Fisheries Financing Program; Construction of New Replacement Fishing Vessels, 36699-36702 [2014-15173]

Agencies

• DEPARTMENT OF COMMERCE
• National Oceanic and Atmospheric Administration

[Federal Register Volume 79, Number 125 (Monday, June 30, 2014)]
[Proposed Rules]
[Pages 36699-36702]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15173]


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DEPARTMENT OF COMMERCE

National Oceanic and Atmospheric Administration

50 CFR Part 253

[Docket No. 140401299-4443-01]
RIN 0648-BE15


Fisheries Financing Program; Construction of New Replacement 
Fishing Vessels

AGENCY: National Marine Fisheries Service (NMFS), National Oceanic and 
Atmospheric Administration (NOAA), Commerce.

ACTION: Advance notice of proposed rulemaking; request for comments.

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SUMMARY: NMFS issues this advance notice of proposed rulemaking (ANPR) 
to provide background information and request public comment on 
potential amendments to the regulations governing the Fisheries 
Financing Program (FFP) that address several specific issues currently 
affecting fishers and fishing companies, and to identify specific 
measures that might address these issues. NMFS is requesting public 
comment regarding the potential implementation of changes to the 
current prohibitions against using the FFP to finance the cost of new 
vessel construction and a vessel refurbishing project that materially 
increases an existing vessel's harvesting capacity.

DATES: Written comments regarding the issues in this ANPR must be 
received on or before July 30, 2014.

ADDRESSES: You may submit comments, identified by NOAA-NMFS-2014-0062, 
by any one of the following methods:
     Electronic submission: Submit all electronic public 
comments via the Federal e-Rulemaking Portal: Go to 
www.regulations.gov#!docketDetail;D=NOAA-NMFS-2014-0062, click the 
``Comment Now!'' icon, complete the required fields, and enter or 
attach your comments.
     Mail: Submit written comments to NMFS MB5, 1315 East-West 
Highway, Silver Spring, MD 20910.
    Instructions: Comments sent by any other method, to any other 
address or individual, or received after the end of the comment period, 
may not be considered by NMFS. All comments received are a part of the 
public record and will generally be posted for public viewing on 
www.regulations.gov without change. All personal identifying 
information (for example, name, address, etc.) voluntarily submitted by 
the commenter may be publicly accessible. Do not submit confidential 
business information or otherwise sensitive or protected information.
    NMFS will accept anonymous comments (enter ``N/A'' in the required 
fields if you wish to remain anonymous). Attachments to electronic 
comments will be accepted in Microsoft Word, Excel, or Adobe PDF file 
formats only. Related documents, including the FFP regulations, are 
available upon request at the mailing address noted above or on the 
Financial Services Division's Web page at: https://www.nmfs.noaa.gov/MB/financial_services/.

FOR FURTHER INFORMATION CONTACT: Paul Marx or Earl Bennett at 301-427-
8724.

SUPPLEMENTARY INFORMATION: The FFP was originally created as the 
Fishing Vessel Mortgage and Loan Insurance program in 1971. It was 
renamed the Fishing Vessel Obligation Guarantee in

[[Page 36700]]

1973. In 1998 it became the FFP. While originally created as a Federal 
Guarantee program that guaranteed loans made by the private sector, the 
program ultimately became a direct lending program. The FFP does not 
require appropriated funds because it has a negative subsidy under the 
Federal Credit Reform Act (FCRA) of 1991. It operates on the basis of 
credit authority, provided by the Congress in annual appropriations, 
which authorizes the program to borrow from the U.S. Treasury. Unused 
lending authority cannot be obligated after the end of each fiscal 
year, so the lending authority must be authorized each year. The FFP 
regulations do not allow financing the cost of new vessel construction 
or a vessel refurbishing project that materially increases an existing 
vessel's harvesting capacity. Additionally, for several years, prior to 
FY14 (see comments below), appropriations language has prohibited the 
use of FFP loan authority for any project that increases the capacity 
in any U.S. fisheries.

