MARAD Seeks Feedback on Proposed Title XI Amendment

U.S. Maritime Administration Proposes Policy Change to Title XI Loan Guarantees

February 2014 (No. 2)

Maritime

NEW DEVELOPMENTS

On February 24, 2014, the U.S. Maritime Administration (“MARAD”) published a notice in the Federal Register proposing to add new environmental policy considerations to its determination of “economic soundness” for applicants for Title XI loan guarantees. 79 Fed. Reg. 10075 (February 24, 2014). In addition to the six mandatory factors for determining “economic soundness”, e.g., the market potential for employment of the vessel over the life of the guarantee, MARAD proposes to add as a contributing factor for Federal decisions to award Title XI loan guarantees “whether approval will help a vessel meet or exceed environmental standards.” A copy of the notice is available at: www.gpo.gov/fdsys/pkg/FR-2014-02-24/pdf/2014-03729.pdf.

The notice is open for a 30-day comment period. Comments must be received on or before March 26, 2014. Comments should be filed at: www.regulations.gov, Docket No. MARAD-2014-0011.

DISCUSSION OF THE NOTICE

Key Points in the Notice

As MARAD states in the notice, the primary purpose of Title XI is to promote the growth and modernization of the U.S. Merchant Marine and U.S. shipyards. MARAD also confirms that, under 36 U.S.C. § 53702(a), the agency has discretion whether to award a Title XI loan guarantee.

The Notice reiterates that the main tenet for awarding a Title XI loan guarantee is the determination whether the project is “economically sound.” Under the law, there are six mandatory factors for making this determination. These include: the need in the particular segment of the maritime industry for new or additional capacity; the market potential for employment of the vessel over the life of the guarantee; projected revenues and expenses associated with employment of the vessel; any charter or contract of affreightment; and “other relevant criteria.”

MARAD now proposes, as a matter of policy, to include in its consideration of “other relevant criteria” various environmental initiatives that are likely to increase efficiency and lead to future cost savings. Some of these initiatives may include alternative fuel system designs, fuel cells, hybrid propulsion systems, air emissions reduction technologies, ballast water treatment technologies, or other environmentally-friendly designs.

As justification for this proposed policy change, MARAD references an increased demand for such designs, fuels and new technologies, and the requirements to meet new air emission and other discharge standards. MARAD acknowledges, however, that these benefits cannot be quantified in a traditional manner, i.e., through recoupment in freight rates or passenger fees, but may be able to be quantified by economists and environmental experts in qualitative terms.

Analysis of the Notice

It is understandable that MARAD wants to encourage vessels constructed or converted using Title XI loan guarantees to be more environmentally-friendly, and the demand for LNG-fueled vessels is certainly increasing and may be important to the future of the maritime industry. Why this is being done as a component of “economic soundness” is less evident. To the extent that use of environmentally-friendly technologies improves efficiency, that analysis should already be included in the analysis of their effect on reduction in operating costs. Further, the analysis of the use of such technologies must include the impact of incorporation of these technologies on the capital cost of the vessels and the related shore-side infrastructure, which, could, in fact, more than offset any improvement in operating costs.

Therefore, it seems that trying to shoehorn analysis of the effect of certain environmental issues and related social and public benefits into “economic soundness” is questionable. If MARAD wants to provide a basis to consider environmental factors in its evaluation of Title XI applications, it should incorporate a new priority factor that would allow the agency to do so. Attempting to do so moreover as a policy rather than a regulatory change is problematic. A regulatory proposal would allow for a full vetting of the scope of environmental considerations MARAD should include in its evaluation of Title XI applications as well as the criteria that the agency will use to evaluate those considerations.

The other conundrum is how applicants are going to quantify the economic benefits and costs of incorporating certain environmental factors or technologies, such as converting a vessel to LNG, when, as MARAD admits, these benefits (and costs), including social and public impacts, cannot be captured in increased freight or passenger rates. This would almost certainly require adding another economist or expert to the already burdensome process of requiring independent outside financial reviews for each Title XI application.

For FY2014, MARAD has received an appropriation of $38.5M for the Title XI loan guarantee program. These funds can be used for the subsidy cost of a Title XI application, resulting in a multiplier effect of approximately 10:1. The agency now has an opportunity to maximize the use of these appropriated funds by streamlining the application process and reducing the burden on applicants by eliminating unnecessary duplicative reviews.

CONCLUSIONS AND RECOMMENDATIONS

Shipowners and shipyards should analyze the proposed policy change closely and determine whether it is beneficial to their long-term plans. While adding environmental considerations may have a positive policy benefit, it remains to be seen how it will affect the Title XI loan guarantee process, which is already very lengthy and costly for applicants. Will these new factors become a priority in the application process? If that is the desired outcome, MARAD should undertake a full rulemaking process. Further, if MARAD really wants to help the U.S. maritime industry, it should streamline the application process and reduce the time and costs of evaluating applications, not add to them.

Notice: The purpose of this Maritime Developments Advisory is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured.