QUINCY SHIPYARD: VALUATION OF
THE YARD FOR INDUSTRIAL WATER-DEPENDENT USES
by
BEATRICE HELENE ESILDE BALLINI
Laurea in Ingegneria Chimica Politecnico di Milano
(1983)
SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE IN OCEAN SYSTEMS MANAGEMENT
and by
JAMIE ANN HENSON
B.A., Stanford University
(1983)
SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE IN MANAGEMENT
at the
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
June 1986
©
Beatrice H.E. Ballini and Jamie Ann Henson 1986
The authors hereby grant to M.I.T. permission to reproduce and
to distribute copies of this thesis document in whole or in part.
SIGNATURES OF AUTHORS:
...........
.
red P. Sloan School of Management
May 16, 1986
CERTIFIED BY:
..
.
.
Hank
..
Marcus
0 a0 0*
and John Parsons
Thesis,/Co-Supervisors
ACCEPTED BY:
............ .:. 0••
............
$. Douglas Carmichael
Chairman, Departmental Graduate Committee
I
/. Department of Ocean Engineering
ACCEPTED BY:
Jeffrey A. Barks
Associat
ean, Master's and Bachelor's Programs
Alfred P. Sloan School of Management
QUINCY SHIPYARD: VALUATION OF
THE YARD FOR INDUSTRIAL WATER-DEPENDENT USES
by
BEATRICE HELENE ESILDE BALLINI
Submitted to the Department of Ocean Engineering on
May 16, 1986, in partial fulfillment of the requirements for
the Degree of Master of Science in Ocean Systems Management
and by
JAMIE ANN HENSON
Submitted to the Alfred P. Sloan School of Management on
May 16, 1986, in partial fulfillment of the requirements for
the Degree of Master of Science in Management
ABSTRACT
This thesis evaluates the proposed sale of the Quincy
shipyard by General Dynamics Corporation. Its purpose is to
understand the economic factors which characterize the sale
transaction and to develop a conceptual framework for
evaluation of such situations. The shipyard has been chosen
for study because it represents an unresolved market
transaction, in which the public sector is considering direct
or indirect intervention to protect public interest. Further,
because much of the data used is specific to the shipbuilding
industry, this thesis also contributes insight into the more
general problem of shipyard conversion in times of worldwide
overcapacity.
The content has two major focuses: (i) determination of a
fair market price for the shipyard to a private investor,
given future diversification opportunities in industrial
water-dependent activities; and (ii) identification and
analysis of externalities related to the sale. Both are
important to an understanding of the process which will
eventually culminate in an agreement on the shipyard's market
price.
Due to the complexity of this topic, as well as to the
timing of the inquiry, many of the issues addressed are
controversial and highly publicized. The findings are based
on an extensive volume of data collected, in large part,
through interviews with parties involved in different sides of
the transaction.
Thesis Co-Supervisor:
Title:
Henry S. Marcus
Associate Professor of Marine Systems
Thesis Co-Supervisor:
Title:
John Parsons
Professor of Management
-2-
TABLE OF CONTENTS
CHAPTER 1:
Page
8
INTRODUCTION ................................
CHAPTER 2:
HISTORICAL OVERVIEW .........................
A.
The
1.
2.
3.
4.
5.
B.
C.
The
1.
2.
3.
4.
5.
B.
C.
15
15
20
25
28
31
36
36
38
42
44
48
57
57
61
61
65
THE THIRD HARBOR TUNNEL PROJECT .............
67
Description of Alternatives ....................
1. Bored Tunnel versus Sunken Tube Tunnel .....
2. Concrete versus Steel ......................
Steel Tube Construction and Site Requirements
Value of the Steel Tube Construction and
Outfitting Project at the Quincy Shipyard ......
1. Cash Flows .................................
2. Discount Rate ..............................
3. Calculation of Project Value ...............
70
70
72
74
CHAPTER 4:
A.
Quincy Shipyard and General Dynamics .......
History of the Quincy Shipyard .............
General Dynamics' Tenure ...................
The Decision to Close the Shipyard .........
The Impact on Labor ........................
Potential Buyers of the Shipyard ...........
Public Sector Interest in the Future of
Quincy Shipyard ................................
1. The Task Force of the Reuse of the Quincy
Shipyard ...................................
2. Intervention Options Held by the State of
Massachusetts ..............................
a. Exercise of Licensing Powers ...........
b. Participation in Purchase of the
Quincy Shipyard ........................
CHAPTER 3:
A.
Shipbuilding Industry ......................
International Scene: Overview and Trends ..
The U.S. Shipbuilding Industry .............
Cost Disadvantages of U.S. Shipyards in
Commercial Shipbuilding ....................
Changes in Federal Support and Protection
Programs ...................................
Proposed Solutions to Revitalize the U.S.
Shipbuilding Industry ......................
13
83
84
88
93
VALUATION OF A CALL OPTION
Variables Determining the Potential Value of
the Shipyard to Private and Public Buyers ......
-3-
97
B.
98
Application of Options Pricing Theory ..........
Description of Options and Their Valuation .....
C.
Calculation of the Call Option .................
D.
100
102
EXTERNALITIES ...............................
111
A.
Return on Public Investments ...................
1. General Issues .............................
2. Analysis of Three Types of Investments .....
3. Deadweight Loss of Tax Revenues ............
4. Conclusion .................................
117
117
120
131
134
B.
The
1.
2.
3.
136
136
136
138
138
141
147
CHAPTER 5:
Existence of Externalities .................
A General Definition of Externalities ......
Externalities and the Quincy Shipyard ......
Discussion of Potential Externalities ......
a. Impacts on the Local Economy ...........
b. Education of the Work Force ............
c. Commercial Navigation Activity .........
d. Impact on Other Industrial Activities
Around the Weymouth-Fore River Basin ...
e. Potential Loss of the Port Facility
for Future Use .........................
f. Pollution ..............................
g. Change in the Character of Quincy ......
h. Loss of Defence Mobilization
Capability .............................
151
153
154
158
159
....................................
162
CONCLUSION ..................................
166
FOOTNOTES ...............................................
170
C.
Conclusion
CHAPTER 6:
-4-
LIST OF EXHIBITS
Page
Exhibit
1:
2:
3:
4:
5:
6:
7:
8:
9:
10:
11:
12:
13:
14:
15:
16:
17:
18:
19:
20:
21:
22:
23:
24:
25:
26:
27:
28:
29:
30:
31:
32:
New Building Orders and Total Orderbook ........
1983 Shipbuilding Costs, U.S. and Japan .......
New Building Orders for Merchant Ships
in the U .S. ....................................
Trend in U.S. Shipyard Shut-Downs ..............
Comparison of Labor Costs in Real Terms
Between a U.S. and a Japanese Shipyard ........
The State of U.S. Shipbuilding ................
Proposals to Revitalize the Shipbuilding
Industry ......................................
Quincy Shipyard Location .......................
Layout of the Third Harbor Tunnel .............
Sunken Tube Construction Method ...............
Recent Construction of Tunnels in the U.S .....
Construction Operations .......................
Harbor Tunnel Metal Sunken Tube ................
General Dynamics Quincy Shipyard Plan .........
Construction Schedule for Third Harbor
Tunnel ........................................
Cash Flows for the STCO Project Expressed
in 1990 Dollars ...............................
Project Costs and Discounted Cash Flows .......
Discount Rate for the STCO Project ............
STCO Project Decision Tree .........................
Payoff Diagrams ...............................
Calculation of Upper and Lower State Asset
and Call Values ................................
Calculation of the Call Option Value ..........
The Value of the Call Option Under Different
Probability Assumptions .......................
Dredging Projects at Weymouth-Fore River ......
Industrial Facilities with Waterfronts on
Town River Bay, Fore River Bay and King Cove ..
Weymouth-Fore River 35-Foot Project Costs .....
Map of Fore River Bridge ......................
Breakdown of Estimated Costs for Bridge
Reconstruction ................................
% Training Obtained in Different Occupations
On-the-Job versus Off-Production Site .........
Weymouth-Fore River Freight Traffic 1983 ......
Type of Activities Conducted by Industries
Located on the Waterfront in Town or Fore
River Basins ..................................
Net Spillover Benefits: Decisions Available
to the Public Sector ..........................
-5-
19
21
23
24
26
30
32
37
71
73
75
77
78
81
85
86
89
92
99
103
106
108
109
121
123
125
127
130
146
149
150
168
ACKNOWLEDGEMENTS
The authors would like to express gratitute to
Professors John Parsons and Hank Marcus whose guidance
made this thesis possible.
Thanks are also extended to Peter Gwyn, Judy
Kildow, Carl Boutilier, and our anonymous sources, who
provided insights and information that made much of
this thesis possible.
-6-
to our mothers,
-7-
CHAPTER 1:
INTRODUCTION
After a 102-year history, the Quincy shipyard is
closing.
The shipyard, owned by General Dynamics
Corporation, adds its name to a long list of U.S.
shipbuilding facilities which have shut-down over the
last ten years.
Thus, its closure serves as testimony
to the decline of the U.S. shipbuilding industry, and
raises interesting questions about future shipyard
conversion.
General Dynamics' decision to sell the
yard was only the beginning of its problems.
Private
industrial buyers have not shown significant interest
in the yard.
In addition, the public sector, in
particular state agencies and the city of Quincy, have
expressed strong concern about the shipyard's future.
Quincy's conversion process represents a
fascinating and timely opportunity to understand the
economic forces behind a heavily publicized event.
The authors approach this challenging topic through
the use of financial and economic analysis and
concepts, and base their findings on an extensive
volume of data collected, in large part, through
interviews with the various parties involved in the
-8-
situation.
The purpose of this thesis is to understand the
economic factors characterizing the Quincy shipyard
sale transaction.
Given potential opportunities for
diversifying into industrial water-dependent projects,
the authors assess a fair market price for the
shipyard, from the perspective of a private industrial
investor.
The recognition that this assessment, based
on well-proven financial models, constitutes only part
of a more complex problem, leads to an analysis of
public interest in the outcome of the sale.
In the case of Quincy, political pressure has been
asserted to protect social welfare.
The claims for
such protection are based on assumptions of varying
degrees of legitimacy, but the aggregate effect is
interference in a transaction between two private
entities, and modification of market mechanisms.
Thus, interested parties -- the buyer, the seller and
the public sector -- may all have different
assessments of value for the same economic good.
Based on this background, the study proceeds to
identify economic factors which may cause price
-9-
misplacement.
Two potential factors are the expected
return on public investments and the effects of
externalities.
An assessment of the validity of these
issues leads to the finding that public concern in the
sale transaction is justified.
Therefore, the sale of
Quincy shipyard represents a case of market failure,
where social benefits and costs are connected with the
private characteristics of the asset.
Under these circumstances, the public sector has a
legitimate reason to steer the market toward a
decision which takes account of spillover costs and
benefits.
The public sector should therefore
participate in the sale so as to maximize social
welfare.
However, there are reasons, described in our
conclusion, why the government may in fact not
intervene, despite a valuation of net spillover costs.
This thesis begins in Chapter 2 with a description
of the current economic situation characterizing the
U.S. shipbuilding industry.
The recession in the
world shipping industry and the loss of competitive
advantage by U.S. shipbuilders are presented as the
major causes for present excess capacity and for the
recent closure of shipyards.
Chapter 2 then proceeds
-10-
with a more specific analysis of the history of the
Quincy yard and the factors leading to General
Dynamics' decision to sell.
Alternative proposals for
helping the industry and Quincy to survive are also
presented.
The authors argue that diversification in
activities related to ship construction is the best
strategy in the current environment.
Chapter 3 analyzes a real diversification project
which has been proposed for the Quincy shipyard,
namely the steel tube fabrication for the Third Harbor
Tunnel.
A cash flow analysis results in a positive
net present value for the project in year 1990, when
it is expected to begin.
The project's present value
is then determined for use in the option pricing
calculation in the following chapter.
Chapter 4 values the implicit option that a
potential industrial buyer can acquire by purchasing
the Quincy shipyard today.
The option's future and
present values will depend, for the most part, on the
availability of projects, like the Third Harbor Tunnel
project.
The price that an investor will,
theoretically, be willing to pay is the sum of the
option value and the value of the land.
-11-
Chapter 5 addresses the main dilemma of the Quincy
shipyard.
If a private investor can theoretically
assess that the shipyard has a positive market value,
then why does the private sector refuse to buy and why
should the public sector intervene.
the chapter explores two issues:
More precisely,
(i) the existence of
a gap between the price sought by General Dynamics and
the price that a private investor may be willing to
offer; and (ii) the motivations for public sector
intervention in a transaction between private
parties.
The distortion from competitive market
conditions is explained by studying externalities,
which are the costs and benefits that the community
will have to bear as a result of the transaction.
Chapter 5 proceeds with a detailed assessment of
each externality related to closure of the shipyard.
The authors conclude that there are compelling reasons
for public concern with the fate of the shipyard.
The
public sector therefore has an incentive to intervene
in a private market transaction.
Obviously, this
condition adds an element of complexity to the Quincy
shipyard situation, since the seller, the potential
buyer, and numerous public entities have conflicting
interests and different assessments of the asset's
value.
-12-
CHAPTER 2:
HISTORICAL OVERVIEW
This chapter is an introduction to the industrial
setting in which the Quincy shipyard, owned by General
Dynamics, operates.
An explanation of past and
current events in the shipbuilding industry and at the
Quincy shipyard leads to a discussion of the current
decision to sell the yard.
The purpose of this chapter is two-fold.
First,
the authors want to understand the factors that have
affected the destiny of the Quincy shipyard.
Second,
the authors want to understand what alternative
opportunities can be envisioned both for U.S.
shipyards in general, and for the Quincy shipyard in
particular.
The first goal is achieved by considering
overviews of the U.S. shipbuilding industry and of the
tenure of General Dynamics at Quincy.
International
competition and changes in government policies which
affect the U.S. shipbuilding industry are explored in
section A of this chapter.
The relative competitive
position of the Quincy shipyard and its managerial
-13-
implications are described in section B.
The second goal really underlies the entire thesis
project, but it already becomes relevant here.
In
general, the authors advocate that shipyards should
diversify their product lines in order to survive the
current recession in the shipbuilding industry.
However, when this concept is applied to the specific
case of Quincy, several concerns and constraints
become apparent.
An initial description of these
issues is undertaken in sections B and C of this
chapter.
In particular, section C concentrates on the
interest of the public sector in the fate of the
Quincy shipyard.
Several agencies and public concerns
advocate a claim on the outcome of the decision to
sell the shipyard.
Their role and their regulatory
power are also described in section C.
-14-
A.
THE SHIPBUILDING INDUSTRY
1.
International Scene:
Overview and Trends
The demand for new ships, which constitutes the
primary product of any shipyard, is derived from the
demand for trade of physical goods.
Any impact on
shipping services is reflected in shipbuilding sales.
In fact, at any given moment in time, there is a
certain stock of ships in the world.
Some of them may
be under repair, and others temporarily laid up, but
their supply potential is real.
When demand for
shipping services is strong and ships' capacities are
fully utilized, a rush of orders for new ships affects
the shipbuilding industry; but as soon as demand for
shipping services decreases below full capacity,
orders are converted or cancelled.
The shipbuilding
industry is therefore heavily dependent on the status
and on the expectations of the shipping industry.
With the volume of world trade increasing rapidly
and ninety-five percent of all international physical
trade movements made by sea [11,
there is no doubt
that the shipping and shipbuilding industries have to
compete within an international environment.
-15-
Besides
the fact that most countries tend to protect and
subsidize their own fleets, advocating some kind of
mercantilistic policy, international competition
largely affects the shipping industry.
Vessels with
lower operating costs, due to a lower cost of national
labor, have a competitive advantage vessels over
nations with higher wages, especially when there is a
general surplus in shipping capacity.
Shipyards,
where most of the value added to input materials is
represented by labor costs, also strive in an
international environment for some form of cost
advantage.
Dependency of the shipbuilding industry on
the demand for shipping services and the international
competition characteristic of both industries are two
critical factors that will underline the analysis of
this section.
Before we investigate the competitive position of
U.S. shipyards with respect to foreign shipyards, we
need to discuss two issues:
a. recent trends in the shipping industry;
b.
recent trends in shipbuilding orders and
their worldwide geographical distribution.
-16-
The analysis is kept at a general level and is focused
on the commercial sector.
In fact, our intent is to
develop a perception of major constraints and
potential opportunities facing the U.S. shipbuilding
industry.
From 1974 until now, the supply of world shipping
capacity in the merchant fleet has exceeded demand
causing a world surplus that reached 160 million dead
weight tons (dwt) in 1984. [21
(Dead weight tons
measure the weight that a ship can carry in tons.)
The two major sectors of the world merchant marine
fleet, the dry-bulk and the tanker sectors, are both
in trouble.
The dry-bulk sector is experiencing a
chronic overcapacity, and the tanker sector is just
beginning to emerge from a decade of loss-making
freight rates, still with an urgent need to reduce
fleet surplus.
In 1985 the amount of surplus dry-bulk carrier
tonnage was estimated to be at almost 50 million dwt.
[3]
Little comfort comes from a possible boost in the
demand for dry-bulk shipping caused by a growth in the
world's GDP, since the growth in the world's GDP in
1985 was only 2.7% in real terms, and forecasts for
-17-
1986 are not much higher.
Also, the scrapping rate
(the rate at which ships are sold for scrap when not
used for transportation anymore) for dry bulk carriers
was 3.5 million dwt in 1984, 4 million dwt in 1985,
and is expected to reach 6 million dwt in 1986; but
the rate is still too small to considerably improve
the current overcapacity.
The tanker fleet also
reduced its tonnage to 276 million dwt in 1985, down
by 28.2 million dwt from 1984.
However, only if the
recent drop in oil prices continues over a long-term
period and the market does not plunge into a rush of
new orders, will the tanker market eventually emerge
from its chronic overcapacity.
The surplus tonnage in the merchant fleet has
caused a slowdown in new building orders.
Exhibit 1
reports new building orders in 1983 and 1984, and the
world orderbook (record of backlog orders for ship
construction) in 1984 and 1985.
The Exhibit shows a
decrease in both new building and cumulative new
orders worldwide.
