STATEMENT OF HON. DONALD W. ALEXANDER, MARITIME ADMINISTRATOR; ACCOMPANIED BY ROBERT J. ABLES, GENERAL COUNSEL, MARITIME ADMINISTRATION, DEPARTMENT OF COMMERCE

Mr. ALEXANDER. My name is Donald W. Alexander. I am Maritime Administrator.

Mr. Chairman, with your permission, I would like to have Mr. Robert Ables, the General Counsel, join me at the table.

The CHAIRMAN. Yes, sir.

Mr. ALEXANDER. I have a prepared statement, sir.

Section 502 (b) of the Merchant Marine Act, 1936, provides that the construction-differential subsidy may equal, but not exceed, the excess of the bid of the lowest responsible bidder (less the cost of national defense features, which shall be paid by the United States) over the fair and reasonable estimate of the cost of construction of the proposed vessel (less the cost of national defense features) in a representative foreign shipyard.

Section 502(f) of the Merchant Marine Act, 1936 (a) authorizes the Secretary of Commerce to allocate ship construction, reconstruction, and reconditioning if certain findings are made with respect to mobilization requirements, and (b) provides that the excess of the contract price, under the allocated contract, over the lowest responsible bid shall be paid as a national defense cost. The section, however, does not authorize payment by the United States of any increased vessel inspection and vessel delivery costs which an operator incurs as a result of the allocation, nor does it provide for payment to the United States by the operator of any savings in these costs which the operator makes as a result of the allocation.

Section 1 of the bill would amend section 502 (f) to provide that if, as a result of the allocation, the vessel owner incurs expenses for inspection of the vessel during construction, and for the delivery voyage, in excess of the estimated expenses that he would have incurred for such services if the vessel had been constructed by the lowest responsible bidder, the Secretary of Commerce shall reimburse the vessel owner for such excess, less any gross income the applicant receives that is allocable to the delivery voyage, minus the extra expenses incurred to produce such gross income. The section further provides that if the owner's expenses for vessel delivery and inspection services are less because of an allocation, the owner shall pay to the Secretary of Commerce an amount equal to such reduction. The section provides that the delivery voyage shall be deemed terminated when the vessel reaches its home port or a point on its subsidy route equally distant from the shipyard at which the vessel was built.

Section 2 of the bill provides that any contract that has heretofore been made for the construction of a ship with allocation under section 502(f), shall be amended, if parties other than the Secretary of Commerce consent, to include the provisions of the bill.

We recommend favorable consideration of the bill if the bill is amended as hereinafter proposed.

When ship construction is allocated under section 502(f), the allocation is made for the purpose of remedying an existing or impending inadequacy in the shipyard mobilization base at a strategic point. Such allocations are made for national defense reasons and if, as a result of the allocation, the shipowner incurs additional vessel inspection and delivery costs, we think it is equitable that he should be reimbursed by the United States, and we likewise think it is equitable that if an operator makes a saving in these costs as a result of the allocation, such savings shall be paid to the United States. We, therefore, have no objection in principle to the prospective features of the bill. We think, however, that it would be desirable to amend the bill with respect to termination of the delivery voyage. The bill provides that the delivery voyage shall be deemed terminated when the vessel reaches its home port or a port on its subsidy route which is as distant from the shipyard where the vessel was built as the vessel's home port is. This language evidently anticipates that the vessel will not go to its home port. Since the home port is merely the port at which the vessel is documented, there is no reason why the vessel should go there before it goes into service.

With respect to vessels that will be paid operating-differential subsidy, we think the delivery voyage should be deemed terminated when the vessel begins loading at any port on an essential service of the operator, and with respect to vessels that will not be paid operatingdifferential subsidy, we think the delivery voyage should be deemed terminated at the port at which the vessel begins loading. In either case, however, we believe that the maximum excess delivery costs for which the operators should be compensated should be an amount equal to the cost that would be incurred in delivering the vessel from the shipyard at which it was built to the shipyard of the lowest responsible bidder.

With the foregoing amendments, we have no objection to the prospective features of the bill.

We are opposed to the retroactive features of the bill in their present form. Section 2 of the bill provides that any contract that has heretofore been made for the construction of a ship with allocation under section 502 (f) shall be amended, if parties other than the Secretary of Commerce consent, to include the provisions of the bill. Two operators have incurred additional vessel delivery and inspection expenses through allocation, and one operator has made savings. In our opinion, the operator who made savings through allocation could not now constitutionally be required to pay these savings to the United States, because this would impair the obligation of the contract he has with the United States under which he acquired the ships. We, nevertheless, believe that there should be no retroactivity under the bill unless arrangements are made to place the United States in the position it would have been in if the bill had been enacted before any allocations were made. We think the bill should be amended to provide that there shall be no retroactivity unless provision is made, within 1 year after enactment of the bill, for payment to the United States of an amount equal to the savings that were made by the operator who made savings.

