FINDING COMMERCIAL RETURNS IN U.S. SHIPPING

Vincent J. SolarinoPresident & Chief Operating Officer

CMA, STAMFORD, CT, APRIL 4, 2019

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Jones Act: Statutory Framework for U.S. Shipping

• The Jones Act was signed into law June 5, 1920.• Section 27 of the Merchant Marine Act of 1920. • The terms "Jones Act" and "Merchant Marine Act of 1920" used

interchangeably by MARAD

• Sen. Wesley Jones (R-WA) Senate Commerce Committee chairman introduced bill to encourage greater commercial use of U.S. ships.

• He presented it as a plan to ensure adequate domestic shipbuilding capacity and a ready supply of merchant mariners to be available in time of war or other national emergencies and avoid need to rely on foreign shipping.

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Jones Act-Plans and Objectives

• Restricts domestic shipping services to vessels that are:

• U.S.-built• U.S.-flagged

• U.S.-owned

• U.S.-crewed

100% - Assembled entirely in U.S. with all major components of the hull and superstructure fabricated domestically (although there is heavy reliance on foreign parts, investment and design)

75% or more U.S. ownership

75% or more crewed by U.S. citizens (This rule has its origin in the Shipping Act of 1916,when foreign interests were buying up U.S. shipsduring WWI)

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Jones Act Administration and Enforcement

• No fewer than 16 congressional committees and 6 Federal agencies have some form of oversight authority

• Customs and Border Protection (CBP) has primary enforcement responsibility

• Maritime Administration (within DOT) keeps records and has authority to waive U.S.-build requirements

• U.S. Coast Guard responsible for determining vessel eligibility and issues certificates and other documentation

• Department of Defense informs CBP when to issue waiver in interest of national security

• Department of Energy advise CBP on requests for waivers for shortages or imminent shortages in the energy supply

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U.S. House and Senate Oversight Committees

• House Committees:

• Senate Committees:

Transportation and Infrastructure; Natural Resources; Armed Services; Homeland Security; Judiciary; Education and Workforce; Ways and Means; Appropriations

Commerce, Science and Transportation; Energy and Natural Resources; Armed Services; Homeland Security and Government Affairs; Judiciary; Finance; Appropriations; and Health, Education, Labor and Pensions.

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DECLINE OF U.S. FOREIGN-TRADE MERCHANT FLEET PREDATES JONES ACT

• Historical Examples that caused Decline:• Cost to Build: U.S. Clipper ships by 1850 were showing the flag in most ports of the

world with coastal forests providing supply of inexpensive virgin lumber and considered world’s best sailing vessels at that time.

• Tax Considerations: Custom duties reduced 10% for goods imported in U.S. vessels as well as tonnage tax in favor of U.S. shipping, enacted in 1789.

• Financial Risk Considerations: The civil war (1861 – 1865) began the decline of U.S. foreign-trade merchant fleet as vessels lost as ‘prizes’; shift to foreign registry to lessen risk of capture and avoid high insurance rates and not permitted to return to the U.S. registry.

• Technological Considerations: Development of steel-hull propelled ships with advanced technology in England and other European countries providing foreign builders advantage in cost of building iron vessels. High cost of domestically built ships demanded heavier capital investment and reduced potential earnings in foreign trade. The law prohibited register of foreign-built ships under U.S. documentation

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Law’s Effect on U.S. Shipping Industry

• U.S. fleet consists of 40,000 vessels - but barges on Mississippi River alone account for 55% of that number.

• 9 out of every 10 commercial vessels produced in U.S. shipyards since 2010 have been barges and tugboats.

• Jones Act ocean going ships 1,000 GT or more transporting cargo declined from 193 to 99 since 2000, and only 78 are militarily useful.

• American-built coastal and feeder ships cost between $190 million and $250 million compared to about $30 million in foreign shipyard - 8 to 9 times more expensive.

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Law’s Effect on the U.S. Shipping Industry (cont.)

• MARAD listed 117 active shipyards in 2013, of which about 20 are mid-sized to large shipyards capable of building naval ships and submarines, ocean- going cargo ships, drilling rigs, and high complexity mid-sized vessels.

• Japan has more than 1,000 shipyards, and China has more than 2,000.

• Only 7 active major shipbuilding yards in the U.S. (ships more than 150 meters) compared to about 60 in Europe. 4 of the 7 U.S. shipyards build exclusively for the military.

