Robert E. Allen

• Decision Date: 25 August 1980
• Docket Number: B-199215
• Parties: GROUP DIRECTOR, CED - ROBERT E. ALLEN, JR.
• Court: Comptroller General of the United States

GROUP DIRECTOR, CED - ROBERT E. ALLEN, JR.

No. B-199215

Comptroller General of the United States

August 25, 1980

Digest review of operating differential subsidy (ods) program (file b-199215; code 065551)

Incident to the house committee on merchant marine and fisheries' request that GAO review the operating differential subsidy (ods) program as provided for by the merchant marine act of 1936 (1936 act), as amended, you asked the questions below.

Question 1:what are the primary objectives of the ODS program as provided for in the 1936 act, as amended, and related hearings?

Answer the 1936 act was passed to promote the American merchant marine so that it could develop foreign and domestic commerce and contribute to the national defense. Assistance to the shipping industry through operating differential subsidies under this act is intended to effect a balance between the costs of operating American flag vessels and the costs incurred by foreign shippers. Farrell lines, Inc. v. United states, 499 F.2d 587, 594 (ct.Cl. 1974). The resultant parity of operating expenses is expected to place American shippers in a better competitive position with their foreign counterparts who have historically had the advantage of lower costs.

Question 2: does the congress have legal authority to eliminate ODS immediately despite outstanding 20-year contracts with operators?

Answer the ODS program operates as contracts, not gratuities. The benefits conferred by gratuities May be withdrawn at any time in the discretion of congress. In contrast, operating differential subsidies, being contracts, create vested rights and are property. Congress can only extinguish these rights when acting under a paramount power in the public interest.

Congress acting under the power vested in it by the commerce clause May terminate these contracts, as long as such an action is not arbitrary or capricious. This action, however, would constitute a taking of property so that congress would be required to make just compensation to the holders of these contracts.

Question 3: what are the legal implications of reducing ODS payments using section 606(1) of the 1936 act?

Answer: section 606(1) of the 1936 act gives the secretary of commerce, who May act through his agent, the maritime subsidy board, the authority to reduce, potentially down to zero, operating subsidies when conditions are such that the payments are no longer needed to put the American operator on parity with his foreign competitor. Any attempt to use this provision to make an across-the-board cut in the ODS program would be unlawful since it requires a case-by-case determination based on the facts peculiar to each ship operator.

Attached is an analysis that more fully discusses these matters.

Attachment

Operating differential subsidy program

Digests:

1. Purpose of operating differential subsidy (ods) is to place operating costs of American-flag ships on parity with costs incurred by their foreign competitors in order to promote American merchant marine, develop commerce and strengthen national security.

2. Operating differential subsidy program is structured as contracts, not gratuities, bestowing vested rights on parties. Any action to terminate these contracts must fall within some paramount power vested in congress by the constitution. Pursuant to commerce clause, art. 1, Sec. 8, Cl. 3, congress would have authority, in public interest, to abrogate existing ODS contracts. Since, however, these contracts are property to their holders, just compensation would have to be made upon their termination.

3. Section 606(1) of merchant marine act of 1936 authorizes secretary of commerce to readjust amounts of operating differential subsidy in accordance with circumstances affecting American operator's ability to compete with foreign operators and with act's goal of establishing parity between American and foreign operators. This provision requires individual determination of facts in each case, and cannot be used to make an across-the-board reduction of all operating subsidies.

Discussion

Question 1: what are the primary objectives of the operating differential subsidy (ods) program as provided for in the 1936 act, as amended, and related hearings?

Answer the ODS program is a product of congressional judgment expressed in 1936 by the merchant marine act, ch. 858, Sec. 101, 49 Stat. 1985 (1936), and reiterated in 1970, pub. L. 91-469, Sec. 1, 84 Stat. 1018 (1970), that vital national security and commercial interests are served by the maintenance of ocean vessels under united states registry. Oceanic steamship Co.V. United states, 586 F.2d 774, 777 (ct.Cl. 1978); sea-land services, Inc. v. Kreps, 566 F.2d 763, 767 (d.C. Cir. 1977).