The recession of the shipping
industry therefore has a direct negative impact on the
shipbuilding industry.
This negative impact affects some nations more
-18-
EXHIBIT 1
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9
3
,4
1980 1981 1982 1983 1984
Sources:" US Shipping and Shipbuilding:
Trends and Policy Choices,"
Congress of the US,
Congressional Budget Office,
August 1984
" Shipping Shipyards and Sealift:
Issues of National Security and
Federal Support,"
Nacoa Report, preliminary draft,
1985
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-19-
than others, namely those nations that are at a
comparative disadvantage in building ships, either
because of higher costs or use of less advanced
technologies.
The results from Exhibit 1 indicate
that two nations, Japan and Korea, have the largest
share of world merchant shipbuilding orders, and
therefore should have some form of competitive
advantage or strong government support to maintain
their dominant positions.
In fact, more efficient
production methods, low real cost of labor, and a
supportive national industrial policy have enabled
Japan and South Korea to cut their shipbuilding costs
and gain a competitive edge.
Exhibit 2 shows
shipbuilding costs in the U.S. and Japan.
It
indicates that, for example, a merchant ship built in
Japan costs one third as much as the same ship built
in the United States. [4]
2. The U.S. Shipbuilding Industry
The excess capacity in the world shipping industry
and the competitive cost advantage of foreign yards
have put the U.S. shipbuilding industry in an
unfavorable situation.
A large part of that
industry's business has historically come from two
-20-
EXHIBIT 2
(90 ,000dwt)
country built
Japan
69.0
96.0
US
22.5
34-3
source: "US Shipping and Shipbu ilding: Trends and
Policy Choices," Congres
.
.84
, 8
Congressional Budget Of .ic
s
of
.
the
.
•
----------------------------
-21-
.
•
US,
•
.
•
.
•
•
.....
•
• •
•
•
•
•
.
•..
major sectors:
commercial and military.
Commercial
shipbuilding orders have reached very low levels in
the last five years, and naval orders have not been
sufficient to support the shipbuilding capacity of
major yards in the United States.
(Major yards are
defined as having at least one shipbuilding position
large enough for a vessel of minimum 475 foot length
by 68 foot beam.)
In 1982, out of twenty-seven major
shipyards in the U.S., only three were doing
commercial work.
Four have since gone out of business
or run out of ships to build, and ten more will finish
Navy construction projects in the next three years.
[51
If we add to this situation the decline in
building orders for merchant ships over the period
1981-1983 and the inadequate recovery of 1984, we have
the major reasons for an increase in plant shutdowns.
Exhibit 3 shows the trend in new shipbuilding orders
for merchant ships in the U.S., and Exhibit 4 the
trend in plant shutdowns.
The decline in commercial shipbuilding orders is
caused by the following factors:
a.
the real cost disadvantage of U.S. shipyards
with respect to yards in Japanese, South
-22-
EXHIBIT 3
1983
million
grt
1984
market
share W
million
grt
1985
market
million
share W
grt
new building orders
SJapan
11.13
56.8
8.39
55.4
6.63
South Korea
3.74
19.1
2.29
15.1
1.2
WORLD TOT AL
19.6
100
15.14
100
n.a
20 2
43
South Korea
7.05
15
4.67
VORLD TOT AL
47
100
27.5
total orderbook
SJapan
SSource: Lloyd's Register, Far eastern Economic R vie.w
Feb.13, 1986, pp 47
:.South Korea
3.74
19.1
2.29
15.1
-23-
10.45 .
1..2
.
EXHIBIT 4
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.•........•.......•....°•...o..........••...
...................
°°..=.•.o•...........•....
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.
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.
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.
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.
.
:::::::::::::::::::::::rQ
....
,..................................
..........
...........................
.....................................
........................................
1956-65
.....
o.,.•.....
•........
•o.•
1966-75
1976-85
Source: Booz Allen & Hamilton,
"Potential reuse study of the Quincy
Shipyard," February 1986
•
•.
.o
.
.
:
.•
.* . .
•
°
.-
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-24-
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. •
°
Korean and Taiwanese yards, stemming from the
lower productive efficiency and higher cost of
labor (in real terms) at the U.S. yards;_
b.
changes in federal support and programs
protecting the maritime industry.
Both factors are analyzed hereafter and supported by
industry data.
3.
Cost Disadvantages of U.S. Shipyards in
Commercial Shipbuilding
It is estimated that 34% of a ship's value comes
from input materials and 66% from the labor intensive
manufacturing process. [6]
Thus the cost of labor and
labor productivity are two critical parameters for the
measurement of competitive position in the
shipbuilding industry.
The higher cost of labor in
real terms has put U.S. yards at a competitive
disadvantage with respect to yards in Asia.
Exhibit 5
shows a comparison of labor costs in real terms
between a U.S. and a Japanese shipyard.
Not only are
U.S. costs higher than foreign costs, but also
production efficiency is lower.
-25-
It is estimated that
EXHIBIT 5
.. . . .......
. .. ..
.. . .. . . . ..
. . .. . . .. . .. ..
.. . . . . .....
.. ..
....
....... ..... .. .......-... ....I................ . I
.....
. . . . . .• .
..w..
. . 't..
.
,. . .l,:
. . . . . . . . . . . . . . . ..
..- . . .
. =.. . .
.
t.. . ..
6=
iI .bs-b-O
9• * in ==..................
inflation rate ( i. in %)
1980
4.9
1981
2.6
1982
1729
1773
i
JAPAN
Labor cost in manufacturing
of transport equipment (gen/hr)
inflation rate ( i in
%)
109
Labor cost i n manufacturing
10-39
2.6
11-12
of transport equipment (yen/hr)
inflation rate ( i
10
in %)
us
Exchange rate ( E $/__enl
.0049
6
.0045
.0042
.0043
.0040
7.43
7.09
X
Real Exchange rate( __$gen
(i+i
X= E
(1+i
)
ja
)
us
Real Japanese vges in $
sources: Yearbook of Labor Statistics, tnternational Labour Office
of Geneva, 43rd issue, 1983
.1
International Moody's,1981,1982,1983
!
.. . . . . . . . .. . . . . . . . . .. . . . . . . . .
::·-:·
·:·i·
· · · :·:-·:·
· ·:- ·
:·
........................................................
-26-
the delivery time of yards in Asia is almost always
less than for a U.S.-built ship.
For example, a
recent proposal by Lykes Bros. Steamship Company to
build C-9 container ships calculated a delivery time
of 24 months for foreign-built ships and 36 months for
American-built ships. [7]
Historically, the competitive disadvantage of the
U.S. maritime industry has been supported by
construction and operating subsidies (CDS and ODS
respectively) to make up for the cost differentials in
constructing and operating U.S. vessels.
Cargo
preferences under the Jones Act have also supported
the U.S. flag shipping industry by requiring that all
cargo shipped by water from one U.S. port to another
U.S. port must be carried in U.S. flag ships, built in
U.S. shipyards, and owned by U.S. citizens.
Financing
subsidies under Title XI, the Capital Construction
Fund (CCF) and Investment Tax Credit (ITC) legislation
have provided substantial incentives for capital
investments in ship construction.
-27-
4.
Changes in Federal Support and Protection
Programs
The Reagan administration has discontinued the CDS
program, granted ODS and CCF for foreign-built ships,
and cancelled Title XI. [8]
These actions are
intended to boost the U.S. shipping industry and its
participation in world trade.
With no direct
subsidies and few orders, the U.S. shipbuilding
industry is undergoing a major shake-out period.
The
shipyards that still survive are those which have been
able to secure Navy contracts and position themselves
to best compete for Navy ships.
The Naval ship construction program has expanded
during the Reagan administration.
The Five Year
Defense Plan (FYDP) for 1984-1988 had an allocated
budget in 1984 of more than $12 billion, and the FYDP
for 1985-1989 has only slightly been lowered from the
1984 level. [9]
However, there are two major problems
with the Navy business, and those are:
a.
Orders are not distributed evenly across the
major shipyards, and therefore are not
sufficient to support all of those yards;
-28-
b.
Navy projects are somewhat volatile.
It is estimated that 75% of Navy construction work
(in terms of budget) goes to the few major yards that
have successfully positioned themselves to handle the
sophisticated technological requirements of Navy
work.
Among these stand Newport News Shipbuilding in
Virginia, Bath Iron Works in Maine, and Ingalls in
Mississippi.
The remaining 25% of the Navy budget
includes construction of auxiliary ships or the
conversion of existing ships.
The number of Navy
vessels under construction at private shipyards is
shown in Exhibit 6.
Many of the major shipyards have
not been able to position themselves for the bulk of
Navy work.
They must compete for the remaining
portion of it and experience conditions of chronic
overcapacity.
The reliance on a single buyer (the Navy) in the
shipbuilding industry represents a monopsony
situation, with substantial bargaining power in the
hands of the buyer.
This creates an unstable
situation for many commercial shipyards since not only
can the Navy's FYDP change substantially from one year
-29-
EXHIBIT 6
The @QoDG of9M@[pbOiDOin
i
------
--
---
I ------
Number of vessels under construction •
or on order at private shipyards
Litter (Ingalls)
Pasca gouia, MS
Bell Aeroespace, Textron
. New Orleans. LA .
Todd Shipyards
Galveston, TX ,
11 shltps
ship .
I..
1
SIthip
Soum: US Navy. March 1985
~
I-
-30-
-
-
-
_1 ------· 111~--
to the next, but also there are limited alternative
sources of work for the major shipyards.
5.
Proposed Solutions to Revitalize the U.S.
Shipbuilding Industry
The future of the U.S. shipbuilding industry can
derive little from the present situation, and many
different groups have proposed solutions to help the
industry overcome its current problems.
A brief
description of some proposals to revitalize the U.S.
shipbuilding industry follows hereafter.
In general, all proposed solutions affect
commercial shipping and shipbuilding since the two
industries are tightly connected.
categories of solutions:
There are two broad
those implying federal
support - direct, indirect or political; and those
advocating the benefits of free market competition.
Exhibit 7 lists the different types of proposals
according to the two categories and their effects on
the shipping or shipbuilding industries.
Solutions implying federal support are based on
assumptions that the U.S. shipbuilding industry cannot
-31-
EXHIBIT 7
°
.
•
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
•..
.•.
.
.
.
.
.
.
. .
.
.
.
.
.
.
.
Shi pbuildi ng
Shi ppjng
direct
Shipbuilder
Council of
America ,L Rice
Shipbuilder
Council of
America, L.Rice
policies
Cargo Preference
Cargo Preference
Navy
John Lehman
John Lehman
NACOA report
-authors" opinion-
Federal
suRPort
Free market
Source - authors
'. * .
..
.
.. . .
.
.
.
.
.
.
.
-32-
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
compete under free market conditions and that the
maritime industry in general should be treated as an
integral part of the economic and defense policies of
the U.S. government.
The resurrection of the CDS
program and the build-and-charter program
(constructing from the government's account and then
chartering to private operators) are examples of
direct federal support and intervention.
The cargo
preference regime is another example of a supportive
policy that allocates a fixed percentage of U.S.
traded cargo to U.S. ships.
Finally, the Navy (listed under federal support
because its FYDP budget is approved by the government)
is considered a solution to survival of the shipping
industry.
The rationale behind supporting
shipbuilding through Navy contracts has recently been
explained by John Lehman, Secretary of the Navy. [10]
Lehman claims that the Navy, with its system of
competitive bidding, helps to keep the shipbuilding
industry alive by creating a competitive environment.
Whether this view is legitimate or not, the point
remains that some rationalization of the industry may
in fact be undertaken through Navy contracts.
-33-
Among advocates of free market conditions to help
revitalize U.S. shipping and shipbuilding industries
is the National Advisory Committee on Oceans and
Atmosphere (NACOA).
NACOA recommendations include:
a
co-production ten year plan under the Jones Act to
relax domestic building provisions; and liberalization
of CCF provisions to allow reinvestment of the tax
deferral of U.S. flag shipping profits in foreign ship
construction.
The authors of these proposals think that one way
to save the productive capacities of shipbuilding
facilities is to diversify the activities of shipyards
into related products and to support technological
innovation in the production process.
By broadening
their product lines, shipyards can lower the risks
associated with the widely fluctuating demand pattern
for new ships and can potentially disentangle the fate
of their business from that of the shipping industry.
Diversification would also mitigate the effects of
dependence on a single buyer in shipbuilding.
Further, through support of technological innovation,
shipyards can maintain a competitive position by
offering products that are differentiated in terms of
their technological content.
-34-
The Quincy Shipbuilding Division of General
Dynamics, aka "the Quincy shipyard," is an example of
a major U.S. shipyard forced to close as a result of
both the slump in the shipping industry and the
effects of international competition among shipyards.
The issue of shipyard conversion in the U.S., given
the reality of shipbuilding overcapacity, and the
roles played by both the public and private sectors in
deciding the fate of individual yards are discussed in
this thesis.
The controversy surrounding the Quincy
shipyard is seen as representative of that which other
U.S. shipyards potentially face or are currently
facing.
Quincy is therefore used to outline issues
and to introduce an analytical framework for
definition of public interest in shipyard conversion.
-35-
B.
THE QUINCY SHIPYARD AND GENERAL DYNAMICS
1.
History of the Quincy Shipyard
The Quincy Shipyard was founded in 1884 as The
Fore River Engine Company by Thomas A. Watson, a
machinist reknown for his association with Alexander
Graham Bell, in East Braintree.
Watson moved the yard
downstream to its present location, as shown on
Exhibit 8, in 1900. The initial business at the yard
was in farm engines, but later expanded to include
first marine engines and then construction of marine
vessels.
In 1913, Watson sold the yard to Bethlehem
Steel Corporation, under whose auspices it was renamed
the Fore River Shipbuilding Corporation.
Fifty years
later in early 1963, Bethlehem Steel closed the yard
due to a lack of Navy contracts.
In December, 1963,
it was sold to General Dynamics Corporation for $5
million.
Throughout the yard's 101-year history, more than
six hundred vessels have been designed and built
there, with output levels closely paralleling U.S. war
activities. [11]
Production peaks have occurred
during the Spanish-American War in 1898, later during
-36-
EXHIBIT 8
QiwMUE
B@jhciPtf Latioo
RAINSFORD i.
SHUZC£
AV
A
SHEEP .1'
1U2Jy'c V NA V
35' TURNING
(1NIEK
*r
:RAPE 1.
8' STATE
LATEI
QUINCY
RPS OF ENGINEER
-37-
World Wars I and II, and finally in the late 1960s,
reflecting American involvement in Vietnam.
2.
General Dynamics' Tenure
General Dynamics has pursued both commercial and
government contracts in an effort to maintain
production activities at the shipyard.
Although the
relative proportion of government to commercial
contracts has oscillated over time, 7% of all merchant
ships produced in the U.S. in the last 22 years were
built at Quincy. [121
Commercial business has primarily been in the
construction of tankers and barge carriers.
Quincy
was the world's leading producer of liquified natural
gas (LNG) tankers, until demand for those ships
disappeared.
Its "LNG program" was a response to the
disappearance of Navy work in the early 1970s.
The
program lasted from 1972, when the first LNG contracts
were negotiated, to 1981, when the last tanker was
delivered.
In total, 10 LNG tankers were constructed.
[13]
As part of the LNG program, General Dynamics
-38-
invested heavily (more than $75 million) in new
equipment specific to LNG tanker production.
The
result of that investment is that Quincy is one of the
most modern shipyard facilities in the U.S. with a
very high steel throughput capacity.
The major
improvement which were made include:
a.
conversion of two conventional sliding ways
ways to large construction basins;
b.
new steel fabrication process line with a
a substantial amount of updated equipment;
c.
1,200-ton Goliath bridge crane which is the
largest in the Western hemisphere;
d.
new materials handling equipment including two
200-ton transporters and robotics equipment;
e.
new facility at Charlestown, South Carolina,
for the fabrication of spherical tanks. [14]
This investment program reflected management's
prediction that the LNG business would expand and
their consequent strategic decision to create a niche
-39-
for Quincy in that market.
Demand for LNG tankers
eventually waned, however, due to a number of factors,
which included:
the softening of oil prices, an
increase in concerns about the safety of storing LNG
tankers in urban harbors, and the failure of the U.S.
and Algerian governments to reach contract agreement
regarding LNG transport.
The demise of the LNG program dealt a severe blow
to the Quincy yard.
Because LNG tankers require
substantial steel work and throughput, while Navy
construction contains a high proportion of outfitting,
investments made under the LNG program equipped the
yard for a market which no longer exists.
In the end,
much of the new equipment purchased was barely used,
and, having been built into the facility through
concrete foundation for specific shipbuilding uses,
cannot be resold except to a new shipbuilder operator
with similar steel work requirements.
The LNG program represented Quincy's largest
investment in commercial shipbuilding.
Because they
sustained substantial losses, management was hesitant
to pursue commercial work requiring any significant
initial investment the'reafter.
-40-
The commercial
shipbuilding industry in the U.S. has since dried up
almost completely, as discussed in the previous
section, and Quincy is predominantly dependent on
government contracts for shipbuilding.
General Dynamics is a major military contractor,
and owns two shipyards: its Quincy Shipbuilding
Division and its Electric Boat Division in Groton,
Connecticut.
The two yards have focused on different
ends of the Naval shipbuilding industry:
Quincy
builds smaller, less complex support ships including
auxiliary, amphibious and merchant hulls; and Electric
Boat builds submarines.
Quincy's market is more
competitive, as many other shipyards have the capacity
for support ship construction, but not for submarine
construction.
In addition, Quincy's contracts are
individually less valuable and of shorter duration.
Specifically, the estimated total value of support
ship contracts should be $17 billion during the
1986-1995 period, while those of submarine contracts
only will be approximately $15.5 billion [15]; and the
production period for support ships averages 2 to 3
years, while that of submarines is 4 to 6 years [16].
The demand for support ship construction has
-41-
steadily diminished over the last 30 years, as the
Navy has chosen to overhaul old support ships or
convert commercial ships, rather than commission new
orders. [17]
The trend has intensified competition
among the numerous shipyards geared towards this
market.
