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I realize that there have been times when extensions have had to be made for various reasons but the theory always has been that those ships would be replaced at the end of their statutory life; is that not correct? Mr. ALEXANDER. That is correct.
Mr. MAILLIARD. Now, by lifting these payments at the end of the vessel's useful life, you are, I would suppose, anticipating the extension of subsidized operation of these vessels beyond the statutory period and I can see the equity of this that, if they have paid it all, why should they have to pay any more, but this, it seems to me, ignores the possibility of distinctly unfair competition with unsubsidized vessels operating in the domestic trade which were not subsidized at the time of construction, either.
Mr. ALEXANDER. Of course, a ship such as you describe operating in the domestic trade would not be paid operating-differential subsidy. Mr. MAILLIARD. That is correct.
Mr. ALEXANDER. This all has to do with a repayment of construction differential subsidy and there is a question how long does this obligation go to the owner of the vessel ?
Mr. MAILLIARD. I understand that, but what I am trying to get at, and I am asking because I do not really know, is right now our domestic carriers are protected from subsidized U.S.-flag competition by both the reduction of operating differential subsidy or the elimination of it as to that section of the voyage and by the requirement of repayment of the proportionate part of the construction-differential subsidy which presumably puts them on an entirely equitable basis. Mr. ALEXANDER. Right.
Mr. MAILLIARD. If they run to the end of their economic life and are not replaced as the act contemplates and continue to operate on their subsidized routes, you would continue to withhold the operatingdifferential subsidy under the domestic section but you would at this point no longer require the payment of the proportionate share of the construction subsidy.
I am not enough of a mathematician or economist or shipping man or anything else to figure out what effect this has on the competitive position of your unsubsidized domestic trades who are using ships that did not get construction-differential subsidy. It is just a question that pops into my head and I do not know what the answer is. Mr. ALEXANDER. I don't know, sir. I don't really know. Mr. MAILLIARD. I would think you would have to know before you could properly advocate the passage of this bill. Mr. ALEXANDER. We think this is an equitable provision.
Mr. MAILLIARD. It is equitable to the subsidized lines but have you considered whether it is equitable to the domestic lines? Equitywhere we sit-has to apply across the board. It is no good to be fair to one group if you are, in effect, discriminating against the other.
Mr. ALEXANDER. I think that the situation, which you are describing, is possible but I think that it is rather remote.
Mr. MAILLIARD. If it is remote, then why do we need the bill at all? If you are not planning to operate these ships under subsidy beyond the 25 year life is not all of this unnecessary; which is my understanding. I refer not to the first part but to the section 2, and your amendment becomes unnecessary unless the operation continues beyond the statutory life.
Mr. ALEXANDER. I think that is correct.
Mr. MAILLIARD. Then, if you are going to do this, I must understand that you are contemplating operation beyond the economic life and I must satisfy myself that this would not be creating unfair competition to the nonsubsidized domestic carrier.
Mr. ALEXANDER. Well, I think it is a hypothetical situacion which could exist and, to the extent that there was a limitation of the obligation of the subsidized operator who would operate in the domestic trade to be relieved of this requirement to pay back a part of the construction differential subsidy, I think that would be an inequity to the domestic operator; but I really think it would be a remote situation.
Mr. MAILLIARD. If it is so remote, we do not need this provision that: Such annual payments shall terminate at the end of the vessel's useful life. If this is the only situation in which this would apply and, if at that point, the expense—and this repayment is an expense of operation of the subsidized operator on a domestic leg is reduced by that much; to that extent his competitive position as against the purely domestic unsubsidized operator becomes advantageous.
Mr. ALEXANDER. I think that is correct.
Mr. MAILLIARD. In dollars or cents or in proportion of the cost of operating a ship, whether this is meaningful or meaningless I do not know but, I do not think we should take such an action without knowing what that impact might be on the part of our merchant marine which we do not have to subsidize.
Mr. STUBBLEFIELD. Would the gentleman yield ?
Mr. TOLLEFSON. Mr. Chairman, I had just yielded to Mr. Mailliard. • Another factor occurs to me: The subsidized operator repays the amount of the construction differential subsidy back to the Government on the basis of these 20 or 25 per-year figures. There is no interest charged there; is there?
Mr. ALEXANDER. No, sir.
Mr. TOLLEFSON. Now, if he financed his own 50 percent, of course he would have paid interest on that. The domestic operator pays interest on the full cost of his ship and, amortized over a 20-year period, that would run into quite a chunk of money, would it not?
Mr. ALEXANDER. Yes, sir. Mr. TOLLEFSON. That would put the domestic operator at a disadvantage from the standpoint of the funds invested in his ship as against the funds invested by the subsidized operator. Have you taken that interest factor into consideration ?
Mr. ALEXANDER. No, sir.
Mr. TOLLEFSON. I wish you would, just to see what it might work out to be in a hypothetical case.
I think that is all, Mr. Chairman. Thank you.
