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-L he U.S. Navy has been in the shipbuilding and repair business for nearly 180 years. Today, this expensive public enterprise comprises eight shipyards with more than 66,000 employees. In the past 15 years, approximately $500 million has been invested >n improving this large industrial complex. This article asks whether a non-taxpaying, government- owned business can be justified in an era of tight defense budgets when, at the same time, the nation’s privately owned shipyards probably have the capability of meeting all Navy requirements. The article also addresses a related issue—the status of private shipbuilder claims against the Navy.
Background: Naval shipyards are almost as old as the nation itself, funds being authorized for the first two yards in 1799, within ten years after the last
Is There a Future for Naval Shipyards?
By Clinton H. Whitehurst, Jr.
One of the last occupants of the Boston Naval Shipyard when it closed in the early 1970s was the venerable USS Constitution (lower left in photo). Following a history which has included building and repairing naval vessels frojn the time of the Constitution onward, new uses are envisioned for the site. The ambitious plans, shown in the model, include the recycling of historic buildings for such things as commercial use, apartments, and light industry. With the Navy much reduced in size from the time this old shipyard was in its heyday, other naval yards may find new uses if commercial shipyards take over the Navy’s workload.
state (Rhode Island in 1790) ratified the Constitution. In the 19th century and through World War I, naval yards provided the principal logistics support for the fleet. However, in the interwar period and particularly with the Navy’s massive building and repair requirements during World War II, private shipyards assumed a larger share of this responsibility.1
Since the end of World War II and particularly since 1962, when the naval shipbuilding program began a long-term decline, the percentage of work done in private yards has increased. In the interest of economy, Congress mandated in 1964 that at least 35% of all naval conversion, alteration, and repair (CAR) work be performed in private yards2 and di-
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rected in 1967 that all new construction be in the private sector. The Boston, New York, and Hunter’s Point (San Francisco) naval shipyards were closed, as was the repair facility at San Diego. The closures resulted from the increase in Navy work at private yards and the substantial reduction in fleet size over the past ten years.
The decade of the sixties was one of doldrums for U.S. shipbuilding, but the seventies promised a brighter future. Passage of the Merchant Marine Act of 1970 with its proposed 300-ship program augured well for the industry. Moreover, the decline of fleet size during the Vietnam conflict and the corresponding buildup of Soviet naval strength caught the attention of Congress. The end result was a marked year-by-year increase in the Navy’s procurement budget. Of the 19 major private shipyards in operation at the beginning of the 1970s, six were handling all new Navy construction while the remaining major yards and some 175 smaller private yards could, if they chose, bid on approximately $300 to $400 million annually in naval CAR work. But the dollar benefit of a reawakened interest in our maritime posture has not been spread evenly. Many of the smaller private yards whose livelihood depends entirely upon repair and overhaul work constantly face the possibility of closure—an end to which some have already come. For the remaining, obtaining a larger share of Navy CAR work has been a matter of survival.3
Present and Possible Mixes Between Naval and Private Shipyards: There are some 190 privately owned shipyards in the United States with a capability of meeting most Navy and merchant marine repair and/or building requirements. The majority are smaller yards engaged in ship repair work. It is estimated that the industry employs approximately 170,000 persons. Should there be a conflict between Maritime
Administration (MarAd) and Navy construction programs, the U.S. General Accounting Office concludes that it would most likely come about as a result of . . shortages in the skilled labor pool that shipbuilders must draw upon whether they build for Navy or private interest. . . ,”4 An even greater problem than an overall shortage of skilled labor is that of smoothing out the peaks and valleys of shipbuilding demand during peacetime.
But what of mobilization or wartime situations? In the past, there has been a difference in views between the Maritime Administration and the Department of Defense. MarAd’s assessment is based on a NATO war of at least a year’s duration and specifically considers the shipyard capacity necessary to replace wartime losses. Under its assumptions, MarAd finds the present shipbuilding/repair base deficient. DoD considers the present U.S. ship construction capability adequate for limited wars during the period of actual hostilities and does not consider a postwar rebuilding program.
