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LEGISLATIVE PROPOSALS OF THE SUBSIDIZED

LINES-H.R. 83

WEDNESDAY, JULY 10, 1963

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON MERCHANT MARINE

OF THE COMMITTEE ON MERCHANT MARINE AND FISHERIES,

Washington, D.C.

The subcommittee met at 10 a.m., pursuant to notice, in room 219, Cannon House Office Building, Hon. Herbert C. Bonner (chairman of the subcommittee) presiding.

The CHAIRMAN. The subcommittee will come to order. The subcommittee will consider H.R. 83.

(H.R. 83 and agency reports follow :)

[H.R. 83, 88th Cong., 1st sess.]

A BILL To amend section 802 of the Merchant Marine Act, 1936, as amended, to provide that owners of vessels requisitioned by the United States shall be accorded preference toward reacquiring these vessels when they can be released by the Government, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 802 of the Merchant Marine Act, 1936, as amended (46 U.S.C. 1212), is hereby amended:

(1) By inserting "(a)" after "SEC. 802.”.

(2) By adding new subsections (b), (e), and (d), reading as follows:

"(b) If any vessel, which was acquired by the United States and to which the provisions of subsection (a) are applicable, can be released from Government service, such vessel shall be offered for sale promptly to the owner from whom such vessel was acquired or to the person for whom the vessel was constructed or being constructed but to whom delivery thereof was prevented by the United States (such owner or person being hereinafter in this section referred to as the 'former owner') at a price computed as follows: The basic value of each such vessel shall be the price paid by the United States to the party from whom acquired, from which shall be deducted normal depreciation at the rate of 4 or 5 per centum per annum, as the case may be depending upon the life of the vessel as provided in this Act, on a straight line basis upon the former owner's gross book value of the vessel, and from which shall also be deducted, as war service, depreciation at the rate of 3 per centum per annum, for such period or periods of war service as the Secretary of Commerce determines will make reasonable allowance for excessive wear and tear by reason of war service which cannot be or has not been otherwise compensated for under this subsection. As used herein, gross book value shall mean the actual construction cost of such vessel (together with the actual cost of capital improvements thereon, but excluding the cost of national-defense features) less the amount of construction-differential subsidy theretofore paid incident to the construction or reconditioning of such vessel. Prior to delivery to the former owner, each such vessel shall be restored in a condition at least as good as when acquired by the United States, less ordinary wear and tear, or the former owner shall be paid or credited with an amount sufficient to place the vessel in such Condition: Provided, however, That in the event the United States determines that the conversion of the vessel for use in Government service was so extensive as to alter the basic physical characteristics of the vessel and that the cost of reconversion to normal class and condition is excessive, and that said restoration

is not justified by other national reasons, then the provisions of this subsection shall be inapplicable but the former owner shall be given a preference for the acquisition of a similar vessel pursuant to subsection (d) hereof.

"(c) In the event such vessel was, at the time of acquisition from the former cwner by the United States, subject to a mortgage in favor of the United States, such vessel shall be sold to the former owner upon the same terms and conditions as those contained in such mortgage. In the event such vessel was subject to a mortgage insured under the provisions of title XI of this Act at the time of acquisition of the vessel by the United States, or such vessel was eligible for such an insured mortgage, the Secretary of Commerce shall, at the request of the former owner, insure a mortgage in connection with the reacquisition of the vessel by the former owner pursuant to this section: Provided, however, That before the Secretary of Commerce shall issue such a mortgage or insure a mortgage under provisions of title XI he shall make the statutory findings required under the Act with respect to the financial soundness of the project and that the former owner continues to possess the necessary experience and financial ability to operate the mortgaged vessel.

"(d) In the event that any such vessel cannot be returned to the former owner, at the termination of the emergency or as soon thereafter as is reasonably possible, the former owner thereof shall be given a preference as to any person except the former owner thereof, to purchase a similar vessel, at a price computed in accordance with subsection (c) of this section, and under the terms and conditions set forth in subsections (b) and (d) of this section."

GENERAL COUNSEL OF THE DEPARTMENT OF COMMERCE,
Washington, D.C., July 9, 1963.

Hon. HERBERT C. BONNER,
Chairman, Committee on Merchant Marine and Fisheries,
House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: This is in further reply to your request for the views of this Department with respect to H.R. 83, a bill to amend section 802 of the Merchant Marine Act, 1936, as amended, to provide that owners of vessels requisitioned by the United States shall be accorded preference toward reaequiring these vessels when they can be released by the Government, and for other purposes.

Section 802 of the Merchant Marine Act, 1936, provides that all constructiondifferential subsidy contracts entered into under that act shall provide that if the vessel is requisitioned the owner shall be paid the value thereof but not exceeding the depreicated cost of the vessel to the contracting shipowner, or the scrap value of the vessel, whichever is greater. This requisition price runs with the title to the vessel.