Quincy won its last contract for two Marine
Prepositioning Ships (MPS) on August 18, 1982; the
contract was expanded to include three more ships the
following year.
delivered:
Four MPS vessels have been
the "2nd Lt. John P. Bobo" on January 19,
1985, the "Pfc. Dewayne T. Williams" on May 18, 1985,
the "Ist Lt. Baldomero Lopez" on October 26, 1985, and
the "Ist Lt. Jack Lummus" on February 22, 1986.
The
fifth MPS, the "Sgt. William R. Button" is scheduled
for delivery in May, 1986. [18]
3.
The Decision to Close the Shipyard
On July 24, 1985, General Dynamics announced that
it would close the Quincy shipyard after the last MPS
vessel is delivered.
Gary Grimes, the yard's vice
president and general manager, stated that the
decision to close was made "after assessing upcoming
Navy contracts and deciding Quincy had little if any
chance of winning them."
[19]
-42-
Another probable reason
behind the decision is that the shipyard does not meet
General Dynamics' expected return on investment.
According to the company, of the 21 years to 1985 that
General Dynamics owned the shipyard, 9 years were
profitable and 11 unprofitable. [20]
Prior to the decision to close, General Dynamics
lost three bids for contracts.
The first was for a
$341 million commercial contract to build container
ships; that contract was lost to a foreign bidder in
October, 1984. [21]
The second bid for a $525 million
Navy contract to build three fleet oil tankers was
awarded to Avondale Shipyards Inc. of Avondale, La.,
and Pennsylvania Shipbuilding Co. of Chester, Pa.
[22]
The third bid for a $130 million Navy contract
to construct two TAGS surveillance ships went to
Bethlehem Steel of Sparrows Point, Md.
Loss of the third bid was a particular blow to the
Quincy yard.
The contract was expected to generate
1,000 jobs per year into 1988. [23]
Industry sources
affirm that Bethlehem's bid, which was substantially
below the Navy's cost estimates, will not support
completion of the ships.
They also claim that because
Bethlehem does not have sufficient cash from
-43-
-'I
operations to cover cost "overruns" (which will
obstensibly be due to design alterations), the Navy
will be obliged to provide further financing to ensure
the ships' completion in the future. [24]
The government charged General Dynamics with using
the same strategy in the past, i.e. bidding under cost
and later overcharging for design alterations in order
to win contracts.
That and other charges have
resulted in law suits which are still pending against
General Dynamics may have contributed to the company's
recent lack of success in obtaining contracts for
Quincy.
Increased public scrutiny and credibility
problems ensure that the company's bidding will remain
conservative for the duration of legal proceedings.
4.
The Impact on Labor
Employment at the shipyard has fluctuated widely
with production levels:
from 812 workers during the
Depression to 32,000 during World War II, and from 0
in 1963, when the yard was closed by Bethlehem, to
over 11,000 in the late 1960s. [25]
During General
Dynamics' recent tenure, the shipyard employed, on
average, 6,000 to 7,000 workers in the 1970s, and
-44-
4,000 to 5,000 workers in the 1980s. [26]
In 1984,
employment grew to 6,300 when work on the MPS vessels
was at its peak. [27]
On April 30, 1985, General Dynamics announced that
because it had not secured any contracts for future
work, 3,100 of the 5,267 workers on payroll would be
laid off by the end of the year. [28]
Layoffs had
already been occuring as MPS work decreased, but the
announcment in April served to formalize management's
expectations regarding future contract opportunities.
By July 24, 1985 when the company announced that the
yard would be closed, there were 4,203 workers left on
the payroll. [291
About one-quarter of those are
salaried white-collar workers who are expected to keep
their jobs but transfer to new locations. [30]
The
remaining 3,300 hourly workers have been laid off in
stages to be completed in May, 1986 when the final MPS
vessel is delivered.
Thereafter, a skeleton crew will
be maintained until December, 1986.
Of the 3,300 hourly workers scheduled for layoff,
800 are from Quincy, 1,000 from Boston, and the
remainder from other parts of the state.
Of that same
number, 1,000 have worked at the shipyard for 15 years
-45-
or longer, 1,200 for 5 to 15 years, and 1,100 five
years or less. [31]
The majority of hourly workers scheduled for
layoff fall predominantly into the following type of
skill categories:
shipfitters, riggers, loftsmen,
welders/flamecutters, machinists, electricians,
pipefitters, sheetmetal workers, boilermakers and
electronics mechanics, rigger-erectors, production
laborers, carpenters, chippers and burners.
Only the
first three categories are unique to shipbuilding; the
others are in general use in equipment manufacture and
construction industries. [32]
Demand for these labor categories is relatively
elastic, except when demands for the products of
industries competing for labor are rising.
Since
rising demand does not typify the current economic
condition of most competing industries, demand for
Quincy's labor force is at present relatively elastic.
The economy may be unable to absorb the highly-paid,
skilled workforce from Quincy at wages to which they
are accustomed, and the expected hardship to those
workers is of major concern to the state government.
In particular, workers from the first three skill
-46-
categories and those who are least mobile will be
hardest hit.
The traditionally cyclical nature of work in
shipbuilding is similar to that of the construction
industry, which has in fact provided the most direct
competition for shipbuilding labor in the past.
Construction work could eventually offer the single
most significant source of comparable work to Quincy's
labor force.
Construction pays more on average than
shipyards for the same skills, even though
shipbuilders work under dirtier, more cramped, and
noisier conditions; this wage differential is due to
the fact that shipyards offer more stable employment
in a fixed location.
Workers have been willing to
trade off those benefits for lower wages. [33]
The
possibility that a sizable percentage of workers will
be employed, within Massachusetts or nearby states, in
construction activities is important in that, under
this scenario, remobilization of the workforce at
Quincy would be possible sometime in the future.
Remobilization potential is an important factor to
shipbuilders or other industrial operators who
consider purchasing the yard.
-47-
5.
Potential Buyers of the Shipyard
When General Dynamics publicly announced that the
Quincy yard would be closed, the company indicated
that it "would consider conversion of the yard to
other uses and sale of the yard to another shipyard,
to employees, or to developers seeking to use the yard
for an industrial park or condominiums."
[34]
Initially General Dynamics focused on other
shipbuilders as the major pool of potential buyers.
The company's sales effort included a mass mailing of
brochures to all major U.S. defense contractors and
shipyard owners.
However, due to the present
condition of the U.S. shipbuilding industry, as
previously discussed, most large shipbuilders are
unwilling at this time to acquire new capacity.
The possibility that a smaller, entrepreneurial
shipbuilder with experience in Naval contracting could
run a profitable business at the shipyard, either now
or sometime in the medium-term future, can not be
dismissed.
General Dynamics has not specifically
targeted this type of shipbuilder in its marketing
activities as the company prefers to sell the entire
-48-
yard to a single buyer.
A shipbuilder could use only
a portion of the yard's capacity because of the
current scarcity in large Naval contracts, but such a
buyer could eventually complement other industrial
buyers if the yard is diversified.
General Dynamics did enter into negotiations with
one entrepreneurial buyer, Frank Rack.
Rack had
worked with General Dynamics for 17 years, but left
his position as deputy operations manager at Quincy in
1973.
In December 1985, Rack founded Genesis
Shipbuilding and signed a tentative agreement with
General Dynamics to purchase the shipyard.
Rack
intended to produce four $200 million luxery liner
cruise ships, which could be converted to military
uses during wartime, at Quincy.
The success of his
plan depended, however, on the provision of $75
million per ship in subsidies by the federal
government.
The tentative agreement with General
Dynamics expired in January 1986, when Rack failed to
gain the cooperation of Congress or the Armed Services
Committee. [35]
Since that time, General Dynamics has
not reported any other solicitations from shipbuilder
entrepreneurs.
-49-
~,QLclSZ~;~.-d~4~M1S118;4i~jF~748~(~WI~* rrmmr
In examining industrial conversion of the yard,
General Dynamics has focused on large single buyers.
Large manufacturing companies, specifically those
involved in industries which require heavy lift, heavy
machining and ocean access, are viewed as the second
most-likely target buyer group.
The main problems
General Dynamics has encountered in attracting these
types of companies have included the relatively high
wage rates, expensive real estate, low unemployment
rate, and lack of state-sponsored business incentives
in Massachusetts.
Large manufacturing companies
easily locate, or relocate, wherever costs are lowest,
as they usually are not dependent on retaining skilled
labor.
Other constraints are that the yard has limited
highway and rail access.
The yard is located at a
distance from main highway arteries.
And, although
one Conrail spur services the Braintree end of the
shipyard, its overhead bridge allowances are low.
The
flat railcars used for steel transport are of an
acceptable height, but most container-type cars,
particularly those used for shipping, are too tall for
the overpasses.
Large U.S.-based manufacturers often
rely on highway and rail access for receipt of
-50-
supplies and product distribution, rather than on
ocean transport.
For this reason, shipyard conversion
or diversification in nations like Japan, Taiwan and
South Korea would be less problematic in that many of
their industries are water-dependent.
Advocates of diversification believe that smaller
industrial businesses or projects could be found to
utilize the shipyard's productive capacity.
Such
projects would ideally be water-dependent, need some
proportion of skilled labor, and require geographic
location either within the region or in the state of
Massachusetts.
The last characteristic would typify,
for example, small manufacturers with local suppliers/
buyers or public works projects.
Coordination of this
type of many-project or many-buyer diversification
requires creativity, a long-term perspective and
dedication to the conversion plan.
A large, private
military contractor such as General Dynamics, using
its own industry-specific requirement for return on
investment, would generally show little interest in
directing such an effort.
Groups, such as the South Shore Conversion
Committee (SSCC), believe that the failure of General
-51-
Dynamics to find a successful means of converting the
shipyard to other industrial uses is due to management
inflexibility.
They believe that a large enough
number of projects could have been found to generate
the company's required return on investment.
Further,
the SSCC charges that General Dynamics did not
seriously pursue conversion because the community
support for that alternative made it a political
issue.
They have proposed that the yard be used to
produce "plant ships" that could generate electricity
or process timber at sea (designed by the Applied
Physics Lab of John Hopkins University).
However,
neither private investors nor public utilities have as
yet shown an interest in plant ship investment. [36]
Leaders of the shipbuilders union in Quincy have
steadfastly opposed conversion of the shipyard.
They
believe that their members would, in all probability,
be forced to accept lower wages for any other type of
work which could be done at the shipyard.
They
believe that either General Dynamics or another large
shipbuilder operator could make the yard profitable
through employment of more modern shipbuilding
methods, such as pre-outfitting or modular
construction, methods currently used in Japan.
-52-
They
accuse General Dynamics of failure to make the
appropriate capital investments and lack of managerial
know-how. [37]
In fact, General Dynamics would be the first to
admit that it made a strategic error in its massive
LNG investment program during the 1970s.
Whether or
not they should have foreseen that the LNG business
would wane is arguable.
Although the union's
accusations may be true, the fact that no private
investor is now willing to invest in modernizing the
shipyard reflects:
the decreased demand in the
shipbuilding industry, as previously discussed; and
the unlikelihood that a large shipbuilder under
current economic conditions will be able to obtain an
acceptable return on investment.
There has been a recent proposal that former
workers buy the shipyard with state financing.
Despite potential assistance from the state, the
receipt of federal support, in the form of loan
guarantees, would also be needed to ensure the idea's
success.
The plan is to obtain small shipbuilding
contracts, and to supplement those revenues with
temporary diversification projects, until shipbuilding
-53-
,~X1Pr*-~~~~n~.4.p*~,~·tBlrNi-~~~k-
-~BDB*ll~r~YII~1I~YPYiT~j5fir~~~~B1~M~~~UY
'~p~-e~~U~Wlls~·~~rrr~Ul~(i41CUI~~~
becomes economically feasible at some point in the
future.
The union is thus far divided on the issue,
because the plan's success will depend on the
acceptance of lower wages by the small portion of
workers who are allowed to remain.
The state is
tentatively interested in this particular alternative,
and may request a $100,000 ($75,000 from the state and
$25,000 from the union) study on the feasibility of an
employee buyout. [38]
Factors which influence the
state's concern and degree of potential participation
are discussed in both section C of this chapter and in
Chapter 5.
General Dynamics requests that all bids and
proposals be submitted by August, 1986.
The company
has expressed a willingness to cooperate with state
and union representatives in selling the site for a
price lower than that optimally obtainable from the
market [39]; whether they will actually take such
action remains to be seen.
A number of private
developers have contacted both General Dynamics and
the Quincy Planning Department to express interest in
purchasing the yard for commercial and residential
development.
The yard would have to be rezoned for
those types of uses, as described in Chapter 5,
-54-
however the booming South Shore economy may enable a
developer to offer a price which is higher than that
currently obtainable from the industrial sector.
In conclusion, the authors of this thesis hold the
view that if industrial diversification is undertaken,
particularly with the participation of a shipbuilder
entrepreneur and/or former shipyard workers, the
shipyard could survive profitably, while maintaining a
sizable number of blue-collar jobs and its industrial
water-dependent setting.
Without diversification, the
shipyard may remain idle, may eventually be sold to a
large industrial manufacturer with no need for skilled
labor, or may be rezoned for residential uses.
Given this range of potential outcomes, various
government agencies and representatives are concerned
about sale of the yard and its impact on the public.
Due to the fact that no single shipbuilder, or
industrial buyer similar to General Dynamics, has been
found, a smooth transition (from the public's
perspective) to a new owner is less likely.
The
government bears the responsiblity of ensuring that
public interests are protected in the decision-making
process.
Major public entities currently involved in
-55-
resolution of this situation, and their respective
mandates, are described in the next section.
-56-
C.
PUBLIC SECTOR INTEREST IN THE FUTURE OF QUINCY
SHIPYARD
1.
The Task Force of the Reuse of the Quincy
Shipyard
When General Dynamics announced that the Quincy
shipyard would be closed, the Massachusetts state
Governor, Michael S. Dukakis, established a task force
to investigate possible alternatives for use of the
shipyard.
That group met for the first time on August
13, 1985 in Boston.
A representative of the state's
Department of Industrial Services, an agency designed
to help companies facing economic troubles, chairs the
task force.
The other seventeen members include state
Labor Secretary Paul Eustace, Secretary of Economic
Development Evelyn Murphy, the economic advisor to
Governor Dukakis, state legislators from Quincy,
Boston, Weymouth, and other South Shore communities,
Local 5 of the Marine and Shipbuilding Workers Union
at Quincy, General Dynamics, and representatives from
a variety of other state agencies.
The state is interested in outcome of the sale
because of the potential direct impacts on the local
-57-
economy, which include:
loss of state tax revenue,
state expense for unemployment benefits, loss of
property tax to the cities of Quincy and Braintree,
and loss of income to businesses which supply or
service the shipyard.
Government agents are also
concerned about the personal hardship to former
shipyard employees, most of whom are state residents,
and about any potential less tangible effect on the
community and on the local environment.
Finally, the shipyard is a "designated port area"
(DPA), a state classification usually given to
developed areas with port facilities, often used for
heavy industry, where few or no natural land forms or
vegetation remain. [40]
The state is concerned that
maintenance of Quincy as a DPA may be of sufficient
value to the public that an alternative which uses its
industrial and port capacities should be enforced.
Each of the government's concerns regarding direct and
indirect effects of closure of the shipyard are
discussed in Chapter 5 in greater detail.
Two state agencies were interviewed by the
authors:
the Department of Industrial Services and
the Office of Coastal Zone Management.
-58-
The opinions
of each of those offices are described below.
The Department of Industrial Services favors that
alternative industrial use which promises to support
the maximum number of former shipyard workers.
They
are strongly opposed to any use which would not employ
blue-collar workers.
In particular, the agency
believes that a shipyard should be maintained on the
site, whether it uses all of the yard's capacity, or
part of it in conjuction with other diversified
industrial activities.
The Executive Director of
Industrial Services hired Booz-Allen & Hamilton, a
management consulting firm, on behalf of the task
force to prepare a $100,000 report on reuse of the
shipyard; that firm concluded that the U.S.
shipbuilding industry will be revitalized in the
medium to long-term future, and that other industrial
diversification opportunities will not fully utilize
the yard's capacity. [41]
The office of Coastal Zone Management (MCZM) is a
policy and planning branch of the Executive Office of
Environmental Affairs.
Its policies are implemented
by the Department of Environmental Quality Engineering
(DEQE) and various other agencies.
-59-
The MCZM is
primarily concerned with the fact that the shipyard
site is a designated port area, and as such, must be
used in accordance with waterways regulations which
give preference to marine-related industrial uses at
port areas.
In other words, if there is a viable
water-dependent industrial use for the shipyard, the
MCZM is obliged to give priority to that use through
the DEQE licensing procedure and, when necessary, to
enforce it.
The MCZM's general guidelines are clear;
its problem in this case is to ascertain whether a
viable water-dependent industrial use for Quincy
actually exists and, if one does, how to steer the
private sector toward that preferred use. [42]
Each government player has slightly different
jurisdiction in the protection of public interest, but
a general consensus exists among state representatives
on the optimality of continued shipbuilding and/or
alternative water-dependent industrial uses at the
Quincy site.
Of course, the latter use is qualified
to exclude industrial uses which cause excessive
environmental pollution or disruption as detailed in
the Environmental Impact Report (explained below).
If one or more buyers appear that fit the optimal
-60-
use profile, the state can facilitate the transaction.
However, if shipbuilder or industrial buyers fail to
appear, the state will have to decide whether or not
to intervene in the situation.
The state's various
alternatives to influence the outcome of the sale are
described in the next section.
2.
Intervention Options Held by the State of
Massachusetts
Although the state usually prefers not to
intervene in private sector transactions, it is
empowered to take whatever action is needed to enforce
public interest.
Government agencies are responsible
for protection of the environment and certain limited
resources, the economy (if possible), and the "quality
of life" of persons living under their jurisdiction.
For these purposes, the state of Massachusetts has
regulations, ownership of specified public lands "ad
infinitum," and income from taxes, from which the
following options for intervention stem:
a.
exercise of licensing powers
Any new owner of the shipyard property will have
-61-
to go through an elaborate licensing process to gain
permission to use or in any way alter facilities under
the state's control, which include all facilities
located seaward from the historical mean high water
mark. [43]
These lands are owned by the state of
Massachusetts "ad infinitum" and are protected by laws
which regulate their usage.