There was probably no better test of our shipyard capability in a limited war than that provided by the Vietnam conflict. Private shipyards not only handled normal peacetime merchant marine and naval requirements but refitted and maintained 176 Victory-type cargo ships taken from the National Defense Reserve Fleet. Naval and private yards together handled all Navy CAR work. Efficiency, however, is another matter. A number of studies have shown that CAR work can cost up to 30% more in naval yards. Thus, while the capacity/capability of the present mix of yards in a peacetime, contingency, or wartime environment is adequate, it is a high-cost option.
What, however, might be expected if some present naval yards were closed? To evaluate this option, let us examine the general arguments for maintaining naval yards.5 The most persuasive arguments are ready availability of naval yards in times of peak workloads in the private sector and the fact that a
naval yard, by definition, will give priority to naval vessels. The remaining arguments, if valid at all, are persuasive only in the short term. Sufficient numbers of private yards, given time, can gear up to handle technologically complex ships, and the Navy, given time, can provide a full range of crew support facilities in locations where they might be lacking.
The suggestion that naval yards are less prone to Work stoppages than private ones assumes civil service employees are less likely to strike. While this may have been true in the past, recent union organizational activity and strikes in the public sector make it an increasingly tenuous assumption. And as for the argument that naval yards serve as a yardstick to measure private sector performance, in the past ten years it has been, if anything, a case of the other way around.
Assume four naval yards are closed. If done simultaneously, the mobilization base and requirements undoubtedly would be affected but only in the short tun. If closings were phased sequentially and scheduled well in advance, there is no reason to suppose the private sector could not take up the slack.6 Nor is there anything to suggest that by closing four naval yards the nation’s ship-repair capability would be adversely affected. Closing some naval shipyards and shifting their work to private yards would be cost-effective. The same work could be done for less money, and private yards that might eventually have to close because of lack of work would remain a part
of the taxpaying mobilization base.
Now consider closing all except two naval yards but program them to handle new construction also. Whether these yards would be programmed to build nuclear-powered ships is an open question. The Carter administration has come down in favor of more conventionally powered ships, while many in the Navy, led by Admiral Hyman G. Rickover, insist that 1974 legislation mandating a nuclear navy be strictly adhered to. Closing six yards would, of course, have to be done in sequence and over a longer period. In time, most CAR work would be shifted to the private sector. An important consideration would be to ensure that the mobilization base was not made up of a relatively few large private yards and that those yards handling naval repair work were strategically located. In analyzing this alternative, several trade-offs must be considered. The price paid by the Navy for CAR work would be less, but reinstating a construction capability at two naval yards would involve significant start-up costs. Mainly because of these start-up costs, the Office of Management and Budget strongly opposes such an option. Moreover,
experience and several independent reviews have found that building a ship in a naval yard costs about one-third more than if built in a private yard.
Balanced against admittedly higher costs in naval yards is the stated unwillingness of some of the larger private builders to bid on Navy work.7 This publicly stated reluctance has prompted some in the Navy to consider placing new construction in naval yards. In testifying on the appropriations request for fiscal year 1977, Admiral Rickover stated: “We have been thinking about getting Navy yards back into the construction business—Mare Island Naval Shipyard for submarines, and possibly Puget Sound for building aircraft carriers. We have not wanted to do it in the past because it was considered more expensive but with the claims private shipbuilders are submitting it is no longer out of the question.”8
If some new construction work is returned to naval yards, it can be expected that in times of depressed demand, private yards will be less efficient. In essence, exercising the option could force both naval and private yards to operate at higher average costs. A policy which would risk this outcome cannot be squared with one of the stated purposes of the Merchant Marine Act of 1970 which is “to improve the competitive situation of the United States shipbuilding industry in world shipbuilding markets. . . •’
The last option—closing all naval yards—raises several questions aside from the fact that private in* dustry could handle the entire Navy workload more economically. In particular, what is to be done with | closed yards? Should they be mothballed and held if , reserve, or should they be declared excess and sold to private industry? Or is there a halfway solution? M the naval yards were closed, how could the Navy bo absolutely certain that private yards will be responsive to fleet needs when a priority situation arose? This problem must be solved not only for repairs but construction as well.
