[Federal Register Volume 59, Number 179 (Friday, September 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22865]
[[Page Unknown]]
[Federal Register: September 16, 1994]
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DEPARTMENT OF TRANSPORTATION
Maritime Administration
46 CFR Part 298
[Docket No. R-150]
RIN 2133-AB09
Obligation Guarantees
AGENCY: Maritime Administration, Department of Transportation.
ACTION: Final rule.
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SUMMARY: The Maritime Administration (``MARAD'') is issuing this final
rule which amends its regulations for Obligation Guarantees
implementing Title XI of the Merchant Marine Act, 1936, as amended
(``Act''). This rule will carry out the provisions of Subtitle D of
Title XIII, Public Law 103-160, enacted on November 30, 1993. Subtitle
D authorizes the Secretary of Transportation (``Secretary'') to
guarantee obligations issued to finance (1) the construction,
reconstruction, or reconditioning of eligible export vessels, and (2)
advanced shipbuilding technology and modern shipbuilding technology of
a general shipyard facility located in the United States. While Title
XI of the Act is applicable to financing assistance for all types of
vessel construction, that part of the Title XI program related to
fishing vessels is administered by the National Oceanic and Atmospheric
Administration of the Department of Commerce, (NOAA), pursuant to NOAA
regulations, which appear at 50 CFR Part 253. Subtitle D of Title XIII
directed the Secretary to prescribe interim regulations within 90 days
after the date of enactment and a final rule within 270 days after
enactment. MARAD published an interim final rule on March 31, 1994, and
is now issuing this final rule that reflects its consideration of only
those comments received that addressed the specific subject matter of
the interim final rule.
EFFECTIVE DATE: This final rule is effective September 16, 1994.
FOR FURTHER INFORMATION CONTACT: Mitchell D. Lax, Director, Office of
Ship Financing. Telephone 202-366-5744.
SUPPLEMENTARY INFORMATION: Title XI of the Act, 46 App. U.S.C. 1271 et
seq., authorizes the Secretary to provide guarantees of debt
(``obligation guarantees'') issued for the purpose of financing or
refinancing the construction, reconstruction or reconditioning of
vessels built in United States shipyards. Applications for obligation
guarantees are made to MARAD, which acts under authority delegated by
the Secretary to the Maritime Administrator (``Administrator''). Prior
to execution of a guarantee, MARAD must, among other things, make
determinations of economic soundness of the project and the financial
and operating capability of the applicant. Prior to amendment by Public
Law 103-160, guarantees could be issued only for debt incurred by
United States citizens for vessels to be operated under the U.S.-flag.
Now, guarantees may be issued with respect to debt obligations for
certain vessels flying foreign flags.
The Title XI program enables owners of eligible vessels to obtain
long-term financing on terms and conditions and at interest rates
comparable to those available to large and financially strong
corporations. Funds secured by the obligation guarantees that are used
for financing a vessel are borrowed in the private sector.
Public Law 103-160, the ``National Defense Authorization Act for
Fiscal Year 1994'' (``Authorization Act''), was enacted on November 30,
1993. Subtitle D of Title XIII of the Authorization Act, the ``National
Shipbuilding and Shipyard Conversion Act of 1993'' (``Shipbuilding
Act''), establishes a National Shipbuilding Initiative (NSI) program to
support the industrial base and national security objectives by
assisting in the reestablishment of the United States shipbuilding
industry as a self-sufficient internationally competitive industry. It
adds new sections 1111 and 1112 to the Act.
New section 1111 applies to vessels and provides that the Secretary
may guarantee obligations for eligible export vessels in accordance
with the same terms and conditions of Title XI as have been applicable
to vessels documented under United States law. Alternatively, the
Secretary may guarantee obligations in accordance with such other terms
as the Secretary determines to be more favorable than the terms
otherwise provided in Title XI and to be compatible with export credit
terms offered by foreign governments for the sale of vessels built in
foreign shipyards.
Section 1111 also establishes an Interagency Council to ``obtain
information on shipbuilding loan guarantees, on direct and indirect
subsidies, and on other favorable treatment of shipyards provided by
foreign governments to shipyards in competition with United States
shipyards.'' New section 1112 applies to shipyards and provides that
the Secretary may guarantee the payment of the principal of, and the
interest on, obligations for advanced shipbuilding technology and
modern shipbuilding technology of general shipyard facilities located
in the United States.
Hereinafter in the discussion of this rule, the use of initial
capital letters in a term will indicate that it is a defined term in
this Part 298.
The Act presently provides a limitation of 75 percent or 87\1/2\
percent of the amount of Actual Cost which can be guaranteed, depending
on the category of Vessel financed. However, in 1985 MARAD formalized
the policy, begun in 1982, of issuing Guarantees of no more than 75
percent of the Actual Cost of a project in reaction to the growing
number of defaults in several industry segments. As amended, the
regulations now require a 25 percent equity contribution in every case.