The CHAIRMAN. Other than the interest then, they are on an equal footing, as Mr Tollefson has developed. The cost of the vessel has equalized itself to the nonsubsidized operator, and the subsidized operator other than the interest the nonsubsidized operator paid on the money he had in the vessel, over and beyond that foreign cost.
Mr. ALEXANDER. Plus this point that Mr. Mailliard raises, and that is that: If the subsidized operator operates in the domestic trade after the vessel has passed its economic life; to that extent there would not be complete fairness to the domestic operator.
The CHAIRMAN. Mr. Stubblefield?
The only way you could rationalize the situation which has just been described by Mr. Mailliard would be that you do not consider there is a ship after 25 years or if there is it is so obsolete that it cannot compete?
Mr. ALEXANDER. There would have to be a ship that had passed its economic life that was operating under operating subsidy which would mean that it is in the foreign commerce of the United States and that ship, past its operating life, would have to be operating on a leg of domestic voyage. All of these circumstances would have to apply to reach this situation. Mr. STUBBLEFIELD. As far as you are concerned, there is no ship?
Mr. ALEXANDER. As a practical matter, we know that ships do not disappear at the end of 25 years.
Mr. STUBBLEFIELD. To push it a little further then: If one does exist it is so obsolete that it would be nothing capable of competing with a nonsubsidized ship?
Mr. ALEXANDER. I think that is part of the theory of the 25-year economic life; yes, sir. Mr. STUBBLEFIELD. Thank you. The CHAIRMAN. Mr. Glenn? Mr. GLENN. I have no questions, Mr. Chairman.
The CHAIRMAN. It would not be correct because some of these nonsubsidized operators are running ships now, are they not, that have reached 20 years or more? Mr. ALEXANDER. Yes, sir; they are. The CHAIRMAN. The subsidized vessel would compete.
Do you have any suggestion as to what might be done here to correct what seems to be an inequity?
Mr. ALEXANDER. One thing that we might do is go back and, making the assumptions which have been suggested relative to interest rates and relative to operations of vessels past their economic life on domestic legs, we might take some hypothetical assumptions and see what the impact would be in dollars and cents under those conditions. That we would be happy to do, sir.
The CHAIRMAN. You mean, and include the apportioning of the interest rate charged over the number of years that he uses his ship beyond 25 years?
Mr. ALEXANDER. That is the only suggestion we would have, sir.
Mr. MAILLIARD. Mr. Chairman, if I can see that I understand, Mr. Tollefson raises the question that: As things exist now, there is probably an inequity created by the interest charges on the portion of the unsubsidized ship that the owner had to put up his own money for. That is continuing and we have been living with that for quite a long time.
My concern is that, by adding this provision, you might further compound the difficulty and I think that you are on the horns of a dilemma here. In one sense, it is not fair to make the subsidized operator pay back more than the total subsidy and, on the other hand,
it is not fair to give him an unfair advantage over the nonsubsidized operator. I think this is a genuine dilemma that faces us. Who wants to be Solomon?
The CHAIRMAN. If you will stand by, let us hear from the industry. STATEMENT OF NOAH M. BRINSON, VICE PRESIDENT, AMERICAN
PRESIDENT LINES, LTD., REPRESENTING THE COMMITTEE OF AMERICAN STEAMSHIP LINES; ACCOMPANIED BY IRA L. EWERS, COUNSEL FOR VESSEL REPLACEMENT COMMITTEE OF COMMITTEE OF AMERICAN STEAMSHIP LINES Mr. BRINSON. Mr. Chairman, I am Noah Brinson, vice president of the American President Lines, representing the Committee of American Steamship Lines, and I am accompanied by Mr. Ira Ewers.
I might say at the start, Mr. Chairman, that our statement as it relates to part I of the bill, H.R. 6813, exactly coincides with the views expressed by the Maritime Administrator. If the chairman desires, in order to conserve time, I would like to just cover section 2 of the bill.
I have this prepared statement which I will file for the record.
STATEMENT OF Noah M. BRINSON, VICE PRESIDENT, AMERICAN PRESIDENT LINES,
Mr. Chairman and members of the committee, my name is Noah M. Brinson. I am a vice president of American President Lines, Ltd., 601 California Street, San Francisco, Calif. I appear here on behalf of the Committee of American Steamship Lines which represents 15 American-flag steamship companies who have operating-differential subsidy agreements with the United States. Unfortunately the bill I am here to support is a technical one and though I will try to keep my presentation brief and simple, this will not, I fear, be an easy task.
The bill before your committee, H.R. 6813 contains two principal provisions which are set forth in section 1 and 2 thereof.
Section 1 of H.R. 6813 is intended to correct an obvious technical oversight in Public Law 86-518, as that law in turn affected section 506 of the Merchant Marine Act, 1936.
Congress enacted Public Law 86-518 in 1960. It provided for a 25-year economic life for merchant ships for subsidization, depreciation, government loan amortization, and other accounting purposes. Prior to that time the economic life of such ships had been 20 years.