If the option is to rely on the private sector completely, then the reliance must be truly Complete- Facilities should be sold with return rights only in a mobilization. To do otherwise would be to inject an element of instability into the system. What is not needed is the always-possible threat to reopen naval yards when disagreements arise. As to private sector responsiveness in less than mobilization situations, congressional initiatives are probably essential if the “non-naval yard” option is to be a viable one. Should all naval yards be closed, many heretofore discretionary decision areas on the part of the involved parties — the Navy, MarAd, and the private
shipbuilder—will be considerably constrained.
Closing some or all naval yards would not be accomplished without considerable political opposition. Naval shipyards are large employers, and their operations have a significant impact on local economies. Several considerations, however, would tend to mitigate any catastrophic economic impact. Closings would be accomplished over an extended period of time, and there is no reason to believe that many naval yard employees and facilities would not be absorbed into the private sector.
Shipbuilders’ Claims Against the Navy: In the summer and fall of 1974, hearings on naval and private shipyards were held by the Seapower Subcommittee of the House Armed Services Committee. Witnesses appeared for all parties concerned—the Navy, civilian supporters of naval yards, and officials of private yards, both large and small. The printed records of the hearings exceeded 1,500 pages in three volumes. Included therein was some of the bitterest and most acrid testimony on record regarding relations between an armed service and some of its major suppliers.
An issue raised in the hearings which bears on the future of naval shipyards is the one of private shipbuilder claims against the Navy. The tie is obvious. While ships already contracted for may well be completed under court order, there is no way that a private yard can be forced to bid on Navy contracts unless emergency authority is invoked. Assuming government seizure of shipyards is ruled out, the only remaining option is to build in Navy yards.
Causes of claim-producing cost overruns fall into three classes—those controllable by the Navy, those controllable by shipyards, and those which are uncontrollable by the firm or Navy because of economic conditions. Navy-controllable areas include minimizing the cost impact of change orders, minimizing Navy control over construction management, using an efficient (fast) method of settling legitimate shipyard claims, and developing procedures to ensure that the government, in its role as a subcontractor, meets its commitments with respect to equipment/ information on schedule. A particular problem is allowing sufficient time for follow-on yards to review the building plans (for a class of ships) of the lead yard in order to discover any inaccuracies which might be the basis for future cost overruns. Shipyard-controllable areas include acquiring and maintaining skilled labor, estimating overhead costs more precisely when bidding, optimally planning and scheduling naval and non-naval work, and maintaining productivity throughout the contract period at levels sufficient to ensure a reasonable return on investment. Uncontrollable economic areas include the effect of inflation on fixed-price contracts, the typical cyclical demand for merchant ship construction, and the uneven pattern over the years of Navy ship procurement and repair work.
In 1974, shipbuilder claims amounted to approximately $1.2 billion. Since that time, some claims have been settled and others added. A General Accounting Office report to Congress summarized the status of claims as of June 1975:
“Shipbuilders have submitted to the Navy 106 shipbuilding and other claims—totaling over $1.6 billion—from 1967 to the end of June 1975. These claims were made on the basis that the Government, by its actions or inactions, caused the contractor to perform work different from, or in addition to, that specified in the contract. As of June 30, 1975, the Navy’s total inventory of major shipbuilder claims amounted to $826 million.”9
By the end of 1975, the total had reached $1.4 billion, and by the end of March 1976, additional claims had pushed the total in excess of $1.9 billion. With unsettled claims approaching the $2 billion mark, Deputy Secretary of Defense William P. Clements, Jr., opted to resolve the issue in a single stroke under the provisions of Public Law 85-804. This legislation allows DoD to modify defense contracts when such is in the interest of national defense and has the approval of Congress. Secretary Clements’s hope was to bypass the time-consuming appeals board procedure. All pending claims would be settled for between $500-$700 million or approximately 40 cents on the dollar. However, even before negotiations were opened with the shipbuilders, the plan was denounced by Admiral Rickover. Gordon W. Rule, Director, Procurement Control and Clearance Division, Navy Material Command, then denounced Rickover as the man primarily responsible for openly defying the Office of the Secretary of Defense on the decision to employ Public Law 85-804, continuing to urge takeover of private shipbuilding by the government, being responsible for past and continued harassment of private nuclear shipyard management, and for dictatorial contracting practices that resulted in shipbuilder claims.
