American Shipbuilding Association

American Shipbuilder

Volume 15, Issue 5                                                                                           August 2009

House Appropriates $13 Billion for 10 Ships

On July 30th, the House of Representatives passed its version of the FY 2010 Defense Appropriations Bill (HR 3326).  The legislation provides $13 billion for 10 ships, which is $949 million and two ships above the Administration’s budget request for new naval ships.  The specific dollar amounts for the major shipbuilding programs are listed below:   

The House bill fully funds the procurement of:  one Virginia-class submarine and the advance procurement to fund the building of two submarines a year starting in 2011; one DDG-51 class multi-mission destroyer; and two T-AKE combat logistics force ships.   Funding was also included to complete the tenth LPD-17 amphibious transport dock ship.  House Appropriators reduced the request for the DDG-1000 multi-mission destroyer program by $11 million, and the Navy was directed to review the feasibility of using DDG-1000 technologies on future surface combatants as part of the Quadrennial Defense Review.  The House bill also rescinds $178 million in advance procurement for LHA-R from the FY 2009 appropriation. 

The House legislation further provides for the procurement of four littoral combat ships (LCS) and two joint high speed vessels (JHSV), which is an increase above the Administration’s request of one ship for each class.  In the report accompanying the bill, the Committee expressed concern with DOD’s failure to submit shipbuilding budgets that will achieve the established 313 ship force structure requirement.  House Appropriators expressed a “strong desire to increase stability in the nation’s shipbuilding industrial base by increasing the quantity of ships being constructed each year” and believes that the addition of one LCS and one JHSV will provide stability to the industrial base while at the same time achieving the required fleet size. 

The Senate is expected to complete its version of the defense spending bill following the August congressional recess. 

House and Senate Appropriators Separately Appropriate Funds for Title XI

On July 30th, the Senate Appropriations Committee passed the FY 2010 Transportation Appropriations Bill (HR 3288, as amended), providing $10 million for new Title XI loan guarantees.  The House Defense Appropriations Subcommittee added $50 million for the Title XI Ship Loan Guarantee program as part of the National Defense Sealift Fund in the FY 2010 Defense Appropriations Bill (HR 3326).  Despite the role the program plays in job creation and marine infrastructure investment, funding for new loan guarantees was not included in the Administration’s budget request. 

Administered by the Maritime Administration (MARAD), Title XI provides American ship owners with a federal guarantee of 87.5% of a commercial bank loan for 25 years.  The program is essential to ensuring affordable finance rates at reasonable terms and conditions to allow ship owners to replace and expand their fleets of ships to meet the nation’s energy transportation needs, domestic commerce requirements, and to serve as a military auxiliary fleet in times of emergency. 

With the tightening of the credit market, the federal guarantee provided through Title XI is essential to recapitalizing America’s merchant fleet.  Moreover, ship construction will play a key role in America’s economic recovery.  Once an application for a Title XI loan guarantee is approved, the construction order is immediately place in a shipyard, instantaneously creating and sustaining thousands of jobs in the shipyard and supplier base for two to three years.  Existing commercial loans that are refinanced under the Title XI program ensure that construction is not disrupted for those ship construction projects already underway. 

Last year Representative John P. Murtha (D-PA), Chairman of the House Defense Appropriations Subcommittee, appropriated $48 million for new loan guarantees.  As a result, MARAD has seen a surge of applications for vessel construction.  This has underscored the importance of the program to this country’s ship owners and the need for affordable financing in the current economic climate.  The Title XI program must be funded annually to restore stability to commercial shipbuilding, allowing ship owners to plan and budget their fleet recapitalization needs. 

Navy Directed to Submit Report on Leases of Foreign-Built Ships

In the report accompanying the House FY 2010 Defense Appropriations Bill (HR 3326), Appropriators expressed their concern regarding DOD’s continued use of foreign-built ships under long-term lease to fulfill dedicated sealift missions.  House Defense Appropriations Subcommittee Members Representatives Maurice Hinchey (D-NY), Marcy Kaptur (D-OH), Steven Rothman (D-NJ), and Peter Visclosky (D-IN) have been leading the fight to end the outsourcing of America’s military sealift missions to foreign countries by limiting the length of these leases to no longer than two years.    

