DEPARTMENT OF TRANSPORTATIONSTATEMENT OF
ACTING MARITIME ADMINISTRATOR
JOHN E. GRAYKOWSKI
BEFORE THE OVERSIGHT PANEL ON THE MERCHANT MARINE
COMMITTEE ON NATIONAL SECURITY
U.S. HOUSE OF REPRESENTATIVES
IN SUPPORT OF FISCAL YEAR 1999 AUTHORIZATION
FOR THE MARITIME ADMINISTRATION
Mr. Chairman and Members of the Committee, it is a pleasure to be here today to discuss the Maritime Administrations budget for fiscal year 1999. It is indeed appropriate to come before the National Security Committee since Secretary Slater has made national security one of the five strategic goals of the Department of Transportation (DOT) and the Maritime Administration (MARAD) shares with the U.S. Coast Guard the primary national security role within DOT. The Secretary and Administration fully support MARADs national security missions as reflected in the Budget we present today.
We have accomplished a great deal at MARAD in the last year. I can say with confidence that we are fulfilling our national security mission effectively and efficiently, and that our strategic sealift capability, shipbuilding industries and maritime transportation system are stronger today as a result of MARADs activities and programs. I further believe that by any measure, the investment you make in our programs, on behalf of the taxpayer, achieves precisely those results that are expected. Using the Government Performance and Results Act (Results Act), we have an objective means to measure our progress, our work and our results. We fully support the Results Act, have embraced it and made it an essential part of our management, program planning and administration.
Let me begin my overview of MARADs accomplishments and future plans with the linchpins of our national security efforts, namely the Maritime Security Program (MSP) and the Voluntary Intermodal Sealift Agreement (VISA) program.
MARITIME SECURITY PROGRAM
The implementation of MSP has occurred exactly as we planned and discussed with you last year. As you recall, MSP was enacted late in 1996, and MARAD was given a very short period of time to craft regulations, select MSP participants and enroll them in the program. I
think we all should recognize that, in contrast to what might be a common misperception of governments ability to move quickly, MARAD, in consultation with the Department of Defense (DOD) and our private sector partners, moved swiftly following enactment and had MSP up and running in less than 90-days. Mr. Chairman, MSP is a brand new program, which changes not only the process, but also the assumptions, culture and the governmental support relationships for sealift resources. We achieved this dramatic change and implemented this program with a minimum of conflict or controversy, and now have identified 47 militarily useful ships that will be part of MSP for the next eight years.
However, since 1997 was a transition year from the old Operating-Differential Subsidy (ODS) program to MSP, only 29 ships actually received MSP payments in 1997. In 1998, that number will increase to 45 vessels, with payments to the final two vessels commencing in FY 1999. This will result in expenditures of approximately $86 million in FY 1998, made up of carryover and funding authority, and we are seeking $98 million for MSP in FY 1999 to support 47 vessels.
I believe that we can all take great pride in how the MSP program has evolved. A collateral benefit of MSP has been the transfer to U.S. registry of 11 modern, efficient containerships and, in some specific trades, expansion of U.S. service. In addition, American President Lines (APL) has brought or committed to bring three additional vessels, all unsubsidized, into the U.S.- flag fleet. Thus, MSP has stopped the hemorrhaging of U.S.-flag vessels from our national security sealift structure while enhancing it with the addition of modern, efficient vessels to the inventory of U.S.-flag ships available to our military planners. This capability is important in terms of the vessels themselves, but also with respect to maintaining the pool of highly-skilled, U.S. citizen merchant mariners who crew the government fleet during emergencies. That simply could not have occurred if it had not been for the combined support and commitment of the Administration and Congress to maintaining a U.S.-flag sealift fleet.
VOLUNTARY INTERMODAL SEALIFT AGREEMENT (VISA)
On January 30, 1997, the Secretary of Defense approved the Voluntary Intermodal Sealift Agreement (VISA) as a sealift readiness program. Already, VISA has succeeded in a way we scarcely thought possible when it was first developed. The essence of VISA is to create a genuine, dynamic and effective partnership among MARAD, DOD and the private sector to give DOD guaranteed access to intermodal transportation capabilities in the private sector. These capabilities consist of an $8 billion worldwide transportation network owned and operated by U.S. companies which offer unequaled vessels, capacity, container assets, port and terminal operations, innovative management and the finest transportation professionals that can be found.
