Troubled Waters

January/February 1999 

The once-obscure business of shipbreaking is suddenly swamped with controversy, complaints, and congressional investigations. Are more tranquil waters on its horizon?

By Robert L. Reid

Robert L. Reid is managing editor of Scrap.

In Nova Scotia, where the maritime tradition is long and the romance of the sea is strong, a folk song tells of an old boatbuilder who lovingly dismantles an aging fishing boat plank by plank and timber by timber. It’s a touching song—and, sadly, far from the reality of how most ships meet their end.

Shipbreaking is the word most often used to define this industry—a harsh-sounding word for what is often a harsh business, accused of exploiting employees, polluting the environment, and even (somewhat romantically) failing to treat retired ships with proper respect.

While the industry has heretofore operated in relative obscurity, shipbreaking has been at the center of a political whirlpool for almost two years, thanks in part to a Pulitzer prize-winning series in the Baltimore Sun, a Department of Defense review panel, two congressional hearings, and ultimately an executive memo from Vice President Al Gore.

Meanwhile, there’s a growing backlog of more than 200 U.S. ships that need to be scrapped, with the problem only getting worse, says a recent government report.

So, what in the high seas is going on?

Downsizing and Dollars

The current shipbreaking problem is a consequence of America’s victory in the Cold War.

Although shipbreaking was common in the 1960s and 1970s, few U.S. Navy ships were scrapped in the 1980s because it was a time of military expansion. But when the Cold War ended, so did the nation’s commitment to so large a Navy. Defense budgets were trimmed and the military began to downsize. The fleet dropped from 570 active ships to only 333 by late 1998, and demolition of government vessels resumed in 1991.

More than a dozen shipbreaking operations have opened since then, with contracts generally awarded to the highest bidder regardless of the firm’s ability to protect employees or the environment. In part, that’s because the Navy spends some $17 million a year to store and maintain obsolete vessels, many of which contain asbestos, PCBs, and other hazardous substances. Thus, there’s a strong incentive to make ship sales as profitable as possible for the government—75 percent of the proceeds from selling Navy vessels remains in the Department of Defense while the rest is earmarked for the Department of the Treasury as general receipts.

Moreover, the Defense Reutilization and Marketing Service (DRMS), which sells Department of Defense property including old military vessels, isn’t permitted to accept a “negative” bid—one in which the government sells the vessel at a loss, say, by agreeing to subsidize the environmental cleanup during its scrapping. Likewise, the Maritime Administration (MARAD), which sells ships such as old cargo vessels, is legally required to maximize “the return to the United States.” (These rules apply only to non-nuclear-powered vessels. The Navy uses private contractors to scrap such vessels at its own facilities and absorbs the expense of environmental compliance as a cost of downsizing.)

Unfortunately, the Navy and MARAD approach led to a policy of “squeezing every possible dollar out of shipbreaking,” the Sacramento Bee editorialized in January 1998. But even then, the plan wasn’t working well: As of last year, only two shipbreakers—both in Brownsville, Texas—could reportedly scrap ships at a profit to the government.

The Sun Series

Problems with the way America disposes of its old ships had been identified before the Baltimore Sun’s three-part series on shipbreaking. DRMS, for instance, initiated a new process for ship sales in 1996 that no longer focused so strictly on the highest bidder, although only a handful of bid solicitations have been issued under this new approach. But it was the Sun’s articles in December 1997 that hit the industry with a tidal wave of public scrutiny and accusations of wrongdoing.

The Sun explained how the Navy’s downsizing after the Cold War helped create a shipbreaking industry that produced “harm to human health and the environment” almost everywhere it dropped anchor, at home and abroad.

At home, the Sun reported about shipbreaking operations on both coasts and in Texas where employees were killed or injured in avoidable accidents (safety equipment was available but not used); hazardous substances leaked or were illegally dumped into harbors, rivers, and other waterways; the owner of one shipbreaking firm was convicted of exposing employees to asbestos (they reportedly ripped out the material with their bare hands); and DRMS’s sole inspector for the entire shipbreaking industry refused to inspect a vessel being scrapped because he thought it was too dangerous to board (an employee died on that project the next day, and DRMS has since increased the number of shipbreaking inspectors to four).

In numerous cases, the Navy, which retains ownership of its vessels during the shipbreaking process, had to take ships back from scrapping operations no longer deemed qualified.

Bad as the domestic industry seemed, the international situation was “far worse,” the Sun noted. Although the United States, Spain, Portugal, and Italy used to dominate the shipbreaking industry, that changed in the 1980s when the labor-intensive work shifted to Asia—initially Taiwan, South Korea, and China. Today, developing countries such as India, Pakistan, and Bangladesh lead the world in shipbreaking, with Vietnam, the Philippines, and Thailand planning to join them.

Unfortunately, the shipbreaking operations in many of these countries are defined by low wages and lax environmental and employee safety enforcement. For instance, India, the current leader in shipbreaking, is a nuclear power, yet conditions at its shipbreaking site in Alang, a six-mile stretch of beach on the Arabian Sea, border on the primitive. The Sun reported that Alang’s 35,000 men scrap freighters, tankers, even warships with few tools and even less safety equipment. They can earn as little as $1.50 a day. The work is so hazardous that as many as 40 laborers have been killed in a single incident.

Privately owned American vessels have been sent to places like Alang for years. But environmental rules regarding PCBs had previously made it difficult for the Navy or MARAD to sell ships for scrapping overseas. In August 1997, however, the U.S. EPA issued an exemption that gave the Navy a green light for such exports. MARAD received a similar exemption that November. So, just as complaints were rising about America’s domestic shipbreaking industry, the issue suddenly took on a global perspective.

Reactions and Hearings

 Outrage over the Sun’s revelations was swift.

Within days, Sen. Barbara Mikulski (D-Md.) called for a review of the Navy’s shipbreaking program and an end to the scrapping of U.S. warships overseas. Other members of Congress joined the fight, with Rep. Wayne Gilchrest (R-Md.), chairman of the Coast Guard and Maritime Transportation Subcommittee, promising to hold hearings. And environmental groups condemned the sale of government vessels—which contained hazardous materials—to shipbreakers in developing countries as “toxic colonialism.”

Although the Navy initially defended its overseas shipbreaking plan, the controversial idea was dropped just before Christmas 1997—two and a half weeks after the first Sun article ran. MARAD cancelled its overseas scrapping plans shortly afterward.

But the overall shipbreaking controversy didn’t drift away so easily.

March 1998 saw two sets of public hearings—the first on March 5 before a specially formed interagency review panel of three admirals and officials from the departments of defense, labor, transportation, and justice, as well as the EPA. The second was held on March 18 before Gilchrest’s House subcommittee.

ISRI Executive Director Robin Wiener testified on both occasions, stressing the fact that the highest bid isn’t always the best bid—not when it means “supporting substandard labor conditions and condoning the reckless abandonment of environmental protection demonstrated by foreign—and some domestic—shipbreakers.” Moreover, the highest-bid approach penalized “the shipbreakers who ‘do it right’” by following all workplace safety and environmental laws, since the costs of such compliance virtually guaranteed that their bid wouldn’t be the highest, Wiener said.

Others testifying included a Sierra Club representative who questioned whether shipping vessels filled with hazardous material to developing nations would violate the Basel Convention; a union local president who wanted to keep shipbreaking jobs in the United States and urged that these ships be “buried with honor”; members of Congress who argued that the U.S. shipbreaking industry needed to be overhauled; and several veteran shipbreakers, including Kerry L. Ellis, owner of Seawitch Salvage Inc. (Baltimore), who was convicted in May 1997 of illegally removing asbestos and dumping oil in a river while scrapping the aircraft carrier U.S.S. Coral Sea in Baltimore’s harbor.

Ellis, who at the time of his testimony had been sentenced to two years in prison but was planning to appeal, blamed the Navy for problems on the Coral Sea project. He claimed that pipes and fuel tanks in the carrier were mislabeled as to whether they were hazardous or full, adding that the Navy took two years to give him a survey of where PCBs were located in the vessel.

Ellis’s son, Kerry R. Ellis, also testified and invited the interagency review panel to visit the Coral Sea work site, which he had taken over (he repeated the invitation at the subcommittee hearing and ultimately did lead at least one tour of the carrier).

The difficulty of U.S. shipbreakers competing with foreign firms was emphasized by Joseph D’Alessio of Norfolk Recycling (Fort Lee, N.J.), who noted that it only costs $2 a ton to scrap a vessel in India or Pakistan compared with as much as $90 a ton in the United States. Fred Cornell, an environmental manager with Camden Iron & Metal Inc. (Camden, N.J.), stressed the need for cooperation between private industry and the government in identifying hazards and ensuring that these “potential floating Superfund sites” are scrapped only in the safety of a dry dock—a point D’Alessio had also made, urging the Navy to lease some of its closed and open dry dock facilities to private shipbreakers.

At the congressional hearing in late March 1998, Mike Dunavant, an environmental and legislative affairs manager for Simsmetal America (Richmond, Calif.), testified about the former Peck Recycling Co. (Richmond, Va.) shipbreaking facility that Simsmetal had purchased in 1997. Based on Simsmetal’s experience with shipbreaking in Virginia and elsewhere, Dunavant concluded that “we did it right and lost money ... to dismantle a complete vessel in the U.S., including proper remediation and appropriate safety measures, will result in a loss, as the cost of remediation including preparation of recyclable materials will always exceed its salable value.”

Dunavant urged a partnership between shipbreakers and the U.S. government to scrap ships “with a reasonable cost to the government.” That same theme was adopted by Rep. George Miller (D-Calif.), who noted that the government already “accepted that public dollars must be spent on environmental remediation as a major facet of base closures and other aspects of military downsizing.” Thus, it might also be necessary for the government “to cover some or all of the costs” of decontaminating obsolete ships before they’re sold for scrap, Miller testified.

Gilchrest supported the idea that the government should subsidize some part of the environmental cleanup during shipbreaking by declaring, “It’s our responsibility to clean up our own mess rather than practice an out-of-sight, out-of-mind policy, whether domestically or internationally.”

David Peck, who formerly owned Peck Recycling, didn’t testify about shipbreaking but has urged the Navy and MARAD to follow a system similar to ship repairs. Instead of selling ships to the highest bidder, the government would hire an experienced shipbreaker to do the work on a general contractor-basis, with the project supervised by current or ex-Navy personnel. A detailed audit would be conducted of all expenses, and detailed records would be kept—including videotaping—to promote the proper procedures in future shipbreaking operations. 

Momentum for changing the system continued to grow at the end of March when DRMS introduced potential shipbreakers to its revamped system for future ship sales. The new two-step process, designed to correct the problems of the old highest-bidder approach, required bidders to submit a technical proposal specifying how they’d properly remediate the vessel and protect employee safety. In addition, it launched a new program to sell ships in lots of four to six vessels rather than individually so shipbreakers could take advantage of economies of scale and receive a steady supply of recyclable material.

A Disappointing Report

While these changes were mostly applauded by the interested parties, including ISRI, the approach still regarded ship sales as a “sales contract” rather than a “service contract” and thus placed “the entire burden, financial responsibility, and liability on the shipbreaking industry,” an ReMA analysis noted.

More disappointment came on April 20, 1998, when the interagency review panel issued its report, which critics quickly said didn’t go far enough.

The report called for stepped-up inspections and more information and guidelines provided to shipbreakers. But it also argued that the Navy and MARAD should retain the option of shipping vessels to overseas shipbreakers—the very policy that had attracted the most scathing criticism in the earlier hearings.

Other highlights included requiring bidders to submit a safety and occupational health plan along with financial, business, and environmental compliance plans; requiring federal, state, and local regulators to develop protocols for sharing information on potential bidders; and requiring winning bidders to obtain a performance bond. The report also called for the Navy to establish a pilot project to “quantify the scope and costs associated with ship scrapping in [U.S.] private industry” and for the creation of an oversight program for international ship sales.

Labeling the report “a pathetic response,” the Sun editorialized that the government wanted to keep “the system that kills people, only with more inspections.” Gilchrest immediately announced plans to hold another round of hearings, while Mikulski moved ahead with legislation to forbid the Navy from sending U.S. ships to overseas shipbreakers.

Mikulski’s bill, introduced in May, proposed banning all overseas scrapping of Navy and MARAD vessels unless the EPA and Department of Labor could certify that the host country was enforcing labor and environmental standards comparable to those in the United States. 

Mikulski did, however, support the idea of a pilot project on domestic shipbreaking. Her bill called for a three-year demonstration project in which the Department of Defense would pay the up-front costs of scrapping obsolete vessels at two shipyards that would be selected based on their good records of safely handling hazardous materials. 