I. Background

    The FFP is a direct government loan program that receives annual 
loan authority from Congress to provide long-term loans to the 
aquaculture, mariculture, and commercial fisheries industries. These 
loans involve a wide variety of fisheries activities, including 
fishing, fish processing, purchases of fishing quota, and aquaculture 
facilities. Borrowers may be single proprietors, private corporations 
and limited partnerships, or public corporations. The program can 
finance up to 80 percent of the cost of an eligible project.

General Program Requirements

    In order to be eligible for this program:
    1. Borrower must be a U.S. citizen, or an entity who is a citizen 
for the purpose of documenting a vessel in the coastwise trade under 46 
U.S.C. 50501,
    2. Borrower must have a good credit and earnings record, net worth, 
and liquidity in support of the project,
    3. Lending must be fully secured with borrower's assets, which may 
include personal guarantees and additional collateral not directly 
associated with the project,
    4. Borrower must generally have the ability, experience, resources, 
character, reputation, and other qualifications necessary for 
successfully operating, utilizing, or carrying out the project.

Loan Terms

    The FFP makes long term, fixed rate loans with interest rates of 
two percent over the U.S. Department of the Treasury's cost of funds. 
Loan maturities may be up to 25 years, but may not exceed the economic 
useful life of a project. Loans have no prepayment penalties. All loans 
are secured by a promissory note, capital assets, and security 
agreement.
    Applicants must pay a fee of 0.5% of the amount applied for with 
the application for a new loan. Half of this is the filing fee, which 
is nonrefundable.

Need for Action

    The FFP has operated under regulations stating that loans will not 
be made for the cost of new vessel construction or vessel refurbishing 
that materially increases an existing vessel's harvesting capacity. 
Vessel owners have indicated that a significant portion of the existing 
fleet of U.S. fishing vessels consists of older vessels which are not 
optimal in terms of safety, efficiency, and environmental and fuel-
efficient operation. The country needs to maintain the economic 
benefits of having a commercial fishing industry. This industry is a 
large employer, produces significant exports, and feeds people. The 
economic benefits trickle down to many segments of the national 
economy, including but not limited to the insurance, fuel, and vessel 
supply and equipment sectors. In many communities, the fishing industry 
is an essential element in their survival. This action will also 
generate employment by supporting projects in U.S. shipyards. Renewal 
of our aging fishing fleet would improve both safety and fuel 
efficiency and assist in maintaining the economic benefits derived from 
the commercial fishing industry.
    Fiscal Year 2014 Appropriations increased FFP's traditional loan 
authority from $59 million to $100 million and removed the language 
prohibiting its use for new vessel projects that increase capacity. 
Meeting this new program initiative will require changes to the 
existing FFP regulations at 50 CFR part 253. Specifically, the 
regulations will need to be changed to allow the direct loan program to 
finance the construction of new fishing vessels and projects that 
increase an existing vessel's capacity under specific circumstances. 
The regulations would also specify the manner in which these types of 
loans will be managed, including project review, qualification and 
collateral requirements, and related provisions.
    In this ANPR, NMFS requests comments and input on the proposed 
program changes, and the provisions that need to be in place to 
implement those changes. Specifically, NMFS seeks to answer the 
following programmatic questions. Can fishing fleets be replaced or 
modernized without causing overfishing? Does it require that 
recapitalization occur only in limited access or quota share fisheries? 
If, implemented, are the suggested lending standards and requirements 
adequate?

II. Potential Program Solutions

    NMFS generally does not want to finance the cost of new fishing 
vessels or reconstruction of existing vessels that materially increase 
harvesting. NMFS believes it can entertain financing these costs only 
for vessels participating in limited access fisheries. Where catch 
limits control the annual harvest, replacement or improvement of 
vessels does not increase the total catch. The FFP currently does not 
make vessel loans in any fisheries that are listed as overfished or 
subject to overfishing.