Instead of seeking to replace, overlay and direct the utilization of those resources with government-owned or requisitioned resources -- something that is impractical, unrealistic and costly -- VISA contemplates a fully coordinated effort among all the parties built upon joint planning, prior negotiation of terms and conditions and exercises to ensure that if and when we need worldwide intermodal transportation, it will be there with no questions asked or time lost.
The driving force within VISA is the Joint Planning Advisory Group (JPAG) which is comprised of industry and co-chaired by MARAD and USTRANSCOM. We couldnt have predicted how quickly this group would gel into an effective forum to identify potential problems in activating VISA, resolve those problems and develop true contingency plans to meet DOD requirements. If not done now, this work would have to be done in the middle of a build up or other exigent circumstances, which makes calm and orderly resolution of difficult issues that much harder. However, we are doing this work now, in the cold light of peacetime which gives all of us great confidence that VISA will enable us to transition from peacetime to wartime operations in a seamless and time-phased manner without undue impact on normal commercial operations.
Industry participation in VISA has been substantial. MARAD has enrolled all of the MSP vessels and related capacity along with most of the other U.S.-flag, dry cargo transportation companies. In total, we have enrolled 24 companies and have gained guaranteed access to more than 200 vessels of all types and the entire worldwide structure supporting those vessel operations.
It is worth bearing in mind that VISA does not involve any direct peacetime payments to enrollees, but relies on peacetime cargo incentives to attract carriers. The voluntary nature of VISA adds another layer of security in the form of the commitment these companies, and their people, are making; I can attest personally to the seriousness with which VISA companies have approached this process.
Mr. Chairman, we are getting tremendous value from this program, along with MSP, at a very modest investment. Perhaps the most rewarding aspect has been the creation of the partnership between government and industry, which is a major initiative in this Administration. In raising this with you, I speak not only for myself but also for our partners at USTRANSCOM, General Kross, General Thompson, General Montero at Military Traffic Management Command (MTMC) and Admiral Perkins of the Military Sealift Command (MSC). What weve created here is exactly what government ought to be doing; i.e., working shoulder to shoulder on a common problem with the best our private sector has to offer to make America stronger.
Before I leave this topic, I want to mention several changes in corporate structure that have occurred in the maritime industry which have impacted our MSP and VISA programs. In March of 1997, one of the MSP companies, Lykes Bros. Steamship Co., Inc. (Lykes), as a result of its bankruptcy reorganization, requested approval to transfer its three agreements under the MSP to a new company, Sea Crews II.
Sea Crews II is composed of U.S. citizen creditors of Lykes who proposed to charter the Lykes vessels to a subsidiary of Canadian Pacific Limited (CP). In June 1997, MARAD denied that request because the level of foreign control over the vessels was too significant -- MSP ships must be controlled by U.S. citizens and must be available, without question, in time of national emergency or war. Subsequently, Lykes transferred the rights to its MSP operating agreements to First American Bulk Carrier Corporation (FABC). MARAD is reviewing FABCs proposal to take over the three contested MSP agreements.
Another MSP participant, APL, also requested approval to transfer its agreements under the MSP to American Ship Management LLC (ASM), a U.S. citizen company, which would time charter the vessels to APL after its merger with Neptune U.S.A., Inc., an affiliate of Neptune Orient Lines, Ltd., a Singapore-based company. MARAD approved this transfer because it determined that ASM independently operates and manages the ships. In addition, the vessels -- which are owned by a U.S. citizen trustee -- are deemed owned and operated by U.S. citizens under a provision of the Coast Guard Authorization Act of 1996 which provided for facilitation of trust cross-border financing for U.S.-flag companies using arrangements such as this.