The following month, on June 4, Gilchrest held a second round of hearings. Among those testifying were shipbreaking executives Kerry R. Ellis and Kevin McCabe, chairman of International Shipbreaking Ltd. L.L.C. (Brownsville, Texas). Both argued that it is possible to make a profit scrapping ships while following all environmental and workplace safety regulations. They, along with ISRI, opposed the provision in Mikulski’s proposed pilot project that would limit the work to qualified shipyards, with McCabe asserting that shipyards are where ships are built, not taken apart.

But David Watson, president and CEO of Baltimore Marine Industries (Baltimore), whose shipyard has been mentioned as a possible site for the pilot project, challenged the idea that shipbreaking can be both profitable and environmentally sound. He said his yard wouldn’t enter such a “high-stakes, high-risk” business until the true costs are determined.

Offering support for government-subsidized scrapping was Navy Capt. John Butler, who described how the Navy dismantles nuclear-powered submarines and cruisers at its Puget Sound Naval Shipyard in Washington state. Using private contractors, the Navy has successfully scrapped 70 nuclear submarines since 1990, Butler explained, with another 50 expected to be dismantled by 2003. But there’s a catch—the average nuclear submarine costs about $10 million to scrap while returning only about $600,000 to the government from the sale of scrap.

Later in June, the Senate passed Mikulski’s proposal as part of the 1999 Department of Defense authorization bill. Unfortunately, the House had already passed its defense authorization legislation without a similar provision, so the issue seemed destined for a conference committee.

Uncharted Waters

 In late August, the Navy moved ahead with its own version of a shipbreaking pilot project. Its plan called for two demonstrations, one on each coast. Although details of the “ship disposal project” are still being worked out (a draft request for proposal was issued Nov. 18, with the final version expected by January 1999), the Navy’s project isn’t limited to shipyards and doesn’t automatically assume the ships can be scrapped at a profit. Cost remains an issue, of course, but the government will help defray the expense of environmental cleanups, one potential contractor expected. Moreover, the pilot project contracts will be awarded based heavily on the shipbreaker’s ability to complete the work while following workplace safety and environmental regulations. And unlike the Navy’s usual ship sales, the shipbreakers selected for the pilot project won’t have to purchase the vessels.

Although the specific Mikulski pilot project never passed, Congress did designate $7.5 million to study domestic shipbreaking. At presstime, it was unclear how this money would be applied to the Navy’s pilot project.

Then, on Sept. 23, it was the White House’s turn to weigh anchor on the issue. Vice President Al Gore issued an executive memorandum imposing a one-year moratorium—until Oct. 1, 1999—on the sale of U.S. ships by the Navy and MARAD to overseas shipbreakers. Although the memo gives MARAD the chance to request exemptions, due to other statutory issues affecting the agency, Gore’s announcement effectively ended the debate on overseas scrapping until this fall. As a result, Mikulski withdrew her legislative efforts to ban overseas scrapping.

So where does this leave the shipbreaking issue?

In uncharted waters. For instance, when Gore’s moratorium expires in October, the practice can resume unless the ban is extended. Moreover, the Navy’s pilot project will undoubtedly still be under way, with no conclusions yet drawn about the viability of domestic shipbreaking.

Meanwhile, the problem grows worse. Last October, the General Accounting Office issued a report that found a backlog of 127 Navy vessels, 63 MARAD ships, plus 15 Coast Guard vessels, and one scientific research vessel all in need of scrapping.  The Navy ships aren’t even useful for sinking in naval training exercises, the office noted, with some of them in such bad shape “they may need dry-docking for repairs to keep them afloat until they can be scrapped.”

 For the time being, therefore, the domestic shipbreaking industry—and the U.S. government’s retired vessels—will remain adrift. •

Shipbreaking Resources

 For more information on the interagency review panel, including a copy of the panel’s report and testimony from panel and congressional hearings, visit www.denix.osd.mil/denix/public/news/OSD/ships/ships.html.

For a copy of the General Accounting Office’s report, Federal Surplus Ships: Government Efforts to Address the Growing Backlog of Ships Awaiting Disposal (GAO/NSIAD-99-18), visit www.gao.gov/ and click on GAO Reports and Testimony. The report was issued in October 1998 under the National Defense category.

For a copy of the draft request for proposal for the Navy’s shipbreaking pilot project, visit www.contracts.hq.navsea.navy.mil/webdata/acq/infodoc/sdp/sdp.html. For copies of Robin Wiener’s shipbreaking testimony on behalf of ISRI, call Tracy Mattson, 202/662-8533. 
—R.L.R.