In defense of his position, Admiral Rickover testified before Congress:
“To maintain a sound basis for conducting future business, I believe the Navy should insist on compliance with its contracts—in federal court if necessary. If contractors believe they can evade their contractual obligations by submitting in-
flated claims; refusing to honor contracts; complaining to higher authority, and the like; then all defense contractors will be encouraged to follow this approach in the future.”10 By late May 1976, it was apparent that the major yards were unwilling to settle claims within the range proposed. The DoD enticement of an immediate cash offer to settle had failed and on 9 June the offer to settle under terms of Public Law 85-804 was withdrawn. The following week, compromise offers made by Newport News Shipbuilding and Litton Industries were also withdrawn. And on 29 June, Litton announced its intention to stop construction of several amphibious assault ships (general purpose). The Navy position was that construction must continue—under court order if necessary. During the summer of 1976, Newport News filed a motion in federal court to be relieved from continuing work on a nuclear-powered cruiser. In neither case, however, was work actually stopped. By fall, proposals to place some Navy new construction in naval yards were being frequently heard at DoD. Initially, it was suggested that building take place in two West Coast yards and one East Coast yard. As might be expected, private shipbuilders were adamantly against such a move.
By March 1977, total claims stood at $2.3 billion. Hearings held on the fiscal year 1978 Navy shipbuilding and conversion budget request were almost a replay of the 1974 hearings. On the industry side, there were complaints of uncertainty about the future because of poor industry-Navy relations, uncertainty caused by Navy plans to reopen some of its yards to new construction, and the lack of business opportunity caused by unrealistic Navy contracting techniques. For the Navy, Admiral Rickover repeated his frequent assertions that cost overruns on Navy contracts were primarily the fault of the shipyards. He pointed out that the Newport News yard had made frivolous and inflated claims of millions of dollars and then had settled two of them for five cents and 29 cents on the dollar.
In the 1975! report to Congress cited earlier, the General Accounting Office had identified a number of corrective procedures introduced by the Navy to prevent future claims and improve industry-Navy relations and concluded that “actions taken by the Navy hold considerable promise for reducing future claims. . . ,”11 In its 9 August 1977 follow-up report, the GAC|—while suggesting several areas in which claims j management could be improved— concluded that “Navy procedures were generally adequate to make sure claims were reasonably settled.”12 However, in commenting on the report, the
involved shipbuilders completely disagreed with the contention that they had overstated their claims in some instances or were in any way responsible for delays that occurred in settling.
Evaluation of Shipyard Claims Issue: All evidence indicates that during 1975-76 the Department of Defense was anxious to settle shipyard claims as quickly as possible. In fiscal year 1977, Congress appropriated $320 million for this purpose, and $381 million was requested in fiscal year 1978. As noted above, the preferred method of resolution at DoD was Public Law 85-804. The exception was Admiral Rickover. His preference is to let the claims work their way through the normal settlement procedure. The essence of the Rickover position is that shipbuilder claims are, in the main, unjustified and that by hard bargaining the Navy can reduce the claims substantially—in effect, lending credence to the argument that the claims were unjustifiable in the first place.1'* However, as plausible as this might seem to the ordinary taxpayer, it is on shaky ground in terms of economic analysis.