READY RESERVE FORCE
Mr. Chairman, the Ready Reserve Force (RRF) is one of those programs that makes all of us proud and which demonstrates that we really can do things "right." We currently have 96 vessels in the RRF which are maintained in various stages of readiness from 4 days to 20 days. These vessels consist of many types of vessels -- from 31 roll-on/roll off vessels (RO/ROs) to 34 breakbulk to 10 tankers, to specialized vessels such as 10 crane ships, 7 heavy lift ships, 2 aviation logistics support vessels, and 2 troopships. These ships are located around the country at outport locations near military loading facilities. Thirty eight of them are moored at three MARAD reserve fleet sites at Beaumont, Texas; Suisun Bay, California; and in the Chairmans district in the James River of Virginia. The rest are outported around the United States and three small tankers in Japan. Most of the outported ships are reduced operating status maintained by civilian maintenance crews which work for private sector ship managers. Funding for the RRF is projected in FY 1999 to be $260 million from the Navys National Defense Sealift Fund.
The RRF operates at a level of efficiency and readiness that any organization would be proud to have, and in the 60 so-called "no notice" activations since the Persian Gulf Sealift in the early 1990's. We delivered our ships on time, every time and in excellent condition with only two minor exceptions where ships were a few hours late. We have learned from the past operations of the RRF, and continue to make program refinements which lead to a 99% reliability rating for our pre-positioned ships, and a 90% fleetwide readiness rating for our RRF ships located here. Currently 93% of our 96 vessels are fully available for service; the other 7% are undergoing scheduled routine maintenance and repair operations.
I can say, and believe Vice Admiral Perkins of MSC, our "customer," would affirm that we have taken all question out of our military planners minds whether and if our ships will be
there on time and in good condition. That is the least we can do, since it fulfills our core RRF mission, and our success can be directly attributed to the way that we manage this program.
We have decentralized RRF management and placed much of the day-to-day responsibility for ship readiness and operations in the hands of our partners--commercial U.S. ship managing companies and U.S. merchant mariners. But, in addition, the Reduced Operating Status (ROS) concept has proved to be enormously successful in maintaining both the readiness of the vessels and that of the crew as well. I invite all of you to visit one of our ships--we have several stationed in Baltimore--to see for yourselves what this program is doing. The ships are in great condition, the crew filled with pride and you would see that we are truly "ready."
As you may know, we are in the process of soliciting new bids from ship managers for the entire fleet. I would anticipate that contract award decisions will be made by the end of May and you can be certain that the one unyielding requirement will be the continuation of the success we have seen to date.
The other component of MARADs National Defense Reserve Fleet (NDRF) is the 121 ships in varying degrees of condition which are not part of our front-line RRF. These vessels, which are moored in the James River, VA; Suisun Bay, CA and Beaumont, TX are in many cases obsolete and candidates for disposal. In addition, MARAD is negotiating with the U.S. Navy to take title to another 60 obsolete vessels, which will have to be scrapped.
An issue which has gained prominence and visibility in the last year pertains to the proper disposal of obsolete government-owned vessels, most of which reside in the MARAD and U.S. Navy fleets. Under the National Maritime Heritage Act of 1993 (P.L. 103-451), MARAD was directed to scrap all obsolete vessels in the NDRF in a manner which maximizes the economic return to the United States by September 30, 1999. This date was later extended by Congress in the National Defense Authorization Act of 1998 (P.L. 105-85) to September 30, 2001.
By law, revenues from the sale and scrapping of obsolete vessels in the NDRF are distributed into three accounts: (1) 50% specifically for the acquisition, maintenance, repair, reconditioning and improvement of vessels in the NDRF (including the RRF); (2) 25% for payment or reimbursement of expenses of the State maritime academies or the U.S. Merchant Marine Academy for facility and training ship maintenance, repair and modernization or for purchase of simulators and fuel; and (3) 25% for the National Maritime Heritage Grants Program which is administered by the Department of the Interior.
Historically, the sale of obsolete vessels has been a positive source of funds to offset the need for federal appropriations for the purposes cited above. MARAD has been successful in obtaining the highest return to the government, in compliance with its statutory mandates, through sales to overseas disposal facilities located in countries such as India, Pakistan, Mexico, China and Bangladesh. Furthermore, MARAD has found that the capacity of domestic scrapping businesses is limited and unable to accommodate the number of ships in both the MARAD and U.S. Navy inventories.