1. Questions Associated With Considering these Changes

    a. How and where to implement new vessel construction lending and 
remain harvesting neutral?
    b. How to identify, approve and control the use of the replaced 
vessel?
    c. How to control movement of new or improved vessels to other 
fisheries?
    d. How to protect the FFP from the risks associated with vessel 
construction lending?
    The FFP's regulation prohibits financing the cost of either new 
vessel construction or a vessel refurbishing project that materially 
increases an existing vessel's harvesting capacity. NMFS believes it 
should enter into financing the construction of new vessels and 
refurbishing that increases a vessel's harvesting capacity only if such 
lending results in no significant increase in fish harvesting. We will 
make that determination on an application-by-application basis.
    NMFS is considering two approaches in implementing this new 
authority: Either we will act upon plans submitted by Fishery 
Management Councils responsible for particular fisheries or we will 
allow vessel owners in any limited access fishery to use the FFP. 
Factors to be considered in this determination include:
    What fisheries are appropriate for this new lending? Would it be 
any fishery or just limited access fisheries?
    Pros: In a limited access fishery, replacing one vessel with 
another maintains a constant number of vessels and permits. It provides 
the fishers or firms with the flexibility to tailor the replacement 
vessel to the market conditions at the time. If it makes sense to 
replace an existing vessel with a

[[Page 36701]]

