LEGISLATIVE PROPOSALS OF THE SUBSIDIZED LINES-H.R. 6813 TUESDAY, JULY 16, 1963 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MERCHANT MARINE OF THE COMMITTEE ON MERCHANT MARINE AND FISHERIES, Washington, D.C. The subcommittee met, pursuant to other business, in room 219, Cannon House Office Building, Hon. Herbert C. Bonner (chairman of the subcommittee) presiding. The CHAIRMAN. We will now hear witnesses on H.R. 6813, to amend Public Law 86-518 and section 506 of the Merchant Marine Act, 1936, to authorize the amendment of contracts between shipowners and the United States dealing with vessels whose life has been extended by Public Law 86-518. (H.R. 6813 and agency reports follow :) [H.R. 6813, 88th Cong., 1st sess.] A BILL To amend Public Law 86-518 and section 506 of the Merchant Marine Act, 1936, to authorize the amendment of contracts between shipowners and the United States dealing with vessels whose life has been extended by Public Law 86-518 Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 8(c) of Public Law 86518 is amended by adding the following to the end thereof: "Provisions in such contracts affecting vessels covered by this Act providing for refund of construction-differential subsidy for domestic operations under section 506 of the Merchant Marine Act, 1936, and costs of national defense features for commercial use shall be amended so that for such refund payments made for the period after December 31, 1959, the base upon which such refund payments are computed annually thereafter shall be the undepreciated amount of subsidy or the national defense feature, as the case may be, as at December 31, 1959, divided by the years of life of the vessels as provided under this Act, remaining after December 31. 1959." SEC. 2. Section 506 of the Merchant Marine Act, 1936, as amended (46 U.S.C. 1156), is hereby further amended so as to add the following sentence after the first sentence thereof: "Such annual payments shall terminate at the end of the vessel's useful life for depreciation purposes as provided in section 607 of the Merchant Marine Act, 1936." SEC. 3. Any contract between the owner and the United States which was entered into prior to the date of enactment of this Act and which would be affected if the provisions of the amendment made by section 2 of this Act were applicable thereto, may, at the request of the owner be revised to be in accordance with the law as amended by this Act, with respect to such of the vessels covered thereby as may be designated by the applicant. 111 GENERAL COUNSEL OF THE DEPARTMENT OF COMMERCE, Hon. HERBERT C. BONNER, Chairman, Committee on Merchant Marine and Fisheries, DEAR MR. CHAIRMAN: This is in further reply to your request for the views of this Department with respect to H.R. 6813, a bill to amend Public Law 86-518 and section 506 of the Merchant Marine Act, 1936, to authorize the amendment of contracts between shipowners and the United States dealing with vessels whose life has been extended by Public Law 86-518. With the amendment hereinafter proposed, we recommend favorable consideration of the bill. Prior to the enactment of Public Law 86-518, section 506 of the Merchant Marine Act, 1936, provided that every owner of a vessel for which a constructiondifferential subsidy has been paid shall agree that the vessel shall be operated exclusively in the following services: 1. In foreign trade; or 2. On a round-the-world voyage; or 3. On a round voyage from the west coast of the United States to a European port or ports which includes intercoastal ports of the United States; or 4. On a round voyage from the Atlantic coast of the United States to the Orient which includes intercoastal ports of the United States; or 5. On a voyage in foreign trade on which the vessel may stop at the State of Hawaii or at an island possession or island territory of the United States. The section further provided that the owner shall agree that if the vessel is operated in the domestic trade on any of the above-enumerated services, he will pay annually to the Secretary of Commerce that proportion of one-twentieth of the construction-differential subsidy paid for such vessel as the gross revenue derived from the domestic trade bears to the gross revenue derived from the entire voyages completed during the preceding year. The section did not expressly provide that such payments are not required after the 20-year economic life of the vessel has expired. In addition, the section provided that the Secretary of Commerce may consent to the temporary transfer of the vessel to service other than that covered by the agreement whenever he determines that such transfer is necessary or appropriate to carry out the purposes of the act, but that such consent shall be conditioned upon the agreement of the owner to pay to the Secretary an amount which bears the same proportion to the construction-differential subsidy that was paid as such temporary period bears to the entire economic life of the vessel. The purpose of paying construction-differential subsidy is to place the owner on parity with his foreign competitors with respect to the capital cost of his ship. Since his foreign competitor cannot operate in the U.S. domestic trade, and in order to avoid unfair competition with the American-built ships that were built without the aid of construction-differential subsidy and operate in the domestic trade, section 506 limits the right of construction-differential-subsidy ships to operate in domestic trade and requires repayment of the constructiondifferential subsidy to the degree the ship does operate in this trade. When the Merchant Marine Act, 1936, was enacted, it fixed the economic life of vessels for purposes of that act at 20 years. In 1960, however, Public Law 86-518 extended the life of vessels (except liquid-bulk carriers) that were delivered by the shipbuilder on or after January 1, 1946, to 25 years. The amendment which Public Law 86-518 made to section 506 was simply to strike out "one-twentieth" and insert "one twenty-fifth" in lieu thereof. The effect of this amendment was to require repayment of a