However, recently the U.S. Environmental Protection Agency (EPA) has indicated to MARAD and the U.S. Navy that the continued use or sale of vessels which contain Polychlorinated Biphenyls (PCBs) is prohibited by the Toxic Substances Control Act (TSCA, 15 U.S.C. 2601 et seq.) and the export of ships containing PCBs is effectively prohibited. Like many older facilities, vessels constructed before the risks of PCB contamination became known, e.g., most of those in the MARAD inventory, contain transformers, wiring and other components which contain PCBs. MARAD has worked with EPA to develop an interim regime for ship disposal which complies with all federal and state requirements and we have successfully sold two vessels in the past three years under this regime.
To resolve this apparent conflict between the statutory mandate to dispose of obsolete vessels and EPA requirements, as well as to address the growing inventory of obsolete ships in the government fleets, MARAD has joined with the U.S. Navy, EPA, DOD and other federal agencies in an interagency panel to devise a comprehensive policy for responsible ship disposal. This panel is expected to issue its report on March 31, 1998, and we will be pleased to return to the Committee at that time to brief you on the results and recommendations.
In the meantime, MARAD has recently completed an Invitation for Bid (IFB) to sell 13 of the most critical vessels. We are still in the process of reviewing the bids and the respondents environmental compliance plans, but initial review shows that we have received six bids to scrap vessels domestically at prices which range from $1 per ton to $21.
I am hopeful that the panel will devise a responsible and practical solution and the means to go forward with the disposal of those obsolete vessels, which pose a hazard to our environment and which are a drain on scarce government resources during their prolonged storage while awaiting scrapping.
WAR RISK INSURANCE
I would like to mention another MARAD program that is vital to our Nations national security -- the war risk insurance program under Title XII of the Merchant Marine Act, 1936. War risk insurance insures against risks of war including vessels, crew, cargo and third party liability. With the approval of the President, the war risk insurance program can be activated subsequent to a finding by the Secretary that commercial war risk insurance cannot be obtained on reasonable terms and conditions or when commercial war risk insurance is terminated due to the automatic termination clause in commercial policies. Such an automatic termination clause, for example, would take effect upon the outbreak of war between any of the five major powers -- the United States, the United Kingdom, Russia, France and China.
The Title XII program was activated in 1990 during OPERATIONS DESERT STORM/SHIELD. War risk insurance was written on 388 vessels on the militarys behalf and on four commercial voyages. The Navy estimated that the program saved the Government over $436 million in premium expense. The program was also activated during operations in Somalia and Haiti and, most recently, on February 20, 1998, during the latest crisis in Iraq. During the recent activities concerning Iraq, and with the possible introduction of U.S. forces in the region, MARAD processed several war risk policies in conjunction with the deployment of MSC assets and once again MARAD was able to accommodate the needs of MSC in this regard.
Mr. Chairman, I would now like to turn to an issue that is of particular interest to you and other members of the panel, namely commercial shipbuilding and our partnership with the industry in its efforts to revitalize, retool and return to world status as commercial shipbuilders. Though I must hasten to note that we have a robust, competitive and profitable shipbuilding industry centered on the construction of smaller vessels, such as barges, oil rigs and oil supply equipment, and a very competitive repair industry, our larger shipyards, those capable of constructing large commercial, self-propelled ocean-going vessels, have lost much of the market to shipbuilders in the Far East and Europe.
Recognizing this, in 1993, President Clinton, in conjunction with strong bi-partisan support from you and others in the Congress, initiated a comprehensive plan for the revitalization of the U.S. shipbuilding industry. This action was taken out of a recognition by the Administration that this industry was critical to the national defense industrial base and that declining naval construction budgets would make it virtually impossible to maintain that base unless commercial shipbuilding assumed a greater role in the nations orderbooks.
