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Friday, February 3, 2023

Maritime Logistics Professional

Keeping Up With the Jones (Act)

Posted to Global Maritime Analysis with Joseph Keefe (by on August 19, 2015

Puerto Rico’s money woes have nothing to do with the Jones Act. Arguably, the U.S. island would be worse off without it.

In the late 1980’s, I was toiling for a small maritime consulting group, traveling probably 20 days per month, following oil tankers around the globe as they lifted and discharged various cargoes for oil traders and multi-national refining groups. It was wonderfully satisfying work, typically conducted at 3 AM in a sweaty tank farm while swatting mosquitoes large enough to carry away small pets with a single bite. And it involved other pleasant tasks such as making telephone calls to Wharton-educated oil traders who resented having their afternoon squash match interrupted by a perspiring surveyor who had bad news about the dog-of-a-ship they had chartered 45 days prior, at a huge discount, in the hopes of increasing the margins on a less-than-savvy crude oil lifting. * sigh *

As it turned out, one of the places I was dispatched – on a regular basis – was the island of Puerto Rico. In fact, I spent the better part of two years traveling back and forth to the island, often staying ten days or more at a whack before fleeing back to the mainland. Hence, I know a little bit more than most about ocean shipping in and out of the island. I’m embarrassed to say that, given the amount of time I spent there, my conversational Spanish skills should be A LOT better. On the other hand, my experiences there give me a unique perspective that others perhaps do not.

For the most part, I was assigned to attend marine petroleum custody transfers for all manners of liquid cargoes; crude oils, condensate and refined products. Along the way, I vetted ships for suitability and safety, maintained loss accounting records and looked for ways to increase efficiencies for my local, refining and trading clients. It didn’t always go well for the client here, and at one point, I was asked to do a full evaluation – paper and physical infrastructure – of their primary facilities. When I was done, the reasons why became fully evident.

I walked every pipeline in that terminal, located and recorded every valve and its position, and when I was done, I presented my report to the client. Their physical and paper losses were likely to continue, I said, unless they began to employ fully independent and competent security, 24 hours per day, 365 days per year. That’s because it didn’t take a genius to see that unlocked gates at supposedly inactive truck racks, where mysterious tank trucks would show up at odd hours and idle for predictable periods of time, were eating into the profits. Alleged custody transfer losses, in theory of the ship-to-shore kind, were largely paper-generated, and a function of what was happening ashore.

Interestingly, the vast majority of the countless vessels that I boarded and surveyed during my time spent on the island were foreign registered vessels, with U.S. flag product tankers arriving only to haul refined products to the U.S. East Coast. Sometimes, the client might even get a Jones Act waiver when no U.S. flag asset was available. Jones Act trade was actually quite a small percentage of the overall marine traffic in and out that port, and in the end, had little to do with economic success or failure of the operations ashore.

Eventually, I moved on to another job, which took me to other exotic and equally grimy tank farm terminals, and so I understand, the facility in Puerto Rico also eventually closed its doors. To be fair, what I saw and experienced there could happen just about anywhere, but from my bird’s eye perspective, the basis for a prosperous and successful local economy – built on local industry, ocean trade and tourism – were always present, but never fully realized. At the time, a low mileage rental car at San Juan’s International Airport was defined as anything with less than 30,000 miles on the odometer and the local infrastructure was crumbling and dangerous. It was a tough place to work then, and based on what is being reported today about the island’s economy and so-called debt crisis, I’m guessing that it hasn’t gotten any better. Again, that’s got nothing to do with the Jones Act.   

  • Local Debt & Ocean Shipping: apples and oranges

Claims of a causal link between the costs associated with U.S. domestic maritime policies and the reported $72 billion debt crisis facing the Commonwealth are being bandied about by local pundits as an example of what can happen when the Jones Act holds a particular geographic economy hostage. One such account, a report commissioned by the government of Puerto Rico, holds that all islands suffer from high transportation costs. And, the report claims, Puerto Rico “does so disproportionately, with import costs at least twice as high as in neighboring  islands on account of the Jones Act, which forces all shipping to and from US Ports to be conducted with US Vessels and crews.” In contrast, a 2013 study of the Jones Act in Puerto Rico by the U.S. Government Accountability Office (GAO) doesn’t necessarily agree.

One of the primary advantages to Jones Act rules, according to GAO, is the nature of the just-in-time service that regular liner routes provide. If replaced by foreign flag tonnage, the report insists, the likelihood of dedicated liner service to the island would be substantially reduced, and the quality and timeliness of freight service impacted. Beyond this, GAO reported that in 2011, at least two-thirds of the ships serving Puerto Rico were foreign registered, representing as many as 55 different foreign flag carriers. Apparently, then, there is plenty of competition to deliver low cost freight to Puerto Rico.