Economics has long recognized the principle of the time value of money. In essence, a given amount of
money, properly invested, will earn interest. There is a cost associated with borrowed money, and there is the cost of forgone opportunities when money, borrowed or otherwise, is allowed to remain idle. Now consider the principle in the context of shipbuilder claims, bearing in mind that testimony during 1974 shipyard hearings indicated that some claims were unsettled after as long as 14 years.14
Specifically, consider a shipyard manager evaluating a $10 million claim against the Navy. First, he correctly considers all costs associated with the claim as sunk costs and treats them as such. Second, he I reasons that his $10 million claim (or any part of it)
is borrowed money and that it is idle. Last, his rate of return on alternative investments is 8% at a compound annual interest rate. On the basis of past experience, if he presses his claim he might expect to receive 50 cents on the dollar in, say, ten years. Or he can settle now for 30 cents on the dollar and ignore the moral judgment that such a decision is "proof” of an inflated claim. If he opts for the immediate $3 million settlement, it will have a value of $6.47 million in ten years. Had he elected the alternative of pressing the claim, his payoff would be only $5 million, not to mention the costs incurred in pursuing the option. If the rate of return is estimated at 16% (a not unreal figure), then a $3 million settlement would have a future value of $6.3 million in
All new construction work for the Navy is now done in private shipyards. On 14 January of this year, the submarine tender Frank Cable (AS-40) was launched at the Lockheed yard in Seattle. The destroyer Nicholson (DD-982) and amphibious assault ship (general purpose) Nassau (LHA-4) were christened 28 January in a dual ceremony at the Ingalls Shipbuilding yard in Pascagoula.
just five years. It is not difficult to reason that when claims are as high as $500 million, possible “earnings" in accepting a present but lower payoff are significant. Moreover, in managing its claims portfolio, a shipyard will handle each claim differently, based on a probability assessment of future payoffs versus the cost of pressing the claim. Thus, while one claim may be settled for five cents on the dollar, the reason may have been to free corporate resources to press for a 50 or 60 cent settlement on other, perhaps larger, claims. This is not to say that every shipyard claim is meritorious and without flaws, for it is not so. However, a decision to accept a lesser payoff in the present—instead of the possibility of a higher payoff in the future—in many instances is probably a good management decision.
What might reasonably be expected if the Navy- shipbuilder claims dispute is not settled satisfactorily and relations either fail to improve or deteriorate
even further? The answer is found in the present rate of return on shipyard investment, the structure of the industry, and the economic doctrine of opportunity cost. During the 1974 shipyard hearings it was pointed out by industry spokesmen time and again that profit margins were low or nonexistent on naval construction. Many witnesses cited cases of losses. In 1976, DoD released the results of a wide-ranging study on defense contract profits. This study, PROFIT ’76, determined that profit represented 5.8% of assets on defense shipbuilding. This compared with 13.5% for all defense industries and 10.7% for the commercial durable goods sector.15
Since the end of the Korean War, the structure of the shipbuilding industry has changed from a number of independent producers to one in which most shipyards are parts of large conglomerate enterprises. For example, Newport News Shipbuilding is now a division of Tenneco. The Ingalls yard at Pascagoula, Mississippi, is a part of Litton Industries. Of the major yards in the United States which build and/or repair ships, only two remain independent.
The opportunity cost doctrine states that the most favorable price that a factor of production can command will become the minimum cost at which that factor can be had in any economic endeavor. For example, skilled machinists can sell their services to textile firms as well as other manufacturers. The textile firm, however, may be willing to pay more for a machinist. In such a case other firms will be obliged to pay the opportunity cost set by the textile industry.
Putting the pieces together, the following analysis becomes quite plausible. First, resources will not remain in a use which, over the long run, yield a smaller return than they could command in an alternate employment (opportunity cost doctrine and low return on shipyard investment). Second, while it is difficult for an independent producer to shift resources out of an industry with low returns, it is much less so for the conglomerate that has the option of setting off a loss in one enterprise against profits in others (structure of the industry). Taken together, these factors ensure that, in the short run, it is unlikely that much, if any, new investment will take place in the shipbuilding industry. And it is probable that, in the long run, shipyard capital will be more profitably employed elsewhere. On the other hand, closing some or all naval shipyards would go a long way toward reversing the widely cited deteriorating economic position of American shipyards in general—a situation viewed with increasing alarm by industry spokesmen in the first months of 1978.