The task was formidable since it had been almost 40 years since a large ocean-going vessel was delivered for a foreign owner, and while our larger shipyards focussed largely on naval work, other shipbuilding nations, aided by large government subsidies, made continuous investments and improvements to capture the worlds commercial shipbuilding market.
It was in this context that Congress enacted the National Shipbuilding Initiative (NSI) which contained two provisions with a direct impact on MARADs operations. The NSI expanded the Title XI loan guarantee program to permit, for the first time, guarantees to be issued for the construction of export vessels and for the modernization of U.S. shipyards. The second program that was created by NSI was the MARITECH shipbuilding technology investment program. I will discuss both more fully, but I am extremely proud to say that both have produced tangible results and that we can now see definite signs of improvement across all sectors of our industry.
Since 1993, the Title XI program has been an integral part of the resurgence we have seen in the shipbuilding industry. We have approved 53 projects, both vessel construction and shipyard modernization for a total investment of $2.8 billion, and a guaranteed amount of $2.3 billion. This includes 15 large ocean-going vessels, high-speed ferries, oil drilling rigs, barges, electric power barges and a new generation of oil supply vessels. We have approved shipyard modernization projects for National Shipbuilding and Steel (NASSCO) and Avondale Industries, both large Navy shipyards. This is of particular note since both companies indicate that our investment has resulted in millions of dollars in savings to the Navy on its contracts.
Some of our investments have led to the development of new vessel designs, technology and processes, all of which were critical to the recovery of this industry. The shipbuilding industry strongly supports this program; without it we would have seen fewer projects, slower recovery and a concurrent greater pressure placed on the government to maintain this critical industrial base in more direct ways.
Mr. Chairman, the Title XI program is yet another example of how we can work effectively with the private sector in a partnership to achieve mutually beneficial goals. In this case, we maintain rigorous standards of due diligence, are mindful of approving only those projects with a reasonable chance of success and assuring that projects that are approved will not unduly jeopardize existing operators and markets.
In FY 1999, we request $16 million in new appropriations for Title XI loan guarantees and $4 million for program administration. Although at first glance this appears to be a significant reduction in appropriated amounts, we have carry-over funding that will be available for guarantees. In fact, we estimate that new guarantees of approximately $520 million will be possible in FY 1999 based on a weighted subsidy rate of five percent. Thus, the reduction is an attempt on our part to reconcile carry-over balances with projected demand, and we expect to utilize all available funding in FY 1999. One thing we have all learned in these last years is that it takes longer for all of us, industry and government, to bring these complex projects to fruition than we first imagined. But, I believe the demand is there, markets are opening and we should see an upswing in activity.
Let me assure you, however, that all of our projects will continue to meet our stringent requirements relating to economic soundness and financial security. One thing that will help assure that we are able to manage this program effectively and monitor all of our projects is the provision of $4 million for administrative funds. This amount will enable us to conduct thorough due diligence prior to the approval of new projects, as well as have the necessary resources to oversee the construction of vessels around the country.
In short, the Title XI program has been a tremendous success for our industry, and it continues to enjoy full support from President Clinton, Secretary Slater and the entire Administration, and we appreciate your support for this vital program.
The MARITECH program is a government-industry shipbuilding technology effort that is jointly administered by MARAD and the Defense Advanced Research Projects Agency (DARPA) through FY 1998. This program requires industry to match government investments, and since 1993 more than 200 private sector participants have benefitted from the program. A total of 36 commercial ship designs have been developed through MARITECH funding, as well as new commercial shipbuilding processes and procedures. This is an important for our industrys efforts to invest, not only in hardware, but also in those components of shipbuilding management, software, designs, and new processes where foreign nations enjoy a huge advantage.
Finally, MARAD is also responsible for the management of the Capital Construction Fund (CCF) which permits companies to build up tax-deferred sums to be used for the construction and reconstruction of vessels in the United States. Most recently, MARAD approved the use of CCF funds for Arcos construction of two VLCC tankers that will be constructed by Avondale Industries at a cost of approximately $344 million. This project is also noteworthy since it represents a leap forward in the construction of environmentally safe oil transportation systems by U.S. shipyards.
