DOD Leases of Foreign-Built Ships: Background for Congress

DOD Leases of Foreign-Built Ships:
Background for Congress
Ronald O’Rourke
Specialist in Naval Affairs
Foreign Affairs, Defense, and Trade Division
Summary
The Department of Defense (DOD) in recent years has leased some foreign-built
cargo ships for total periods, including options and renewals, of almost 10 years — a
length of time that some observers argue effectively circumvents a legal requirement that
U.S. military ships be built in U.S. shipyards. These observers, particularly the
American Shipbuilding Association (ASA), have proposed reducing the current
five-year legal limit on ship leases to two years for foreign-built ships. DOD has
opposed the idea, arguing that its ship leases are the most cost-effective way to meet its
needs for the ships in question. This CRS report will be updated when events warrant.
Current Law
Under 10 U.S.C. §2401, DOD may not lease a vessel or aircraft for a period of more
than five years unless it is specifically authorized by law to make such a lease. Other laws
and regulations relating to DOD leases of equipment include 41 U.S.C. §11, Appendix
B of Office of Management and Budget (OMB) Circular A-11, OMB Circular A-94, and
the Budget Enforcement Act of 1990, which is Title XIII of Omnibus Budget
Reconciliation Act of 1990 (H.R. 5835/P.L. 101-508 of November 5, 1990).¹ Another
legal provision — 10 U.S.C. §7309 — states that no vessel to be constructed for any of
the armed forces may be constructed in a foreign shipyard.
Recent DOD Leases of Foreign-Built Ships
DOD’s Military Sealift Command (MSC), which operates sealift (i.e., cargo
transport and prepositioning) ships, in recent years has leased some foreign-built sealift

¹ 10 U.S.C. §2401(a) and (b) state that the secretary of a military department may make a contract
for a long-term lease or charter if the secretary has been specifically authorized by law to make
the contract. 10 U.S.C. §2401(d)(1)(A) defines a long-term lease or charter as one the term of
which is for a period of five years or longer or more than one-half the useful life of the vessel or
aircraft.

ships for periods of up to 4 years and 11 months. According to the American
Shipbuilding Association (ASA), a trade association representing certain shipyards and
shipbuilding-related firms,² MSC as of June 2006 had renewed the leases of four of these
ships for additional periods of up to 4 years and 11 months, providing potential total lease
periods of up to almost 10 years.³
American Shipbuilding Association (ASA) Position
Supporters of U.S. shipyards, particularly the ASA, are concerned that, in addition
to the four ships cited above, MSC in the future may renew or extend the leases of other
foreign-built ships beyond 4 years and 11 months, and that the Defense Logistics Agency
(DLA) — another part of DOD — might also begin leasing foreign-built ships.⁴ ASA
argues that leasing a ship for a period of almost 10 years indicates that DOD has a long-
term need for such a ship, and that in such cases, DOD should purchase a ship and have
it built in a U.S. yard. ASA argues that leasing a foreign-built ship for almost 10 years
effectively circumvents the requirement in 10 U.S.C. §7309 that U.S. military ships be
built in U.S. yards. The ASA supports changing 10 U.S.C. §2401 to limit leases of
foreign-built ships to no more than two years, including all options to renew or extend the
contract. ASA says the proposal is intended to encourage DOD, in cases where DOD has
a long-term need for a ship, to purchase the ship and have it built in a U.S. yard, rather
than lease a foreign-built ship. The ASA states that
The Department of Defense (DOD) is purchasing, via long-term leases,
foreign-built ships to meet long-term military requirements. The leases in question
are 5 years in duration and can be, and have been, renewed for another 5-year period.
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....
The Budget Enforcement Act of 1990 placed a limit on the duration of leasing
contracts for capital equipment by the Executive Branch in an effort to impose budget
discipline on future year contract obligations by the Government, and to encourage

² The ASA ([http://www.americanshipbuilding.com]) represents six U.S. shipyards owned by
General Dynamics (3 yards) and Northrop Grumman (3 yards) that build all of the Navy’s larger
ships, and several dozen other firms that provide ship systems, components, technology, and
equipment.
³ The four ships, identified by ASA in a June 14, 2006 e-mail to CRS, are all container ships used
to preposition military supplies overseas. They are the Capt. Steven L. Bennett (TAK-4296),
which ASA says has been leased by MSC since November 1997; the Maj. Bernard F. Fisher
(TAK-4396), which ASA says has been leased by MSC since November 1999; the LTC John U.
D. Page (TAK-4543; previously designated TAK-4496), which ASA says has been leased since
March 2001, and the SSGT Edward A. Carter, Jr. (TAK-4544), which ASA says has been leased
since June 2001. The Fisher was built in Denmark; the other three ships were built in South
Korea. In the designation “TAK,” T means operated by the MSC, A means auxiliary ship, and
K means cargo.
⁴ Regarding DLA, ASA points to the following news story: Jason Ma, “Defense Logistics Agency
Crafts Concept For Resupply-Ship Program,” Inside the Navy, November 28, 2005.