The historical mean high
water mark at Quincy is landward from all drydocks,
and in some areas may include a substantial proportion
of the industrial facilities.
In fact, a considerable
amount of land fill has been licensed over the last
one hundred years since the shipyard was first
developed. [44]
The state's licensing process is based on three
major programs or legislation:
o
Massachusetts Environmental Policy Act
Any new owner who wishes to physically alter or
re-use the land and/or facilities located seaward from
the mean high water mark, for any purpose other than
that exactly matching the previous owner's, must apply
for a license from the MCZM as the first step in the
licensing procedure.
An Environmental Impact Report
-62-
(EIR) would then have to be filed with the
Massachusetts Environmental Policy Act (MEPA) unit of
the Executive Office of Environmental Affairs. The
MEPA unit evaluates and attempts to minimize the
environmental impact of projects by requiring that a
study on those impacts, and also on those of project
alternatives, be submitted for their review.
Issuance
of all other types of licenses is subject to gaining
MEPA approval on the EIR. [45]
o
The Wetlands Protection Program
Under the Wetlands Protection Act (Massachusetts
General Laws Chapter 131, Section 40), a new owner
must obtain a permit before removing, dredging or
filling of wetlands, which at Quincy is defined as
land under the ocean.
This permit must be granted by
the Quincy Conservation Commission, which is charged
with the responsibility of protecting the wetlands as
a natural resource. [46]1
o
The Waterways License and Permit Program
Under Chapter 91 of the Massachusetts General
Laws, a license much be obtained from the DEQE for any
-63-
structural alteration or proposed re-use of the
shipyard facilities, which include all buildings,
drydocks, and other permanent structures located from
the mean high water mark seaward.
Licenses can only
be issued for uses or projects which are waterdependent and deemed to serve proper public service.
[47]
Other types of licenses may be required from state
and local governments if a new owner wishes to
substantially alter the site, again depending on the
degree of environmental impact.
In addition, a permit
must be obtained from the U.S. Army Corps of Engineers
to either dredge or fill the dry docks or waterways.
The U.S. Army Corps of Engineers, however, has
recently changed its wetlands policy nationwide by
instructing its regional offices to "allow development
on wetlands unless another site is available that
meets the developer's criteria."
[48]
The new
guidelines imply that a buyer, who wishes to develop
or alter the shipyard property, will encounter less
resistance from the federal government than from the
state government.
In exercising its licensing powers, the government
-64-
can either completely refuse to grant licenses for
purposes which clearly violate the intents of
protective regulations, or it can suggest that the
licensing applications may take years to adjudicate in
the case of a use not considered optimal.
b.
participation in purchase of the Quincy
shipyard
The government can purchase the shipyard, directly
or indirectly, and either:
let it remain idle until
the preferred buyer appears, or manage a
diversification effort.
The first alternative may be
the only means, at present, to ensure that the
shipyard is available in the future for uses which
will serve public interests.
The latter alternative
could entail either selling the land in parcels for
diversified, water-dependent industrial uses, or
managing a consortium of contractors engaged in
temporary diversified projects of the same nature.
Clearly, the government's preferred action will
depend upon its internal consensus regarding public
interest and regarding the existence of projects/
buyers which fit its perceived optimal use profile.
-65-
~~x.ir
~.
~i·~*re~·XL~.~.~I*dr~UR1&IUUJJIIU9~hrl
xU·X~-~~f"~C***I~"C-~D1I~~Um~lrN
rrTi~~L
In the next Chapter, we will discuss one of the many
potential industrial projects which would be viewed as
appropriate by the government.
-66-
CHAPTER 3:
THE THIRD HARBOR TUNNEL PROJECT
One of the alternatives proposed to diversify the
activities of shipyards is the construction of steel
structures.
This alternative offers the advantage of
using the steel manufacturing equipment of a shipyard
for the production of a wide range of durable goods.
Modules, bridge structures, rail vehicles, turbines,
and components have been successfully produced at
several shipyards worldwide.
Recently, three U.S. shipyards have successfully
diversified in these products.
The Swan Island
shipyard in Portland, Oregon, began to construct
modules for the Alaska northslope oil exploration
program in 1984.
Newport News Shipbuilding in
Virginia manufactured rail cars, hydroelectric
turbines and highway bridge structures in the early
1970s; however the shipyard's new orders for Navy
ships later became so large that it was able
discontinue diversification activity.
Finally,
Avondale shipyards of New Orleans began a
diversification program in the early 1980s to
fabricate steel modules and processing plant
-67-
to
components. [1]
In this thesis, the authors focus on an industrial
water-dependent project that may present a real
opportunity to diversify the Quincy shipyard's product
line.
The project chosen is the construction of
sunken steel tubes for the proposed Third Harbor
Tunnel, a four-lane, two-way tunnel connecting South
Boston to Logan Airport.
The technical requirements
of the project and assessment of the Quincy shipyard
as a feasible construction site are analyzed in the
this chapter.
After evaluating the feasibility of the project,
the authors address the issue of calculating the
project's cash flows and the net present value at the
date the project begins, which is estimated to be in
April, 1990.
The value of the project at Quincy
shipyard will be used in the Chapter 4 to assess the
potential value to a private investor of purchasing
the Quincy shipyard now as an option for future
investment.
The Third Harbor Tunnel represents one of numerous
diversification alternatives that can be undertaken at
-68-
Quincy.
The authors chose this project, one real
opportunity, to establish a methodology that can be
adopted for other potential projects (or for a series
of projects).
-69-
A.
DESCRIPTION OF ALTERNATIVES
The Commonwealth of Massachusetts is studying the
construction of a four-lane, two-way Third Harbor
Tunnel, approximately 3.9 miles in length, which
directly connects with the Massachusetts Turnpike to
the west and Logan Airport to the north. [2]
The
probable layout of the tunnel is shown in Exhibit 9.
The construction of a Third Harbor Tunnel will provide
increased cross-harbor capacity currently available
through the Mystic-Tobin Bridge and Callahan/Summer
Tunnels, and will improve the present traffic
congestion that severely affects the operation of
Boston's transportation network.
1.
Bored Tunnel versus Sunken Tube Tunnel
The Massachusetts Department of Public Works has
evaluated two alternative methods for constructing the
tunnel below Boston Harbor.
These methods consist of
a bored tunnel and a sunken tube tunnel.
The bored or
driven tunnel is constructed by driving a circularshaped tunnel underground by soil excavation.
The
sunken tube tunnel is constructed by sinking and
joining together large units of concrete or steel in a
-70-
EXHIBIT 9
-71-
dredged trench, which is then backfilled.
A pontoon,
moored to the harbor bed, is used to sink and align
the tubes in the sand foundation.
Exhibit 10 shows
the sunken tube method of construction.
After careful
evaluation of the two alternatives, the Department of
Public Works has concluded that the tunnel should be
constructed by the sunken tube method since the bored
tunnel method does not appear feasible for the
project, due to major problems associated with
excavation and dewatering. [3]
2.
Concrete versus Steel
The sunken tube tunnel can be constructed using
two different materials:
concrete or steel.
These
two materials require different construction
techniques and fabricating sites.
The concrete
elements are usually constructed in large commercial
drydocks and towed to the tunnel site.
The steel
tubes are fabricated in a steel manufacturing plant
before being outfitted and towed to the tunnel site.
The outfitting site does not need to be adjacent to
the construction site, but it does have to be as close
as possible to the pontoon for sinking.
In fact,
outfitting consists of placing structural and ballast
-72-
EXHIBIT 10
Dm
T~al
Vanm
mmB
-73-
SItmi
im
i nCtm
concrete to prepare the tube for placement, and after
outfitting the tubes can reach a draft of 25 feet,
making their transportation very difficult and costly.
[4]
The U.S. has no previous experience in concrete
sunken tube construction.
All three tunnels recently
built in the U.S. were made from steel, as shown in
Exhibit 11.
Also, according to experts in the field,
the cost of the concrete tube alternative is higher
than the cost of the steel tube alternative. [51
There are therefore good reasons to believe that the
Third Harbor Tunnel will be made of steel, and for the
purpose of this study, we concentrate on the steel
tube alternative and its construction requirements.
B.
STEEL TUBE CONSTRUCTION AND SITE REQUIREMENTS
In this section, we focus on the fabrication of
steel sunken tube sections and the fabrication site
requirements.
Our goal is to show that a shipyard can
be a feasible construction site if it satisfies some
specific requirements and that the Quincy shipyard is
not only a feasible construction site but also one of
the best sites.
-74-
EXHIBIT 11
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August,85,vol3 p62
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1976
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1978
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1980
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Source: EvlainFeea"ihaiAmn~ain
Third Harbor Tunnel, Iaterstate90/Central Arterq,
Interstate 93, - Environmental
Impact Statement
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Steel tube construction is very similar to the
construction of a ship.
It requires a steel
fabrication process line, stiffening and welding
equipment, large building basins, cranes and lifting
equipment, and piers or wet basins.
In fact, a steel
sunken tube tunnel is formed by a number of units
which are fabricated by welding a steel panel to form
a steel plate, and by stiffening and wrapping a shell
plate around a special wheel.
When the wheel is
collapsed from inside, the module is ready to be
joined to other modules.
Ten to twelve modules are
welded on a shipway to form a unit.
Once the unit has
all its structural pieces and its structural concrete,
dam plates are attached to seal each end, and the
drydock is flooded.
The unit is then outfitted at a
wet basin or pier and towed to the catamaran barge
anchored above the tunnel line.
Exhibit 12 shows the
sequence of operations for the construction of Ft.
McHenry Tunnel in Baltimore.
The Third Harbor Tunnel will measure approximately
2,400 feet.
It will be made of 10 units, 240 feet in
length, each unit having a diameter of 80-90 feet.
typical binocular section is shown in Exhibit 13.
-76-
A
EXHIBIT 12
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-77-
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EXHIBIT 13
Ghl[Dml9 Tunnot G1ag001 @Emmm Tuai
-78-
The total steel content of the tunnel will be
approximately 30,000 gross tons, the equivalent of one
and one-half LNG tanker. [6]
The basic requirements for the construction site
are the following:
a.
steel throughput greater than 30,000 tons
per year;
b.
plate stiffeners;
c.
crane capacity in excess of 20 tons (18 metric
tons);
d.
building basins that can accommodate ships
with a minimum length of 300 feet and a
minimum width of 90 feet.
The Quincy shipyard easily satisfies all of the above
requirements.
In fact, its steel throughput has
reached 2,000 tons/week on a full shift (approximately
100,000 tons/year).
The shipyard has two plate
stiffeners and two 40-ton cranes.
The five building
basins can all accommodate ships with a minimum length
-79-
of 850 feet and a beam of 118 feet. [7]
Since there
are five basins feasible for construction, Quincy
offers the possibility of working on five units of
tunnel at a time.
The current layout of the Quincy
facility is shown in Exhibit 14.
In addition to satisfying all critical
requirements for the construction of sunken steel
tubes, the Quincy shipyard offers the following
advantages over other sites:
a.
outfitting piers to complete outfitting at
the yard;
b.
sea access through the Fore River channel
whose draft of 35 feet allows outfitted tubes,
which draw in excess of 25 feet prior to
placing, to be towed to the tunnel site.
c.
proximity to the tunnel location.
The possibility of completing the outfitting phase at
the yard permits an immediate coordination of the
construction and the outfitting activity since both
are carried on in the same location.
-80-
Also, the
EXHIBIT 14
-81-
proximity to the tunnel location reduces the cost and
risk of towing semi-finished tubes from a distant
shipyard to the outfitting site.
The cost of
transportation alone is significant.
We estimate,
based on data obtained from an interview with Paul
Crowley of Boston Tow Boat Company, that the cost of
transporting one tube can reach $8,000 per day.
Since
on average a tow boat can cover 100 miles per day, the
cost is approximately $80 per mile per tube.
The risks of towing tubes 300 feet in length along
the coast include collision, heavy weather accidents
and even sinking; such risks affect the cost of the
project and may delay its schedule.
"Insurance
against the perils of the sea, free of particular
average" may cost up to $1 million for steel tube
transportation. [81
Quincy shipyard is a feasible and optimal
alternative for the fabrication and outfitting of the
Third Harbor Tunnel steel tubes.
There are no other
sites in Massachusetts capable of performing this
work, as the other possible steel fabricating
locations are out-of-state.
The Third Harbor Tunnel
project represents a real opportunity to diversify the
-82-
shipyard product line into related industrial
water-dependent products.
Therefore, the construction
of steel tubes for the tunnel is chosen as the best
example to outline the methodology by which the
shipyard can be valued.
The first step in this
direction is to value the steel-tube construction and
outfitting project in 1990, the year it is assumed to
begin.
The computations are described in the next
section.
C.
VALUE OF THE STEEL TUBE CONSTRUCTION AND
OUTFITTING PROJECT AT THE QUINCY SHIPYARD
The valuation of the steel tube construction and
outfitting (STCO) project is performed using capital
budgeting methodology.
Forecasted cash flows over the
2-year life of the project are discounted to assess
the net present value in 1990.
Cash flows are estimated from data obtained during
personal interviews and adapted to the STCO project by
the authors.
The discount rate used to actualize cash
flows is the rate suitable for the particular
industrial sector in which the project belongs.
-83-
Cash Flows
1.
We assume that the STCO project begins in April,
1990, and lasts two years.
As shown in Exhibit 15,
the construction phase starts immediately and ends
after 18 months, while the outfitting phase starts in
month 6 and ends at the beginning of year 2. [9]
The
components of cash flows are analyzed every six months
to take into consideration the correct timing of each
project phase.
Cash flows are stated in 1990 real
terms by using the approximation shown in Exhibit 16.
o
revenues
We assume that a margin of 10% after taxes is
charged over total costs and that revenues are evenly
distributed across the project's lifetime. [10]
o
costs
The cost of labor is computed assuming the
following number of workers are employed by the
project:
500 workers (400 skilled and 100 unskilled)
for steel tube construction; and 200 workers (150
skilled and 50 unskilled) for concrete outfitting.
Typical hourly wages for the construction sector in
Massachusetts are $12/hour for skilled workers and
-84-
EXHIBIT 15
.
iui.........
.
steel construction
.
0
12
6
1990
....
•.
18 (months)
1991
outfitting
I
6
. I
12
.
I
I
18
24
1992
source: authors
EXHIBIT 16
°°.°.
.
.
.
.
....
...
.
.
S 1990
.. .91,92
,91,92 cash
cash fnov
90 ,CF1
901 ,CF.
90
1990
wn year
year 1986
1990 dollars
dollars == CF
CF90
mCF9
.CF92
1990 091092 cash flov in year 1986 dollars = CF
.
0 qU0
03
41
or
CF
9j
ED
90
=CF
86
OCF
86
86
CF 9
9
86
91,92
91,92
annual inflation rate =i assumed to be constant over the
period 1986-1990
source: authors
.
.
.
.
.
.
.
.
.
.
.
.
.
.
°. .
.
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..
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.
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.
.
.
.I
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.
.
-86-
.
.
.
.-..
.
.
.
.
. .
..
...
.
.
.
.
.
.
.
.
.
.
.
...
.
.
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.
.
.
..
.
.
.
..
.°
.
.
.
.
°.
.
°.
$10/hour for unskilled workers. [11]
Overhead administrative costs are assumed to be
equivalent to 30% of the labor cost.
The material costs for steel construction include
steel, bulkheads, and joints, while those for concrete
outfitting include structural and ballast concrete.
Material costs are given as dollars per pound or
dollars per foot, and the total amount is computed by
knowing the weight and the dimension of the work in
progress. [12]
The figure for utility costs is not available
separately, but is included in the material cost
figure.
"Start-up costs," i.e. the initial investment
which must be made to start the project, include the
purchase of two reels, automatic welders to stiffen
the shell plates, and miscellaneous tools, and total
$3 million. [13]
The initial working capital is estimated to be 10%
of the downpayment made to the contractor, and is
-87-
r.,l
~I-r- *·1.4* I:.rlc~rrr,~;-?·~,fr-,;·~,~~*·~fi*~i;,~sl
urru·tkr~r;;~a4h~~au;W~'P~i~i~wax*u.m4M
~'"'~-x'--^"-~-`~~" ~~~ ~`~~~-~II-^
released at the end of the project.
Depreciation costs are computed only on the
equipment that needs to be added to the actual
shipyard.
The equipment considered for depreciation
purposes is:
a. 2 reels or "spiders" worth $100,000;
b.
automatic welders worth $2/3 million;
c. miscellaneous equipment worth $1 million.
We assume that the project is fully equity
financed and that the applicable tax rate is 40%.
The computation of the project's cash flows is
shown in Exhibit 17.
2. Discount Rate
The cost of capital used to discount the cash
flows depends on the risk of the project.
To compute
the discount rate, we use the Capital Asset Pricing
Model (CAPM).
The CAPM asserts that investors expect
-88-
EXHIBIT 17
.... PI-c
-------:lL----- JcOxicom-tI
..... ....... ...
COSTS
4W~i
•m
:Sk h-E:-
OI
. . '. D
'. . . U' .' . `. e
`
:Q
`•
' a
'
. . . .
Tube Fabrication
Tube outfitting
( million $/6months)
( million $/6months)
gi~B 4.98
OW am 91
1.8
1.00
.5
2.3
5.98
1
A20
rsm
1grOaga~gF &
`
8.3
Aam~Ca,
ae
1 .79
$
.67~i
167
o m1
MaMS
.69
-0f
~a~a~
AM
29.44
11.30
35.33
13.56
REVENUES
10% net
mar1gi n
EARNINGS
AFTER TAX
40%tax rate
3.53
note: all figures are in 1986 dollars
equipment is fully depreciated
during the first three years
-89-
1.35
. . . . ,.,
.,.,.. . . . . . . . . . . . .'.'.. . .'.. . . . .. . . . . . . . . . . . . . . . . . . .
gear
month
1990
0
1991
12
6
1 992(start)
24
18
net
income
after tax
(million$)
steel construction
-
outfitting
-
*depreciation
-1.67
(million$)
3.53
(b)
3.53
3.53
-
1 .35
1 35
1 .35
,-1.67
(a)
start up costs
(million )
-
3.00
Cvworking cital
S(million3
-
CASH FLOVS
-
6.53
5.2
4.88
6.55
4.88
-
7.93
6.32
5.93
7.96
5.93
3.53
53
in 1986 $
CASH FLOVS
in 1990 $
(inflation rate=59)
DISCOUNTED
CASH FLOWS
(6 month rate
7.93
5.97
5.29
4.73
6.72
= 5.8%)
~ETII
FJW
I
oifmixian 0
-imtII41go.¶
a 1.
cE
DaD00
0
nMUo=
c M.
sourn : authors
(a) start up costs in 1990 dollars are 3.6 millions
(b) income for steel construction is distributed evenly over the first
three semesters and the first earnings are received at month 6
(c) income for outfitting is distributed evenly over the 2nd, 3rd and
4th semester and the first earnings are received at month 12
(d)depreciation over a three year period is recorded at mid g
year
(e) inflation is assumed to be constant over the period 1986-1990
. . .... ....... . ... ...... ... ..
a
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-90-
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. . . . .. . . . . . .