The Shipbuilding Act prohibits the Secretary from establishing any
lesser percentage than set by statute that is intended to be applied
uniformly to all Guarantees that are subject to the limitation.
Subtitle D of Title XIII also makes conforming amendments to Title
XI of the Act to reflect the new authority of the Secretary to issue
Guarantees of debt Obligations used to finance Eligible Export Vessels
and shipyard modernization and improvement, in the form of Advanced
Shipbuilding Technology or Modern Shipbuilding Technology, abbreviated
in this discussion as ``AST/MST'', and referred to at some places in
the text as ``Advanced or Modern Shipbuilding Technology.'' It
restricts the total value of all Guarantees for shipyard modernization
and improvement to not more than 12\1/2\ percent of the funds available
per year for loan Guarantees from funds transferred from the Secretary
of Defense pursuant to section 108 of the National Defense
Authorization Act for Fiscal Year 1994.
As specifically authorized by the Shipbuilding Act that became
effective on November 30, 1993, MARAD published conforming amendments
to its Title XI regulations, as an interim final rule (59 FR 5123-33;
March 31, 1994), effective on publication, to avoid delay in
implementation of the new law that could adversely impact the NSI
program. This interim final rule was intended to minimize transitional
uncertainty, while allowing subsequent fine-tuning of these regulations
based on the opportunity for considered evaluation of comments from
interested parties before adopting a final rule.
It was stated that whenever reference is made in the interim final
regulations to forms prescribed by MARAD for applications or other
filing requirements, the format of such forms in effect prior to the
effective date of these regulations may be used pending revision and
issuance of new forms to be approved by the Office of Management and
Budget. To the extent necessary to reflect statutory requirements, any
form submitted may be modified or supplemented to facilitate
processing, but, until new forms have been approved, these regulations
do not require more extensive paperwork or reporting requirements than
exist under the present Title XI regulations. Exemptions provided
herein should substantially lessen the aggregate reporting burden.
Discussion of Rulemaking Text
The discussion that follows summarizes the comments submitted to
MARAD by 28 commenters on the interim final rule, notes where changes
have been made to it and the rationale therefor and, where relevant,
states why particular recommendations have not been adopted. In
addition to soliciting comments on the interim final rule amendments to
the Title XI regulations, MARAD requested public comment on two
additional topics: (1) The issuance by the Secretary of a Letter of
Interest prior to an applicant's submission of a complete application
and the subsequent issuance, if any, of a Letter Commitment, and (2)
the establishment of a deadline, such as 60 days, by which the
Secretary would act on a Title XI application considered complete by
the Secretary.
Almost all commenters responded favorably to the proposal that the
Secretary exercise discretion to issue a Letter of Interest prior to
the applicant's submission of a complete application. Commenters noted
that the procedure could be particularly useful if the shipbuilder
could use the document as a marketing document to compete effectively
against foreign yards that may be able to offer firm financing on the
satisfaction of simple conditions. Some suggested that if MARAD were
also to preapprove ship designs, Letters of Interest would be very
effective indicators of MARAD's interest in a proposed financing. One
commenter suggested that Letters of Interest could be used by
applicants to forecast the cost of a transaction and the expertise that
will be needed to complete a proposed transaction.
Commenters proposed that requests for Letters of Interest should
contain information about (1) the type and design of the Vessel to be
financed and its intended trade, (2) the approximate cost of the Vessel
and its proposed builder, (3) the amount of the requested Guarantee,
(4) recent financial information on the prospective shipowner or
bareboat charterer, (5) a description of the collateral to secure the
Secretary's Guarantee, and (6) identification of the country in which
the vessel would be owned and documented. A commenter recommended that
there be no charge or fee for the issuance of a Letter of Interest,
that the letter be issued prior to the filing of an application, and
that the letter be issued within ten days of the request.
Several commenters raised two concerns about Letters of Interest.
First, they argued that requests for such Letters must be treated
confidentially because a request for a Letter may come during the
negotiating process and the requester shipyard would not want its
competitors to be aware of the negotiations or potential prices. A
second concern raised was that the formalization of a Letter of
Interest procedure could slow down the expeditious approval by MARAD of
loan guarantee applications by increasing the burden on MARAD or by
effectively duplicating the formal application process. It was
suggested by one commenter that MARAD could substitute preapplication
meetings for the Letter of Interest. Additional concern was expressed
that the conditions contained in a Letter of Interest should not be
deemed by the agency to be binding if the applicant later demonstrates
that it can meet alternative, but equivalent, conditions.
Many commenters thought that the 60-day processing period for
completed applications was reasonable, appropriate, and adequate.
