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As explained in our earlier letter, at discount rates above about 8%, it is advantageous for the Government to charter rather than purchase the offered ships, because the present value capital charter payments is less than the corresponding acquisition cost. Ship conversions will be financed entirely by private capital, with no payment of Navy funds until after completion of an acceptable ship and commencement of service under the charter.

The ship proposals received have confirmed that by competing the design and expanding the competitive base to include consideration of new design, as well as existing U.S. and foreign ships, the resultant Government costs have been reduced below those which would have been incurred under the original Navy plan to convert six existing ships and build six new ships. Utilization of existing ships also has greatly accelerated the time when the TAKX ships will be placed in service. Sufficient ships now will be available to complete the program about two years ahead of that original schedule. This will result in strategic improvement within program plans and budget and will allow the early phase-out of those ships now serving USMC requirements in the Near Term Prepositioned Fleet with concomitant cost savings.

Each of the selected offerors will supervise the construction, inspection, approval, and acceptance of its vessels, having negotiated a separate agreement with its preferred shipyard. All required ship purchase prices and construction prices to be paid by the offerors have been contracted at firm fixed prices. The contracts contain mechanisms to assure against Navy costs being escalated, while at the same time providing means for the Navy to obtain the benefits of falling interest rates which has already occurred during the competitive process.

Suitability of the ships was evaluated based on their life cycle cost including capital and operating cost. This evaluation process also resulted in selecting ships that will be commercially useful to the U.S. Merchant Marine in the unlikely event that defense requirements for these highly flexible sealift ships fade in the future.

Because the Navy Industrial Fund (NIF) supplies the necessary capital to support the Government's obligation and contingent liability, we have structured the charter program for these 13 ships such that it can be accommodated within existing and predicted levels of the Navy Industrial Fund. We have included options for a portion of the three MAB prepositioning force, and plan to exercise these options in Fiscal Year 1983 when the Industrial Fund is large enough to cover the contract obligations and the contingent termination liability.

With the defined costs confirming our previous representations, we are now in a position to make final contract awards, and would like to do so as rapidly as possible. The House Armed Services Committee Authorization Bill contains provisions in Section 303 that require notification be provided to the Congress regarding the terms of our proposed TAKX charter agreements and justification for entering into them. Additionally, the Chairman of the Defense Subcommittee on House Appropriations has expressed the desire to review the program prior to completing contractual commitments. We believe that this letter, our letter of 21 July 1982, and our on-going discussions with the House Surveys and Investigations staff have laid the foundation for the required review and approval. We stand ready to provide any specific contractual details you may require to support your review of this program; and we look forward to an early commencement of the very labor intensive industrial work phase.

A similar letter has been sent to the Chairmen of the House and Senate Appropriations Committees, the Chairman of the Senate Armed Services Committee, and the Chairman of the Subcommittee on Defense, House Appropriations Committee.

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This is in response to Under Secretary Goodrich's letter of August 17, 1982 notifying the committee of the Navy's intent to contract for ship operating services for the TAKX prepositioning ship program. The committee interposes no objection to these contracts.

As a result of our review of the TAKX program it has become clear that existing authorization procedures are not adequate. The camittee believes that additional legislation will be necessary to ensure timely and effective Congressional review of any future long term lease proposals and that such review should be accomplished prior to the release of a request for proposal.

The acquisition of the TAKX maritime prepositioning ships by lease rather than purchase shifts the cost of the vessels from the procurement account into the operation and maintenance account. As you may know, the committee initiated legislation to require amual authorization of Department of Defense operation and maintenance appropriations to promote readiness through a better balance between the investment, personnel and operating accounts. Although I believe we have ranaged to achieve a better balance between these accounts over the past two years, the fact remains that the fiscal year 1983 Defense Authorization Act contains a 24.6 percent real growth for procurement compared to about three percent for operation and maintenance.

The projected average annual cost of $216 million ($16.6 million times 13 TAKX ships) in lease payments represents a significant transfer from the procurenent to the operation and maintenance accounts. Poughly, it equates to one percent of the FY 1983 Navy O&M budget. Because 80-85 percent of the lavy O&M budget is fixed cost, the addition of one percent of additional fixed cost translates into over a five percent decrease in discretionary areas. The discretionary areas are most caronly associated with readiness and quality of life--training, depot maintenance, and real property maintenance. Thus, major transfers of investment costs into the operation and maintenance account could result in the degradation of future fleet readiness.

Sincerely,

MP: bsj

12-279 0 - 83 -- 3

lelvin Price
Chairman

Shipbuilders

Council of America

1110 Vermont Avenue, N W •Washington, D.C. 20005-3553 (202) 775-9060

July 16, 1982

Dear Mr. Chairman:

In the coming weeks, your Committee will receive from the Navy Department requests for approval to proceed with chartering arrangements involving the acquisition of Maritime Prepositioning Ships (T-AKX) and point-to-point tankers (T-5 replacements). Our membership, composed of major shipyards and ship component manufacturers in all sections of the country, strongly endorses these requests and most respectfully urges your favorable consideration.

Our endorsement and appeal is based on the realities of today's circumstances: the ships are urgently needed for Military Sealift Command missions, and a significant segment of the U.S. shipbuilding industry urgently needs work.

The Administration's announced expanded naval shipbuilding program will not impact on our shipyards in any substantial manner for two to three years. Meantime, half of the yards expected to participate in this planned endeavor to achieve a 600-ship Navy fleet by the mid-1990's are simply now running out of work.