Shipbuilding support remains one of MARADs core activities and we are committed to working in full partnership with the industry to maintain this critical national resource. With your continued support, I am confident that the progress we have already witnessed will continue and we will once again become a major commercial shipbuilding nation.
OPERATIONS AND TRAINING
MARAD is active in a number of other areas and programs that have significance for our entire maritime industry. These activities are funded in our Operations and Training (O&T) budget and we are requesting budget authority of $70,553,000 for FY 1999. This represents an increase of $2,953,000 over FY 1998 enacted levels and we strongly believe that this increase is justified and necessary to carry out our mandated responsibilities. For example, much of this increase will pay for Government-wide civil service pay raises, benefit adjustments and inflation costs, as well as moving forward with much-needed accommodation upgrades at the U.S. Merchant Marine Academy and to begin the redesign and renovation of barracks utility and piping systems.
Mr. Chairman, we have made great efforts to reduce our operating budget, cut costs and downsize the agency. MARAD O & T funding has been level for over two years, and we have reduced all areas of discretionary funding to meet these lower funding levels. During FY 1997, we terminated our market development program, reduced most other programs within the Agency, closed field offices and drastically cut funding for travel, training, supplies and support contracts. We also implemented a Reduction-in-Force in October, 1996 which, along with a virtual hiring freeze reduced headquarters and region O/T staffing by 17 percent in FY 1997.
In FY 1998, we have continued to restrict hiring, despite vacancies in critical areas, and reduced funds for all non-payroll expenses. All this occurred at the same time that we were implementing the MSP and VISA programs, both new to the Agency; became involved in a number of cross-modal initiatives to enhance intermodal transportation systems; engaged in intense international negotiations to open foreign ports and terminals to U.S. operators, and continued our efforts to assist the shipbuilding industry in non-Title XI activities. In short, we truly have reached a point in our Agency where further reductions could severely impair our ability to meet our statutory obligations. Any organization, if it is to maximize effectiveness and service to the taxpayer cannot continue year-after-year without any increase in funding. We need to train our people in new updated skills. We need the ability to engage in service contracts. We need the flexibility to add people to a few critical positions. I urge you to consider our request carefully and hope that you will conclude, as I have, that our request is both reasonable and justified.
Our O & T budget includes $40 million for Maritime Education and Training expenses which includes the amount that will be allotted to the U.S. Merchant Marine Academy (USMMA) and to the six state maritime academies. We intend to allocate $33.25 million to the USMMA and $6.75 million for the state academies. This will be sufficient to support the capital improvements at the USMMA, along with support for the educational programs and for the Student Incentive Payment (SIP) program at the state academies and for maintenance and repair activities for the state academy training ships.
The Administration has proposed an elimination of the SIP program over the next four years. Beginning in FY 1999, only participants enrolled through FY 1998 will receive SIPs and no new participants will be selected. This should produce savings in FY 1999 of approximately $350,000. It is expected that the USMMA will continue to keep graduating about 200 midshipmen, USMMA all of whom must serve as either active duty or reserve officers in the armed forces.
Our educational programs are of great importance to the maritime industry, since our academies train the finest and most highly skilled transportation professionals in the world. There is a universal shortage of skilled merchant mariners throughout the industry, and our professionals remain the key to our ability to meet U.S. national security requirements. In addition, our academies have begun to expand their educational programs to include emphasis on intermodal transportation operations. Each of these institutions is a national asset that provides lasting benefits to the nations economy and national security.
PORT AND INTERMODAL DEVELOPMENT
In the area of ports and intermodal development, MARAD provides leadership and linkage between the commercial maritime sector and the military. It also seeks to continually improve the capability and efficiency of the Nations ports to transfer cargo between water and land transportation. MARAD is assisting the U.S. port community with the development of an environmental management handbook to assist the ports in managing their increasingly complex environmental requirements. We are also working through the AAPA to encourage ports to consider brownfields and empowerment zones/enterprise communities in their economic development plans.
