife with inefficiency and corruption. President Franklin Roosevelt took the bull by the horns and proposed moving to an entirely new subsidy system. The solution was not universally popular and met with determined opposition in Congress. In the end, however, the Merchant Marine Act, 1936 became law which “proved to be critical to the eventual Allied victory in the Second World War.” A similar concerted and sustained effort will be needed to support the privately owned U.S.-flag fleet because without a renewed national commitment, this may very well be the last port of call for the U.S. merchant marine.


References:
1  U.S. Maritime Administration web site (Resources – Maritime Statistics).
2  E.g. Clinton H. Whitehurst, Jr., “Last Clear Chance for an Enduring Maritime Policy,” The Strom Thurmond Institute (1998).
3  U.S. House of Representatives, Comm. on Armed Services, Subcomm. on Seapower and Projection Forces, Hearing on Sealift Force Assessment (July 30, 2014).
4  U.S. Maritime Administration, A Report to Congress -- Impacts of Reductions in Government
Impelled Cargo on the U.S. Merchant Marine at 49.
5  U.S. House of Representatives, Comm. on Agriculture, Subcomm. on Livestock and Foreign Agriculture and Comm. on Transportation and Infrastructure, Subcomm. on Coast Guard and Maritime Transportation, Hearing on Food Aid Transportation (Nov. 17, 2015).
6  Louis Francis Harlow, “An Analysis of the National Defense Reserve Fleet, the Ready Reserve Force Component and Their Capability to Meet National Emergency,” Naval Postgraduate School (Sept. 1979) at 29.
7  Andrew E. Gibson, “So Long, American Flag – It Was So Nice to Fly You,” Naval War College Review (Autumn 1993) at 50.
8  46 U.S.C. § 50101; 50 U.S.C. § 4401.
9  U.S. Senate, Comm. on Commerce, Hearing on Establishment of an American Merchant Marine (Feb. 7, 1920) at 1011.
10  E.g., Statement of Gen. Paul J. Selva, Commander, U.S. Transportation Command to the U.S. Senate Armed Services Comm. (March 19, 2015).
11  Econometrica, Inc., Final Report: Maritime Security Program Impact Evaluation, Submitted to the U.S. Maritime Administration (July 2009) at 45. 
12  John Jay (Secretary of Foreign Affairs) to John Adams, November 1, 1785, in Correspondence and Public Papers at 175.
13  Samuel A. Lawrence, United States Merchant Shipping Policies and Politics, The Brookings Institution (1966) at 33-34.
14  James R. Reckner, Teddy Roosevelt’s Great White Fleet, Naval Institute Press (1988) at 104-105.
15  E.g. Lane C. Kendall, “‘Capable of Serving as a Naval and Military Auxiliary . . .’” U.S. Naval Institute Proceedings (May 1971) at 219. 
16 Andrew E. Gibson and Commander Jacob L. Shuford, USN, “Desert Shield and Strategic Sealift,” Naval War College Review (Spring 1991) at 16.
17  Andrew E. Gibson, “After the Storm” Naval War College Review (Summer 1992) at 22.
18  UN Conference on Trade and Development, Review of Maritime Transport 1991 and 2015.
19  Lawrence, United States Merchant Shipping Policies and Politics at 39-40.
20  Harlow, “An Analysis of the National Defense Reserve Fleet” at 29.
21  U.S. General Accounting Office, Strategic Sealift – Part of the National Defense Reserve Fleet is No Longer Needed (Oct. 1991) at 3, 8.
22  U.S. House of Representatives, Comm. on Armed Services, Subcomm. on Seapower and Projection Forces, Hearing on Logistics and Sealift Force Requirements and Force Structure Assessment (July 30, 2014) at 42.
23  Id. at 8.
24  Gibson & Shuford, “Desert Shield and Strategic Sealift” at 12-14.
25  Harlow, “An Analysis of the National Defense Reserve Fleet” at 27.
26  U.S. Maritime Administration, A Report to Congress Impacts of Reductions in Government
Impelled Cargo; U.S. House of Representatives, Hearing on Food Aid Transportation.
27  Salvatore R. Mercogliano, “The United States Merchant Shipping Offensive During the Second World War,” The Northern Mariner (Oct. 2001) at 30.
 
 
 
(As published in the February 2017 edition of Maritime Reporter & Engineering News)
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