H.R. 83 would amend section 802 of the act to provide that if any vessel, whose requisition price is established under the section, is requisitioned and can be released from Government service, the vessels shall be promptly offered for sale to the former owner at the requisition price paid by the United States, reduced by normal depreciation at the rate of 4 or 5 percent per annum (depending on the economic life of the vessel provided in the act) on the former owner's gross book value, and also reduced by depreciation at the rate of 3 percent per annum on such book value for such period of war service as the Secretary of Commerce determines will make reasonable allowance for war service which cannot otherwise be compensated for under the section. This bill further provides that, prior to delivery of the vessel to the former owner, the Secretary shall restore the vessel to at least as good condition, less ordinary wear and tear, as when it was requisitioned, or the Secretary shall pay the former owner (or credit him with) an amount necessary to place the vessel in such condition. The bill also provides that if the vessel cannot be returned to the former owner (presumably because it has become an actual or constructive total loss, or because its basic characteristics have been changed, or because the Government still needs it) the former owner shall be given a preference to purchase a similar vessel, except as against the former owner of that vessel, at a price "computed under subsection (c) of this section." The bill is not clear whether this is the price at which the former owner, whose vessel is not being returned, could have repurchased his vessel if it were being returned, or whether this is the price at which the vessel, with respect to which the preference exists,

would have been returned to its former owner if such former owner had elected to repurchase it. There are provisions in the bill providing for resale of the vessel on terms of a Government mortgage, or of a title XI insured mortgage, if the provisions of the act, with respect to those mortgages, are complied with and if the vessel was subject to such a mortgage at the time it was requisitioned. We recommend against favorable consideration of the bill.

The resale provisions of the bill would apply to vessels which are requisitioned by the United States while they are being constructed (lines 3-6, p. 2) and the resale price provided is the depreciated requisition price. Since such a vessel would be finished by the United States, and the resale price does not take this into account, this resale price would not be equitable to the United States.

The 4 or 5 percent normal depreciation provided by the bill, for computing the resale price, is not correct as to a vessel to which capital improvements have been made before it is requisitioned. If the vessel has a 20-year life under the act, and capital improvements are made at the end of 10 years which do not extend its economic life, and the vessel is then requisitioned, a 5-percent depreciation rate would not recover the cost of the capital improvement over the remaining 10 years. Likewise, if a vessel whose life is 20 years under the act is reconstructed at the end of 10 years and before it is requisitioned, so that its life is extended under section 607 (b), a 5-percent rate will not recover capital costs unless the extension of the vessel's life is for an additional 10 years from the date of reconstruction.

The bill contains no provision to compensate the United States for any capital improvements that are made to the ship after it is requisitioned. This is inequitable to the United States.

We think the 3-percent additional depreciation allowance, authorized by the bill for war service, is not justified by experience with World War II ships. War service has not reduced the operating life of these vessels below the 20 years provided by the act. We expect to be subsidizing the operation of some of these vessels until they are over 30 years of age. The provision of the bill requiring restoration of the vessel to at least as good condition, less ordinary wear and tear, as when requisitioned is not fair to the United States.

We are opposed to the bill in principle. We would be in favor of reselling, to their former owners, construction-differential subsidy vessels which we requisitioned if the circumstances, existing when the vessels are to be resold, indicate that this is the best disposition that could be made of the vessels from the viewpoint of the Government's interests. No one now knows, however, the circumstances which will exist at the end of any emergency that requires the requisitioning of vessels for title. If, for example, all of the vessels requisitioned from some owners are lost, but none of those requisitioned from other owners are lost, and if no vessels are built for Government account during the emergency, it appears that it would be to the Government's interest to sell these remaining vessels among the remaining owners in such a way as to reestablish those shipping services which are most essential to the commercial and national defense interests of the United States.

We do not believe that the Government should be bound now to resell these construction-differential subsidy vessels to their former owners when it is far from clear now that such disposition will be in the Government's interest at the time when the vessels are to be sold.

What this bill amounts to in substance is a prohibition on the Government to requisition construction-differential subsidy vessels for title. A requisition for title under a requirement to resell the vessel to its former owner is, in substance, a requisition for use. This would, in substance, give the owners of construction-differential subsidy ships an immunity from requisition for title when the Government needs the property for public use which (so far as we are aware) is an immunity the owners of no other species of property enjoy.

We see no reason why this immunity should be granted together with construction-differential subsidy in the amount of 55 percent of the American cost of the ship (60 percent for the reconstruction of some passenger ships) to applicants who wish to engage in the U.S. foreign trade. We think that an even stronger case is made for not modifying existing contracts to grant this immunity when these contracts were freely entered into by the present owners on the basis that they would have no such immunity.

We would favor resale of requisitioned vessels to their former owners at the end of the emergency that required the requisitioning if this disposition of the vessels is warranted under the circumstances existing at the time when the

vessels are no longer needed by the Government.

