SJR 171

Joint Subcommittee Studying Economic Incentives for Virginia's Shipbuilding Industry

December 17, 1998, Virginia Beach

The joint subcommittee was established to study economic incentives to promote the growth and competitiveness of Virginia's shipbuilding industry. The joint subcommittee's second meeting featured reports by industry representatives that identified specific barriers to the continued health of the Commonwealth's ship repair industry.

Declining State of the Industry

The president of Norshipco identified two reasons for the declining employment both in his firm and in the industry generally. The first is the reduction in the amount of Navy repair work. This concern encompasses both the overall decline of work as the Navy reduces the size of the fleet and the diversion of much of the remaining work to the public-operated Norfolk Naval Shipyard. While the Secretary of Defense has mandated privatization, the Navy has chosen to in-source a majority of its non-nuclear repair work in Hampton Roads. By law, the Navy may allocate 50 percent of its non-nuclear repair work to the private sector; in practice, the share allocated to the private sector is approximately 20 percent.

The number of ships repaired by private yards in Tidewater will have dropped from 16 in 1996 to three in 1999. Private shipyards received 27 percent of Navy depot funding in 1997; in 1999, their share will fall to 15 percent of Navy depot funding. While the private share of Navy depot funding is falling 42 percent over this period, the total of Navy and private yard funding will increase from $360 million to $375 million.

The vast majority of Navy non-nuclear ship repair work is allocated to the Norfolk Naval Shipyard despite the fact that its costs are two to three times higher than private sector costs. While the Norfolk Naval Shipyard's man-day rate is $600, Norshipco's man-day rate is $250. As a result of the declining share of Navy repair work available to private yards in Hampton Roads, the yards that invested heavily in piers and docks for Navy work have been put at a competitive disadvantage.

The second cause for declining shipyard employment is the industry's high cost of doing business. Taxes and TBT (tributyltin) are raising the industry's costs and thereby narrowing its profit margins. The local utility tax rate levied by the City of Norfolk has recently been lowered from 20 times as high as the rate in Virginia Beach to a level "only" 14 times as high. Moreover, in Norfolk a business's machinery and tools are assessed for city tax purposes at 40 percent of their original cost, regardless of age, condition or use.

TBT is an antifouling agent that prevents the growth of barnacles on ships' hulls. It is designed to leach out as a ship moves through the water. Virginia is the only state that imposes TBT limits in the discharge permits of shipyards. Virginia has established a water quality criterion, resulting in an effluent limitation in the water discharge permits of shipyards. The limit on TBT discharges of shipyards is so minute that it cannot be accurately measured without sophisticated equipment.

Approximately 70 percent of all commercial vessels have an antifouling paint containing TBT on their hulls. While restrictions have been placed on Virginia's industry through water discharge permits, there is no known technology to test levels this low on a reliable basis or to treat the washwater to the required level. In addition, restrictions have not been placed on the releases by vessels entering the Ports of Hampton Roads for cargo. The amount of TBT released in Virginia's waters from these vessels is far greater than from the washdown process in drydock.

Governor Gilmore has proposed an amendment to the biennial budget that will provide $1.5 million, to be matched by the industry, for the Center for Advanced Ship Repair and Maintenance (CASRM) to research ways for shipyards to meet the state's strict TBT regulations. The CASRM study, which includes $1 million in federal funds, will take 30 months.

Joint subcommittee member Thomas Godfrey, who is president of both the South Tidewater Association of Ship Repairers and Colonna's Shipyard, took issue with the Hampton Roads Planning District Commission's prediction that the outlook for the region's shipbuilding and repair industry is optimistic. Employment levels are declining at most shipyard firms, and most see no reason for optimism. Much of the decline is attributable to market conditions and federal government policy over which the industry has no control.

Ship repair yards are affected by unique burdens that other industries in the Commonwealth do not face. The dual jurisdiction issue in workers' compensation was cited as one example. While federal law provides shipyard employees with workers' compensation benefits, Virginia provides duplicate coverage. Shipyards bear the added financial burden of covering their employees on a policy that incorporates both federal and state laws.