Presently, our naval shipbuilding workload is seriously diminishing as verified by recent Navy Department testimony before your Committee, and since 1979, employment rolls in this sector of our industry have been dropping at the disturbing rate of some 6,000 workers per year. These are, for the most part, skilled craftsmen who cannot be economically retained on the basis of projected future employment which may or may not materialize. These are journeymen who once lost to the shipyards can only be replaced at a cost of about $25,000 each in terms firstly of severance and unemployment benefits followed by costly recruitment and training of substitutes when work volume is resumed.

Another reality: the backlog of merchant ship construction in U.S. shipyards is rapidly disappearing. The pace of new contracts has virtually come to a halt, and on the basis of current production schedules, only eight vessels will remain on order with four U.S. shipbuilders at the end of 1982. With the Administration's advocacy of, and policy decisions in support of, exportation of ship construction and repair contracts to foreign shipyards, commercial opportunities for U.S. shipbuilders are being stifled by governmental decree.

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The underlying reasoning is difficult to comprehend, especially when viewed in the context of maintaining a shipbuilding industrial base for national security. Committees of the Congress have deplored the steady erosion of that base: facilities are being idled and, as indicated, a skilled workforce is dissolving. By every indicator, the infrastructure of the shipbuilding base which has long been considered essential for mobilization purposes in the event of a national emergency is not being preserved, and positive action is imperative to reverse this disintegration of a necessary resource.

The charter programs as proposed by the Navy provide a desperately needed near-term workload with (1) utilization of production facilities which have been greatly improved in recent years, and (2) gainful employment alternatively will be looking for jobs.

for workers who

For example, the T-AKX program will employ some 2,000 shipyard workers over the next three years. The T-5 program will engage another 800 workers. Further, these combined projects will sustain employment for an additional 6,000 people in the supply of materials and supporting services. Importantly, these two charter programs can provide a modest activity level in three or four shipyards which otherwise may be forced out of business.

We most respectfully request your favorable consideration of the Navy's proposals to charter these auxiliary ships. The resulting work will significantly enhance the survivability of the Nation's shipbuilding industrial base.

Sincerely,

Edwin day, Sme

Edwin M. Hood
President

Honorable Melvin Price

Chairman

Committee on Armed Services
House of Representatives

Washington, DC 20515

CHARI TOE. BONNETT, FLA.
SAMUEL S. STRATTON, N.Y.
RICHARD C. WHITE, TIDL

VILL NICHOLS, ALA.

JACK SPINKLEY, GA.

Rrs. RT H. MOLLOHAN, W.VA.

DAN DANIEL, VA.

G. v. (SONNY) MONTGOMERY, MISS.

LES ASPIN, WIB.

RONALD V. DELLUMS, CALIF.
PATRICIA SCHROEDER, COLO
ABRAHAM KAZEN, JR., TEL.
ANTONIO B. WON PAT, GUAM

LARRY MC DONALD, GA.
BOB STUMP, ARIZ

BEVERLY & BYRON, MD.

NICHOLAS MAVROULES, MASS.

SARL HUTTO, FLA

IKE SKELTON, MO.

MARVIN LEATH, TEX.

DAVE MCCURDY, OKLA

THOMAS M. FOGLIETTA, PA.

ROY DYSON, MO.

DENNIS M. HERTEL, MICH.

JOSEPH F. SMITH, PA.

U.S. House of Representatives

COMMITTEE ON ARMED SERVICES

Washington, D.C. 20515

NINETY-SEVENTH CONGRESS
MELVIN PRICE (ILL.), CHAIRMAN

September 10, 1982

WILLIAM L DICKINSON, ALA.
G. WILLIAM WHITEHURST, VA.
PLOYD SPENCE, S.C.
ROBIN BEARD, TENN.

DONALD J. MITCHELL N.Y.
MARJORIE S. HOLT, MO.
ROBERT W. DANIEL JR.. VA.
ELWOOD HILLIS, IND.
DAVID F. EMERY, MAINE

PAUL TRIBLE, VA.

ROBERT E. BADHAM, CALIF.
CHARLES F. DOUGHERTY, PA.
JIM COURTER, M.J.
LARRY J. HOPKINS, KY.
ROBERT W. DAVIS, MICH.
KEN KRAMER, COLO
DUNCAN HUNTER, CALIP.
JAMES L NELLIGAN, PA.
THOMAS P. HARTNETT, SC

JOHN J. PORO,' STAFF DIRECTOR

Mr. Edwin M. Hood

President

Shipbuilders Council of America

1110 Vermont Avenue, N.W.
Washington, D. C. 20005

Dear Mr. Hood:

This is in response to your letter of July 16, 1982
urging favorable consideration of Navy Department requests
for approval to proceed with chartering arrangements
involving the acquisition and operation of Maritime
Prepositioning Ships (TAKX) and T-5 Replacement Tankers.
I regret not replying sooner, but the committee has only
recently received detailed information regarding the TAKX
lease and convert program and the viability of the T-5
program hinged on the outcome of deliberations by the
House/Senate conferees on S. 2248.

As you are aware, the conferees agreed to amend the
Aspin amendment requiring American manufactured main pro-
pulsion systems and major components in T-5 Replacement
Tankers to apply only to operation and maintenance (O&M)
funding for vessels under a request for proposal circulated
after July 1, 1982. I believe this represents a reasonable
compromise that safeguards the ongoing source selection,
while maintaining the position that every effort be made in
future solicitations to maximize the participation of American
industry and labor.

With regard to the charter and convert arrangements
for TAKX vessels, the committee is currently evaluating
a study performed by the Navy on program costs and the
relative merits of leasing versus buying these assets.
Recognizing the well documented requirement for these ships,
the committee's primary focus is on the acquisition strategy
being proposed.

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