The ships currently under long-term lease by DOD are used, foreign-built commercial ships, which have been converted to meet DOD requirements.  Presently, there are eight foreign-built ships under long-term lease by the Military Sealift Command that are operating as part of the logistic pre-positioned and sealift fleets for the ­­­­military.  Five of these ships have had their leases renewed for a consecutive 59-month term, or said differently, will be leased for 10 years minus 2 months at the end of their current contracts.  The lease term for one of the five ships was renewed for a third 59-month term.  The average age of the ships on their second and third leases is 23 years.  DOD has been able to circumvent federally mandated leasing restrictions by entering into lease contracts of 59-months (one month shy of five years), thereby avoiding triggering the Budget Enforcement Act of 1990, which places a limitation on leases of capital assets that are five years or longer.  Additionally, the cumulative length of these leases amounts to de facto purchases, which violates the intent of U.S. acquisition law (Section 7309 of Title 10 USC) requiring ships for the U.S. military to be built in this country. 

Despite the efforts of several Representatives to include legislation in the House bill to prohibit leases of foreign-built ships that exceed two years in duration, the House Appropriations Committee has not done so because of strong opposition from the Navy.  Instead the Committee requested an update to the Navy’s March 2008 report regarding the lease of foreign-built ships.  Due March 31, 2010, the Navy has been directed to include in the report a plan to phase out the practice, replacing foreign-built ships with U.S.-built ships by 2012. 

House Subcommittee Holds Hearing on Improving Shipbuilding Effectiveness

On July 30th, the House Armed Services Seapower and Expeditionary Forces Subcommittee held a hearing on efforts to improve shipbuilding effectiveness.  In his opening statement, Subcommittee Chairman Gene Taylor (D-MS) underscored the need to reduce the cost of naval ships and improve efficiencies in order to legitimately rebuild America’s Navy and preserve the U.S. shipbuilding industrial base. 
Representing the Navy, Mr. Sean Stackley, Assistant Secretary of the Navy for Research, Development and Acquisition, acknowledged in his opening statement that ship costs have risen faster than defense top line budgets and that this will impair the country’s ability to rebuild the naval fleet.  Citing low rates of production, reduced competition, and increased system complexity as a few reasons why the costs of naval ships has increased, Mr. Stackley outlined for the Subcommittee some of the initiatives underway to lower costs and create or capitalize on shipbuilding efficiencies.  A few examples include initiatives to establish realistic cost estimates for naval ships and increase capital improvement programs that encourage or assist shipyards to invest in facilities for increased efficiencies.  In response to separate questions from Representatives Roscoe Bartlett (R-MD) and Rob Wittman (R-VA) on the importance of increasing commercial shipbuilding as a means to lower the cost of naval ships, Mr. Stackley acknowledged that increased volume provided through commercial ship orders would help to lower the costs of ships being built for the Navy.  He also stated that the current economic downturn has made facilitating commercial ship orders even more difficult. 
Testifying on behalf of the U.S. shipbuilding industry, David Heebner, Executive Vice President of General Dynamics Marine Systems Group, and Mike Petters, President of the Northrop Grumman Shipbuilding, noted that the shipyards have already made several investments to improve efficiencies, but are dependent upon Congress and the Navy to improve volume, stability and predictability in funding and scheduling to ensure maximum efficiencies in the shipyards and throughout the supplier base.  Revisiting the issue of commercial shipbuilding in meeting some of the industry’s goals, Mr. Heebner praised Congress in its support of the Title XI ship loan guarantee program to increase ship construction volume.  Highlighting the need for solutions to improve shipbuilding efficiencies, Mr. Petters stated that the industry has and continues to work with the Navy to respond to current and emerging requirements.  Furthermore, he commented that the shipyards have done much to modernize facilities and have made investments to maintain a highly skilled workforce.  Mr. Petters suggested that the long-term goal is for Congress, the Navy, and industry working together to break current funding and procurement practices that are constraining efficiencies.  In the short-term, he recommended negotiating contracts with realistic cost estimates, understanding the issues confronting the shipbuilding industry, and helping create valid business cases that will allow the U.S. shipbuilding industry to “attract capital, talent and technology…”

You Can Make A Difference

Today’s Navy of 285 ships is the smallest naval fleet this country has possessed in 92 years, and 28 ships below the force structure requirement of a 313 ship fleet.  Keep informed of the decisions Congress is making with respect to America’s sea services.  Sign up today to be a Sea Power Ambassador. 

Well Said!

“The shipbuilding industry is not broken, though it is not as healthy as it could and should be.  The healthier we are as an industry, the better we can serve the needs of our Navy and the American people.”

Mike Petters
President, Northrop Grumman Shipbuilding
Before the House Armed Services Seapower and Expeditionary Forces Subcommittee
July 30, 2009