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. ..
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. . . .
.
.
a risk premium above that of a riskless investment in
government bonds that is proportional to the beta of
the project or industry.
Beta is a coefficient that
measures the sensitivity of a stock to overall market
movements.
The beta of a project can be estimated by
using as proxy the beta of the business sector the
project belongs to.
Industry betas are recorded every year by
investment banks and other financial institutions.
Although these betas reflect historical stock
movements, they represent the best estimates of future
events.
The Merrill Lynch beta-book of 1985 reported
a beta equal to 1.2 for construction contractors, the
industry sector with characteristics most similar to
those of our project.
The computation of the discount rate for the STCO
project is shown in Exhibit 18.
The market
risk-premium is assumed to be 8.8%, since this has
been the average over the past 50 years. [14]
rate on Treasury bonds is 7.47%.
The
This figure
represents, in nominal terms, the one year riskless
rate investors expect in 1990.
It is obtained by
looking at long-term Treasury bonds and computing
-91-
·U-~r~YF~.XNV..~(r*P~·r~Lli~"li*~U~b~.~i
'~*-~(7·idlF~XC~~~IRIIlOCLI·CiQl~ff~~
EXHIBIT 18
(r
-r
+8
r
=r
market
project
risk free
project
r
r
risk free
market
risk free
)
= rate of return on government bonds in 1990
- r
risk free
= 8.8%= market risk premium
B prject = average response of the project value to hisorical moves
in the market.= 1.2
calculation
r
r1st free
Average
r.ates on Government Bonds in the month of April 1996 (Finan••~1
year of maturity
Tirnmes )
r
rate
1987
6.56%
t
6.56%1
1988
6.84%
7.12%
1989
7.07%
7.53%
1990
1991
7.17%
7.26%
r is obtained from the formula:
t
t
t-1
(1+r )
( 1+rate ) = (1+r)
t
t-1
7.62%
r proect = 7.47% + 1.2 ( 8.8% ) = 18 % (nominal terms)
-18
1 = 12% (real terms)
-
1.05
source: authors
.......................
.....
......................
......
........................................................
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.
. . .. . . . . . . . . . . .. . . .
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.
... .. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . .. .. .. .. .. .. .. .. ..
-
-
.....
·
-92-
1
expected future rates.
The calculations are shown in
Exhibit 18.
Since the cash flows considered in Exhibit 17 are
in real terms (1990 dollars), the discount rate should
also be converted into real terms.
For this purpose,
we assume an inflation rate of 5%.
The real discount
rate becomes 12%.
3.
Calculation of Project Value
Using the 12% discount rate, we can discount our
projected cash flows and determine the net present
value (NPV) of the project in 1990.
$14.78 million.
This value is
The present value of the project,
excluding start-up costs, is therefore $18.42 million.
The STCO project is just one example of
alternative industrial water-dependent projects that
can be conducted at the Quincy shipyard.
Industrial
sources have assessed that the STCO project will tie
up only 20-30% of the shipyard's total capacity
(measured as steel throughput in tons per year).
Consequently, we can estimate that a capacity
utilization of 80% can be valued for similar projects
-93-
from a minimum of $49.12 million to a maximum of $73.7
million, excluding initial investment.
These values
are somewhat conservative since we assume that the
lifetime of the project is only two years, and we
disregard the resale value at the end of the project's
life.
Our purpose in assuming an average value of $61.4
million [(49.5 + 73.7)/2] for a large scale project at
Quincy is to have a realistic estimate of what an
industrial activity for water-dependent uses could be
worth if conducted in the Quincy shipyard.
We now use
this figure in the next chapter to value a call option
for a potential buyer of the yard.
-94-
CHAPTER 4: VALUATION OF A CALL OPTION
This chapter uses the binomial options pricing
model to determine the implied value of a call option
on future use of the shipyard.
The purpose of this
calculation is to understand if the value obtained is
consistent with the current sale price asked by
General Dynamics.
The first two sections discuss the applicability
of options pricing theory to the Quincy shipyard
situation.
Section A identifies the different
variables which enter into the calculations of private
versus public buyers in determining the shipyard's
value.
The sequential nature of the decisions faced
by potential buyers is discussed in section B, where
we assert that the existence of a time delay between
the two decisions provides an option on the second
decision to the buyer.
In section C, call options and their valuation
using the binomial options pricing model are
described.
The model is applied to the Quincy
shipyard, using the Third Harbor Tunnel project as
-95-
---.-n .r-~irr, ,r-xrr*rrr-~,~t-..,c~~*·Jrur.lp&~.,iv,~n
-·lr·rr~r;w- ·r~-..,.. x -~.~..-
-~.r · rslrrr~u~nrr~:Msn~,~~P~zt~i~E(rasK·~r.~sr
LYc~~a*B~unr;
proxy to determine the value of future investment.
Finally, the value of the option is calculated in
section D.
The option value is used in Chapter 5 to
discuss the actions of private and public investors.
-96-
A.
VARIABLES DETERMINING THE POTENTIAL VALUE OF THE
SHIPYARD TO PRIVATE AND PUBLIC BUYERS
Both public and private sectors must calculate the
value of the shipyard's potential future opportunities
for their own purposes, in order to decide whether or
not the property should be purchased.
Both sectors
are capable of buying the property now and will do so
if the present value of those future opportunities is
determined to be greater than the sales price.
The private sector will purchase the property
based on the net present value of known or predicted
cash flows.
A private buyer may also consider
purchase of the property at this time to secure an
option on use of the yard for future projects.
The public sector may be interested in buying the
shipyard to insure that if water-dependent industrial
projects are viable in the future, the shipyard will
be available for those activities.
The government,
for reasons in addition to realization of currently
expected cash flows, would like to have an option then
to use the shipyard facilities.
Further, the
government may want such an option to insure that uses
-97-
not deemed in the public interest will not be imposed
on the shipyard before viable industrial projects
become evident.
B.
APPLICATION OF OPTIONS PRICING THEORY
The decisions faced by the buyer are sequential in
nature.
The first stage decision is:
purchase the
property or don't purchase the property.
decision must be made now.
That
If a decision in favor of
purchasing the property is made, another decision
point will be available at a second stage.
second decision will be:
That
invest in a viable project,
or do not invest and resell the property.
The
decision not to invest may result from a nonexistence
or insufficient number of feasible projects.
The
separate decision points can be illustrated using a
decision tree, as shown in Exhibit 19.
Of course, any potential buyer could also decide
to wait, in hopes that no one else will buy the
property between now and the time at which the second
decision is reached.
The second decision could then
be made without having to make a first decision, i.e.
without requiring an initial investment.
-98-
However, we
EXHIBIT 19
S.
.....::::::::::::::::::
....
......
...........
.::::::::::::
.........
I::::::::::::::
i~:S8:t~~i~~'tf~m:::
·...... .....
: ::
::::
::::::::::::::
. .. .....
. ......::
.....
... . .......
.
.
.
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.
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.. .
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°.
°...
.
INVEST FOR 809
.
.
.
.
.
.
.
.
.
..
.
CAPACITY
PRODUCTION
DON'T INVEST and sell
property
1
D%
STOP
O
IClfCl
on
lPuT
PROBABILITY NODE
source: authors
i~l~-·----·IC-·l
-··
I
~-----
II-- ·--
·
----
-99-
--
----
-
-
-
-·-·I
-- · IIIC-·ZIC
-~-·I
-
Ci
assume here that any buyer who determines that the
shipyard has a positive net present value, including
the option value, will be willing to purchase the
property now at a price equal to or less than that net
present value.
The buyer cannot wait and risk losing
the net present value because the Quincy shipyard is a
unique asset.
Any buyer who purchases the Quincy shipyard now
will have an option to invest in a viable project in
the future, or to abandon that project, without having
made any project-specific investment.
The value of
this option can be approximated using options pricing
theory.
The net present value of the project's
potential cash flows alone would not attribute any
value to the buyer's option.
C.
DESCRIPTION OF OPTIONS AND THEIR VALUATION
A call option gives its owner the right to buy an
asset at a specified exercise (or purchase) price.
The call price is the amount paid now to buy the
option.
When the call must be exercised on a given
date, it is known as a European call; and when it can
be exercised on or before that date, it is known as an
-100-
American call.
One method used to value a call is the "binomial
options pricing model."
The binomial model considers
two asset states -- the upper value of the asset (uS)
and the lower value of the asset (dS); and two call
states -- the upper value of the call (uC) and the
lower value of the call (dC).
The asset states
correspond to the call states such that uC will result
from uS, and dC from dS.
The payoffs from purchasing
a call on this asset can be replicated in a stock and
bond portfolio providing the identical payoffs to the
buyer.
The present value of that replicating stock
and bond portfolio represents the value of the call
option. [1]
The binomial options pricing model is appropriate
to valuation of the option implicit in purchase of the
shipyard.
In order to generalize the shipyard's
future investment opportunities, we refer to the Third
Harbor Tunnel project as a typical example which we
have studied in depth.
We assume that there will be
two states of the world as of April, 1990:
one in
which the project is undertaken and one in which it is
not.
-101-
We can consider that the buyer of the shipyard is
purchasing a European call option on the project, with
a striking price equal to the project's start-up
costs, and an expiration date of April, 1990.
If the
property is purchased now, the buyer will have an
option to invest in a potentially viable project in
1990.
D.
CALCULATION OF THE CALL OPTION VALUE
The value of this option is calculated by using a
1-period binomial model.
That one period spans the
4-year gap between the decision to buy now and the
decision to invest in April, 1990, when the project is
expected to begin.
Further, we assume, as described
in Chapter 3, that the Third Harbor Tunnel project can
serve as a proxy for a potentially viable project
which will use 80% of the shipyard's capacity.
The asset and call payoffs on the Quincy shipyard
are shown in Exhibit 20.
We define the variables used
in the calculation of call option value as follows:
L = the value of the land at Quincy shipyard
in 1986
-102-
EXHIBIT 20
uS = uP
+
at
PAYOFFS ON ASSET
dS = dP + aL
T=4 years
aL + uC = aL
+
max(O, uP-K)
PAYOFFS on
CALL and LAND
aL + dC = aL + max(O, IP-K)
source: authors
-103-
a = 1 + the annual appreciation rate on land in
Quincy to the fourth power
P = the present value of project opportunities in
1990 dollars
r = 1 + the annual risk-free rate to the fourth
power
S = current value of the asset which is equal to
the value of the land (L) plus the expected
present value of future project opportunities
in 1986 dollars
K = the option striking price = the project
start-up costs in 1990 dollars
The present value of future project opportunities
in 1990 dollars, the risk-free rate, and the start-up
costs have already been determined in Chapter 3.
We
assume that the upper value on P is the full present
value of the project, and the lower value on P is zero
because the project is not viable.
The values used for land and its annual
appreciation rate are estimated to be $16 million and
16% respectively. (The appreciation rate was
-104-
determined by taking the lower of a range provided to
us by the Quincy Assessor's office for land in
Quincy.
According to that office, 1.25%-1.5% monthly
appreciation is a conservative appreciation estimate.
[2])
We use the value of land in our analysis, rather
than the value of land plus an assumed value for plant
and equipment (P&E), because the present value of P&E
is assumed to be zero.
This assumption is legitimate
because no uses for the shipyard currently exist, and
four years from now the equipment will have lost most
of its value.
The upper and lower asset states, uS and dS,
include the upper and lower values of project
opportunities, and the appreciated value of the land,
since the land will have to be purchased.
The
appreciated land value is shown as a constant in
addition to the upper and lower call values because
the buyer will realize a gain on the appreciation at
maturity in either state.
The payoff on the call
option is the maximum of upper and lower project
values, uP and dP, minus the striking price, or zero.
The numerical values assumed for each variable, as
well as the values calculated for the upper and lower
-105-
,''.,''.
" -1--
IIý-·-
%
r~S4~-~~~.~Il~~ T~**l*
~
~ JI~ I.~E:·
C~~~~C.C-*
~rX 1~~~~~
C~rl~~ ~ --W1~1 ~ n
1-0
-"-PY~~F·~dTU
EXHIBIT 21
... .
..
.•
.
°
.
.
.o
.
.
.
.
.
.
.
•..
.
.
...
.
.
.•
. ...
. -..
all figures are in millions:
r = ( .0747)4
k=
uP = 61.4
L = 16
a=
(1.16)
14.4
4
dP =
0
therefore ,
uS = uP + aL = 61.4 +16 (1.16 )
dS =dP + aL =
0
+ 16 (1.16)
4
= 90.4
=29
and ,
uC = max ( 0, uP-K) = ( 61.4-14.4)= 47
dC = max ( 0, dP-K) =
0
source: authors
-106-
..
asset and call states, are shown in Exhibit 21.
In
order to obtain S, which includes the expected present
value of the project opportunity in 1986 dollars, we
must assume a probability (q) that the project will in
fact be viable in 1990.
20%.
We initially assume that q =
Using that probability, we calculate expected
present value of the project opportunity as follows:
[(.20 * uP) + (.80 * dP)]/(1.0747)A4
= [(.20 * 61.4) + (.80 * 0)1/(1.0747)^4
= 9.2
Thus, assuming q = .20, S = L + 9.2 = 25.2.
The call value is calculated in Exhibit 22, using
the value for S at q = .20.
The replicating stock and
bond portfolio is long (buys) .765 on the underlying
asset and is short (lends) 16.74 in bonds at the
risk-free rate.
The value of that portfolio, and
therefore the value of the call (C), is $2.638
million.
Because the call value is sensitive to the value
assumed for q, we have calculated alternative values
for S and C, as shown in Exhibit 23, under a range of
-107-
Exhibit 5.1 here
Source : author
EXHIBIT 23
S
.5
39.1
1 3.2
.4
34.4
9.68
.3
29.84
6.16
.2
25.2
2.64
.12
21.52
0.00
. .o
.source:
..
.auth.
. . .
.
.
.
.
.
.
.
.
.
.
.
C
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-109-
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(L~5)*~~i*~-1;6·liei~lf
~~*SJ~*;nr~rT~^~X~L-~-.
i~;lfli).~,,~..~*ilZrrUI~·L~l~.nlllPILhl
hlUV-rUI*^~i*l~
X~nl·I·L·^-CI~-
probabilities.
We will use the call value obtained
assuming q = .20 in further discussion, as we believe
that it represents a realistic and conservative
estimate of probability in this situation.
Our result is that the call value implicit in
purchase of the shipyard now for an option on future
project opportunities is 2.638 million (4.3% of the
the project value in 1990, but 28.7% of the project's
present value, assuming q = .20).
A buyer should therefore be willing to purchase
the shipyard for $18.638 million, a figure which
represents the present value of the land plus the
value of the call option.
In the next section, we
will compare this result with the price being asked by
General Dynamics and discuss other factors influencing
the buyer's decision.
-110-
CHAPTER 5:
EXTERNALITIES
In the last chapter, we concluded that a private
industrial investor should be willing to purchase the
shipyard for approximately $18.64 million, a figure
that includes an option value of $2.64 on future
project opportunities.
Despite our assessment of the
shipyard's value, to date no buyer has managed to
close a deal with General Dynamics.
Furthermore,
although the public sector has expressed consistent
concern with the fate of the shipyard, no public buyer
has as yet taken steps toward its purchase.
This paradoxical situation is characterized by
both an apparent lack of private interest and
substantial public concern, and can only be
interpreted through consideration of the economic
factors that cause "market failure."
Market failures
are defined as situations that lead to a
misfunctioning of the competitive market.
They
normally involve two kinds of economic goods:
goods and externalities.
public
The first are generally
goods that cannot be distributed to specific
individuals.
The latter are costs and benefits that
-111-
impact the community, but are caused by a private
transaction.
The fact that no private buyer is willing to
purchase the Quincy shipyard can be explained as
follows.
The price asked by General Dynamics is too
high for the assessment of future opportunities that
private industrial investors have made.
In other
words, the two parties to the transaction do not seem
to be able to reach a "fair valuation" for the
shipyard.
If we assume that there is adequate market
information on the value of the asset in question,
then some other effects cause this deviation from free
market conditions.
One reason General Dynamics may
ask for a price higher than that offered by the market
is the existence of externalities, or spillovers
effects, which interfere with the valuation of the
shipyard.
It is possible that the constant and extraordinary
public pressure on General Dynamics to influence the
shipyard's fate may cause this discrepancy.
Driven by
concern about social costs and benefits related to the
shipyard operation, public representatives may have
forced General Dynamics to focus on buyers in an
-112-
ri~ill^i·~~L~n~CVd(l
IV~-Li'?31CnlUM~·~CI~d
~R~n_*1~LI~T~I*·I~~*"iX~Yr~lBF~i~I~*mli~ 1
economic sector that cannot meet the company's optimal
price, i.e. that which is the maximum obtainable from
the market. Even though General Dynamics states that
it is willing to accept a lower price, it is not clear
that the company will in fact accept a price
affordable to private industrial buyers.
Because no
sale has yet been made, General Dynamics seems to be
asking a price that is misplaced for the economic
sector which is targeted by public representatives.
The company's preferred optimal price reflects an
avoidable loss that General Dynamics may not be
willing to incur.
For this reason, we may say that if
pressured into selling to an industrial buyer, General
Dynamics may be forced to internalize some
externalities through acceptance of a lower price.
