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for which a construction differential subsidy has been paid shall agree that the vessel shall be operated exclusively in the following services:
1. In foreign trade, 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 conpleted 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 United States 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 construction-differential 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 construction-differential 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 1520 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 1925 of the construction-differential subsidy should be avail
able for this purpose. Added together these two fractions come to more than the whole amount of the construction-differential subsidy, 15/20 + 10%25 (or 820) = 2320.
Public Law 86-518 contains provisions whch 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 Îife 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, 15/20 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 5/20 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 1/10 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 1/20 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 1/20 of the United States 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 provides 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 features was divided by 25 which (similarly to the amendment that was made to section 506 of the Merchant Ma
rine 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 show 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 construction-differential 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 beJieve that the obligation to repay construction 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 31/2 percent of the depreciated foreign cost, and with provision for recapture of a proportion of one twenty-fifth of the difference between 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 that there is no objection to the submission of this statement from the standpoint of the Administration's program.
Thank you, Mr. Chairman.
The CHAIRMAX. Would you explain further?
Mr. ALEXANDER. This basically corrects the loopholes that were left at the time the bill was passed extending the economic life from 20 to 25 years. There were some provisions that were apparently overlooked at the time that that bill was enacted, and the purpose of this bill is simply to correct the slip-ups that were made at the time the original bill was enacted.
The CHAIRMAN. Do I understand that, as the law is now with respect to the extension of the life of the vessel, the recapture would be more than the part the Government subsidized the vessel for?
Mr. ALEXANDER. As the act now stands, that would be the case and this is intended to correct that situation.
The CHAIRMAN. And to make it only fair.
The CHAIRMAN, So that the operator who has a subsidized vessel only pays what the actual subsidy was? Mr. ALEXANDER. That is correct. The CHAIRMAN. Mr. Tollefson? Mr. TOLLEFSON. It has to be run by me a couple of times, too. The part of the bill that has to do with the 20- and 25-year depreciation does not bother me. I can see where we overlooked a point there and that it could result in the operator paying, as you put it here 23/20 of the amount of construction differential subsidy. But, by this amendment of section 714, I confess that I do not know just exactly what you are trying to do here. You say:
No problem arises under this section with respect to recomputation of the recapture. but you say, The section should be amended, however, to terminate the obligation to pay recapture at the end of the vessel's economic life.
Mr. ALEXANDER. That is the important consideration and that is the other feature of this bill, so that this recapture provision does not continue on indefinitely but in the case of 714 as in the case of 506, it would terminate at the end of the vessel's economic life.
Mr. TOLLEFSON. I guess I do not know quite what you mean. You say no problem arises under that section. Yet you want to do something about the wording to terminate the obligation to pay recapture. Is that because there might be some possibility in the future? Mr. ALEXANDER. Yes, sir.
Mr. TOLLEFSON. You are just taking care of something that might arise! Mr. ALEXANDER. That is correct, sir. The CHAIRMAN. Give an example of that. Mr. ALEXANDER. Well, it is conceivable that under 714, which provides for the charter, there might be a situation where this recapture provision would extend out for an indefinite period of time and we believe that if 714 is applied there should be a cutoff date which is the termination of the economic life of the vessel and that after that time
The CHAIRMAN. What is the economic life of the vessel ?
is the imp this recall as in ife.
Mr. ALEXANDER. No, sir. This is just a cutoff point, sir, which we believe should be inserted so that if, in the future, such a situation as I described should occur
The CHAIRMAN. If we extended the life of the vessel further there would be no requirement ?
Mr. ALEXANDER. All of the provisions of the act now provide for a 25-year economic life of a vessel and this simply cuts off this recapture provision at the end of the economic life.
The CHAIRMAN. Which is 25 years?
Under section 714, you say there have been no vessels built by the Maritime Administration between January 1, 1946 and January 1, 1960. Were any built thereafter?
Mr. ALEXANDER. As far as I know, there have not been. This date of January 1, 1960, simply refers to the date of the enactment of this Public Law 86-518.
Mr. TOLLEFSON. While no ships have been built under title 7 during this period of time you mentioned, you take the position that possibly in the future a ship or more than one might be built and you just want to take care of that contingency? Mr. ALEXANDER. That is correct, sir. Mr. TOLLEFSON. I yield to Mr. Mailliard. Mr. MAILLIARD. I understand the logic of treating title 7 vessels the same way as the ones that would be taken care of in section 2 of the bill, but I am kind of mystified as to what happens at the end of 25 years. Presumably you would no longer be subsidizing a vessel that was over 25 years old, would you, for operating subsidy; or would
Mr. ALEXANDER. Yes.
Mr. MAILLIARD. Then do you not put your domestic carriers in a peculiar competitive position that at the end of 25 years the carriers in the foreign trade can still operate in the domestic trade to the extent that is permitted here but with no penalties at all. In other words, they are going to be using the cheaper cost vessels perhaps in competition with the domestic carriers. Is this not what could happen?
Mr. ALEXANDER. I think that, as a practical matter, at the time that the act was originally passed in 1936, it was generally agreed that after 20 years a vessel was no longer useful. Then later that period was extended to 25 years. Now you say can a vessel operate after it has been in service for 25 years and we know that this is possible because we have some vessels.
I agree with your point but I think there has to be some determination, some cutoff point as to what the economic life of a vessel is and at the present time we think 25 years is proper.
Mr. MAILLIARD. Of course we do, too. We passed a bill that says so, so that that is statutory, but the contemplation as I have always understood the operating subsidy act was that the subsidy period for the operation of that vessel would normally be expected to coincide with the statutory economic life.