• 70% of U.S. shipbuilding and ship-repairing industry revenue for new large, deep- draft vessel orders in 2014 was derived from the military.

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Law’s Impact on Economy

• Higher prices for waterborne transportation drive down demand for shipping services.

• The daily operating costs for a U.S.-flagged vessel engaged in foreign commerce in 2010 was $20,053 compared to $7,454 for foreign-flagged vessels.

• Labor cost represent about 68% for U.S. crew compared to 35% for foreign-flagged ships.

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Law’s Impact on Economy (cont.)

• Less cargo moved by water means shipping companies purchase fewer vessels, reducing demand to build ships, fewer employment opportunities for merchant mariners, and fewer shipbuilders.

• Only 2% of U.S. freight travels by sea compared to 40% in the EU where limited cabotage among member states is permitted. 80% of world’s coastlines have cabotage laws

• Cabotage laws apply to air carriers, truck, and rail.• Moving crude oil from the U.S. Gulf Coast to the

Northeast on Jones Act tanker cost $5-$6 per barrel compared to $2 per barrel when shipped to Eastern Canada on foreign flagged vessel.

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Law’s Impact on Economy (cont.)

• Increases demand for trucking, rail and pipeline services inflating business costs throughout supply chain

• U.S. cargo shipped along Atlantic coast, Pacific coast and Great Lakes is half the volume than it was in 1960

• Cargo shipped over same period by rail increased 50%, and intercity trucking increased by 200%

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Law’s Impact on Economy

• Increased infrastructure and maintenance costs on roads, bridges and rail

• Creates a "stealth tax" on the economy• Increased infrastructure costs for maintaining

and operating highways and bridges. Trucks are responsible for more than 75% of these costs.

• According to MARAD, the nations’ surface transportation costs $200 billion per year, 4.2 billion hours in traffic and 2.9 billion gallons of fuel used idling, also increasing pollution.

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Benefits of Jones Act

• Cost of National Defense: Without the Jones Act, the Navy would need to spend many billions of dollars on new sealift vessels. Without the Jones Act, the Navy would be hard-pressed to crew the sealift vessels it already has.

• Shipbuilding Industry Commercial Impact: Without the Jones Act, U.S. construction of large oceangoing commercial vessels would cease.

• National Security: Without the Jones Act, foreign ships and mariners would take over critical U.S. economic infrastructure.

• Healthy Domestic Shipping: The Jones Act assures the U.S. mainland and its offshore communities continue to have reliable domestic water transportation service subject to national control in times of emergency.

• Safety: Environmental standards, liability, safety, and enforcement areassuredly improved by having American-owned vessels and U.S.-citizen-crews responsible for safely delivering the goods along our nation’s waterways.

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Benefits of the Act (cont.)

National Strategic Industry: As per Rear Adm., U.S. Maritime Service, Christopher J. McMahon:

“Transportation and its subcomponent marine transportation, is a national strategic industry. The entire economy of any nation and the prosperity of its people are completely dependent on access to quality, effective, efficient intermodal transportation systems. The ability of a nation to project military power is completely dependent on transportation and logistics systems which, in the case of the United States, means availability of substantial commercial marine transportation.”

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Benefits of the Act (cont.)

National Military Strategy Structure:

• U.S. Military depends on Commercial Sealift/Airlift:o USTRANSCOM Coordinates deployment of Army’s Surface Deployment

Distribution Command (SDDC), Airforce’s Air Mobility Command (AMC), Navy’s Military Sealift Command (MSC), and MARAD’s Ready Reserve Force (RRF)

• USTRANSCOM relies on three fleets of vessels:o Military Sealift Command (MSC)o MARAD’s Ready Reserve Force (RRF)o U.S. Merchant Marine – MARAD Maritime Security Program (MSP)

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Benefits of the Act (cont.)TOTAL OPERATIONAL AND CAPITAL INVESTMENT IMPACTS OF THE JONES ACT SHIPPING INDUSTRY ON THE U.S. ECONOMY

Category Direct Indirect Operational

Indirect Capital Total Impact

Employment 95,470 530,180 22,570 648,220

Labor Income $ 8.1 $ 32.2 $ 1.3 $ 41.6

Value Added $ 17.5 $ 52.8 $ 2.1 $ 72.4

Output $ 54.0 $ 96.7 $ 4.1 $ 154.8

Tax Impact $ 4.0 $ 12.4 $ 0.5 $ 16.8Numbers in $ Billions

The water transportation segment is responsible for most of the economic contribution of the Jones Act fleet, accounting for 56 percent of employment and 78 percent of output.