The public sector's explicit interest in the
outcome of the sale, and its concurrent reluctance to
purchase the yard, can be interpreted as follows.
The
public sector has reasons to believe that important
spillover effects are included in the sale of the
shipyard, but the amount of these effects does not
justify public purchase of the yard at the price asked
by General Dynamics.
While the first statement
supports our previous observation on the misplacement
-113-
of price for the private investor, the second
statement seems to contradict it.
The price asked by General Dynamics should match
the price that the public sector is willing to pay for
the property, if that price reflects the effects of
externalities.
But, the public sector also has to
overcome an internal barrier, when looking at the
transaction, which is potential "bureaucratic
failure."
The complex decision process that normally
characterizes a large, political organization may
constitute a substantial obstacle in the decision to
buy the shipyard.
The purpose of this chapter is to explore the
nature and the impact, where possible, of
externalities which may be involved in sale of the
shipyard.
Its contents develop around two bases for
public interest:
(i) financial concerns, including
return on public investment and potential deadweight
loss of tax revenues; and (ii) externalities.
In
discussing each of these issues, we try to understand
how and why these factors could affect the sale
outcome.
-114-
The discussion on public investments analyzes
three investments that may have benefitted the
shipyard in the past.
If benefits can actually be
attributed to the shipyard, the public sector may
claim a residual return on these investments.
The
Weymouth-Fore River dredging project, the Fore-River
Bridge project, and the Conrail spur construction are
analyzed separately in detail.
Then, the discussion
proceeds to study the impact of the shipyard closure
on federal, state and city tax revenues.
The discussion of externalities covers possible
impacts that closure of the shipyard might have on
third parties.
After a general definition of
externalities, the section explores issues related to
the following:
the local economy, education of the
workforce, commercial navigation activities, other
industrial activities around the Weymouth-Fore River
basin, potential loss of the port facility for future
uses, pollution, change in the character of Quincy,
and loss of defense mobilization capacity.
An effort
is made to assess the relative importance of each of
the aforementioned effects.
Finally, the conclusion to this chapter assesses
-115-
the validity of public claims on the outcome of the
shipyard sale.
The discussion is supported by our
findings.
-116-
A.
RETURN ON PUBLIC INVESTMENTS
1.
General Issues
One reason the public sector may be interested in
a private business transaction is the potential loss
of tax revenues that may result from its outcome.
This is especially true if the loss is substantial.
However, if this statement is considered in light of
economic theory, one could argue that in an efficient
market, the private sector will allocate its resources
in the most efficient manner.
More precisely, the
outcome of the private transaction will be the most
profitable activity given the resources invested.
Thus, the public sector can benefit from the
maximization of tax revenues without interfering in
the private
transaction.
As a consequence of the argument above, public
concern about the loss of tax revenues may exist for
only two reasons:
a.
some public investment made in the past has
specific characteristics related to the
private business in question;
-117-
b.
the loss of tax revenues is a deadweight loss
since no other party is willing to carry on
any profitable business activity.
The first issue can be explained as follows.
A
public project is usually undertaken when a divergence
between private and social costs (and benefits) would
lead the private sector to make choices, based on its
own profitability requirements, that are not optimal
from the public's perspective.
The allocation of
resources to public projects, and the expected return
on those projects, is analyzed by comparing the
benefits promised and the costs incurred over time.
Most of the benefits are difficult to quantify since
they are related to goods and services not traded in
the market.
Costs are more easily measured by
observing the market prices of resources used in the
project.
However, when some of the benefits of a
public project accrue specifically to a private
business, the public sector may consider the tax
revenues from that business as a return on its
expenditures.
The second issue is more immediate.
-118-
The public
may have a vested interest in the decision to close a
business when no subsequent alternative profit-making
activity is expected to use that business' resources.
The public's concern will be more pronounced when tax
revenues from that activity are substantial.
Given this framework, it is important to
understand if the public sector (including the City of
Quincy, the Commonwealth of Massachusetts, and the
federal government) has the right to claim a return on
previous investments whose benefits might have
directly affected the shipyard's activities.
In the next section, we will attempt to ascertain
the major public expenditures related to the shipyard
and the return obtained from those investments in the
form of tax revenues.
Where possible, we divide the
funds and returns between the state and federal
governments.
The purpose of our analysis is to
understand if the public sector has a legitimate claim
on the shipyard's future returns, and thus on the
outcome of the sale, based on the public's expected
return on investment.
-119-
2.
Analysis of Three Types of Investments
Three different investments have been made or
proposed which might be seen as benefitting the Quincy
shipyard:
the Weymouth-Fore and Town Rivers dredging
projects, the Fore River Bridge reconstruction, and
the construction of the Conrail spur.
These three
investments are discussed below.
o
the Weymouth-Fore and Town Rivers dredging
projects
Between 1905 and 1976 when the last project was
completed, four major dredging works were undertaken
in the Weymouth-Fore River channel.
Exhibit 24 lists
the first three projects together with the public
funds allocated to them.
The most interesting project
for our purposes is the fourth, the 35-foot channel
project, which is described here in more detail.
In 1964, two years after General Dynamics acquired
the Quincy shipyard, plans to deepen the Weymouth-Fore
and Town Rivers' entire waterway to 35 feet, to
enlarge the turning basin in the Town River, and to
increase the 550 foot maneuvering area at the mouth of
-120-
EXHIBIT 24
Channel depth
Year Local contribution Federal funds
(approved) ($ in year approval) ($ gear approval)
1 8-foot
1905
58,300
24-foot
1916
100,000
* 27-foot
1935
NA
b
NA
69,000
658,500
funds allocated to dredge and maintain the depth
-
Chab.
funds centributeionto the projct
ources: River and Harbor Act 3/3/1905
Letter from Secretary Armyj
24-footRiver an
Harbor Act 7271916
'Letter from Secretary Army"
River and Harbor Act 8/30/1 935
SLetter
•.
..
.
.
.
.
from Secretary Army'
....
.
. . . . . . . • ..
,
.
.
.
.
.
....
. .
.
. •.
..
.
•
. ...
. . .
.
.
. •
. •
.
.
.
.
.
.
.
,
-121-
.
.
,,
,
King Cove and Town River, were approved by Congress
under the Harbor and River Act of 1964. [1]
The
reasons given for deepening and widening the channel
were that:
(i) shipping was subject to numerous tidal
delays; and (ii) prospective commercial navigation was
restrained by the existing 27-foot channel.
In 1964 it was estimated that 2.35 million tons of
cargo were carried in and out of the Weymouth-Fore
River channel.
The cargo was received and shipped by
industrial facilities with waterfronts on Town River
Bay, Fore River Bay and King Cove.
Exhibit 25 shows
the location of these facilities at the time the
project was evaluated.
The major increase in cargo movement was expected
to come from coal transported to a new electric power
station on Town River, the Quincy Electric Light &
Power Company.
The power plant required 2 million
tons of coal per year.
In considering the benefits to
commercial navigation on the waterway, the River and
Harbor Act of 1964 estimated a figure of $1.59 million
per year in 1964 dollars. [2]
The project cost was estimated to be $14.04
-122-
EXHIBIT 25
wcmultotal
t with WOU2eil
ate
ufugyw on
TCUID IeZI3n
e @0093o ftGs
MZ
D OW MOED @MG
BG
CRAINSFORD 1.
•I~I'CV
35' TURNING
SHEEP
&AV
--1'
*/
8'
S)' STATE
STATE
GRAPE
LATE I
OUINCY
OF ENGINEERS
-123-
million in 1964 dollars.
The division of costs
between the Weymouth Fore River and the Town River,
and between federal and non-federal funds, is shown in
Exhibit 26.
In 1980, seven years after the project
began and four years after it was completed, its total
cost was assessed at $28.64 million in 1976 dollars,
including a $0.5 million local cash contribution. [3]
There are reasons to believe that the project
might have benefitted the Quincy shipyard.
The
35-foot channel facilitated the launching of ships for
the LNG program.
These ships had a loaded draft of 36
feet and a light draft of 17 feet. [4]
Also, the
channel permitted easier maneuvering and access for
ships that needed to be repaired and converted.
For
these reasons, we can say that part of the dredging
project benefitted to the shipyard.
However, the main
purpose of the project was to support the procurement
of coal at the Quincy power plant.
Therefore, only a
small fraction of project cost, if any, can be related
to the shipyard.
The observation that a small amount of federal
funds in the channel project might be associated with
a direct benefit to the Quincy shipyard is only part
-124-
EXHIBIT 26
-
site to dredge
Ia~E tiOr~r~i
~
Ssource of funds
($million as of 1964)
... ..B...
.......
. ..........r
. . . .d~............
. . .
·:. . ... . . .
5.65
5.85
......... ..................
.................. ..........·:·:
·
.. . . .
1.,5
.:sou:rceo Wgozh:j
.
....
.
.
. ...
.
.. . .
.04
0
-125-
--- ~··
-·-·-···m)Y·Liy
~~X.,Xlli(Cc~.~.:---t~i~.IC~Cl/f~lT~j~l~T24~*
~WY~·~1RIIVlmp.~~~~Tjr*t~s~l~i~..li--~J
of the issue.
Even if this small amount is
considered, the federal taxes paid by General Dynamics
on revenues generated by the Quincy shipyard over the
1973-85 period provided a substantial return to the
public sector, as described in the section on local
tax revenue below.
For this reason, we assert that a
claim on future tax revenues by federal and state
government, based on an expected return from the
channel project, should be discredited.
Moreover,
since local funds for that project were minimal, and
only a small percentage of those were related to the
shipyard, return on local investment cannot be
considered an issue.
o
the Fore River Bridge reconstruction
The Fore River bridge, separating the cities of
Quincy and Weymouth, is downstream from the Quincy
shipyard.
The bridge has a 175-foot drawspan, and it
was constructed in 1936.
The location of the bridge
is shown in Exhibit 27.
In 1974, the construction company Parsons,
Brinckerhoff, Quade & Douglas was asked by the Bureau
of Transportation of the Commonwealth of Massachusetts
-126-
EXHIBIT 27
-127-
to evaluate reconstruction of the Fore River bridge.
The bridge was to be lengthened to a 300-foot span.
The main objectives of the study were:
(i) to assess
the constraints posed by the present bridge on the
maximum beam of ships constructed at the Quincy
shipyard; and (ii) to analyze the benefits offered by
a wider bridge for future ship construction programs.
In 1974, when the dredging program was already
underway, the Weymouth-Fore River channel could handle
very large crude carriers (or tankers) of up to
400,000 dwt.
However, the bridge constrained the area
available for maneuvering ships in front of the
building basins and outfitting piers.
A 300,000 dwt
tanker was the largest vessel which could be handled
within this constraint. [5]
At that time, the LNG ships under construction at
Quincy had a beam of 143 feet, and they represented
the largest ships which could safely navigate the
bridge.
The shipyard was also considering a bid for
construction of LNG liquification and regasification
terminals with a possible beam of 285 feet.
Bridge
restrictions could have seriously affected the
prospects of such a program.
-128-
The Fore River bridge reconstruction project was
specifically proposed to meet the shipyard's needs.
In fact, there were no reasons for increasing the
highway capacity in the corridor served by Route 3A.
Given this scenario, the cost of bridge replacement
was directly weighed against the benefits which would
result from an expansion of the shipyard's activities.
A preliminary estimate of the reconstruction cost was
$30 million in 1974.
A more detailed breakdown of the
total cost is shown in Exhibit 28. [6]
The bridge
reconstruction project was never undertaken, and other
than the construction study, no state funds were
allocated to it.
o construction of the Conrail spur
The Conrail spur branches off the Y line into
Braintree and serves the General Dynamics, Procter &
Gamble, and Cities Service facilities located around
the Weymouth-Fore River Bay.
The rail spur was built
in 1885, after land purchases, which began in 1845 to
procure right of way, were completed.
The benefits of investment in the spur were
-129-
EXHIBIT 28
:* :::: intr
.
.
.. .
.
.
.
.
.
.
.
.
.
.
0 lia:
:Om
W:rn8
: T
.
.
.
.
.
.. .
: .
.
..
*..•
•...
.
.
.. .. .
.
*::
.
.
.
.
.
..
total cost
(MILLION OF $)
8.1
type of construction
structural steel
concrete and site work
14.1
7.8
equipment
TOTAL
30.00
source: adapted from "Fore-River Bridge Reconstruction
Evaluation," progress report Parsons,
Brinckeroff, Quade&Douglas, Inc-.,
Commonwealth of Massachusetts
Department of Public Works, 1974
.
.
•
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•...
.
.
.
.
.
•
•
.
..
°
....
•
...
-130-
.
.
.
.
.
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.
.•....
.
.
•
....
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.
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•...
.
assumed by the public along with the company, upon its
acquisition.
It does not seem relevant, however, to
address the issue of tax revenues as return on
investment in a project which was undertaken such a
long time ago.
We discuss the Conrail spur investment
in this thesis because it was mentioned, along with
the federal dredging investment, by former Senator
Paul Harold (D-Quincy) as justification for the
public's "moral right to go in there [shipyard] and
free up the facility for alternate use."
[7]
We do
not believe that this statement can be supported in
light of our findings.
3.
Deadweight Loss of Tax Revenues
The second major reason for public concern in a
private transaction arises when the outcome of that
transaction may produce a deadweight loss in taxes.
If the Quincy shipyard remains idle for a substantial
period of time, the federal, state and city taxes paid
by General Dynamics will diminish.
With no earnings
from shipyard production and the possible tax
abatement from the city of Braintree, aggregate tax
revenues will be reduced.
-131-
o
local tax revenues
In 1984, the shipyard paid approximately 4.5%
($2.25 million) of the total property tax bill
collected by the city of Quincy. [8]
The shipyard is
in fact the largest taxpayer in Quincy.
However, the
city pays General Dynamics $2.8 million per year in
tax abatements for overassessing the shipyard property
in the years from 1977 to 1983.
Those payments more
than offset the company's tax bill, and will continue
until 1993. [9]
Closure of the shipyard could potentially reduce
the property tax revenues collected by the city of
Braintree; General Dynamics will be eligible to apply
for abatement of taxes paid to that city when the yard
closes.
Slightly more than 27% (2,115,278 out of
7,820,995 square feet) of the shipyard's property is
located in Braintree, [10] and the property tax bill
should be approximately, but not exactly, proportional
to that levied by Quincy.
The amount of property tax
paid to Braintree is determined using a different
method of property valuation, and the base property
value used in the calculation is probably lower than
that used in Quincy, because a higher concentration of
-132-
production facilities is located in Quincy.
Although concern regarding the loss of property
taxes has been stated repeatedly in the press, the
outcome may be different.
Not only does the city of
Quincy end up paying more in tax abatement than it
receives from General Dynamics, but also Massachusetts
tax laws should allow Braintree to recoup its losses
by slightly raising the taxes of that city's other
property owners. [11]
o
state and federal tax revenues
In 1984, the shipyard paid $8.1 million in state
income taxes [12], and $18.0 in federal income taxes.
[13]
Based on the size of the tax bills, we conclude
that there could be justified concern on the part of
state and federal governments; if the shipyard's
facilities remain idle in the future, a deadweight
loss in tax revenues will occur.
If in fact, the market is assumed to be efficient,
the public should expect to obtain the highest
possible tax bill through the private sector's
maximization of return on investment.
-133-
If a deadweight
loss does actually occur, despite the private sector's
motivation to maximize return, market failure could be
responsible.
In this situation, market failure would
most likely occur as a result of imperfect
information.
For example, all potential buyers may
not have knowledge about the sale of the shipyard, the
value of the shipyard's assets, or demand for the
shipyard's products, when such knowledge may be
essential to their investment decision.
The state government does in fact believe that
market failure may have occurred in this case; its
representatives argue that the shipyard has not been
sold to any industrial buyer because General Dynamics
has not marketed the yard correctly, and potential
buyers are therefore unaware of its availability. [141
4.
Conclusion
In summary, we do not believe that public concern
for the loss of future tax revenues as an expected
return on past public investment is justifiable in
this case.
The Weymouth-Fore and Town Rivers dredging
projects were not specifically undertaken to benefit
the shipyard; the only project which would have been
-134-
undertaken for that purpose, the Fore River Bridge
reconstruction project, was never actualized.
The net deadweight tax loss appears to be a
justifiable concern only to federal and state
governments, and only if market failure is assumed.
Public interest in the future of the shipyard may,
however, be justified by the existence of
externalities, which are costs and benefits incurred
by the public, but not included in the purchase
price.
In the next section, we will discuss
externalities in the context of the Quincy shipyard.
-135-
B.
THE EXISTENCE OF EXTERNALITIES
1.
A General Definition of Externalities
In a market system, prices do not always reflect
all of the costs or benefits incurred in the use or
production of a good.
Both costs and benefits may
therefore accrue outside of the market transaction;
in such cases, those costs or benefits incurred by
individuals other than the buyer or seller are called
"externalities" or "spillover effects."
A capitalist
market does not account for externalities.
In a
competitive economy, profit-seeking entities are not
motivated to include hidden costs in the prices of
their goods;
and buyers will not agree to pay for
benefits accruing to others.
2.
Externalities and the Quincy Shipyard
Externalities will occur in the sale of the Quincy
shipyard in that certain costs and benefits to
individuals other than the buyer and seller will not
be accounted for in the selling price.
We will
discuss the nature and impact of these externalities
in the following section by assuming that the shipyard
-136-
-~CX-~3UVr
l-ri~C1~~rxrl~~iY*~-ltCiUI~DC~ZI~L~7JXUOKIJI~B~*~)i
is simply closed down, and potential buyers are
unknown.
There are two main reasons for making this
assumption.
First, the nature of the buyer's business
(industrial, commercial or residential) will affect
the degree to which externalities occuring in
connection with the shipyard's activities change.
For
example, another industrial use may provide a balance
between public costs and benefits which is similar to
the one maintained by the shipyard.
An analysis of
externalities affected by the shipyard's closure may
therefore be applicable to those which would occur
through purchase, in that the externalities connected
with the buyer's business could fully offset, mitigate
or have no effect on the public impact of closure.
Second, further externalities related to the
buyer's business will accrue.
For example, another
industrial use could produce more pollution than
shipbuilding does, or a residential use could change
the local capacity for industrial water-dependent
activity.