the purchase rather than leasing of capital assets to meet long-term requirements
because of the higher cost associated with leasing. To enforce this budget discipline,
the Office of Management and Budget (OMB) issued scoring guidelines stating that
vessels and other capital assets leased for a period of five years or longer would have
to be scored in the budget year in which the contract was entered into, and the budget
request in that year would have to include authorization for the total multi-year lease
contract. This scoring rule eliminated the budget benefits of leasing versus buying
American-built ships. Additionally, in the 1980’s, Congress passed restrictions in
Defense Appropriations Bills limiting ship and other capital leases to not more than
18-months in duration in an effort to deter leasing and discipline out-year funding
obligations.
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.
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....
[The ASA recommends] Support [for] an amendment to the DOD FY07
Authorization and Appropriations Bills that will limit the duration of DOD lease⁵
contracts of foreign-built ships to two years, including contract options.
DOD Position
DOD argues that its leases of foreign-built ships are the most cost-effective way to
meet its needs for the ships in question, and that limiting such leases to no more than two
years would make them much more expensive and difficult to implement, and therefore
less cost effective. DOD opposes changing 10 U.S.C. §2401 to limit leases of foreign-
built ships to no more than two years. DOD states that
[MSC] charters ships (from the commercial market) to meet the requirements of DoD
components and respond to changes in the operational environment. Unfortunately,

⁵ ASA point paper provided to CRS on May 3, 2006.

very few commercial ships with high military utility have been constructed in U.S.
shipyards in the past 20 years. Consequently, when MSC has a requirement to charter
a vessel, nearly all of the offers are for foreign-built ships. In cases where the need
is immediate or subject to change, due to the operational environment or other factors,
a commercial charter is the only practical way to obtain the capability. When a
requirement for a particular type of vessel is known to be long-term , as was the case
with the Large Medium Speed Roll-on/Roll-off [sealift] ships (LMSRs) [that were
procured for DOD in the 1990s], the Navy seeks authorization from Congress for a
new construction program which can take up to five years for delivery of the first
vessel....
In cases where there are long term, consistent requirements that are best satisfied by
the construction of new purpose-built vessels, the Navy, upon authorization by
Congress, establishes and funds programs such as the LMSRs and the [Lewis and
Clark (TAKE-1 class) dry cargo ships], to meet these requirements. We are also
moving ahead with the acquisition of the Joint High Speed Vessel [JHSV] as a
replacement for the capability currently fulfilled by the WESTPAC EXPRESS
Charter....
[DOD] opposes [a provision to limit leases to no more than 2 years], as it would
have a severe negative impact on the ability of [MSC] to carry out its mission of
providing sealift support for a wide variety of [DOD] activities. To support rapid
deployment of military forces, the military services maintain equipment on MSC
chartered vessels (some foreign built, converted in U.S. shipyards, all U.S.-flagged
and U.S.-crewed) for periods up to five years and budgeted for operational
requirements accordingly. MSC also operates vessels chartered for periods up to five
years for other unique military requirements. Having to conduct new charter
solicitations biennially would greatly reduce the Services’ ability to effectively plan
and budget resources and would severely limit [regional] Combatant Commanders’
ability to maintain mission readiness, especially for our nation’s prepositioning force
and in support of the Global War on Terror. Additionally, the potential necessity to
return the ships to the United States for the purposes of transferring the equipment to
a newly chartered ship, as ship charters changed, would severely impact DOD
readiness. This constant disruption and transition on a biennial basis would defeat the
central purpose of the prepositioning program: forward deployment of fully-loaded
ships in strategic locations worldwide that are ready to meet warfighting needs at a
moment’s notice.
Additionally, such a restriction would adversely impact the U.S. merchant
marine industry upon which [DOD] relies to crew surge sealift ships, since any
foreign built vessel chartered by MSC must have all reflagging work performed in a
US shipyard and, during operation, must be crewed with US merchant mariners.
Thus, the charter of foreign-built vessels by MSC has the added benefit of increasing
the number of privately owned cargo vessels flying the US flag. Further, any such
restriction would be contrary to [DOD’s] objectives of supporting a vigorous and
competitive domestic ship repair industry.
Restricting the maximum lease/charter period for foreign built vessels to 24
months would not increase the number of U.S.-built militarily useful ships. It would
increase the cost for MSC to charter vessels. Responses to informal queries to the
owners/operators of MSC chartered ships indicate that the Government would likely
have to pay twice as much [per day] for charters if forced from 59-month to 24-month
charter periods. This price differential results from the ship owner’s ability to
amortize capital investment costs over longer periods of time for longer leases.