In FY 1997, MARAD entered into cooperative agreements with USTRANSCOM and California State University at Long Beach (CSULB) to assist in the management of the Center for the Commercial Deployment of Transportation Technologies (CCDoTT). The CCDoTT program demonstrates existing, emerging and developing technologies in cargo handling, tagging, tracking, information management systems and high speed sealift (HSS). These technologies, if adopted, will help expand the ability of commercial transportation to quickly accommodate military cargo, minimize the impact on commercial transportation from military surge deployments and improve the overall ability of terminals to accommodate a variety of ship types.
In the area of emergency port readiness, MARAD -- as the permanent chair of the National Port Readiness Network -- works closely with both the military and U.S. ports to ensure that commercial port facilities, services and personnel are available to meet DOD requirements and to coordinate port operations at the local level during a deployment of U.S. military forces or other requirements of the Nations defense.
MARADs Port Facility Public Benefit Conveyance Program, which allows for the conveyance of surplus Federal property to non-Federal public entities for the development or operation of a port facility, has generated much interest since its enactment as part of the National Defense Authorization Act for Fiscal Year 1994. In September 1996, MARAD conveyed property to the Port of Benton in Richland, Washington for use as a foreign trade zone and industrial park. In March 1997, surplus property was conveyed to the Oxnard Harbor District in Port Hueneme, California for the development of a cargo staging area, terminal access improvements and the expansion of storage facilities. Additional applications have been received from the Port of Los Angeles, Los Angeles, CA; Rhode Island Economic Development Corporation, North Kingstown, RI; Port of Long Beach, Long Beach, CA; Port of Stockton, Stockton, CA; and the Village of Harrisonburg, Harrisonburg, LA.
The Administration remains fully committed to the maintenance of our domestic maritime industries, which are an essential component of our national security sealift program, as well as contributing billions to the national economy. It is a vibrant, competitive and efficient industry. About 90 million passengers and over one billion tons of freight move in the domestic trades every year. This contributes more than $7 billion to the gross domestic product and 124,000 tax-paying jobs. Water transport accounts for 24% of domestic inter-city freight for just two percent of the national freight bill. Industry has used our Title XI loan guarantees to invest hundreds of millions of dollars in assets, whose economic survival is based entirely on continuation of coastwise shipping laws.
You need only to look at any of the recent deployments of the RRF to find compelling evidence that the domestic industry is the largest and most consistent source of maritime labor to support national security needs. .
MARAD continues to monitor compliance with these laws, as well as assisting the shipper community to comply with these laws in the most economical manner. We will continue these activities as part of our national security mission.
A related program, which provides indirect support to the U.S. flag merchant marine, is "cargo preference," or cargo reservation. Federal agencies are generally required to utilize U.S.-flag vessels in the shipment of their goods, and the principal shipper agencies are the U.S. Department of Agriculture and DOD.
MARAD has been active in the last year to streamline all cargo preference programs to ensure that U.S. government agencies receive the best value at the lowest possible cost to the taxpayer. I believe that we have been successful in building valuable partnerships with federal shipper agencies and have reduced the regulatory burdens on these agencies while maintaining the integrity of the cargo preference programs. Our carriers, many of them MSP and VISA participants, rely on these cargoes to maintain their service and operations. In return for our commitment as the government to make these cargoes available, the industry is committed to the principle of providing these services at a reasonable cost to the government. But we have made important and lasting changes to these programs which will lead to lower costs to the government and less regulation of industry.
Employment for U.S.-flag vessels has also been found in the Israeli Cash Transfer Program. As a result of the close working relationship between the Agency for Economic Development (AID), the Government of Israel (GOI) and MARAD, the United States has successfully met the 800,000 ton U.S.-flag shipping agreement set forth in a side letter between AID and GOI. In FY 1997, it appeared that the program would be 130,000 tons short. This quantity of cargo employed 13 U.S.-flag vessels, each with a carrying capacity of about 60,000 metric tons and generated revenue of approximately $25 million. We expect the same quantity of 800,000 tons to be carried on U.S.-flag vessels in FY 1998, since the GOI has entered into a new side letter agreement for that year.