In sum, the externalities which result from sale
-137-
I-··- .--- ovrU~siuW')-"4":~·Sn-rXW~I"*·hhn~.L~d-~'
".'~...
.
.
~..`..~-` *I.rv..Y-~~*"'z~a_·~-g;*-,:~I~WV·2*r.r*:
~
of the property could dramatically change, mitigate,
or offset those which occurred from operation of the
shipyard by General Dynamics.
We will not attempt to
analyze the myriad of externalities which could result
in each type of sale.
This thesis focuses instead on
externalities which are affected by the shipyard's
closure.
By doing that, we provide a framework for
evaluating externalities under different buyer
scenarios.
3. Discussion of Potential Externalities
We identify and discuss specific externalities
which could potentially result from the shipyard's
closure hereafter.
Valuation of externalities is
generally problematic, but cost or benefit estimates
are given wherever possible.
a.
Impacts on the Local Economy
There are both direct and indirect impacts on the
local economy which could result from the shipyard's
closure.
First, the loss in government revenues
(state and local income taxes paid by General Dynamics
and its workers, as discussed above) directly affects
-138-
'r4~-·rS
CIWi.?~·)Er~~lri*1LJ-M~W·~~dulJB~l~iF~I*)
the local economy by reducing the source of funds
available for public spending.
In addition to the
reduction in sources of funds, the government must use
funds to support shipyard workers who are eligible for
unemployment insurance and who have been unable to
secure new employment.
Unemployment laws guarantee
workers at least 30 weeks of benefits, and do not
require proof of ongoing job search. (15]
Second, indirect impacts result from a "multiplier
effect" on the loss of demand for goods and services
by the company and its employees.
The multiplier
effect means that any change in aggregate demand in an
economy has a series of effects on total spending.
Thus, the shipyard generates not only tax revenue, but
also jobs and sales revenues in local businesses where
the company and its employees purchase goods and
services.
In 1984, company expenditures within the
state totalled $24.3 million; and employee payroll was
$114 million.
Estimates of the resultant multiplier
value lost to local businesses as a result of the
closure range from $353 to $500 million annually. [16]
Closure of the shipyard will have the greatest
economic impact on small businesses in its immediate
-139-
'IlI
C' ~^"r~l · '
'r·` ,~.~r~r..-nr..r~r- r~,~~·al~,·~l;x~r.~r~I-*·L~*YCh~L·~~SP·H
-.
L'**~Y~*YII~C~-nrrr~·a_~~-~V~~n~*lf~-
I~
vicinity, mostly restaurants, with sales which are
solely dependent on the spending of shipyard workers.
Specifically, owners of the Mae-fare coffee shop,
Joe's Lunch, and Ma's Lunch, all located on South
Street across from the entrance to the yard, have been
extensively interviewed in the press.
Some are
planning to close and move elsewhere, while others
will attempt to survive through targeting a different
customer group, or through waiting out the closure.
[17]
In summary, we conclude that while closure of the
shipyard will have some negative effect on aggregate
spending in the local economy, it will be difficult to
measure that effect.
The change in workers' personal
spending levels is difficult to ascertain for a number
of reasons.
First, most workers residences are
dispersed geographically throughout the state, and a
change in their spending habits will thus have a
minimal effect within their own communities.
Second,
many workers receive unemployment compensation to
supplement their income in the short-term, and may be
collecting that benefit without reporting wages being
earned in Quincy's booming underground economy.
This
hypothesis has been forwarded by Barbara Opaki, who
-140-
runs the retraining and placement center in Braintree,
based on her observation of the frequency in workers'
refusals of highly paid job offers. [18]
Third, many
workers have or will have found jobs within a
relatively short period of time.
General Dynamics
estimates that 70% of its workers have found new jobs
or are in retraining programs; state officials have
lower estimates but some "are nevertheless optimistic
that the healthy economy will absorb the laid off
workers." [19]
In conclusion, the factors presented above serve
to mitigate the economic impact of the shipyard's
closure resulting from the multiplier effect, and make
estimation of that impact difficult.
Finally, the
most measurable and definite economic impact will be
that on businesses located in the shipyard's immediate
vicinity.
b.
Education of the Workforce
There are three costs involving education of the
workforce which the public might incur due to the
closing of the shipyard:
the cost of training current
workers for reemployment; the potential cost of
-141-
remobilizing the labor force at sometime in the future
when a need arises for skills specific to
shipbuilding; and the cost of losing the shipyard as a
long-term source of education for the workforce.
o
training displaced workers for reemployment
Both General Dynamics and the state government
have invested in retraining Quincy's displaced
workers.
The company budgeted $10 million for both
job placement services and severance pay.
This amount
includes a severance bonus based on seniority for
workers who remain on the job until their scheduled
dismissals and the partial funding of the job
placement center in Braintree. [20]
In addition,
General Dynamics has hired psychological consultants,
Troy Associates, to help workers who suffer from
depression, frustration, confusion and fear. [21]
These costs have been incurred by the company and do
not represent externalities.
*The government, however, has also invested funds
in retraining workers.
Both the state and federal
governments provide the remaining portion of funds
used for the placement office in Braintree.
-142-
The state
government has a total budget of $810,000 for
retraining purposes.
This amount has also covered the
payment of $1,800 in tuition for workers who attend a
28-week intensive retraining program at Massasoit
Community College in Canton.
The purpose of the
classroom program is to prepare workers for
entry-level occupations in "economically stable and
growing sectors of the economy," such as computer
programming, heating and air conditioning, diesel
technology, construction, and electrical technology.
To date, 69 out of 79 enrollees have graduated from
this program. [22]
o
Potential Cost of Remobilization
When workers with skills specific to shipbuilding
are forced to move to other industries, their skills
are essentially lost from the labor pool.
Such
workers will learn new skills applicable to their new
jobs, and they will not necessarily reappear in the
future if and when skills specific to shipbuilding are
needed.
There may thus be a cost to remobilizing the
work force in the future; that cost would include the
training of new workers or the hiring back of former
workers, at wages high enough to compensate them for
-143-
leaving their interim occupations.
The maximum cost for remobilization of workers
with skills specific to shipbuilding would then be
that of training new workers.
If it were more
expensive to hire back former workers, new ones would
always be trained.
The potential maximum cost can
therefore be estimated as equivalent to the training
costs for those displaced workers.
The three job
categories considered specific to shipbuilding are
shipfitter, rigger-erector, and loftsmen, representing
approximately 17% of Quincy's former workforce. [23]
Therefore, of the 4,203 workers employed when the
closure was announced in July, 1985, about 714 fell
into these categories.
Available statistics on the
duration of on-the-job training for selected
metalworkers is on average 3,915 hours [24]; assuming
that only 10% of those 714 workers would have to be
retrained while receiving a beginning wage of $6 per
hour, the total cost incurred in remobilization would
be $1,677,186.
If the percentage of workers needing
to be retrained or the beginning wage were higher,
both conservatively assumed in this calculation, the
cost could be substantially higher.
-144-
The potential remobilization of the shipbuilding
workforce may not be an externality, in that any
business which mobilizes a workforce for the purpose
of making a profit will pay training costs as part of
its investment.
On the other hand, should the public
have to finance remobilization for a public purpose,
such as a national defense effort, then the loss of
those skills would represent an externality.
o
Loss of the Shipyard as a Long-Term Source
of Education
A large proportion of general metalworking skills
are learned in on-the-job training programs, provided
either directly by the employer or through unionregistered apprenticeships.
The percentages of
on-the-job training versus off-site training received
in preparation for the various metalworking
occupations used at Quincy are shown in Exhibit 29.
As discussed in Chapter 2, demand for labor at the
Quincy shipyard has fluctuated widely over the years.
During demand upswings, a certain number of workers
were trained in order to remobilize the workforce, and
conversely during demand downswings, a certain number
-145-
EXHIBIT 29
°
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-146-
r·r.:~lrrlspl,~.rl7=,~,~~U;~~~~~*I(FUWr
si·~ra,
~-~·~-~-···. ~~·n··.~,~~.,!..
I~L-~fl
1~~~·~lJ~lJ~lJ~lJ~lJ~IJ~Sr~L~-~-~-~.Sf~~ 1~5C·.~I*I·r
of workers were released to seek employment in other
industries.
Thus, the shipyard has provided a source
of skilled labor to the surrounding economy over time,
and closure of the shipyard represents a decrease in
the aggregate source of education available to the
public.
This education effect is most important with
respect to workers trained in general metalworking,
and other non-specific skills, because those skills
can most easily be transferred to other industries.
In summary, there are externalities associated
with education of the workforce.
Current public
expenditures on the retraining of displaced workers is
directly observable.
In addition, the potential need
to remobilize a labor pool with skills specific to
shipbuilding and the loss of the shipyard as a
long-term source of education are both legitimate
public concerns.
c.
Commercial Navigation Activity
Another possible externality resulting from the
shipyard closure can be identified with a reduction in
commercial navigation activity on the Weymouth-Fore
River channel.
Commercial navigation provides
-147-
earnings to shipowners and income to crews and to
handling facility personnel.
The shipyard might be a
source of commercial navigation, and it is important
to establish the impact of its closure on that
activity.
The Army Corps of Engineers annually records a
detailed breakdown of waterborne commerce in the U.S.
by location and type of freight.
Exhibit 30 shows the
freight traffic in the Weymouth-Fore River channel as
reported in 1983 [25]; Exhibit 31 shows the type of
activities conducted, and the purpose for which the
waterfront is used in each setting.
From the these
two types of information, one can estimate the
allocation of freight traffic to the different
industries located on the waterfront in the Town or
Fore River basins, based on the type of activities
they conduct.
Our estimates of traffic volume attributable to
the Quincy shipyard are highlighted in Exhibit 30.
Assuming that all fabricated metal products and
machinery are received at or shipped from General
Dynamics, the shipyard's traffic volume in 1983,
during full-scale MPS vessel production, was 905
-148-
EXHIBIT 30
:..:
. .:.:.
:.:-:-:-:
.. sh ri.ioh•)
. . . . . . . . . . . . . . . . . . . . . . . . . . ...
commodity
total tons
vegetable oil
11,110
sodium hydroxide
basic chemicals
i'
''
2,108
3,316
796,128
267,829
77,080
gasoli ne
dlstillate fuel oii1
residual fuel oil
petroleum&coal products
Sabriicaited
137
-metal: prirducts :.: - -. -•--•.--.
.·-
- :· .- . . :::-.-.668.
!·
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:::::: ::
*De:::::::
partent
fr:the .Arn
o rps.f
-.~agi:ners: .1 985:
-149-
I**-r·r,·u·r.i~..i~·~,rsur*~*-r4Sr~p~BXn
EXHIBIT 31
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.
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com-p
C ari
name
Operated by
pie~rs ,vharv es and
docks are useed
j·
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Purpsse for' which
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orIng,
r, a!
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1i
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iu~idiJi
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arnd
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QuslrioY r.Adu
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Y&I IrimKuzrgq
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inn
'Cry·fi
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,~-L1C
.J,
s~i·3);1
:
•.t
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".4fieF,
't'.,..
i.'. i
:.- C.-.·-
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.
IT
I
:
ar,~
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.
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Ctiteg C,-r
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i
1
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&-fst" E-3isori.. C~ic
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[
IEt.rWh.arf
Fore
'
onEfT!
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source: "The Port of Boston, Ma," US Army Corps of
Engineers, Port Series no.3, 1983
--
·
. .
-150-
I ·
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tons.
This amount represented 0.1% of the total
volume transported that year.
Obviously, for a more
detailed and accurate analysis, we would need more
information regarding the value of cargo and the size
of the ships used.
Nonetheless, it appears evident
that the shipyard has not had a very significant role
in the commercial navigation activities at the
Weymouth-Fore River basin.
In summary, we conclude that the closure of the
Quincy shipyard will not have any major effect on
freight traffic in the channel.
d.
Impact on Other Industrial Activities
Around the Weymouth-Fore River Basin
As previously stated, General Dynamics spent $24.3
million on goods and services in Massachusetts.
The
proportion of the amount which may have gone to other
large industrial businesses located around the
Weymouth-Fore River basin is minimal.
None of those
businesses, as named in Exhibit 25, are directly, if
at all, dependent on the shipyard for revenues.
Because no significant economic exchanges between
General Dynamics and those concerns occur, the direct
-151-
impact of the closure on their businesses can be
assumed to be negligible.
The only exception would perhaps be the Quincy
Electric Light & Power Company which received $6.6
million in 1984 from General Dynamics. [26]
If that
company's margin is seriously affected over a long
period by a loss in revenue, compensation in the form
of a rate increase will, in all probability, be
granted, and the cost passed on to local residents.
An indirect impact on the industrial companies
located near the shipyard may result from a recent
proposal to rezone a large parcel of the shipyard
property, which is located within Quincy city limits.
The proposal concerns a change in zoning class from
Industrial B to PU-D (Planned Unit Development), and
is currently pending.
A PU-D classification
designates land for mixed commercial and residential
uses.
The proposal was filed by Ted DeCristofaro, the
Ward 2 Councillor representing the Quincy port area.
A public hearing was held before the City Council and
the city's Planning Board on April 7, 1986, at which
time the hearing was recessed for further public
comment.
The zoning decision will ultimately be made
-152-
by the City Council (2/3 vote) after the Planning
Board has submitted its recommendation. [271
The outcome of this rezoning proposal could affect
the future of the Weymouth-Fore River basin as an
industrial waterfront area.
Zoning decisions, like
legal cases, have precedent implications.
Other
Quincy-based industrial concerns may more easily gain
PU-D classification if the shipyard is rezoned.
In
the South Shore area, where real estate prices and
commercial businesses are booming, industrial
businesses could be tempted to move if a precedent for
PU-D rezoning is provided.
e.
Potential Loss of the Port Facility for
Future Uses
The Quincy shipyard is a port facility, which
possesses drydocks, basins and piers.
In addition,
the Weymouth-Fore River channel, providing access to
the facility, is a "stable" channel.
That means that
the channel's current activity is such that, once a
dredging to widen or deepen the channel has been
completed, there will be only a minimal need to
redredge the channel in the future. [28]
-153-
Because stable channels are a limited natural
resource, which implies that port facilities located
on such channels are also limited in number, the
shipyard facility can be seen as a public asset.
This
asset can be used to support any number of water
dependent activities.
We cannot predict all potential future needs for
port facilities on stable channels.
Destruction of
the Quincy port capacity will diminish the limited
pool of such assets.
If, at some time in the future,
public need for a port facility with stable channel
access unexpectedly arises, and none are available,
the public could incur significant cost.
This cost
may be that of foregoing opportunities or that of
attempting to rebuild suitable port facilities which
have been used for other purposes.
Therefore, if
Quincy is sold for commercial or residential uses, the
loss of its port facility may represent an
externality.
f.
Pollution
Pollution is one of the most common externalities.
-154-
Its costs are inflicted on a community by private
industrial entities, having no economic reason to bear
those costs.
Extensive debate on the subject has been
centered on how to design effective regulations that
can shift spillover costs to the sources of
pollution.
In this section, we are interested in
problems that may arise when an industrial activity
ceases its operations.
More specifically, we want to
address the issue of permanent pollution of the
environment caused by closing an industrial plant.
The Quincy shipyard has been an industrial setting
for 102 years.
Early tenants operated the shipyard
with no stringent rules on pollution control.
Over
time processes began to produce larger amounts of
hazardous waste, and regulations became more
stringent.
Today, the shipyard is closing, and its
land and waterfront show evident signs of an
industrial activity carried on for over a century.
During the last 20 years, the largest source of
hazardous waste at the Quincy shipyard have been
coating and painting processes. [29]
As a result,
organic aromatics, solvents and volatile materials
have polluted the nearby atmosphere and the land, and
-155-
traces of solvents and organic compounds are left in
the soil.
The second major source of hazardous waste
comes from the leakage of hydraulic and lubricating
oils.
Most of these oils, if contaminated, are burnt
away in a specific industrial waste site, as required
by the DEQE.
However, leakages are inevitably
absorbed by the soil and accumulate over time.
Finally, the "Hazardous Waste Manifest" of the
DEQE prohibits industrial plants from treating or
storing solid materials, fluids and pieces of
equipment, such as PCB transformers, for more than 90
days without a special permit.
In order to comply,
the Quincy shipyard has removed an average of six tons
of hazardous waste per quarter in its last few years
of operation.
This figure does not include any
treatment of soil consistently polluted by leakage of
solvents, organic compounds and oils aforementioned.
Nor does it represent an estimate of the cost which
would be incurred to clean up pollutants derived from
past tenants.
Given this situation, one may argue that there are
pollution spillover effects that the shipyard closure
may provoke.
General Dynamics is aware of, and
-156-
attempting to deal with, its hazardous waste problem.
Recently, a sum, specified as a "6-figure" amount by
one of our contacts, was spent by the company for
ground assessment.
In the first quarter of 1986, 80
tons of hazardous waste, including an underground tank
and some PCB transformers, were removed from the
shipyard.
At an average cost of $2,000/ton,
approximately $160,000 has been spent in the last few
months.
And General Dynamics has expressed an
intention to spend much more on the site, and in fact,
claims that the land will be clean enough to "use as a
playground." [30]
Of course, the liability problem that General
Dynamics might incur as a result of its hazardous
waste offers an incentive to clean up the land.
On
the other hand, General Dynamics should not be responsible for the pollution caused by past tenants.
If it
decides not to remove hazardous wastes attributable to
the activities of past tenants, it may leave them on
site.
While it may be difficult to ascertain
responsibility for hazardous material dumped, it is
likely that potential pollution may be left at the
shipyard after its closure.
If this happens, there
might be an incentive for the public sector to address
-157-
the issue of pollution at Quincy shipyard.
g.
Change in the Character of Quincy
Quincy city officials, including Mayor Francis X.
McCaulley and city council President Jim Sheets, have
expressed concern on behalf of residents that closure
of the shipyard will change Quincy's character. [31]
Two main reasons for this change are cited.
First, they argue that the shipyard represents a
symbol of the town's waterfront tradition, and that
removal of that symbol will, in some sense,
irrevocably cut the city's ties with its history.
