Jones Act Ship Owners Retain Rights to Repair Vessels in Foreign Shipyards

Published Oct 5, 2006 12:01 AM by The Maritime Executive

The final language of the Defense Authorization Act for 2007 has given US flag shipowners at least a temporary victory in their battle to maintain the right to repair Jones Act ships in foreign shipyards. Passing unanimously in the US Senate and 398-23 in the House of Representatives, the bill requires the Secretary of Defense to issue an acquisition policy no later than June of next year to “establish as a criterion the extent of foreign repair” under which a ship might undergo overseas and still remain eligible for US defense cargoes. Until about six years ago, the US Coast Guard ruled on work for US ships in foreign yards on a case by case basis as they determined whether the vessel could be considered to have been “rebuilt.” More recent rules call for not more than 10% of a Jones Act compliant vessel’s hull work to be done in foreign shipyards. Unfortunately, says the American Shipbuilding Association’s (ASA) Cynthia Brown, “Jones Act ship owners are continuing to have work done overseas in successive, 10% incremental visits.” Brown also questioned why the decision should be left up to the Department of Defense when the rules restricting foreign repairs are set forth and enforced by the US Coast Guard. According to ASA’s Brown, two provisions which might have restricted the amount of work performed on Jones Act vessels in overseas shipyards failed in the latest legislation. Among them, an effort to limit DOD long-term leasing of foreign built hulls also fell short of inclusion. But, according to some industry analysts, the latest legislation also soothed fears in Washington that the threat of a full review of the exemption enjoyed by the Jones Act at the World Trade Organization might be forthcoming. Brown called those threats, “Hollow posturing.” Although opponents of foreign repairs to US vessels might claim their concerns have been totally ignored, the bill does not seem to change the current rules that restrict the total steel weight attributable to foreign repairs to 10% and also calls for US Coast Guard approval for projects that would increase the weight to more than 7.5%. The ASA supported the amendment to the DOD FY07 Authorization and Appropriations Bills that will limit the duration of DOD lease contracts of foreign-built ships to two years, including contract options. Currently, the Department of Defense (DOD) is purchasing, via long-term leases, foreign-built ships to meet long-term military requirements. According to the ASA, the leases in question are 5 years in duration and can be, and have been, renewed for another 5-year period. ASA maintains that “the length of these leases indicate a long-term military requirement, and results in de facto purchases of the ships in contravention of U.S. acquisition law (Section 7309 of Title 10 USC), which states that ships for the U.S. military shall be built in the United States, and the intent of the Budget Enforcement Act of 1990, limiting leases of capital assets.” Cynthia Brown says “DOD has been circumventing these leasing restrictions by entering lease contracts of 59-months (one month shy of five years), thereby avoiding triggering the requirement of scoring the entire cost of the lease in the first year as required by the Budget Enforcement Act of 1990. Many of these 59-month leases are being renewed for an additional 59-month period resulting in foreign-built ships operating for DOD for a period of nearly 10 consecutive years.” In a position paper produced by ASA and obtained by MarEx, ASA went on to explain that “While the Budget Enforcement Act met its intended objective of ending long-term leases of U.S.-built ships, it has opened the door to leasing foreign-built assets. Most of the ships under lease are used commercial ships of South Korean manufacture that have been modified to meet U.S. military specifications. DOD states that it needs to have the ability to lease these ships for 59 months to provide the foreign owner of the ship access to private financing to convert a commercial ship to meet a specialized military requirement. U.S. shipbuilders cannot obtain bank financing to build new ships to meet the requirement unless they recover the entire construction cost in the five years of the lease, making the lease payments for newly built ships non-competitive with foreign ships of ten or more years old for which the capital cost has been significantly amortized.” “While DOD needs to have the flexibility to lease foreign-built ships to meet shorter-term or emergency requirements, the growing reliance by DOD on this practice is resulting in the de-facto purchase of foreign-built ships to meet special, dedicated, long-term military requirements.”