Any contract entered into by the Commission under the provisions of this subsection shall be subject to all of the terms and conditions of this Act, excepting those pertaining to the awarding of contracts to the lowest bidder which are inconsistent with the provisions of this subsection. In the event that a contract is made providing for a price in excess of the lowest responsible bid which otherwise would be accepted, such excess shall be paid by the Commission as a part of the cost of national defense, and shall not be considered as a part of the construction-differential subsidy. In the event that a contract is made providing for a price lower than the lowest responsible bid which otherwise would be accepted, the construction-differential subsidy shall be computed on the contract price in lieu of such bid.

Senator BARTLETT. Also to be placed in the record is a letter signed by Alvin Shapiro, dated April 30, 1963, Mr. Shapiro being vice president of American Merchant Marine Institute, supporting S. 1263. (The letter is as follows:)

AMERICAN MERCHANT MARINE INSTITUTE, INC.,

Senator WARREN G. MAGNUSON,
Chairman, Committee on Commerce,

U.S. Senate, Washington, D.C.

Washington D.C., April 30, 1963.

DEAR SENATOR MAGNUSON: The American Merchant Marine Institute, a national trade association representing the owners and operators of a majority of American-flag ships, supports S. 1263 which your committee is considering.

The bill would provide for reimbursement to certain shipping lines of the United States of all additional costs which the lines incur because of the allocation by the Secretary of Commerce, as a matter of public policy, of a construction contract to a shipyard other than that of the lowest responsible bidder.

Under existing law, when the Secretary makes such an allocation the excess cost is borne by the Government as part of the cost of national defense. The Secretary of Commerce has interpreted this as not to apply to expenses incurred by the shipowner for inspection and supervision of the vessel during construction, and for delivery of the vessel, in excess of the estimated expenses for the same services he would have incurred had the vessel been constructed by the lowest bidder.

Passage of this proposed legislation is necessary to correct what is undoubtedly a technical defect in the construction-subsidy provisions of the Merchant Marine Act of 1936. The extra out-of-pocket costs that result from a contract allocation made solely for national defense reasons add no value to the delivered ship so far as the owner is concerned.

The authority for the Secretary of Commerce to reimburse a ship operator for such costs should be made clear. This would be accomplished by enactment of S. 1263. Therefore, we urge your favorable consideration of the proposal. Further, we respectfully request that this letter be made a part of the written record of this bill. Sincerely,

ALVIN SHAPIRO.

(Subsequently, the following letter from the Comptroller General, dated May 21, was made part of the record:)

COMPTROLLER GENERAL OF THE UNITED STATES,
Washington, D.C., May 21, 1963.

Hon WARREN G. MAGNUSON,
Chairman, Committee on Commerce,
U.S. Senate.

DEAR MR. CHAIRMAN: Your letter dated April 4, 1963, requests our comments on S. 1263, 88th Congress.

S. 1263 would amend section 502(f) of the Merchant Marine Act, 1936, as amended, to provide that, in the event construction of a vessel is allocated to other than the lowest bidder, the Secretary of Commerce shall bear the excess expenses incurred by the applicant for inspection and supervision of the vessel during construction and for the vessel's delivery voyage.

If such additional expenses are to be assumed by the Government, it is only fair and reasonable that, in the event allocation to other than the low responsible

bidder should result in lower inspection, supervision, and delivery expenses to the applicant, the savings accrue to the Government rather than to the applicant. We therefore oppose enactment of S. 1263 unless it be amended to so provide.

If the bill be amended in accordance with the foregoing suggestion, it is our position that its effect prospectively is a question of policy for the Congress to decide, as to which we make no recommendation.

However, unless the same result can also be accomplished in the case of existing contracts, we also oppose the retroactive effect of section 2 of the bill. This section would apply to all cotracts which have heretofore been allocated under section 502(f) of the act, and since any retroactive modification of existing contracts may be effected only with the consent of the other contracting parties (as is recognized by the language of the present sec. 2), we oppose enactment of section 2 of the bill unless it be amended to provide that existing contracts may be modified only if the parties to all existing contracts. both those under which savings as well as additional expenses have or will accrue to applicants, agree to such modifications.

