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    Document Summary
    - Report Published -

    Senate Document No. 37
    PUBLICATION YEAR 2001

    Document Title
    Economic Incentives to Promote the Growth and Competitiveness of Virginia's Shipbuilding Industry

    Author
    General Assembly; Joint Subcommittee

    Enabling Authority
    SJR 171 (Regular Session, 1998)

    Executive Summary
    Senate Joint Resolution No. 171, adopted by the 1998 Session of the General Assembly, established a joint subcommittee to study economic incentives to promote the growth and competitiveness of Virginia's shipbuilding industry. The joint subcommittee was charged with determining whether, and at what level, tax benefits or other economic incentives would be an effective tool in ensuring the continued health of Virginia's maritime industries.

    At its meeting in December 1998, the joint subcommittee was requested to examine five proposals to assist the Commonwealth's shipyards in making the transition from their traditional focus on United States Navy work to a new economic era in which firms will need to compete with yards in other states and other nations for commercial shipbuilding and repair work while exploring nontraditional opportunities. These proposals included:

    1. Considering proposals for incentives for firms to invest in capital improvements in their shipyards;

    2. Establishing a Virginia Marine Industrial Commission, similar to the Virginia Film Commission, to promote and provide marketing assistance to the shipyard industry;

    3. Extending deadlines for complying with state tributyltin (TBT) regulations;

    4. Conducting a comprehensive study of the tax structure of the Commonwealth and its impact on the shipyard industry; and

    5. Reviewing the federal and state workers' compensation acts to eliminate duplicative coverage that makes the benefit programs confusing and costly.

    The complexity of these issues prevented the joint subcommittee from completing its mission in a single year.

    Continuation of Study in 1999

    Senate Joint Resolution No. 436, adopted by the 1999 Session of the General Assembly, provided for the continuation of the study by the joint subcommittee. The joint subcommittee was charged with re-examining and exploring the five proposals put before the subcommittee in 1998. The joint subcommittee met in 1999 and began to address two of the five proposals: promoting and providing marketing assistance to Virginia's shipyard industry and designing incentives for firms to invest in capital improvements in their shipyards.

    The joint subcommittee determined that a centrally coordinated and comprehensive marketing program would attract new customers to Virginia's shipyards, which could result in less reliance on construction and repair work performed for the Navy. Recommendations were developed to market Virginia's ports and its shipyard industry as part of an effort to diversify the industry's customer base and, specifically, to assist the industry in becoming more competitive in the commercial shipbuilding and repair work marketplace. The joint subcommittee recommended an appropriation of $100,000 for each year of the 2000-2002 biennium to the South Tidewater Association of Ship Repairers (STASR) to help fund the development of a coordinated marketing program to promote Virginia's shipyard industry (STASR is a nonprofit trade association organized for the purpose of maintaining the integrity and high professional standards of the ship industry in Hampton Roads). (*1) One primary objective of such a marketing program could be to attract new customer groups to Virginia's shipyards.

    Along with a coordinated marketing program, the joint subcommittee found performance grants to be another mechanism for facilitating expansion into the commercial shipbuilding and repair work marketplace. The joint subcommittee learned that many businesses making up Virginia's shipyard industry do not have the profits or earnings to finance the retrofitting of their equipment and operations needed to successfully compete in the commercial marketplace. The joint subcommittee believed that performance grants from the Commonwealth to these businesses, awarded based upon investments in capital and operations made by such businesses, would encourage these businesses to retrofit their equipment and operations accordingly. The joint subcommittee recommended legislation providing investment performance grants for capital investments made by businesses comprising Virginia's shipyard industry. Senate Bill No. 7 and Senate Bill No. 573, introduced during the 2000 Session of the General Assembly, required a minimum capital investment of $50,000 on the part of a shipyard company for eligibility to receive a grant equal to 10 percent of the cost of the capital investment. Both bills were continued to the 2001 Session of the General Assembly and subsequently did not get reported out of committee.

    The joint subcommittee was also particularly concerned with skills training for shipyard workers. The subcommittee heard testimony that there generally is a dramatic falloff in skills training for shipyard workers once they have completed entry-level training programs. The joint subcommittee believed that ongoing skills training for shipyard workers was crucial to the long-term success of Virginia's shipbuilding industry. A workforce trained to use current technology was seen as paramount to the economic livelihood of the industry. Thus, the joint subcommittee recommended an appropriation of $800,000 for each year of the 2000-2002 biennium for use by STASR in providing enhanced skills training to shipyard workers. (*2)

    Continuation of Study in 2000

    Senate Joint Resolution No. 177, adopted by the 2000 Session of the General Assembly, provided for the joint subcommittee to continue studying Virginia's shipyard industry in calendar year 2000. The joint subcommittee met in November 2000 and developed recommendations for (i) tax and other incentives for shipyard businesses to undertake capital investments to make use of current technology and to facilitate entry into new and emerging markets for ship construction and repair work; (ii) providing marketing assistance to the shipyard industry for the purpose of attracting new customers and retaining current customers; (iii) providing advanced-skills training to Virginia's shipyard workers; and (iv) bringing about compliance with state TST regulations.