Thus far, the construction of six ships has been allocated under section 502 (f).

Two of the allocated ships were for American Export Lines. These ships were allocated to National Steel and Shipbuilding Co. at San Diego, Calif. The invitation for bids involved four ships for American Export Lines, but only two ships were allocated. The lowest responsible bidder was New York Shipbuilding Corp., Camden, N.J. This allocation required American Export Lines to maintain two inspection staffs. We estimate that the additional inspection costs to American Export Lines caused by the allocation of the two ships is approximately $150,000.

The first of the two allocated ships to be delivered was the Export Agent. This ship left San Diego on January 9, 1961, and proceeded to Portland, Oreg., where it loaded 9,400 tons of grain for Alexandria, Egypt. The ship arrived at Norfolk, Va., which was its first berth on the subsidized service, on February 4, 1961, a total of 25 days from its departure from the shipyard. The ship stopped off at Norfolk and proceeded on its trip to Alexandria, Egypt.

The second of the two allocated ships to be delivered was the Export Aide. This ship left San Diego on April 3, 1961. It proceeded to Portland, Oreg., made a partial load there, and then proceeded to Vancouver where it completed a total of 9,641 tons of grain for Alexandria, Egypt. The ship arrived at Norfolk, Va., its first berth on the subsidized service, on May 8, 1961, a total of 35 days from its departure from the shipyard.

We estimate that it cost American Export Lines $120,000 more to deliver the two ships from San Diego, Calif. (where they were built), to Norfolk, Va. (their first berth on the subsidized service), than it would have cost to deliver the vessels from Camden, N.J. (the location of the yard of the lowest responsible bidder), to Norfolk, Va. Under the bill, the gross income that was earned on the carriage of cargo from the west coast to Norfolk, Va. (minus the extra expenses incurred to produce this income), would be a deduction from the foregoing estimate of $120,000 additional delivery costs.

Two of the six ships that were allocated were for Moore-McCormack Lines. These ships were allocated to Todd Shipyards Corp., San Pedro, Calif. The invitation for bids again involved four ships of which only two were allocated. The lowest responsible bidder was Sun Shipbuilding and Drydock Co., Chester, Pa. The allocation required Moore-McCormack Lines to maintain two separate inspection staffs. We estimate that the additional inspection costs incurred by Moore-McCormack Lines as a result of the allocation is approximately $140,000. Both allocated ships have been delivered. One left San Pedro, California, on January 27, 1961, and arrived at New York (the first berth on its subsidized service) on February 9, 1961, a 13-day voyage. The other left San Pedro on July 8, 1961, and arrived at Baltimore (the first berth on its subsidized service) on July 20, 1961, a 12-day voyage. Both voyages were in ballast.

We estimate that it cost Moore-McCormack Lines $120,000 more to deliver these vessels from San Pedro, Calif., to New York and Baltimore, respectively, than it would have cost to deliver them from Chester, Pa. (the location of the yard of the lowest responsible bidder), to New York and Baltimore, respectively.

The other two ships that were allocated were for American President Lines. These ships were allocated to Bethlehem Steel Co. at San Francisco. Since San Francisco is the home port of American President Lines and the port at which these two vessels went on operatingdifferential subsidy, no additional costs to American President Lines for inspection and delivery were involved in this allocation. Indeed, the allocation was beneficial to American President Lines. If the allocation had not been made, the vessels would have been built at Los Angeles. As a result of the allocation, American President Lines saved inspectors' travel costs and saved the expenses of delivering the vessels from Los Angeles to San Francisco. These ships began their first subsidized voyages at San Francisco. We have been advised by American President Lines that their administrative and inspection costs would have been $33,000 per ship higher, before subsidy, had these ships been constructed in Los Angeles instead of San Francisco. Since there were two vessels involved, the total cost saving to American President Lines with respect to these costs (assuming all items of cost are eligible for subsidy at 50 percent) would be about $33,000. We estimate that the cost would be $4,000 each. The total estimated cost savings to American President Lines as a result of allocation of the two ships, therefore, would be about $41,000.

