Dial Subchapter ‘M’ for Money

CFR 46 Subchapter M is on track and heading for you.  Neither the U.S. Flag inland vessel industry, nor the United States Coast Guard knows for sure where or when, but it is coming. One thing is for sure, however, it is going to be expensive – very expensive.

Subchapter ‘M’ has been cooking for over a decade and is meant to address a segment of the U.S. commercial inland marine industry that currently carries the moniker of “uninspected” vessel. Far from truly uninspected, responsible operators, in consort with the Coast Guard, The American Waterways Operators (AWO), insurers, lenders and classification societies, have for many years – for safety and liabilities sake – addressed a considerable number of issues now scheduled to be codified under Subchapter M. Through Notices of Proposed Rulemaking, public comment periods, and industry input, the final version is due out—sometime soon. Your guess as to when is as good as anyone’s.
In the meantime, consider this: Industry statistics and various publications (including a September 2012 article in MarineNews) claim that the number vessels that will be subject to Subchapter M regulations could be in the range of 5,000 vessels. A highly respected and well accredited safety program developed over a decade ago by the AWO, the Responsible Carrier Program (RCP) has 241 current RCP-Certified and Provisional Operators.  While these 241 operators represent about 1600 self-inspected vessels, that number leaves a lot of vessels that may or may not be in compliance with the new regs.

Options for compliance include developing a Towing Safety Management System (TSMS) with scheduled periodic dry-docking/internal structural inspections and third party compliance audits or the more traditional approach of United States Coast Guard (USCG) inspections. The latter will still require annual and periodic inspections plus scheduled dry-docking with internal structural examinations. The former allows two years to develop a TSMS after the final rule is issued.
Passenger vessels have long been subject to inspections similar in many ways to the requirements proposed in Subchapter M. You can ask any passenger vessel operator whose vessel carries more than a six-pack how much fun it is: between the cost of developing safety management programs, attendant written documentation, periodic haulouts and inspections, requirements for onboard electrical and machinery systems, and other potentially huge expenses in maintaining a vessel’s Certificate of Inspection (COI), compliance is prohibitively expensive.
With the new proposed dry-docking intervals (based on area of operation) it may be difficult just to get dry-docked, inspected or repaired.  Competition for available services will be fierce—let alone costly. It is estimated that after the first two years of COI compliance, as much as 25% of the inland fleet will be up for dry-docking each year.  That number, plus the already existing dry-dock, inspection and repair demand, will make for interesting times.
The U.S. Maritime Administration (according to a 2011 Survey) insists that there are 117 active shipbuilders in 26 states. There are another 200 or so more businesses with the capability of building and repairing marine vessels. The study does not indicate what number of tugs, barges, passenger vessels; commercial fishing vessels, recreational vessels or other types are being built or repaired.  Furthermore, this study does not enumerate the number of facilities with dry docks, heavy lift cranes, travel lifts or other means to haul out large vessels.
With the increased requirement for periodic haulouts, possible sidetracking for hull and machinery repairs, probable lost revenue from downtime, some operators are left to wonder where the additional money to comply will come from. The obvious answer is from increased day-rates, but unless the increased rate complements an already established pool of maintenance and repair funds, increased rates are a cumulative fix to what might be an urgent and timely problem. Hence, and for the larger and more cash-flow positive operators, rising costs of increased maintenance, compliance, inspections and repairs might not present an immediate problem. But to the smaller operator, it could signal the death knell.

This industry was built largely on the backs of so-called “mom and pop” operations. The Gulf of Mexico is full of countless stories of how some of our industry’s largest operators got started. The generation that came out of the bayou to fight the good fight in Europe or Pacific theatres then came home to buy and operate the first of what might become a mighty fleet of boats. I know of operators in the Northeast whose great grandfathers rowed and sailed cargo across New England’s harbors, rough and tumble men who did not know how to quit. And, in the Pacific Northwest, many began their empires running steamboats carrying miners to the Alaska gold rush. And now, it is today’s smaller, start-up operators who are at greatest risk from the cost of compliance with Subchapter ‘M’. That said; there are some survival strategies that might make some sense:

• Evaluate the amount of equity that you have accumulated in your vessels.  You might find that a significant amount of cash can be available for compliance by refinancing the existing mortgage on your vessels. If your loan is more than halfway through its life, given amortization of the principal, appreciation of the vessel’s value and other factors, as much as 40% to 50% of that value may be available to you as capital for compliance issues.
• Reduce the size of your fleet. Determine what vessels are now in excess of your workload and monetize them. Cash at hand is often more valuable than a vessel with 75% utilization.
• Utilize the benefits of membership in a recognized commercial marine association like the AWO or the Offshore Marine Services Association. Why reinvent the wheel if it’s already rolling?
• Work early on with a competent professional that can help you develop your TSMS and engage a qualified, recognized third party auditor or utilize the USCG as your inspection “service.”
• For shipbuilders and repairers who are preparing for the possible onslaught of compliance related work, contact a qualified commercial marine lender to buy a dry-dock. Loan packages can offer terms and amortization up to 15 years. If you are the recipient of a Maritime Administration small shipyard grant, contact a lender who will augment the grant amount with a term loan to help you acquire the equipment you need.

The “M” in Subchapter M arguably stands for money. There is no escaping that fact, but to survive the challenges the new regimen brings, be smart. Consult your financial professional, your accountant and your banker to see what options are available that can help ease the pain.

(As published in the September 2013 edition of Marine News - www.marinelink.com)