This restriction would do nothing to encourage U.S. ship construction because
building new vessels for DOD use would involve unacceptable lead times for current
requirements and require substantial additional funding that is not available. DoD is⁶
pursuing a [JHSV] capability based on lessons learned from leased vessels.
Potential Questions for Congress
DOD’s leases of foreign-built ships raise several potential questions for Congress,
including the following:
^!If current ship leasing authorities are retained, how many additional
foreign-built ships might DOD in the future decide to lease, with
renewals, for total periods of more than five years?
^!If DOD leases of foreign-built ships were limited to no more than two
years, including all options to renew or extend the contract, in how many
cases would DOD purchase a ship and have it built in a U.S. yard rather
than lease a foreign-built ship? What would be the resulting impact on
workloads, revenues, and employment levels at various U.S. shipyards,
and on U.S. merchant marine employment? Would this impact be in the
national security interest?
^!What is the comparative cost effectiveness of meeting DOD sealift
requirements under current ship leasing authorities, under the proposed
two-year limit for leases of foreign-built ships, and through purchase of
U.S.-built ships? How much risk would there be of a mismatch between
DOD’s sealift requirements and DOD sealift capacity if a two-year limit
on DOD leases of foreign-built ships resulted in a decision by DOD to
purchase U.S.-built ships rather than lease foreign-built ships?
^!What are the potential implications, if any, of DOD’s leases of foreign-
built ships for acquisition of other DOD capabilities, such as capabilities
provided by aircraft?

⁶ DOD point paper provided to CRS on May 25, 2006. Regarding the impact of leases of foreign-
built ships on U.S. shipyards and the U.S. merchant marine, DOD also states in this point paper:
Ships chartered to meet DoD missions are required to be U.S.-flagged and crewed by
U.S. merchant mariners. Whenever a foreign-built ship is used for such charters, that
ship is required to be converted to U.S. flag, and crewed by U.S. citizen mariners,
prior to the beginning of the charter. Moreover, any conversion work needed to bring
the foreign-built ship up to U.S.-flag standards must by law, be accomplished in U.S.
shipyards. Over the recent past, the reflagging of foreign-built ships to U.S.-flag has
resulted in the creation of thousands of jobs for U.S. citizen merchant mariners and
millions of dollars of U.S. shipyard work. Presently, 40 percent of privately-owned
U.S.-flagged ocean going vessels over 1000 gross tons are foreign-built, including all
of the vessels participating in the Maritime Security Program. The proposed
legislation would result in exclusion of these and all other foreign-built vessels from
competition for longer-term charters. This severe restriction on full and open
competition would substantially raise the cost to meet the DoD transportation and
prepositioning mission.

Legislative Activity for FY2009
FY2009 Defense Authorization BIll (H.R. 5658/S. 3001). The House and
Senate Armed Services Committees, in their markups of H.R. 5658/S. 3001 and their
reports on the bill (H.Rept. 110-652 of May 16, 2008, and S.Rept. 110-335 of May 12,
2008, respectively), did not include any bill provisions or report language relating to DOD
leases of foreign-built ships. The compromise version of S. 3001 and the accompanying
joint explanatory statement did not include any such provisions or bill language.
FY2009 Defense Appropriations Act (H.R. 2638/P.L. 110-329). House
and Senate committee reports were not filed on the FY2009 defense appropriations bill.
The bill was marked up by the Defense subcommittees of the House and Senate
Appropriations Committees on July 30 and September 10, 2008, respectively, and press
releases were issued on those dates summarizing certain features of the markups. The
press releases do not mention the issue of DOD leases of foreign-built ships. The
compromise version of the FY2009 defense appropriations bill became Division C of
H.R. 2638, a consolidated appropriations bill that was accompanied by an explanatory
statement. H.R. 2638 and the explanatory statement did not include provisions or report
language relating to DOD leases of foreign-built ships.
Legislative Activity for FY2008
FY2008 Defense Authorization Act (H.R. 4986/P.L. 110-181 of January

28, 2008). Section 1011 of the conference report (H.Rept. 110-477 of December 6,

2007) on the FY2008 defense authorization bill (originally H.R. 1585, a bill that was
succeeded by H.R. 4986 following a presidential veto of H.R. 1585) permits the Secretary
of a military department to lease a vessel for a period of greater than two years, but less
than five years, only if the Secretary provides a notification of the lease to the House and
Senate Armed Services and Appropriations committees (including a detailed description
of its terms, a justification for entering it rather than purchasing the vessel, a
determination that entering into it is the most cost-effective option; and a plan for meeting
the requirement upon the lease’s completion), and a period of 30 days of continuous
session of Congress has expired. (See pages 303-304 and 983-984.)
FY2008 Defense Appropriations Bill (H.R. 3222/P.L. 110-116). The House
Appropriations Committee, in its report (H.Rept. 110-279 of July 30, 2007) on H.R.
3222/P.L. 110-116 of November 13, 2007, stated that it was “concerned with the Navy
practice of bypassing the intent of the long term capital lease restrictions in the way
several foreign built military sealift mission ships are leased.... The Committee believes
this leasing practice is harming the Nation’s shipyards and major ship component
industrial base by indirectly denying our shipbuilders the opportunity for additional ship
construction. The Committee recognizes that the ships leased by the Navy fill an
important role that must be continued through the near term and into the future....
However, the Committee strongly believes that the American shipbuilders must take
advantage of this opportunity. Therefore, the Committee directs the Navy to submit a
report that outlines a plan to wean itself off the practice of leasing foreign built ships to
supplement the fleet and institute the practice of utilizing only American built ships
within four years....” (Pages 230-231)