Conclusion: If some, or all, naval shipyards are closed, without doubt there must be ironclad agreements in place which will assure that the private sector is entirely responsive to Navy needs both in terms of new construction and repair requirements. While there are no such agreements now, there are a number of precedents. The Military Sealift Command requires that before shipping lines are eligible to bid on military cargoes they must periodically pledge a part of their fleet for military use in a contingency. On the air side, a Civil Reserve Air Fleet has been in existence since 1951. Like shipping companies, airlines carrying DoD freight and passengers pledge a part of their long-range aircraft for use in a contingency. In a lift shortage DoD first attempts to meet its needs by seeking a voluntary charter of planes and ships before invoking the pledge agreements. In point of fact, no plane or ship has ever been called up under either agreement.
It should present no insurmountable problem for an agreement to be worked out between those shipyards desiring to build and repair naval ships and the Naval Sea Systems Command. The essence of the contract would be for participating yards to agree in all cases to submit bids on Navy construction within their capabilities and/or agree to give naval vessels priority in terms of repair and alteration requirements.16 Disputes would be settled by binding arbitration. Yards wishing to forgo Navy work would not be required to participate in the program. While this might involve some risk, it is argued here that marketplace economics, i.e., the profit motive, would ensure private sector participation. In the unlikely event such an assumption proves incorrect, yard eligibility to build merchant ships under the Maritime Administration’s construction differential subsidy program could be made a part of the agreement. 17
Should some, or all, naval yards be closed, closing plans should be prepared well in advance and implementation take place over a number of years, not months. As a rule of thumb, the more yards to be closed, the longer the time frame. If all yards were closed, a ten-year period would not be unduly long. In this regard, sufficient time would be needed to relocate, where necessary, ship support facilities, e.g., establish medical, record, pay, housing, and messing facilities for crews whose ships are undergoing work in private yards. A last consideration would be allowing time for private yards to acquire any necessary additional work force. Should such prove a problem, time would be available to inaugurate industry-, union-, or MarAd-sponsored training programs.
Although some progress has been made toward resolving the shipyard claims issue, all parties agree there is still a long way to go. In this respect, still further investigations are planned by Congress. In the national interest the claims issue must be resolved with all haste. The most promising way to go is via Public Law 85-804 even while acknowledging that complete equity probably cannot be achieved. For either party, however, to prolong negotiations on the chance of achieving, at best, a marginal monetary gain or saving makes even less sense. The strategy is not only a high-risk alternative in terms of possible payoffs but, more important, prolonging the issue can only weaken our national defense posture. The likely short-run result of not quickly resolving the issue is that some present construction probably will be built under court order. In the long run, a significant amount of Navy construction will be returned to naval shipyards with a likely outflow of capital from the industry and the closing of a number of major private yards.
Thus far, construction costs in private American shipyards have been contrasted to those in naval yards. But this is only a part of the story. When costs between private American and foreign yards are compared, the United States is a high-cost producer—in some cases by as much as 50%. Making American yards more cost competitive was a stated goal of the Merchant Marine Act of 1970. Yet, the goal to reduce the American cost differential has not been reached and in fact has recently slipped. On the other hand, approximately $1 billion was invested through fiscal year 1976 by private yards to improve productivity. What has been the rate of investment in this respect since then? Or, put another way, what has happened to investment since the outbreak of open warfare between the Navy and the shipbuilders? This is an economic statistic that bears watching since capital drain from an industry is subtle and not easily perceived. If the rate of investment has significantly slowed, it is but one more reason to bring the shipyard claims issue to a close.
Swnmary: Is there a future for naval shipyards? A far better question would be, “Should there be a future?” Historically, the United States has placed great reliance upon the citizen-soldier concept and even today, as a superpower, maintains a relatively small uniformed force. Nor have we opted for a state-owned armaments base. Instead it is firms such as General Motors, McDonnell Douglas, and Todd Shipyards that produce our tanks, planes, and ships, and it is the privately owned merchant marine, railroads, and airlines that move most equipment and men in a mobilization. As a concept it has served the nation well in the past and is still endorsed today. In this regard, a 1967 Bureau of the Budget circular states, “There is no change in the Government’s general policy of relying upon the private enterprise system to supply its needs, except where it is in the national interest for the Government to provide directly the products and services it uses.”18 And in its 1970 report to the President and Secretary of Defense, a Blue Ribbon Defense Panel recommended that the Department of Defense divest itself of all plant equipment where ownership cannot clearly be shown to be to the economic advantage of the U.S. Government.