larger one, the business decision is left to the owner. The new vessel 
remains bound by the Total Allowable Catch in the fishery. There is no 
increase in harvesting.
    Cons: Allowing this new lending in any fishery, without limitation, 
could increase the pressure on stocks not under controlled catch 
limits.
    Where should new vessel construction be authorized--Nationwide, or 
in specific regions at the request of fisheries governed by specific 
Fishery Management Councils?
    Pros: Implementing the program nationwide would remove ambiguity, 
allow the fisheries market to determine where and how to recapitalize, 
and might simplify the changes to the rule. Implementing at the request 
of Fishery Management Councils (FMC) would accommodate differences 
between regions and fisheries, and would allow the FMC to more narrowly 
tailor environmental analyses to regional issues and concerns.
    Cons: Implementing the program nationwide might require a 
programmatic environmental assessment (PEA), addressing all of the 
fisheries of the United States. Such a PEA could take longer to 
complete than the time provided to use lending authority in a year. It 
would also require a significant increase in FFP lending authority, no 
matter which region was involved. One estimate of new vessel need for 
the North Pacific alone ranges between $2.2 and $4.4 billion. 
Implementing the program on the basis of Fishery Management Councils' 
plans could result in different rules for different fisheries--for 
example, some fisheries might request loans only for new replacement 
vessels, while others might request loans for vessel rehabilitation as 
well.
    How to deal with the replaced vessel? In the case of new vessel 
construction, attention must be paid to the replaced vessel to insure a 
capacity and harvesting-neutral outcome. With no restrictions on the 
replaced vessel, it will become available for use in other U.S. 
fisheries or elsewhere in the world. This result could lead to, or 
increase, over fishing. The options are to have the vessel scrapped, 
have the vessel title restricted by revoking its fisheries endorsement 
and prohibiting foreign transfer, or have no restriction. An 
alternative would be to prohibit the replaced vessel's use in any U.S. 
fishery without the written approval of the FMC that manages that 
fishery. A related question is whether an FMC should be given 
responsibility to make such approvals. Included in considerations 
surrounding replacement vessels is what vessel is replaced. Can it be 
any fishing vessel or must it be one of similar capacity and in the 
identical fishery? Vessels in limited access fisheries are 
predominantly federally documented. Should we require that both new and 
replacement vessels be federally documented?
    Pros: To require the replaced vessel to be scrapped would be the 
most straightforward solution. The business calculation would be 
simplified. Once the new vessel goes into operation, the replaced 
vessel would have a set time to be scrapped. However, some owners have 
expressed the wish to be able to re-sell their replaced vessel to 
another permit-holder in the same fishery, who would then scrap that 
replaced vessel. Title restriction allows the replaced vessel, which 
may have significant residual value, to be used in a non-fishing 
activity. Applicants will want to realize the greatest financial return 
from the replaced vessel.
    Cons: Requiring vessels to be scrapped may cause owners to delay 
replacement of older vessels with significant residual value, which 
would slow the recapitalization effort and extend the use of older, 
less efficient vessels because of the cost involved and the potential 
loss of revenue from not having an alternative use. Title restriction 
has been an issue with State-documented vessels. Having no restriction 
isn't consistent with being capacity-neutral. Not requiring the vessel 
to be scrapped creates enforcement difficulties, as illustrated by the 
vessel capacity reduction programs. Under the latter programs, the U.S. 
Coast Guard has discovered abandoned buyback vessels docked in harbors, 
causing environmental and economic damage to the community. 
Additionally, buyback vessels have shown up in State waters, fishing in 
violation of the prohibition against fishing. Since they are not 
required to have a fisheries endorsement in State fisheries, they fish 
there with impunity.
    What would we consider for the timing of the removal? We see two 
options. Option one is to require the removal restriction prior to 
funding the loan. Option two would require the removal restriction 
within four months of the new vessel being put in service.
    Pros: Removal of the replaced vessel prior to funding the loan 
makes the process straightforward. There is no risk that the loan can 
be used to increase the number of vessels in a fishery. Removal within 
four months of the new vessel entering service would provide a break-in 
period for the replacement vessel, thus minimizing the disruption to 
the owner's operations.
    Cons: Removal prior to funding exposes the vessel owner to sea 
trials and shake-out risk--potentially having no vessel able to fish 
until the new vessel is fully seaworthy. Management of FFP lending 
risks and traditional lending:
    The FFP has a negative FCRA subsidy rate. As such, no appropriation 
of subsidy is required to allow program lending. New vessel 
construction lending and major rebuilding projects pose higher credit 
risks and are more labor intensive than the current program. 
Additionally, the 2014 appropriation results in an increase to the 
FFP's annual loan authority without allocation of this authority. We 
need to continue to have loans available for the FFP's historical uses. 
The projected size of the proposed new loans could quickly consume a 
year's loan authority without providing any loans for historical FFP 
purposes.
    How do we design the requirements and guidelines to protect the 
FFP's negative subsidy and traditional uses?
    Cost overruns pose a significant risk to the FFP. Progress payments 
while the vessel is in construction represent liabilities in advance of 
the project generating any revenue. The owner must begin to make debt 
service payments before the vessel is completed. If the final vessel 
cost exceeds the original estimate, the vessel owner must make up the 
difference. Cost overruns are common if not normal for large shipyard 
projects. The FFP could be left with an unpaid loan, and an unfinished 
asset with negligible value--the likelihood of a significant loss 
exists. The way to mitigate this risk is either through a performance 
bond or insurance, or a reserve fund.
    Pros: A performance bond/insurance (a common practice) provides a 
payout in the event that the vessel is delayed in the shipyard, faces 
materials cost increases due to market fluctuations, or its final cost 
increases for other reasons. A reserve fund in the amount of 25% to 50% 
of the estimated cost of the vessel provides the same functionality, 
increasing the assurance that the vessel will be completed and viable 
for its intended use in a fishery, even if the cost rises inordinately. 
Either of these mechanisms would reduce the risk to the FFP 
significantly.
    Cons: The performance bond/insurance would raise the owner's cost 
somewhat. The reserve fund would raise the owner's initial cash needs 
substantially, requiring the aggregation of between 45% and 70% of the 
vessel's total cost prior to closing on the FFP loan.

[[Page 36702]]