In addition to the foregoing, we have the following comments. Since it is not clear whether any excess expenses borne by the Government will be attributable to the cost of national defense, we suggest that such expenses be identified in section 502(f) as national defense costs so that the expenditures by the Government will be recognized in the event the vessel is subsequently repurchased by the Government. Furthermore, we recommend that the wording of section 802 of the act, which establishes the limitation of the amount to be paid by the Government upon repurchase, should be amended to provide for the exclusion of national defense costs in place of the existing exclusion of national defense features, in order to embrace not only the expenses of inspection, supervision. and delivery, but also the excess price occasioned by allocation which is not now specified in section 802.

Sincerely yours,

JOSEPH CAMPBELL,

Comptroller General of the United States.

Senator BARTLETT. Next we take up S. 1172. (The document follows:)

[S. 1172, 88th Cong., 1st sess.]

A BILL To amend Public Law 86-518 and section 506 of the Merchant Marine Act, 1936, to authorize the amendment of contracts between shipowners and the United States dealing with vessels whose life has been extended by Public Law 86-518.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 8(c) of Public Law 86-518 is amended by adding the following to the end thereof: "Provisions in such contracts affecting vessels covered by this Act providing for refund of constructiondifferential subsidy for domestic operations under section 506 of the Merchant Marine Act, 1936, and costs of national defense features for commercial use shall be amended so that for such refund payments made for the period after December 31, 1959, the base upon which such refund payments are computed annually thereafter shall be the undepreciated amount of subsidy or the national defense feature, as the case may be, as at December 31, 1959, divided by the years of life of the vessels as provided under this Act, remaining after December 31, 1959." SEC. 2. Section 506 of the Merchant Marine Act, 1936, as amended (46 U.S.C. 1156), is hereby further amended so as to add the following sentence after the first sentence thereof: "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. Any contract between the owner and the United States which was entered into prior to the date of enactment of this Act and which would be affected if the provisions of the amendment made by this Act were applicable thereto, may, at the request of the owner be revised to be in accordance with the law as amended by this Act, with respect to such of the vessels covered thereby as may be designated by the applicant."

Senator BARTLETT. Our first witness is Mr. Alexander, Maritime Administrator.

STATEMENT OF DONALD W. ALEXANDER, ADMINISTRATOR, MARITIME ADMINISTRATION; ACCOMPANIED BY ROBERT J. ABLES, GENERAL COUNSEL, MARITIME ADMINISTRATION; AND GRAYDON L. ANDREWS, DEPUTY GENERAL COUNSEL, MARITIME ADMINISTRATION

Mr. ALEXANDER. My name is Donald W. Alexander. I am the Maritime Administrator. With your permission, Mr. Chairman, I would like to read a prepared statement on S. 1172.

Senator BARTLETT, Yes.

Mr. ALEXANDER. Prior to the enactment of Public Law 86-518, section 506 of the Merchant Marine Act, 1936, provided that every owner of a vessel 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

2. On a round-the-world voyage, 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 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 Unifed States.

The section further provided 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 onetwentieth 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 completed 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 U.S. 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 constructiondifferential 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 "onetwentieth" 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 fifteen-twentieths 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 ten twenty-fifths of the constructiondifferential subsidy should be available for this purpose. Added together these two fractions come to more than the whole amount of the construction-differential subsidy. Fifteen-twentieths plus ten twenty-fifths (or eight-twentieths) equals twenty-three twentieths.

Public Law 86-518 contains provisions which 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 life 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, fifteen-twentieths of the constructiondifferential subsidy has been used up prior to the effective date of the act. If the foregoing provisions had been made applicable, the remaining five-twentieths 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 one-tenth 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 pro

portion of one-twentieth 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 one-twentieth of the U.S. 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 provided 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 feature was divided by 25 which (similarly to the amendment that was made to sec. 506 of the Merchant Marine Act, 1936) would expose the operator to repayment on the basis of more than the original cost of the national defense feature. S. 1172 would provide as follows:

(a) Provisions of contracts (with respect to vessels whose 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 believe 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. We believe, however, that there is one respect in which the bill should be amended so as to clarify its application to existing contracts.

Section 2 of the bill would amend section 506 of the Merchant Marine Act, 1936, and the second sentence of that amendment refers to the "enactment of this Act." Since this sentence will appear, if the bill is enacted, in section 506 of the Merchant Marine Act, 1936, it would look as though the act referred to is the Merchant Marine Act, 1936, though the act intended is undoubtedly the act which S. 1172 will become if it is enacted. The bill could be clarified in this respect if the second sentence of section 2 of the bill were set out as section 3 of the bill and if the words "section 2 of" were inserted after the word "by" in line 17.