greater amount of constructiondifferential subsidy for operation in domestic trade than appears equitable. For example, if a ship was 15 years old on the effective date of Public Law 86-518, then fifteen-twentieths of the construction-differential would have been used up for purposes of section 506. Since the vessel's life was extended for an additional 10 years, the amendment provided that an additional ten twentyfifths of the construction-differential subsidy should be available for this purpose. Added together, these two fractions come to more than the whole amount of the construction-differential subsidy. Fifteen-twentieths plus ten twenty-fifths (or eight-twentieths) equals twenty-three twentieths. Public Law 86-518 contains provisions which prevent this result with regard to other sections of the Merchant Marine Act, 1936, which it amended. With regard to depreciation to be taken under sections 215, 502(g), 507, 510(d), 607 (b), 611 (c), 705, 714. and 1107 (4) of the Merchant Marine Act, 1936, for example, section 8(c) of Public Law 86-518 provides that for the period prior to its effective date, January 1, 1960, such depreciation shall be computed on the basis of a 20-year life and that the remaining depreciation shall be taken for the period after that date on the basis of the remaining years of a useful life of 25 years. If the foregoing provisions had been made applicable to the amendment that was made to section 506 of the Merchant Marine Act, 1936, only the whole amount of the construction-differential subsidy would be taken into consideration for purposes of computing repayment of construction-differential subsidy for operation in domestic trade. In the example that is given above, fifteentwentieths of the construction-differential subsidy has been used up prior to the effective date of the act. If the foregoing provisions had been made applicable, the remaining five-twentieths of the construction-differential subsidy would be used up for this purpose over the remaining 10 years of life of the vessel at the rate of one-tenth per year. We believe that these provisions were not made applicable to the amendment made to section 506 only through a technical oversight in the drafting of the bill that became Public Law 86-518. The extension of the life of vessels delivered after January 1, 1946, to 25 years also affected the national defense feature recapture provisions of the construction-differential subsidy contracts. These recapture provisions apply to national defense features placed on the ship, which are paid for by the United States but which ultimately may have some commercial value. The recapture provisions provided, with respect to national defense speed, that if the ship is operated during any year at a speed in excess of the commercial speed that the operator paid for, the operator shall pay the United States (for operation in foreign trade) that proportion of one-twentieth of the estimated foreign cost of the national defense speed that the time it was operated at the excess speed bears to 365 days, and (for operation in domestic trade) that proportion of one-twentieth of the U.S. cost of the national defense speed that the time it was operated at the excess speed bears to 365 days. With respect to national defense features other than speed, such as heavy lift booms, the national defense features recapture clauses provided that if the operator used the national defense feature commercially, he would pay the United States its estimated foreign cost depreciated on the basis of a 20-year life. The amendments that were made to these clauses after the enactment of Public Law 86-518 did not take into account that for the period prior to January 1, 1960, the operator had been exposed to pay these costs on the basis of a 20-year life. The entire original cost of the national defense feature was divided by 25 which (similarly to the amendment that was made to section 506 of the Merchant Marine Act, 1936) would expose the operator to repayment on the basis of more than the original cost of the national defense feature. H.R. 6813 would provide as follows: (A) Provisions of contracts (with respect to vessels whose lives were extended to 25 years under Public Law 86-518) providing for refund of construction-differential subsidy under section 506 of the Merchant Marine Act, 1936, and for refund of the costs of national defense features for commercial use, shall be amended so that for refund payments made for the period after December 31, 1959, the basis on which such refunds shall be computed shall be the undepreciated amount of the subsidy or national defense feature as at December 31, 1959, divided by the years of life, as provided under Public Law 86-518, remaining after December 31, 1959. (B) Section 506 would be amended so that the obligation of owners of construction-differential subsidy ships to make repayments of such subsidy for operation of the vessels in domestic trade would terminate at the end of the economic lives of the vessels. In our opinion, the bill provides the correct way of computing constructiondifferential-subsidy recapture and national-defense-feature recapture for the period after December 31, 1959, with respect to vessels whose lives were extended under Public Law 86-518. We also believe that the obligation to repay con struction-differential subsidy for operation in domestic trade was intended to be, and should be, terminated at the end of the economic lives of the vessels. We, therefore, favor the bill in principle. The bill, however, does not amend section 714 of the act. This section authorizes the construction of vessels by the Secretary of Commerce for operation on an essential trade route (if the purposes of the act cannot be carried out under titles V and VI) and the charter of such vessels for private operation on the route at an annual charter hire of 4 percent of the foreign cost (5 percent prior to the enactment of Public Law 86-518) plus 32 percent of the depreciated foreign cost, and with provision for recapture of a proportion of one twenty-fifth of the difference betwen the American and foreign