Source: Transportation Institute, PwC calculation using the IMPLAN modeling System (2015 Database)

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Suggested Solutions to Further Benefit U.S. Economy

• Increase U.S. Maritime Incentives

• Tax incentives for US shipyards; Subsidy for State of the shipyards (President Clinton’s five point national shipbuilding initiative in 1994 (MARITECH & MARAD) intended to help U.S. Shipyards to become commercially competitive in international market.

• Tax incentives for hiring US crew (also free or heavily subsidized college/higher education and/or housing ownership assistance.

• Tax incentives for U.S. Owners and Operators.

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Suggested Solutions (Cont.)

• Reduce the U.S.-build requirement

• The most immediately burdensome requirement of the Jones Act is out of step with the realities of the global-supply-chain and the practices of U.S. shipbuilders, who presently assemble oceangoing vessels relying heavily on foreign parts, foreign investment and foreign shipbuilding design and expertise.

• Elimination of this requirement will allow U.S. shipyards to benefit more from advances in technology that could help put U.S. shipbuilding in line with modern developments.

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Suggested Solutions (Cont.)

• Reduce cost for U.S. Owners by creating a new statutory regime and compensation scheme for personal injury matters similar to Longshore and Harbor Workers Compensation Act (LSHWCA).

• The current legal regime allows seamen to recover multimillion verdicts in various jurisdictions in the U.S. which are sometimes not justified. This further drives up insurance costs which reflect an increased risk for operating in the U.S.

• This is an unduly burden on owners and insurance carriers which could be relieved by a fair and well-working workers’ compensation regime for seamen.

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Suggested Solutions (Cont.)

• Further Expand MARAD’s Marine Highway Program

• The Maritime Administration has designated 25 marine highway routes around the country and works to incorporate these navigable waterways into the nation’s greater transportation system.

• In New York and New Jersey metropolitan region, marine highway Route M-87 is the Hudson River and Route M-95 parallels Interstate 95 from Maine to Florida. In February 2018 a new barge service between Rhode Island and the Red Hook Container Terminal was designated a federal marine highway project.

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Suggested Solutions (Cont.)

• The Expansion of the MARAD Highway Program will be:

• Creating and sustaining jobs in U.S. vessels and in U.S.ports and shipyards;

• Increasing the state of good repair of the U.S. transportation system by reducing maintenance costs from wear and tear on roads and bridges;

• Increasing our nation’s economic competitiveness by adding new, cost-effective freight and passenger transportation capacity;

• Increasing public safety and security by providing alternatives for the movement of hazardous materials outside heavily populated areas;

• Increasing transportation system resiliency by providing transportation alternatives during times of disaster or national emergency;

• Increasing national security by adding to the nation’s strategic sealift resources.

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Suggested Solutions (Cont.)

• Eliminate Sanctions for U.S. operators for certain countries (e.g. Cuba)

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CONCLUSION- Benefits and Concerns

“Benefits” • The Jones Act is too much a part of the U.S. economic and

national security fabric to materially change. Many industries, jobs, technologies, routines and processes have grown because of the Jones Act.

• “Concerns” • The Jones Act has appeared to be failing some objectives and

needs some remedy for its own survival and for the future health of the U.S. maritime industry, as well as national defense it was designed to protect.

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HOLD HARMLESS

• This presentation is not the opinion or position of the American P&I Club, its Managers, or the guy giving this presentation –… unless you agree with any of the points, comments or suggestions made during this presentation, then in that case the guy making this presentation gracefully accepts credit and praise.

• The Presenter fully appreciates the sensitivity of this subject matter and thanks all in attendance for withholding the ‘slings and arrows’ that this presentation may have understandably excited the desire for some to unleash without remorse!

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ACKNOWLEDGEMENT AND SOURCE REFERENCES

• I must give credit for the information, statistics and reference of some material sourced in supporting this presentation to the Cato Institute’s Policy Analysis of the Jones Act, published June 28, 2018, paper number 845.

• I also must give credit to Transportation Institute, Richard Berkowitz, and Beth Gearhart from MARAD for providing data, statistics and general information for this presentation.

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