The new law extended the life not only of vessels to be built in the future but also existing vessels, if they had been built after January 1, 1946. A number of subsidized operators own the latter type of vessel. As the result of this change in the law on the economic life of vessels, several provisions in the contracts between the United States and the subsidized operators affecting such existing vessels whose lives had been extended were amended to accommodate this change.
Confusion arose about the effect of Public Law 86-518 on two provisions found in the construction-differential subsidy agreements of a number of the operators affecting such vessels, however. To explain this confusion we must now consider another statute. Section 506 of the Merchant Marine Act, 1936, has always provided that the construction-differential subsidy agreements between the United States and the operators of vessels built with subsidy must contain a provision that would require such an operator to refund a portion of the construction subsidy paid on such vessels if the ship were used in part in a domestic trade such as the intercoastal or coastwise trade (the text of the pertinent portion of sec. 506 is appended to this statement). This was to be computed and paid annually by a formula set forth in section 506. For a vessel with a 20-year economic life, the operator had to refund each year that proportion of one-tewentieth of the total subsidy that had been paid toward the vessel's construction that the gross revenue collected from the domestic trades served bore to the total revenue from all trades served by the vessel during the year.
When Public Law 86-518 was passed in 1960, it simply provided, as to section 506, that what had been one-twentieth in the formula should become "one twenty-fifth." This worked fine for new vessels constructed after enactment of Public Law 86-518. But, as interpreted by the Maritime Administration, it created a strange and inequitable result for vessels in existence whose economic lives were formerly 20 years and were now going to be 25. A specific example is the best way to explain this basically simple but outwardly technical problem.
Let us assume that we are talking about a vessel that cost $10 million to build and that $5 million of that cost was paid with construction-differential subsidy, Assume also that 5 percent of the vessel's activity during its life was in the domestic trade and the remaining 95 percent in the foreign trades. For simplicity's sake let us further assume that this level of domestic revenue was constant, that is, 5 percent of total revenue each year. Under the program set forth in section 506, 5 percent of the total construction subsidy that the operator had received when he built the vessel in question would have been repaid by the end of the vessel's life. If the vessel's life was 20 years, $250,000 would have been repaid at the rate of $12,500 per year over the life of the vessel. (Domestic revenue was 5 percent of total revenue each year and therefore under the formula 5 percent of one-twentieth of the subsidy was returned to the Government each year for 20 years totaling $250,000.)
Next, let us suppose that we had a vessel built after the effective date of Public Law 86-518. Assume that it, too, each year earned 5 percent of its revenue in the domestic trade. Under the new statute its economic life would be 25 years, not 20. But while this would change the amount of construction subsidy repaid each year, the same total amount would be repaid over the life of the vessel as in the case of a 20-year life vessel. The annual payments now would be 5 percent of one twenty-fifth of the total subsidy instead of one twentieth as in the case of a 20-year life vessel. The annual payments would be smaller (5 percent of one twenty-fifth of $5 million is $10,000) but they would be made annually for more years and in the end would total $250,000 which is 5 percent of the total subsidy as is proper.
Let us now get back to the problem that has necessitated the corrective legislation embodied in section 1 of H.R. 6813. Suppose our hypothetical vessel was 10 years old when its life was extended from 20 years to 25 years by Public Law 86-518. For 10 years subsidy repayments would have been paid on a base of one-twentieth per year or, in the example given, in an amount of $12,500 per year. Public Law 86-518 extended the vessel's life for 5 years so that its remaining life became 15 years instead of 10 years. Thereafter the section 506 formula for computation of the annual payment changed so that the 5 percent of total revenue would be applied annually to one twenty-fifth of the total subsidy received instead of one-twentieth. Though this would lead to a smaller payment per year, namely $10,000, what the legislative draftsmen overlooked was that the annual payments were going to be paid over a 5 year longer period. By the end of this vessel's life there would have been $275,000 repaid to the Government instead of $250,000. At the time of the extension of its life, half (1920's) of its subsidy refund has been made. By the drafting oversight in Public Law 86-518 more than half of the balance of the total subsidy refund due would be paid (1525's) after enactment of that statute. The result is a 10-percent overpayment of this refund.
Section 1 of H.R. 6813 would cure this problem by adjusting the base on which the annual revenue computation is made so that no more than 100 percent of the total refund due is repaid. (In the example I have used in this explanation, the base on which the revenue proportion would be applied annually would become one-thirtieth. Five percent of one-thirtieth of $5 million for 15 years is $125,000 which when added to the repayments for the first 10 years equals $250,000, the appropriate refund.)
A substantially similar problem would be cured by section 1 in the case of the so-called speed clause found in some of the operators' contracts. These clauses provide for refund to the United States of the cost of building greater speed, for defense purposes, into the Mariner vessels than was needed for commercial operations if such speed was actually used from time to time by the operator. The formula used for the computation of this refund would be amended by section 1 in the same manner as that for the construction differential subsidy domestic refund so that if the additional speed were used 5 percent of