As recently as 1974, it was noted that:

"The problem of shipping has been a perennial one for Americans.From at least the time of the civil war, this country, the world's largest industrial nation and exporter, has experienced a shortage of American- flag vessels necessary for the commercial and military requirements of this nation." American export isbrandtsen lines, Inc. v. United states, 499 F.2d 552, 557 (ct.Cl. 1974).

The merchant marine act of 1928, 46 U.S.C. Sec. 891 et seq., first sought to strengthen the American merchant marine. It proved to be a failure, leading president franklin D. Roosevelt to urge that new measures be taken. In his message to congress on March 4, 1935, the president gave the following reasons why the united states should have an adequate merchant marine:

"The first is that in time of peace, subsidies granted by other nations, shipping combines, and other restrictive or rebating methods May well be used to the detriment of American shippers. The maintenance of fair competition alone calls for American flag ships of sufficient tonnage to carry a reasonable portion of our foreign commerce.

"Second, in the event of a major war in which the united states is not involved, our commerce, in the absence of an adequate American merchant marine, might find itself seriously crippled because of its inability to secure bottoms for neutral peaceful foreign trade.

"Third, in the event of a war in which the united states itself might be engaged, American flag ships are obviously needed not only for naval auxiliaries, but also for the maintenance of reasonable and necessary commercial intercourse with other nations ***." Merchant marine act, 1936:

Hearings before the Comm. 3On commerce, S. Rep. No. 1721, 74th cong., 2d Sess. 4-5, at 7 (1936).

Congress followed the president's recommendations in its preparation of the merchant marine act of 1936. In its statement of purpose, the 1936 act, as amended, recognizes that:

"It is necessary for the national defense and development of its foreign and domestic commerce that the united states shall have a merchant marine (A) sufficient to carry its domestic water-borne commerce of the united states and to provide shipping service essential for maintaining the flow of such domestic and foreign water-borne commerce at all times, (B) capable of serving as a naval and military auxiliary in time of war or national emergency, (C) owned and operated under the united states flag by citizens of the united states insofar as May be practicable, (D) composed of the best-equipped, safest, and most suitable types of vessels constructed in the united states and manned with a trained and efficient citizen personnel, and (E) supplemented by efficient facilities for shipbuilding and ship repair. It is declared to be the policy of the united states to foster the development and encourage the maintenance of such a merchant marine." 46 U.S.C. Sec. 1101 (1970).

To accomplish these goals, the 1936 act established two subsidies for the American merchant marine, the operating differential subsidy at issue here and a construction differential subsidy.

"The problem congress sought to address was the weakness of the American merchant marine, which was competitively disadvantaged by the lower costs, particularly with respect to wages incurred by foreign competition." Oceanic steamship Co.V. United states, supra.

This competitive disadvantage May be explained by noting that:

"Since at least the turn of the century, united states shipowners and shipbuilders have been unable to compete effectively with foreign shipyards and operating fleets. The higher wage rates for skilled laborers and more stringent safety standards prevailing in this country result in much higher costs for the production of ships; higher seaman's wages, more protective working conditions, and greater food, outfitting, insurance, and repair costs make it impossible for a ship under foreign flags. Indirect and direct subsidies given shipyards and operating fleets further aggravate the disparity in costs." Moore mccormack lines, Inc. v. United states, 413 F.2d 568, 570-571 (ct.Cl. 1969).

Thus, this subsidy was designed to place American operators in a position to compete more favorably with their foreign counterparts. The senate committee on commerce explained:

"It is the purpose of this bill to endeavor to place the American owner and operator of an American flag ship on a competitive parity with his foreign-flag competitor." Merchant marine act, 1936: hearings before the Comm. On commerce, supra, note 8.

The ODS subsidy places the American flag operator at parity with his foreign competitor since he gets his labor and operating expenses at the foreign rate, with the government paying any difference. However, ODS was not a guarantee of profits:

"'parity' carries with it no guarantee of profits, and if there are to be any profits, they must be made in competition with foreign shipping." Id.

The operating differential subsidy is governed by title vi...