In the context of historical precedent and ever more closely scrutinized defense budgets, this article suggests that the day of the naval shipyard is probably over. This conclusion in no way deprecates the contribution these yards have made to the nation’s security during their long history. What it does is recognize that in the years ahead the Navy has larger fish to fry and that in fulfilling its mission a chief problem will be obtaining needed appropriations.
Consider the problem in the context of the economist’s alternative cost doctrine which states that the cost of producing a particular product or service is the value of the forgone alternative product or service which the resources used in its production could have produced. In the first instance, should some new construction be returned to Navy yards, say $2 billion of the $6.5 billion fiscal year 1978 proposed Navy shipbuilding budget, what would be the result? If 20% is accepted as a mean approximation of the differential between the higher cost Navy yards and private yards, then an additional $400 million must be added to the budget. But what is the forgone alternative product? In this example, $400 million would buy three DD-963 destroyers, 20 S-3 aircraft, or in four years a Trident submarine. In the second instance, consider the proposed fiscal year 1978 $2.8 billion ship repair and alteration budget. Assuming private yards performed all CAR work instead of approximately 35%, and assuming the private yards are only 15% more cost efficient than naval yards, what is the value of the alternative product? In this case, a savings of $273 million could buy one LHA amphibious assault ship (general purpose), 14 F-14 fighters, or in less than six years one Trident submarine.19
Two other arguments support closing naval shipyards. First, it is the stated goal of Congress to make American private shipyards more cost competitive with foreign yards. But this probably will not come about, or will come about more slowly, so long as the threat of reopening naval yards to new construe-
tion hangs over the industry. Nor will the smaller shipyard have the incentive to invest more capital as long as naval yards are assigned nearly 70% of the repair and alteration budget. Second, while the basically hostile international environment in which we live probably will not change in the foreseeable future, the winds of diplomacy will sometimes blow warmer or colder. If SALT (strategic arms limitations talks) negotiations fail and a policy of accommodation with the Soviet Union falters, then defense budgets will probably increase. On the other hand, in a lessened tension scenario, defense budgets could be expected to contract. It is argued here that the private sector can better adapt to such changes, that is, respond to the changes in the political and economic market place, than can a military department.20
To this writer’s knowledge, nowhere in the public record has the Navy categorically stated that all of its requirements could not be met by the country’s privately owned shipbuilding and repair industry- Rather, it has stressed certain advantages in maintaining its own shipyard capability. While acknowledging these arguments, this article has called for a complete reliance on the private sector and based its case primarily on economic analysis rather than political considerations. Such reliance can come about only if the claims problem is settled and the atmosphere improved between the Navy and private builders. But those things should be done in any case.
Dr. Whitehurst is a Professor of Industrial Management at Clemson University and is a member of the ad hoc Defense Studies Group in that department. His teaching and research areas are in logistics, transportation, and defense economics. Professor Whitehurst received his Ph.D. in economics from the University of Virginia and did post-doctoral study in defense studies at Edinburgh University. He is the author of a number of articles and books on the merchant marine including “The National Defense Reserve Fleet: Past, Present, and Future,” which appeared in the February 1977 issue of the Proceedings.
’Activity at naval shipyards reached its zenith during World War II with an employment peak of 353,000 in July 1943. After the war, employment declined to less than 70,000, peaked at 140,000 during the Korean War, again declined to about 82,000, and peaked at 94,000 in 1968 (Vietnam War).
2In 1967, the legal requirement was repealed, and private yard share fell to between 30-35%. In 1974, Congress placed a floor of 30% on the amount of CAR work to go to the private sector.