    Performance Grants for Capital Investments

    Representatives for the shipyard industry stated that grants and other incentives for encouraging capital investments in infrastructure and technology were one of the top priorities for the industry. The industry representatives felt that a grant program partially underwriting the costs incurred by Virginia's shipyard businesses in making such capital investments would encourage the industry to undertake needed infrastructure improvements and other capital improvements that would allow the industry to remain technologically current. The capital investments also are needed for the shipyard industry to diversify into new markets, including the market for commercial shipbuilding and repair work. In 1998, the joint subcommittee heard testimony that many of Virginia's shipyard businesses are unable to make these capital investments as the loss of Navy repair work in the 1990s reduced the shipyard industry's profitability, which in turn precluded these businesses from making the capital investments.

    Marketing and Promoting Virginia's Shipyards

    As was the case in 1999, the joint subcommittee concluded that a centrally coordinated marketing effort promoting the competitive advantages of using Virginia's ports and its ship construction and repair companies could provide the following benefits: (i) attracting new customers and more business for Virginia's shipyard industry; and (ii) fostering changes to the traditional work performed by the industry to include more commercial shipbuilding and repair work, which would help to reduce the industry's heavy reliance on Navy contracts.

    Advanced-Skills Training for Shipyard Workers

    The joint subcommittee addressed the need to provide advanced-level skills training for shipyard workers, a need first communicated to the joint subcommittee in 1999. The subcommittee learned that most shipyard workers either possessed or were provided entry-level skills training. However, many shipyard workers do not possess the advanced skills necessary for career advancement in the industry. Consequently, employee turnover is very high in the industry as its workers are drawn to other positions that offer a better chance for career advancement. Employee turnover has real costs, including a loss of experienced workers and the costs to train new workers.

    State Tributyltin (TBT) Regulations

    Finally, the joint subcommittee studied industry compliance with state TBT regulations. TBT is a compound found in paints used on commercial vessels. (*3) It is highly toxic to aquatic life, even in very low concentrations. (*4) TBT can be discharged into Virginia's waters when a ship repair company washes down the hull of a vessel in dry dock in making repairs to the vessel. (*5) The Center for Advanced Ship Repair and Maintenance (CASRM) was awarded a grant from the Department of Environmental Quality in 1999 to study methods and processes to remove TST from shipyard wastewater. The hope was that the CASRM study would lead to an environmentally safe and economically feasible way for shipyard companies to comply with state TST regulations. At this juncture, the CASRM study is ongoing and a full-scale pilot plant treatment system is operational. (*6) Although much progress has been made toward a solution to remove TBT from shipyard wastewater, the joint subcommittee learned that more research needs to be conducted to complete the pilot plant treatment process. In order to complete this research, the joint subcommittee was informed that CASRM would need additional funding in the Commonwealth's fiscal year beginning July 1, 2001.

    Recommendations: Based on its study, the joint subcommittee made the following recommendations (*7):

    1. Pass legislation providing investment performance grants for capital investments made by businesses comprising Virginia's shipyard industry. The minimum capital investment required should be $50,000, and the grant amount from the Commonwealth should be equal to 10 percent of the cost of the capital investment. Under the legislation, the aggregate amount of grants to individual shipbuilding and ship repair companies should not exceed $25 million, and any grants awarded should be limited to actual moneys set aside or appropriated to a special, non-reverting fund. These are the same provisions found in SB 7 and SB 573 (2000), which were continued to the 2001 Session of the General Assembly.

    2. Appropriate $100,000 for the fiscal year beginning July 1, 2001, to STASR to help fund the development of a coordinated marketing program promoting Virginia's shipyard industry.

    3. Appropriate $500,000 for the fiscal year beginning July 1, 2001, to the Virginia Community College System to support an apprenticeship and scholarship program for Virginia's shipyard workers. The program would incorporate skills training in areas such as burning and welding, computer-aided drafting, and marine engineering.

    4. Appropriate $300,000 for the fiscal year beginning July 1, 2001, to the Department of Environmental Quality for CASRM to complete its research and pilot plant treatment process for developing recommendations for the removal of TBT from shipyard wastewater.

    5. Pass legislation continuing for another year the joint subcommittee's study of economic incentives for Virginia's shipbuilding industry.
    ________________________________________
    (*1) The General Assembly provided a $100,000 grant to STASR in the 2000 Appropriation Act for the fiscal year beginning July 1,2000, upon a certification by STASR that it had $100,000 cash or in-kind contributions on hand and available as matching funds. The budget provisions did not specify whether the $100,000 was to be used for the establishment of a centralized marketing program or for enhanced skills training of shipyard workers.
    (*2) Id.
    (*3) "Characterization of Shipyard Wastewaters and Development of Advanced Treatment and Analytical Methods for TST Removal," Final Report, Center for Advanced Ship Repair and Maintenance, July 31, 2000, p. 6.
    (*4) Id. at 7.
    (*5) Id.
    (*6) Id. at 10.
    (*7) All five recommendations were introduced during the 2001 Session of the General Assembly.