The estimate is based on the assumption that the vessel would have had no cargo on the voyage from Los Angeles to San Francisco. Since the voyage was not made, we have no way of knowing whether the vessel would have had cargo or, if it had cargo, what its earnings would have been. The same situation exists in the computation of excess delivery costs under the bill. This requires a comparison of the cost of a voyage that was made with the cost of a voyage that was not made.

With regard to the Export Agent, for example, under the bill American Export Lines would be entitled to be paid the excess of the cost of the voyage from San Diego, Calif. (where the ship was built), to Norfolk, Va. (the ship's first berth on its subsidized service), less the gross income earned on the voyage (minus the extra expenses incurred to produce such gross income) over the cost that would have been incurred on a voyage from Camden, N.J. (the location of the yard of the lowest responsible bidder), to Norfolk, Va. The voyage from Camden, N.J., to Norfolk, Va., was not made, and we have no way of knowing whether the ship would have obtained cargo, or, if it did, what its earnings would have been. Our interpretation of the bill is that the computation is to be made on the assumption that the ship would have had no cargo on the voyage that was not made.

With the amendments proposed, we recommend favorable consideration of the bill.

Attached is a substitute text which would carry out our recommendations.

We are also attaching and have attached a comparative text.
The comparative text may be helpful to the committee.

(The comparative text follows while the substitute text appears on p. 86.)

COMPARATIVE TEXT SHOWING THE CHANGES THE PROPOSED Substitute TEXT WOULD MAKE IN H.R. 82

[Insertions are shown by italics; deletions are shown by black brackets]

That section 502(f) of the Merchant Marine Act, 1936, as amended (46 U.S.C. 1152(f)), is amended by inserting at the end thereof the following:

"If, as a result of allocation under this subsection, the applicant incurs expenses for inspection and supervision of the vessel during construction and for the delivery voyage of the vessel [(which delivery voyage shall be deemed terminated when the vessel reaches its home port or a point on its subsidy route equally distant)] in excess of the estimated expenses for the same services that he would have incurred if the vessel had been constructed by the lowest responsible bidder the [Federal Maritime Board] Secretary of Commerce (with respect to construction under title V, except section 509) shall reimburse the applicant for such excess, less any gross income the applicant receives that is allocable to the delivery voyage minus the extra expenses incurred to produce such gross income, and such reimbursement shall not be considered part of the constructiondifferential subsidy. If the vessel is constructed under section 509 the Secretary of Commerce shall reduce the price of the vessel by such excess, less any gross income (minus the extra expenses incurred to produce such gross income) the applicant receives that is allocable to the delivery voyage. In the case of a vessel that is not to receive operating-differential subsidy, the delivery voyage shall be deemed terminated at the port where the vessel begins loading. In the case of a vessel that is to receive operating-differential subsidy, the delivery voyage shall be deemed terminated when the vessel begins loading at a United States port on any essential service of the operator. In either case, however, the vessel owner shall not be compensated for excess vessel delivery costs in an amount greater than the expenses that would have been incurred in delivering the vessel from the shipyard at which it was built to the shipyard of the lowest responsible bidder. If as a result of such allocation, the expenses the applicant incurs with respect to such services are less than the expenses he would have incurred for such services if the vessel had been constructed by the lowest responsible bidder, the applicant shall pay to [the Federal Maritime Board (with respect to construction under title V, except section 509) an amount to the Secretary of Commerce (with respect to construction under section 509)] the Secretary of Commerce an amount equal to such reduction and, if the vessel was built with the aid of constructiondifferential subsidy, such payment shall not be considered a reduction of the construction-differential subsidy."

SEC. 2. The amendment made by this Act shall be effective with respect to any contract entered into under the provisions of section 502 of the Merchant Marine Act, 1963, as amended, and the Secretary of Commerce shall, with the consent of the other parties thereto, modify any such contract entered into prior to the date of the enactment of this Act to the extent authorized by the amendment made by this Act, except that the Secretary shall not agree to any such modification which would result in a payment by the United States unless, within one year after enactment of this Act, provision has been made for payment to the Secretary of an amount equal to the total of any amounts which would be due the United States under such contracts entered into prior to the date of enactment of this Act if all such contracts were modified in accordance with the amendment made by this Act.

Mr. ALEXANDER. 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 CHAIRMAN. Mr. Tollefson?

Mr. TOLLEFSON. On page 3, in that second paragraph, you say you think the delivery voyage should be deemed terminated at the port at which the vessel begins loading. Is that without regard to whether it is on the trade route or not?

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