2. Project Monitoring

    The vessel construction in progress must be monitored to certify 
milestones for periodic payments and the adequacy of the work. The FFP 
does not have the staff, expertise or funds for this. Not having the 
ability to perform this function would make the credit risk 
unacceptable. Requiring the borrower to procure such a third party is a 
reasonable way for NMFS to assure itself that milestones claimed for 
reimbursement with loan proceeds have, in fact, been met. The applicant 
will engage a surveyor to perform these functions for them. We need to 
determine if the same surveyor can jointly represent the applicant and 
NMFS.
    Pros: Use of a vessel surveyor to monitor construction is the 
standard. Ship surveyors are a skilled trade, with industry 
certifications and licenses. The cost of the surveyor is generally 
proportional to the cost of the vessel. The borrower is responsible for 
managing and reimbursing the surveyor's costs. NOAA/NMFS could be 
adequately represented if we required our approval of the surveyor with 
a requirement to report directly to NMFS. Use of the applicant's 
surveyor would be paid by the applicant, but NMFS would receive copies 
of the surveyor's reports to the borrower.
    Cons: The borrower has already hired a project manager and other 
support staff, so the surveyor may add to the overall cost of the 
vessel. The surveyor will be reporting to the FFP, but hired by the 
borrower. If one surveyor is reporting to the owner and NMFS but being 
paid by the owner, there could be a conflict of interest.

3. Lending Allocation

    The FFP's annual traditional loan authority has been $59 million 
for a number of years. For FY14, it's $100 million. Even assuming a 
continuation at the $100 million level, a few large projects for new 
vessels or major reconstruction ($8-$25 million or more) could use all 
available loan authority. The FFP wishes to ensure it can continue to 
help as many industry participants as possible and provide traditional 
lending for purposes that don't increase capacity. Should there be an 
allocation reserved for traditional loan purposes?
    Pros: The FFP provides a variety of loans for purposes that do not 
increase capacity. Examples include aquaculture facilities, existing 
vessel purchases, vessel repairs, and fish processing facilities. 
Maintaining a portion of loan authority to support these vital projects 
is important.
    Cons: Lending authority set aside for the primary program would not 
be available to meet potential demand for new vessels or reconstruction 
projects. Recapitalization could be slowed as a result.
    NMFS seeks comments on these questions and recommendations, as well 
as any alternatives that may achieve the same goals.

IV. Conclusion

    This ANPR explains the Fisheries Finance Program management history 
while also identifying some major potential changes to the program to 
support recapitalization and modernization of the fishing fleet. Some 
of the ideas discussed are specific changes to the current restriction 
on new vessel construction and reconstruction that materially increases 
the capacity of an existing vessel. This amendment to the FFP could be 
implemented through a regulatory action within the next year. The other 
changes discussed include operational considerations for the loan 
program, but they also signal an overarching policy on providing loans 
to support recapitalization of the fishing fleet over the long term.
    Additionally, we note that all vessel construction or 
reconstruction projects will be required to be performed at a shipyard 
in the United States.
    It is NMFS's goal to move forward with a viable and flexible vessel 
replacement and/or modernization solution that will achieve sustainable 
fishery goals and objectives while minimizing adverse environmental 
impacts. NMFS seeks public comment on the above issues and 
recommendations. NMFS anticipates having a relatively short time to 
draft, publish, and finalize a rule to implement the new authority, as 
well as to obligate the funds made available for the purpose, because 
these funds lapse at the end of the fiscal year for which they were 
appropriated.

V. Submission of Public Comments

    The comment period for all topics discussed in this ANPR closes on 
July 30, 2014. Please see the ADDRESSES section of this ANPR for 
additional information regarding the submission of written comments. 
NMFS requests comments on the potential adjustment of the FFP program 
authority to allow the financing of new vessel construction to replace 
existing vessels in limited access fisheries.
    The preceding sections provide background information regarding 
these topics and ideas for potential changes. The public is encouraged 
to submit comments related to the specific ideas and questions asked in 
each of the preceding sections. All written comments received by the 
due date will be considered in drafting proposed changes to the 
Fisheries Finance Program regulations. In developing any proposed 
regulations, NMFS must consider and analyze ecological, social, and 
economic impacts. Therefore, NMFS encourages comments that would 
contribute to the required analyses, and respond to the questions 
presented in this ANPR.

Classification

    This rulemaking has been determined to be not significant for 
purposes of Executive Order 12866.

    Authority: 46 U.S.C. 53701 and 16 U.S.C. 4101 et seq.

     Dated: June 23, 2014.
Eileen Sobeck,
Assistant Administrator for Fisheries, National Marine Fisheries 
Service.
[FR Doc. 2014-15173 Filed 6-27-14; 8:45 am]
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