Second, they assert that closure of the shipyard will
fuel the recent trend from a blue-collar to a
white-collar environment in Quincy.
They claim that
such change is not welcomed by many residents, and
further that the changes will be perceived by those
residents as causing deterioration in their quality of
life.
We must conclude that this effect, if it is real,
may represent an externality, because changes in the
residents' quality of life will not be accounted for
-158-
in selling price.
However, assessment of the value of
the externality, or even determination of its nature,
i.e. whether the change will be a cost or a benefit,
is beyond the scope of this thesis.
We therefore
merely state that the anticipated change in Quincy's
environment may impact the public.
h.
Loss of Defense Mobilization Capacity
Shipyard mobilization is defined as the
construction, conversion, repair and maintenance
activity that is required during war times.
Under the
assumption that a future war will be conventional,
many advocate the need for preserving sufficient
shipyard capacity in peacetime, so as to be ready to
meet the demand-surge in war times.
More precisely,
government subsidies and supports to the shipbuilding
industry are considered necessary to maintain national
security.
From a theoretical point of view, if one accepts
the basic assumption that a future war might be
conventional, and if one has no particular
disagreement with weapons construction and operations,
there may be some spillover benefits in maintaining
-159-
active shipyards.
Under these assumptions, the
private demand for ship construction may understate
the benefits to society of keeping an active
shipbuilding base.
Resources to shipbuilding may
subsequently be underallocated, if not monitored by
the public sector.
Without questioning the benefit of
national defense, we discuss the effects of closing
the Quincy shipyard on national security below.
This subject has been recently debated in
different studies:
the Shipyard Mobilization Base
Study (SYMBA) [32] and the Nacoa Report [33].
By
projecting different "war scenarios" and assessing the
shipbuilding capacity required in each, the SYMBA
study concludes that the shipyard facilities existing
at the end of 1982 were sufficient for mobilization
purposes.
However, the report also concluded that the
existing shortage of skilled shipyard workers might
have delayed some of the requirements dictated by
surges in demand.
Because shipbuilding capacity has been decreasing
since 1982 as increasing numbers of shipyards close,
one may expect that the current mobilization capacity
of the shipbuilding industry is not sufficient for
-160-
(;"··I~1~.U*F~
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-r·n~n~~icrll(*Pxi~~f~%~Pr~YZl.aOl~li~·
national defense purposes.
However, the Nacoa Report
shows that even with the reduced capacity of 1984, the
nation could meet its mobilization requirements.
It is beyond the scope of our study to pronounce a
judgement on this matter.
controversial.
The issue is very
Opinions generally depend on political
views, on assumptions about the types of future wars
and probabilities of their occurence, on the degree of
risk that a nation can support, and on war scenarios
that can be imagined.
In summary, if we agree with the Nacoa report
finding that there is no need to support an excess
capacity in the industry for national security
reasons, the closure of Quincy shipyard has no
spillover effects on national defense.
On the other
hand, in evaluating the findings of the SYMBA report,
one must engage in the delicate discussion of the
validity of investment in national defense.
-161-
C.
CONCLUSION
The purpose of this chapter is to understand if
the public sector has a valid claim on the sale of the
Quincy shipyard.
To study this problem, we have
analyzed two major topics:
1.
the financial interests of the government,
based on expected return on public investments
and potential deadweight loss of tax revenues;
2.
social claims based on the existence of
externalities related to sale of the shipyard.
The conclusion we reached in discussing the first
issue can be summarized in two points.
First, the
public sector has already realized its return on past
public projects which might have benefitted the
shipyard.
Second, the potential deadweight loss of
tax revenues will be a valid concern, if the public
sector has compelling reasons to believe that market
failure will occur.
Therefore, financial claims
cannot alone be considered a valid argument for
sustaining public concern.
-162-
The second issue is more difficult to address
because it involves controversial issues which cannot
be resolved or accurately quantified.
However, we
summarize our findings as follows.
First, the impact of the shipyard's closure on the
local economy is difficult to measure.
It seems
evident that businesses located near the shipyard will
suffer from its closure.
But, local aggregate
spending provided by the company and its employees may
be replaced by alternative spending sources, due to a
boom in the South Shore economy and to reabsorption of
the workforce.
Second, the closure does present a social cost
with respect to education of the workforce.
The
public sector is in fact allocating funds to retrain
displaced workers, but more importantly, there is a
potential cost related to losing a portion of the
labor pool of workers with skills specific to
shipbuilding, as those skills will not be immediately
available in the future if needed.
Third, the impact of the closure on commercial
-163-
navigation at Weymouth-Fore River is negligible.
Fourth, the change in Quincy's character,
traditionally that of a blue-collar, waterfront
community cannot easily be judged as a benefit or as a
cost, and we do not consider it relevant.
Fifth, the impact of the shipyard's closure on
other industrial activities around the Weymouth-Fore
River basin could be reason for state and local public
concern, in that success of current rezoning efforts
may start a trend which could tempt those concerns to
relocate to other areas.
Sixth, the loss of a port facility for future
needs also justifies public concern.
The shipyard has
extensive facilities facing a designated port area.
The loss of its port facility, a limited asset, can be
considered a potential cost to society, if a need for
such that facility arises in the future.
Seventh, pollution can be a matter of concern to
the public, especially if health problems occur in the
future due to the fact that General Dynamics did not
remove all on-site hazardous waste.
In particular,
all liability for such problems for which private
-164-
~pr~~%~"r~Wa*~·i·UaF*pu~,~-~n~,*K~
responsibility cannot be ascertained may eventually be
covered by the government.
Eight, the impact of the shipyard closure on defense
mobilization capacity is very difficult to assess and
remains a controversial issue.
As a result of the points mentioned above, we
conclude that there is a valid basis for public
interest in the outcome of the shipyard sale.
In
fact, the aggregate effect of externalities, which are
described as being important in this conclusion, seems
to result in a net benefit to the public, if either
the shipyard is maintained as such, or else it is used
for other industrial water-dependent activities.
-165-
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-----
CHAPTER 6:
CONCLUSION
General Dynamic's recent decision to sell its
Quincy Shipbuilding Division has prompted strong
reaction from the public sector.
The difficulties
encountered in finding another shipbuilder operator to
buy the shipyard, together with the public pressure
exerted on behalf of maintaining the property as an
industrial facility, have created a controversial
discussion, centered on the future of the shipyard.
The interests of different parties are often highly
subjective and are based on claims that may be
difficult to interpret on purely economic grounds.
This thesis has identified the key issues
characterizing sale of the shipyard.
By applying
financial and economic concepts in their analysis, the
authors define fundamental factors which affect the
transaction.
A careful study of the price distortions
shows how justifiable and conflicting interests can
lead to a situation where it is not easy to determine
a "fair market price" for an economic good.
More
importantly, this thesis suggests the need to
recognize the misuse of economic concepts in public
-166-
~~~*^~~r~LI~~I1I*Zn*X~--~·UY-~~CWUI·X~il
debate and ascertains the relevancy of the factors
which support our findings.
The Quincy shipyard closure illustrates a case of
market failure.
Spillover costs and benefits
characterize the sale transaction.
As we concluded in
Chapter 5, the shipyard can be considered a source of
net spillover benefits.
Thus, the effects of
externalities cause an "underallocation" of the
asset.
Private buyers are not willing to pay a price
that includes the net spillover benefits to the
community.
Under this circumstance, the public sector has a
legitimate right to direct the outcome of the sale so
as to maximize social welfare.
More precisely, the
public sector will participate in the purchase of the
yard, if its assessment of the value of externalities
exceeds the difference between the price sought by
General Dynamics and the price that a private investor
is willing to pay.
Exhibit 32 shows the actions
undertaken by the public sector in the case of net
spillover benefits.
There are two cases in which the public sector
-167-
EXHIBIT 32
Private
Pubic
P
P
imnv.
E(Net Exter.)
E(Net Exter.)
P
P
G.D.
-P
inv.
G.D.
-P
inv.
NOT BUY
BUY
P
G.D.
-=Price asked by General ..
Dynamics
D...
P inv.
=Price assessed by a private industrial
i nvestor
E(Net Exter.)= expected value of net externalities
S
to the public
source: authors
-168-
-.
will fail to intervene when net spillover benefits
occur.
The first case arises when the public
assessment of externalities is less than the price
differential between the private parties.
This may
happen if the seller and the public sector have
asymmetric information on the effect of externalities.
The second case arises when the public sector
experiences bureaucratic failure.
For this reason, a
decision to participate in the asset's purchase may
never occur, either because of conflicting interests
or information among the various government agencies,
or because of compromise behavior which leads to
suboptimal decisions.
In summary, the public sector has a legitimate
interest in determining the future use of the shipyard
based on the existence and nature of externalities
which will result from outcome of the sale.
Therefore, we expect that the government will
participate in purchase of the shipyard if it
determines that net spillover benefits exceed the
price differential between private parties.
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FOOTNOTES
CHAPTER 2
1.
"A Future for the Few," Far Eastern Economic
Review, February 13, 1986.
2.
"Potential Reuse Study of the Quincy Shipyard,"
Booz, Allen & Hamilton, Inc., February 25, 1986.
3.
Far Eastern Economic Review, op. cit.
4.
U.S. Shipping and Shipbuilding: Trends and
Policy Choices, Congress of the United States,
Congressional Budget Office, August, 1984.
5.
"Too Many Yards Chasing After Too Little Work,"
The Boston Globe, May 5, 1985.
6.
Far Eastern Economic Review, op. cit.
7.
Merchant Marine Miscellaneous - Part 3: Hearing
Before the Subcommittee on Merchant Marine of the
House Committee on Merchant Marine, 98th Congress
2d Session 218-224.
8.
Booz, Allen & Hamilton, op. cit.
9.
ibid.
10
Seapower, April 1985, Vol. 28, No. 4.
11.
Report on Survey of U.S. Shipbuilding and Repair
Facilities, U.S. Department of Tranportation,
Maritime Administration, 1985.
12.
Booz, Allen & Hamilton, op. cit.
13.
U.S. Department of Transportation, op. cit.
14.
ibid.
15.
Booz, Allen & Hamilton, op. cit.
16.
"Too Many Yards Chasing After Too Little Work,"
op. cit.
-170-
17.
"Saga of the Dying U.S. Shipbuilding Industry,"
The Boston Globe, Thursday, July 25, 1985.
18.
"Fourth Quincy-Built Supply Ship Christened in
Honor of USMC Hero," General Dynamics World,
Vol. 16, No. 3, March, 1986.
19.
"Quincy Shipyard To Close," The Boston Globe,
Thursday, July 25, 1985.
20.
ibid.
21.
ibid.
22.
ibid.
"Contract to Lift Shipyard's Jobs," New York
Times, July 25, 1985.
"Why the Shipyard Decided to Close," Patriot
Ledger, July 25, 1985.
23.
"Navy Contracts Key to Quincy," The Boston Globe,
May 5, 1985.
24.
"Quincy Shipyard to Close," op. cit.
25.
Shipyard's Fortunes Kept in Step with America's
Wars," The Boston Globe, Thursday, July 25, 1985.
26.
"Leaders in Quincy, Mass., Weigh Impact of
Closing Shipyard," The New York Times, July 27,
1985.
27.
"3100 Quincy Shipbuilders to be Laid Off," The
Boston Globe, Tuesday, April 30, 1985.
28.
"Shipyard Workers Blame 'the Bigwigs'," The
Boston Globe, Thursday, July 25, 1986.
29.
"The Impact," The Boston Globe, Thursday, July
25, 1985.
30.
"Shipyard Workers Blame 'the Bigwigs'," op. cit.
31.
"Quincy Shipyard to Close," op. cit.
32.
Congressional Budget Office, op. cit.
33.
ibid.
-171-
34.
"Quincy Shipyard to Close," op. cit.
35.
"Union Says Donnelly not Helping with Shipyard,"
The Patriot Ledger, January 6, 1986.
"Potential Yard Buyer's Record is Shipshape,"
The Patriot Ledger, January 17, 1986.
"Shipyard Owners Talk to Others Besides Genesis
About Sale," The Patriot Ledger, January 22,
1986.
36.
"Quincy Shipyard Should Convert," The Boston
Globe, Sunday, May 5, 1985.
37.
"Rescuing U.S. Shipbuilding," The Boston Globe,
April 13, 1983.
Telephone interview with representative of the
Local No. 5, Shipbuilders Union, AFL-CIO, in
Quincy.
38.
"Shipbuilding's Future Rides on Perfect Assembly
of Pieces," The Boston Globe, May 13, 1986.
39.
ibid.
"City Hears Quickly From Possible Buyers," The
Patriot Ledger, July 25, 1985.
40.
Booz, Allen & Hamilton, op. cit.
41.
ibid.
42.
Massachusetts Wetlands and Waterways: A General
Guide to the Massachusetts Regulatory Programs,
Department of Environmental Quality Engineering
(DEQE), November, 1984.
43.
ibid.
44.
Interview with Bert Ward, Chief Engineer,
Commission of Public Works, Quincy,
Massachusetts.
45.
DEQE, op. cit.
46.
ibid.
47.
ibid.
-172-
48.
"Wetland Fight: New U.S. Policy is Under Fire,"
The Boston Globe, May 11, 1986.
CHAPTER 3
1.
Booz, Allen & Hamilton, op. cit.
2.
Third Harbor Tunnel, Interstate 90/Central
Artery, Interstate 93," Final Environmental
Impact Statement and Final Section 4(f),
Evaluation, Federal Highway Administration,
Vol. 3, August, 1985.
3.
ibid.
4.
Interview with Peter Gwyn, President, Peter Gwyn
& Associates, Inc., Management Consultants,
Duxbury, Massachusetts.
5.
Interviews with Peter Gwyn, op. cit., and Lou
Salano, Senior Management Consultant at Bechtel,
Parsons Company, New York, New York.
6.
Peter Gwyn, op. cit.
7.
U.S. Department of Transportation, Maritime
Administration, op. cit.
8.
9.
Interview with Mr. London of John Alden Insurance
Company, Boston, Massachusetts.
Federal Highway Administration, op. cit.
10.
Peter Gwyn, op. cit.
11.
Employment and Earnings, U.S. Department of
Labor, Bureau of Labor Statistics, Vol. 33, No. 3
March, 1986.
12.
Lou Salano, op. cit., and Peter Gwyn, op. cit.
13.
ibid.
14.
Principles of Corporate Finance, Second Edition,
Richard Brealey and Stewart Myers, McGraw-Hill
Book Company, Inc., 1984.
-173-
Chapter 4
1.
Options Markets, John C. Cox and Mark Rubenstein,
Prentice-Hall, Inc., Englewood Cliffs, NJ, 1985.
2.
Interview with staff assessor at the Assessor's
Office, Quincy, Massachusetts.
Chapter 5
1.
Weymouth-Fore and Town Rivers, Boston Harbor,
Massachusetts.
"Letter from the Secretary of the Army," House
Document, No. 247, 88th Congress, 2nd Session,
March 16, 1964.
2.
ibid.
3.
"River and Harbor Projects, Massachusetts," U.S.
Army Corps of Engineering, New England Division,
Vol. 2 and 3.
4.
"Fore River Bridge Reconstruction Evaluation,"
Commonwealth of Massachusetts, Department of
Public Works, 1974.
5.
ibid.
6.
ibid.
7.
Telephone interview with Mike Hoye, Conrail,
Area Engineer's Office, New York, NY.
"State Seeks to Keep Quincy Yard for
Manufacturing," The Boston Globe, August 2, 1985.
8.
"The Impact," op. cit.
9.
General Dynamics Corp. v. Board of Assessors of
Quincy, et al., Supreme Judicial Court of
Massachusetts, Suffolk, 388 Mass. 24, January 21,
1983.
"Quincy Coping with Changes," The Boston Globe,
May 12, 1986.
-174-
10.
General Dynamics Corp. v. Board of Assessors of
Quincy, et al., op. cit.
11.
"The Impact," op. cit.
12.
"Leaders in Quincy, Mass., Weigh Impact of
Closing Shipyard," op. cit.
13.
"Why the Shipyard Decided to Close," op. cit.
14.
Interview with officials at the Department of
Industrial Services, Commonwealth of Mass.
Booz, Allen & Hamilton, op. cit.
15.
"Quincy Coping with Changes," op. cit.
16.
ibid.
"Shutdown Will Cut Deeply into South Shore
Economy," The Patriot Ledger, July 24, 1985.
"Why the Shipyard Decided to Close," op. cit.
17.
"Shipyard Closing Casts Its Shadow," The Patriot
Ledger, April 26, 1986.
18.
"Quincy Coping with Changes," op. cit.
19.
ibid.
20.
"Closing Gives the City Much to Worry About,"
The Patriot Ledger, July 25, 1985.
"General Dynamics Will Spend $10 Million on its
Displaced Workers," The Patriot Ledger, July 25,
1985.
21.
"Approaching an Uncertain Future," The Boston
Globe, May 11, 1986.
22.
"Shipyard Workers Blame 'the Bigwigs'," op. cit.
"69 From Shipyard Hope Retraining = Jobs," The
Patriot Ledger, April 26, 1986.
23.
Booz, Allen & Hamilton, op. cit.
24.
"Occupation Training in Selected Metalworking
Industries," U.S. Department of Labor, Bureau of
Labor Statistics, Employment and Training
Administration, 1974.
-175-
25.
"Waterborne Commerce of the U.S.," Part 1,
Waterways and Harbors, Atlantic Coast, Department
of the Army Corps of Engineers, 1983.
26.
"Quincy Coping With Changes," op. cit.
27.
Telephone interview with Richard Meade, Planning
Department, Quincy, Massachusetts.
28.
Interview with Carl Boutilier, U.S. Army Corps of
Engineers, Regional Office, Boston, Mass.
29.
Anonymous source at General Dynamics Corporation.
30.
ibid.
31.
"Leaders in Quincy, Mass., Weigh Impact of
Closing Shipyard," op. cit.
Closing Gives the City Much to Worry About," op.
cit.
32.
SYMBA Study, Department of the Navy, Office of
the Assistant Secretary and Department of
Transportation, February, 1984.
33.
"Shipping, Shipyards and Sealift:
Issues of
National Security and Federal Support," Nacoa
Report, preliminary draft, 1985.
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