Correctly pointing out that most developed trading nations have cabotage laws applied to various modes of domestic commerce, the GAO study also says that foreign-flag ships are not subject to U.S. taxation, U.S. immigration, and other U.S. laws. Faced with those impediments to the bottom line, the report goes on to say, the perceived gap in transport costs would largely evaporate.

As I write this blog, a massive, domestic, multi-shipper capital improvement program is underway for carriers in the Puerto Rico trades. The U.S. built vessels that will soon join this freight corridor will be among the best, most environmentally correct of any operating anywhere else on the planet. All of that investment brings me around to a larger point, and question: What do we tell U.S. flag operators who collectively operate 40,000 domestically built hulls that the Jones Act is no longer valid? And, don’t tell me that you can selectively eliminate the cabotage rules in one locale (Puerto Rico, for example), but not another. It’s like being a little bit pregnant.

Actually, the most articulate response to Jones Act naysayers I’ve heard in the past ten years came from U.S. flag operator Morton Bouchard III, who told MarineNews magazine back in November of 2014, “The continuous failed attempts by companies to circumvent the Jones Act are amazing to me. This legislation will not change. From our inception, Bouchard has invested well over five billion dollars in vessels built in the United States, crewed by United States seamen and owned by the Bouchard family. During the past few years, Bouchard has again invested well over one billion dollars in new equipment. This investment could have certainly been cheaper if built in foreign shipyards. However, consider all the jobs that were created and the taxes that Bouchard and the shipyard paid, again, in compliance with existing regulations, which gets back to my first issue in managing Bouchard – it all comes full circle. And as for the oil industry’s complaint that rates are too high, I didn’t hear them complaining years ago when owners were losing money. The Jones Act was fine then.”

  • Self-Inflicted Wounds

When the United States government decided that it no longer needed the Naval Base at Roosevelt roads, Puerto Rico, back in 2004, it also signaled the end of an era for the local island economy which took a massive hit when the federal money dried up. As a young Third Mate sailing for the U.S. Navy’s Military Sealift Command, I visited the port and base more than once in the early 1980’s. It was a vibrant operation then, supporting not only the important training of military aviators, but also accounting for as much as 75 percent of the money flowing into local businesses. Nevertheless, the Navy no longer had any need for the base after it halted test bombing of the island of Vieques following years of protests.

Local Puerto Rico officials are still bitter about the base closure, some of whom believe that the U.S. government was punishing them for the loss of their training areas. In truth, it was merely a savvy financial decision (our government does makes them once in a while) to withdraw from the island. Shortsighted local activists (arguably) got exactly what they deserved when they failed to comprehend that the end of the training also signaled the end to the need to operate from the remote location. The impact on the local economy continues to this day, and reverberates all over the rest of the island. In many respects, the drama reminds me of what happened in the Philippines when the U.S. Navy pulled out of Subic Bay when the local government there wanted too much in return for the extension of local leases on the port land. But, I’m moving off point here again.  

  • Bottom Line

The other usual Jones Act defense arguments also apply, including the need to maintain a robust shipyard industrial base and trained mariners to support the U.S. military and protect our shores during times of peace and war. Circling back to Puerto Rico, a $72 billion debt crisis has many causes, but to blame the Jones Act for the island’s woes is simply shortsighted, and frankly, a misguided effort to point fingers elsewhere when the real problems exist much closer to home.

U.S. flag shipping has provided reliable and regular service to the island for many years. That’s not going to change, and, in reality, it may be one of the things that help the island to recover. In May, for example, Crowley Puerto Rico Services announced that it had executed a $48.5 million construction contract for a new pier at its Isla Grande Terminal in San Juan, Puerto Rico, further solidifying its commitment to the region. In conjunction with the investment, the company and the Puerto Rico Ports Authority (PRPA) also concluded a 30-year lease extension for the Isla Grande property. That kind of investment – and local commitment – is exactly what is likely to create jobs and prosperity, with associated tax revenues. What about simple, one-off port calls from a low cost flag of convenience carrier? Not so much. Let’s keep our eye on the ball here.

For Puerto Rico, keeping up with the Jones family also means keeping the Jones Act intact. – MarPro

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Joseph Keefe is the lead commentator of MaritimeProfessional.com. Additionally, he is Editor of both Maritime Professional and MarineNews print magazines. He can be reached at [email protected] or at [email protected] MaritimeProfessional.com is the largest business networking site devoted to the marine industry. Each day thousands of industry professionals around the world log on to network, connect, and communicate.

Tags: Joseph Keefe Jones Act Puerto Rico U.S. Navy