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I am enclosing photocopy of a recent letter of this kind—that dated June 14, 1963, to the United States Lines Co. in respect of the SS America. You will note that for the July 1, 1963, renewal of the hull war risk coverage on the America, MARAD advises the amount of the commercial hull war risk insurance must be not less than $6,400,000 (i.e., a minimum of $6,400,000), though I understand the book value of the vessel is less than $450,000.

I would be pleased to submit copies of many similar letters on other ODS vessels if you so desire; all of which point up the fact that the minimum requirements of MARAD for amounts of commercial marine and war risk hull insurance are substantially in excess of book values in numerous instances.

It is obvious, from the viewing of many such letters through the years, that these minimum amounts acceptable to the Maritime Administration represent their opinion as to the then fair market value of the vessels involved, plus certain miscellaneous amounts to cover loss of bunkers and stores at risk.

The minimum requirements are set forth by the Maritime Administration, I understand, so as to insure that the subsidized operator will have funds available, following the total loss of a vessel, at least equal to the then fair market value of the vessel-and it is further required that such insurance funds be set aside in a special reserve to be used for vessel replacement purposes. In other words, these minimum requirements for commercial marine and war risk hull insurance are for the purpose of insuring the continuation of our merchant marine program.

Yet, in the matter of Government war risk insurance on construction-subsidy vessels, it is presently impossible for the subsidized operator to comply with the Maritime Administration's minimum requirements, even though, I am sure, it was the intent that such Government war risk insurance should supplement and be in accord with usual commercial practices, in the event of war.

Certainly, it is not at all logical to require that adequate minimum amounts of insurance be maintained at all times, and then limit the Government war risk insurance to an entirely inadequate amount at a time when, perhaps, it might be most needed.

In the circumstances, the passage of H.R. 6814 is strongly recommended to the end of putting Government war risk valuations for construction-subsidy vessels on a sound basis. Yours very truly,

C. STEWART ANDERSON,
Vice President and Director.

DEPARTMENT OF COMMERCE,

MARITIME ADMINISTRATION,

Washington, D.C., June 14, 1963. Subject: SS America (No. 239,738), war risk hull and increased value insur

ances. UNITED STATES LINES Co., New York, N.Y.

GENTLEMEN : Our records reflect that the above-mentioned insurance will expire July 1, 1963. The amount of renewal hull insurance (including increased value and/or other forms of total loss insurance) must be not less than $6,400,000.

Our records also reflect that war risk protection and indemnity insurance will expire July 1, 1963. The renewal insurance must be in an amount not less than $5,262,800.

If your broker's or underwriter's confirmation of renewal is not received in this office by the date or dates mentioned above, immediate notice that there has been an act of default under the terms of your contract with the Maritime Administration must be given to the appropriate officials thereof. Sincerely yours,

C. R. FULLEN KAMP,
Chief, Insurance Compliance Branch, Division of Insurance.
The CHAIRMAN. Are there any further witnesses who wish to testify
on this bill?

There being no other witnesses, the hearing is closed.
(Whereupon, at 12:15 p.m., the subcommittee adjourned.)

LEGISLATIVE PROPOSALS OF THE SUBSIDIZED

LINES—H.R. 82 AND H.R. 3117

TUESDAY, JULY 16, 1963

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON MERCHANT MARINE OF THE COMMIT-
TEE ON MERCHANT MARINE AND FISHERIES,

Washington, D.C. The subcommittee met at 10 a.m., pursuant to call, 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 hearing this morning is on H.R. 82 (Mr. Bonner) and an identical bill, H.R. 3117 (Mr. Tollefson), to amend the Merchant Marine Act, 1936, in order to provide for the reimbursement of certain vessel construction expenses.

(H.R. 82 and H.R. 3117 along with agency reports follow:)

[H.R. 82, H.R. 3117, 88th Cong., 1st sess. ] À BILL To amend the Merchant Marine Act, 1936, in order to provide for the reimburse

ment of certain vessel construction expenses Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, 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 distance) 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 (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 construction-differential 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. 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) an amount equal to such reduction and 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, 1936, as amended, and the Federal Maritime Board 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.

GENERAL COUNSEL OF THE DEPARTMENT OF COMMERCE,

Washington, D.C., July 10, 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. 82, a bill to amend the Merchant Marine Act, 1936, in order to provide for the reimbursement of certain vessel construction expenses.

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 contracts, 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 operating-differential 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 operator 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 & 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 Nofolk, 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 & 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, Calif., on January 27, 1961, and arrived at New York (the first berth on its subsidized service)

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