Unique state mandates, combined with the loss of Navy work, may prove deadly to Virginia's ship repair industry. The Hampton Roads Planning District Commission has projected that the decline of Navy repair work, combined with the impact of TBT regulations, will have a total output impact on the Hampton Roads economy of $339 million, a total personal income of $153 million, and a total value added of $202.6 million. In addition, the impact on total employment will be 3,835. Without the full-service capabilities that make the Port of Hampton Roads the second largest port facility on the East Coast, vessel owners will look to other ports where their needs can be met. The impact of the TBT regulations was pegged at $340.2 million and 2,160 jobs.

Specific Incentives to Help the Shipyard Industry

Four measures designed to prevent the continued decline of the ship repair industry were proposed during the joint subcommittee's meeting:
1. TBT. The Commonwealth needs to extend the compliance date for Virginia ship repair yards to align with the Congressionally-funded CASRM pilot treatment project. The extensions to the compliance date must be in place by October 1999. Colonna's Shipyard has a TBT limit in their VPDES permit; Norshipco's permit will come into compliance in November 1999; and Newport News Shipbuilding's permit will come into compliance in June 2000. Unless the compliance date for all three shipyards is extended to align with the 30 months required for the recently funded CASRM project, Virginia shipyards will be unable to remove TBT paint from commercial vessels and thus will be precluded from participating in the commercial ship repair business. Options for extending the compliance date for all of Virginia's ship repair yards include legislation, permit revocation and reissuance, permit modification or variance, consent orders, and mediation. The joint subcommittee was told that it must direct the administration to select and implement a single option for the entire industry within the next six months.

2. Commercial and Industrial Development Initiative. The Commonwealth should establish a commission, similar to the Virginia Film Commission, to promote and provide marketing assistance to the shipyard industry. Shipyards must obtain additional work from the commercial market, in addition to diversifying into non-traditional market sectors worldwide, in order to recover from the loss of Navy ship repair work. Named the Virginia Marine Industrial Commission, the office could serve the industry with such marketing services as developing a strategic plan, overseeing industry participation in trade shows, developing and producing promotional material, and promoting and identifying commercial and industrial opportunities. The industry would match funds appropriated for this purpose. The cost of establishing and operating the VMIC for a biennium was estimated at $400,000.

3. Workers' Compensation Study. The industry recommended that a study committee be established for the purpose of reviewing the federal and state workers' compensation acts. Differences in coverage make the benefit programs confusing, costly and duplicative. A study committee could be composed of representatives from government, industry, and labor.

4. Tax Structure Study. The industry recommended that a committee be established to conduct a comprehensive study of the tax structure of the Commonwealth and its impact on the shipyard industry. Current state and local taxing structures were described as "cumbersome and costly to a declining industry faced with layoffs." The study committee would analyze the various tax structures, including unemployment and sales taxes, and recommend possible avenues of amelioration.

Though no specific recommendations were offered, the industry also noted that incentives for firms to invest in capital improvements in their yards will enable them to be more competitive in the commercial market. The loss of Navy repair work has reduced the industry's profitability, which in turn has precluded shipyards from making the improvements needed to diversify into new markets. Repair yards on the south side of Hampton Roads need to diversify and expand their commercial market lines through construction of vessels, repairs to mega-yachts, large steel fabrication projects, and increased repair of commercial ships. The Commonwealth should develop a program for grants that encourage such investments while preserving existing jobs or creating new jobs. Few south-side ship repairers have been eligible for existing investment incentive programs. The industry will present recommendations for a program providing shipyards assistance in making capital investments to the joint subcommittee at a future meeting.

The joint subcommittee endorsed the chair's suggestion that the study be continued for a second year, during which it may address the issues identified by the shipyard industry.

The Honorable Stanley C. Walker, Chairman
Legislative Services contact: Franklin D. Munyan