cost of the vessel if the vessel is used in domestic trade. No problem arises under this section with respect to recomputation of the recapture, because the Maritime Administration does not now have any vessel which was built under title VII between January 1, 1946, and January 1, 1960. The section should be amended, however, to terminate the obligation to pay recapture at the end of the vessel's economic life. This could be accomplished by inserting "(a)" after "2" in line 8, page 2. of the bill and by inserting at the end of section 2 of the bill a new subsection (b) to read as follows: (b) Section 714 of the Merchant Marine Act, 1936, as amended, is amended by inserting at the end thereof the following sentence: "Such annual payments shall terminate at the end of the vessel's useful life for depreciation purposes as provided in section 607 of the Merchant Marine Act, 1936." With the foregoing amendment, we recommend favorable consideration of the bill. The Bureau of the Budget advises there is no objection to the submission of this report from the standpoint of the administration's program. Sincerely, ROBERT E. GILES. B-115403. Hon. HERBERT C. BONNER, COMPTROLLER GENERAL OF THE UNITED STATES, Chairman, Committee on Merchant Marine and Fisheries, DEAR MR. CHAIRMAN: Further reference is made to your letter of June 10, 1963, acknowledged on June 12, requesting the comments of the General Accounting Office concerning H.R. 6813, 88th Congress, 1st session, entitled "A bill to amend Public Law 86-518 and section 506 of the Merchant Marine Act, 1936, to authorize the amendment of contracts between shipowners and the United States dealing with vessels whose life has been extended by Public Law 86-518." Section 2 of the bill would amend section 506 of the Merchant Marine Act. 1936, as amended, to provide that annual repayments of construction differential subsidy on account of operation in the domestic trade by vessels in certain enumerated services shall terminate at the end of the vessel's useful life for depreciation purposes as provided in section 607 of the Merchant Marine Act of 1936, which presently is 25 years. It is possible that this limitation would not be applicable to repayments of construction differential subsidy required by the third sentence of section 506 of the act in the case of vessels temporarily transferred to service other than that covered by agreement. In other words, as you are aware, the cited portion of section 506 provides for repayments over the economic life of a vessel; whereas, the proposed amendment limits such repayments to the statutory 25-year life of the vessel. We bring this to the attention of your committee in order that section 2 of the bill may be appropriately modified in the event a different result is intended. Other than the above, and since the subject of the bill is a matter of policy for determination of the Congress, we make no recommendation with respect to its enactment. Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. Hon. HERBERT C. BONNER, DEPARTMENT OF THE NAVY, OFFICE OF THE SECRETARY, Chairman, Committee on Merchant Marine and Fisheries, MY DEAR MR. CHAIRMAN: Your request for comment on H.R. 6813, a bill to amend Public Law 86-518 and section 506 of the Merchant Marine Act, 1936, to authorize the amendment of contracts between shipowners and the United States dealing with vessels whose life has been extended by Public Law 86-518, has been assigned to this Department by the Secretary of Defense for the preparation of a report thereon expressing the views of the Department of Defense. H.R. 6813 would change the base for computing the partial refund to the Government of the construction differential subsidy when a subsidized vessel in the foreign trade operates in the domestic trade. The Department of the Navy, on behalf of the Department of Defense, defers to the Department of Commerce on H.R. 6813. This report has been coordinated within the Department of Defense in accordance with procedures prescribed by the Secretary of Defense. The Bureau of the Budget advises that, from the standpoint of the administration's program, there is no objection to the presentation of this report for the consideration of the committee. For the Secretary of the Navy. Hon. HERBERT C. BONNER, C. R. KEAR, Jr., Captain, U.S. Navy, Deputy Chief. THE GENERAL COUNSEL OF THE TREASURY, Chairman, Committee on Merchant Marine and Fisheries, DEAR MR. CHAIRMAN: Reference is made to your request for the views of this Department on H.R. 6813, to amend Public Law 86-518 and section 506 of the Merchant Marine Act, 1936, to authorize the amendment of contracts between shipowners and the United States dealing with vessels whose life has been extended by Public Law 86-518. The first section of the bill would authorize the recomputation of the refund of construction differential subsidy required when a subsidized vessel in the foreign trade operates in the domestic trade by spreading the balance of the construction differential subsidy cost over the remaining 25-year life of the vessel. Section 2 of the bill would provide for the termination of the obligation to make such refunds at the end of the vessel's useful life for depreciation purposes. The proposed legislation is not of primary interest to this Department and the Department has no comment to make as to its general merits. The Department was advised by the Bureau of the Budget that there was no objection from the standpoint of the administration's program to the submission to the Senate Committee on Commerce of an identical report on S. 1172, a similar bill. Sincerely yours, G. D'ANDELOT BELIN, General Counsel. The CHAIRMAN. You may proceed, Mr. Alexander. STATEMENT OF HON. DONALD W. ALEXANDER, MARITIME ADMINISTRATOR; ACCOMPANIED BY ROBERT J. ABLES, GENERAL COUNSEL, MARITIME ADMINISTRATION, DEPARTMENT OF COMMERCE Mr. ALEXANDER. Mr. Chairman, with the amendment hereinafter proposed, we recommend favorable consideration of H.R. 6813. Prior to the enactment of Public Law 86-518, section 506 of the Merchant Marine Act, 1936, provided that every owner of a vessel |