3The case for the smaller yards largely rested on several studies which showed that conversion, alteration, and repair work at naval yards was from 9 to 28% higher than at private yards.
4Comptroller General of the U.S., Government Support of the Shipbuilding Industrial Base (Washington, D.C.: U.S. General Accounting Office, 1975), p. 38.
5For a discussion of the general arguments supporting naval shipyards see House, Seapower Subcommittee of Committee on Armed Services, Hearings on Shipyards, Part 1 and House, Subcommittee of the Committee on Appropriations, Hearings on Defense Appropriations for 1975.
6One source of additional capacity, if needed, might be the nation’s highly productive smaller yards. At present, they are engaged in build- oceanographic research ships, tugs, barges, offshore oil supply vessels, and smaller vessels such as amphibious landing craft (LCUs and LCMs) under government contract. For a summary of this capability see “Prolific Output at Smaller U.S. Shipyards,” Marine EngineeringlLog, August 1976, pp. 45-47.
7House, Seapower Subcommittee of Committee on Armed Services, Hearings on Shipyards, Part 2, pp. 910-1064.
8U.S. Congress, House Subcommittee of Committee on Appropriations, Hearings on Department of Defense Appropriations for 1977, Part 7, 94 th Congress, 2d. Sess. March 1976, pp. 126-127.
Comptroller General of the U.S., Status of Shipbuilders' Claims For Price Increases: Settlement Progress, Navy Claims Prevention Action, Need for Caution (Washington, D.C.: U.S. General Accounting Office, 1975), pp. i., iil 10"Rickover Opposes PL 85-804 Shipbuilding Claims Solution” Shipyard Weekly, 10 June 1976, pp. 1-2.
1’Comptroller General, Status of Shipbuilders’ Claims, p. ii.
‘Comptroller General of the United States, Shipbuilders’ Claims—Problems and Solutions (Washington, D.C.: U.S. General Accounting Office, 9 August 1977) p. i.
13For the detailed position of Admiral Rickover during the 1974 House Hearings on Shipyards, see Part 3, pp. 1262-1267. In the March 1977 House Hearings on Appropriations his position was essentially unchanged.
14John Diesel, chairman of the board of Newport News Shipbuilding, *n testimony on 23 March 1977 before the Defense Subcommittee of the House Committee on Appropriations, specifically related the concept of the time value of money to several settlements reached between Newport News Shipbuilding and the Navy.
,5“Pentagon says shipbuilders have least profitable DoD contracts, Marine EngineeringlLog, February 1977, p. 9.
16How a limited amount of CAR work would be apportioned among competing shipyards would present a problem. If recommendations contained in the U.S. General Accounting Office Report to Congress “Contracting for Navy Ship Repairs and Overhaul—Need for Change” (10 December 1976) are enacted, competitive negotiations will be the way in which contracts are awarded.
17New legislation is not necessary. The government possesses sufficient leverage under a wide assortment of laws, including the Merchant Marine Acts of 1936 and 1970, the Defense Production Act of 1950, and various cabotage laws recited in the Merchant Marine Act of 1920.
18Executive Office of the President, Bureau of the Budget, Circular No- A-76 Revised (transmittal memorandum No. 1, dated 30 August 1967)- The circular notes several exceptions to this policy. Presumably, the exception justifying naval shipyards is found in paragraph 5(b), i.e., "It is necessary for the Government to conduct a commercial industrial activity for purposes of combat support or for individual and unit retraining of military personnel or to maintain or strengthen mobilization readiness ”
‘Comptroller General of the United States, Report to the Congress, Financial Status of Major Acquisitions June 30, 1973 (Washington, D.C.: U.S. General Accounting Office, February 1976), p. 85.
20The essence of the argument is that naval yards can perform only naval work and that historically this work is cyclical, dependent as much on political as economic considerations. On the other hand, private yards perform Navy work, construction and repair work under Mar Ad’s construction differential subsidy program, and work for private accounts that might some day include foreign orders. Thus, with a mix of work, private yards are better able to absorb the impact of a change in demand for any one particular segment of their market.