In FY 1997, MARAD engaged in a number of high-profile negotiations with our international trading partners. MARAD is the lead agency for international maritime negotiations and in this role we seek to open international maritime markets to U.S.-flag carriers. In FY 1997, we achieved a breakthrough agreement with the Government of Japan (GOJ) requiring it to change its regulation of port and terminal operations. Implementation of the agreement rests with the GOJ, and both nations will benefit from this agreement. We will begin negotiations on a new agreement with the Peoples Republic of China (PRC) later this month; those negotiations follow long consultations with China over signigicant problems our carriers face in that country. Brazil also occupied our attention in FY 1997 and we expect to continue our negotiations with that nation in hopes of preventing discrimination against U.S. carriers and ending restrictions on the operation of our carriers.
This is an important aspect of MARADs operations. Our exceptional expertise and strong positive relationships with the maritime industry are key to the successful pursuit of these goals. As trade grows between the United States and the rest of the world, MARAD will pay increased attention to achieving reciprocal treatment for our carriers among all our trading partners.
GOVERNMENT PERFORMANCE AND RESULTS ACT OF 1993
The Fiscal year 1999 budget is the first one for which federal agencies are required by law to develop strategic plans and set measurable performance targets for the year. The Government Performance and Results Act of 1993 requires all Federal agencies to complete strategic plans to include (1) a comprehensive mission statement, (2) a statement of goals and objectives and how the Agency plans to achieve these goals, (3) a summary of the resources required to meet the goals and objectives, and (4) a description of key external factors that could affect the achievement of the strategic goals. Beginning with the FY 1999 budget, Federal agencies are also required to prepare annual plans that establish measurable performance goals for the year.
MARAD has already developed a draft Strategic Plan, focusing on five-year targets through the year 2002 that supports the new Department of Transportation (DOT) Strategic Plan. Comments solicited from stakeholders, and partners in industry and Government are being incorporated into the Strategic Plan. The Strategic Plan will be completed by the end of March 1998.
As part of the FY 1999 budget, MARAD also developed an annual Performance Plan, based on the MARAD Strategic Plan and linked to the DOT Performance Plan. Performance goals and measures are linked to four strategic goals -- national security, shipbuilding, intermodalism and trade. In turn, the program funding requests presented in the budget are linked to achievement of the performance goals. These goals and measures will be revisited as current goals are met, new domestic and international policy objectives emerge, and the needs of our customers change in response to competitive market conditions. In particular, MARAD will reexamine its performance goals and measures based on a more thorough assessment of available data in preparation for the FY 2000 budget.
MARADs national security performance goals to meet DODs sealift capacity requirements will be met largely through the Maritime Security Program, VISA, and the RRF. The national security requirement for well qualified American mariners to crew ships in times of emergency will be met primarily through funding of the U.S. Merchant Marine Academy, State Maritime Schools and MARAD operations activities of the operations and training appropriations. Our goal to maintain strategic U.S. port readiness also is linked to the operations and training appropriation.
In shipbuilding, the performance goals that we have set are to attain a stable and growing commercial shipbuilding order book, assist shipyards to capture new niche markets and increase shipyard productivity. Success in achieving these goals will be heavily dependent on funding for the Maritime Guaranteed Loan (Title XI) Program Account and the MARAD operations activity of the operations and training appropriations.
In the area of increasing trade, the Maritime Security Program, Ocean Freight Differential and ODS programs will finance our efforts to achieve our performance goal to increase cargo moved by water transportation in domestic and international trade. Other performance goals related to trade and to intermodalism are linked to the MARAD operations activity of the operations and training appropriation.
Im sure you can see that MARAD is a small agency with a worldwide reach. We are involved in very important matters that are in many ways unique to the maritime industry. I sincerely believe that MARAD has met or exceeded its statutory obligations and that our Nations security and economic well-being is strengthened by what we do in this Agency. We appreciate your support and your recognition of this vital industry and its role in our national security planning and execution. I am proud of what we have accomplished to date, and with your support will continue to do our part to support our national mission.
Mr. Chairman, members of the Committee, this concludes my prepared statement. I would be happy to address any questions or concerns you may have at this time.