Since no one knows what the circumstances will be, at that time, we do not believe the Government should bind itself now to resale of requisitioned vessels to their former owners.

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,
Washington, March 20, 1963.

Chairman, Committee on Merchant Marine and Fisheries,
House of Representatives.

DEAR MR. CHAIRMAN: Further reference is made to your letter of February 4, 1963, acknowledged on February 6, requesting the comments of the General Accounting Office concerning H.R. 83, 88th Congress, 1st session, entitled “A bill to amend section 802 of the Merchant Marine Act, 1936, as amended, to provide that owners of vessels requisitioned by the United States shall be accorded preference toward reacquiring these vessels when they can be released by the Government, and for other purposes."

The subject of the bill is a matter of policy for the determination of the Congress and, therefore, we make no recommendation with respect to its enactment. However, we believe that the following aspects of the measure should be brought to the attention of your committee for whatever consideration it may deem appropriate.

The price formula which would be fixed by the bill does not establish a floor price to the former vessel owner at the time of redelivery. Such a floor price, in the amount of the fair and reasonable scrap value of the vessel at the time of redelivery would be consistent with the formula established by present law in section 802 of the Merchant Marine Act, 1936, for determining the price to be paid to the vessel owner at the time of purchase or requisition. Furthermore, in the event the scrap value of a vessel should be higher than the price which would otherwise be determined under the formula contained in the bill, the former owner would not be likely to repurchase a vessel solely for the purpose of scrapping it, and, therefore, the unwarranted expenditure of Federal funds to restore to its former condition a vessel not intended for further operation would be avoided.

The bill also would require that the price to the former owner of a vessel be determined by deducting normal depreciation and war service depreciation from the price paid for the vessel by the United States. However, it is silent with respect to whether the price to the vessel owner, as so determined, should be adjusted to give recognition to (1) the Government's cost of completing a vessel which was purchased or requisitioned while under construction and (2) the cost of capital improvements placed on the vessel by the Government. In order to give recognition to these factors in the price formula and thus avoid the possibility of a substantial windfall to the former vessel owner, we suggest the substitution of a comma for the period after "subsection" in line 21 on page 2 of the bill, and the addition of language along the following lines: "and to which shall be added any costs which may have been incurred by the United States in the completion of the vessel, or in the placement of capital improvements on the vessel, to the extent that the Secretary determines, at the time of redelivery, that such costs have enhanced the value of the vessel for commercial operations.” Sincerely yours,

JOSEPH CAMPBELL, Comptroller General of the United States.

The CHAIRMAN. The first witness is Mr. Alexander.

STATEMENT OF HON. DONALD W. ALEXANDER, MARITIME ADMINISTRATOR, ON BEHALF OF THE MARITIME ADMINISTRATION AND THE DEPARTMENT OF COMMERCE

tor.

Mr. ALEXANDER. Thank you.

My name is Donald W. Alexander. I am the Maritime Administra

Gentlemen, section 802 of the Merchant Marine Act, 1936, provides that all construction-differential subsidy contracts entered into under that act shall provide that if the vessel is requisitioned the owner shall be paid the value thereof but not exceeding the depreciated cost of the vessel to the contracting shipowner, or the scrap value of the vessel, whichever is greater. This requisition price runs with the title to the vessel.

H.R. 83 would amend section 802 of the act to provide that if any vessel whose requisition price is established under the section is requisitioned and can be released from Government service, the vessels shall be promptly offered for sale to the former owner at the requisition price paid by the United States, reduced by normal depreciation at the rate of 4 or 5 percent per annum (depending on the economic life of the vessel provided in the act) on the former owner's gross book value, and also reduced by depreciation at the rate of 3 percent per annum on such book value for such period of war service as the Secretary of Commerce determines will make reasonable allowance for war service which cannot otherwise be compensated for under the section. This bill further provides that prior delivery of the vessel to the former owner, the Secretary shall restore the vessel to at least as good condition, less ordinary wear and tear, as when it was requisitioned, or the Secretary shall pay the former owner (or credit him with) and amount necessary to place the vessel in such condition. The bill also provides that if the vessel cannot be returned to the former owner (presumably because it has become an actual or constructive total loss, or because its basic characteristics have been changed, or because the Government still needs it) the former owner shall be given a preference to purchase a similar vessel, except as against the former owner of that vessel, at a price "computed under subsection (c) of this section."

The bill is not clear whether this is the price at which the former owner whose vessel is not being returned could have repurchased his vessel if it were being returned, or whether this is the price at which the vessel with respect to which the preference exists would have been returned to its former owner if such former owner had elected to repurchase it. There are provisions in the bill providing for resale of the vessel on terms of a Government mortgage, or of a title XI insured mortgage, if the provisions of the act with respect to those mortgages are complied with and if the vessel was subject to such a mortgage at the time it was requisitioned.

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