Some commenters suggested a shorter period of 30 days as conforming
more closely to international commercial norms. Some shipyards were
concerned that the 60-day turnaround is noncompetitive in the
international market because a ``complete'' application may in itself
take more than 60 days to draft. They suggested that guidelines would
be necessary to define the procedures for submitting a complete
application. Some suggested that for a pre-approved ship design, MARAD
should be able to issue Letter Commitments within 30 days, and
suggested that MARAD review its application requirements to ensure that
it is not requiring burdensome information. One commenter suggested
that a deadline for processing completed applications is an unnecessary
requirement.
MARAD Response: The discussion of the interim final rule stated
that a separate Notice of Proposed Rulemaking (NPRM) would be published
at a later date that would propose modifications to the Title XI
regulations to improve administration of the entire Title XI program.
Such modifications were not addressed in the interim rule because they
were not required to implement the amendments made to Title XI
resulting from enactment of the Shipbuilding Act. MARAD has determined
that the two specific areas on which comments were solicited--the
Letter of Interest and a deadline, such as 60 days, for processing a
complete Title XI application--should be addressed in the NPRM because
they apply to both the export and domestic programs. This will allow
MARAD to deal with the issues at the same time. Commenters need not
resubmit their views on Letters of Interest and the 60-day processing
period in response to the new rulemaking. Meanwhile, MARAD will
consider requests for Letters of Interest and will make every effort to
finish its review of completed applications within 60 business days.
Discussion of Regulations by Sections
Note: Paragraph references are as designated or redesignated in
the interim final rule.
Section 298.2 Definitions
(c) Advanced Shipbuilding Technology (``AST''). Some shipyards
urged that the requirement that AST/MST be located at a ``general
shipyard facility'' should not preclude the design, development and
construction of ship-borne AST/MST or mobile marine equipment that
incorporates such technology.
MARAD Response: The statutory definition of a General Shipyard
Facility includes a ``Vessel'' designed for the construction, repair,
rehabilitation, refurbishment or rebuilding of any vessel. To the
extent that such a Vessel incorporated the AST/MST, the regulations
would not preclude their eligibility for a Guarantee.
(e) Closing. Certain shipyard commenters requested that the
definition of ``Closing'' be amended to clarify that a Mortgage is not
issued at every closing and that a Mortgage may not be available for
collateral that does not constitute realty.
MARAD Response: MARAD believes that the current regulations are
sufficiently clear. To constitute a ``Closing'' under MARAD's
regulations, a Mortgage need not be required.
(f) Depository. A number of commenters argue that it is unfair for
MARAD to allow foreign Vessel owners and operators to use as a
Depository foreign financial institutions that are not available to
U.S. Vessel owners and operators that participate in the Title XI
program. One commenter was in favor of allowing foreign institutions in
foreign countries to act as Depositories for Eligible Export Vessels.
One commenter stated that the Commonwealth of Puerto Rico should be
specifically added to the definition of Depositories acceptable under
the domestic program and another stated that it assumes the definition
of Depository will not exclude foreign branches of U.S. banks.
MARAD Response: When a Shipowner or charterer fails to maintain an
agreed financial condition, Title XI documents require that it make
certain payments from its net cash flow to the Depository as collateral
for MARAD. MARAD agrees that, for reasons related to the enforceability
of its collateral interests, there is insufficient reason to allow
foreign Depositories for Eligible Export Vessels or Vessels in the
domestic program. To clarify further the range of acceptable financial
institutions allowed in the Eligible Export Vessel Program, MARAD has
explicitly added financial institutions located in the Commonwealth of
Puerto Rico, and, with the subsequent specific approval of MARAD,
foreign branches of U.S. financial institutions as acceptable
Depository institutions, to hold Vessel charter hire and Reserve Funds.
(i) Eligible Export Vessel. A number of commenters stated that the
definition of Eligible Export Vessels was too ``vague'' and should be
clarified to include all vessel types within the scope of 298.2(bb),
the definition of ``Vessel.''
MARAD Response: The regulations provide that an Eligible Export
Vessel means a ``vessel'' with certain characteristics and they also
provide a more comprehensive definition of ``Vessel.'' MARAD intended
the term Eligible Export Vessel to include the definition of Vessel.
The clarification sought by commenters is obtained by amending section
298.2(i) to read: ``Eligible Export Vessel means a Vessel
``constructed, reconstructed, or reconditioned in the United States for
use in world-wide trade that will, upon delivery or redelivery, be
placed under or continued to be documented under the laws of a country
other than the United States.''
(k) General Shipyard Facility. Many shipyards requested a
clarification of whether a General Shipyard Facility must be
geographically contiguous or whether there may be various components of
the facility in different locations if it can be shown that there is an
economically feasible means to achieve increases in productivity,
efficiency and quality.
With respect to paragraph (k)(2), relating to a Vessel, floating
drydock, or barge that constitutes a General Shipyard Facility and that
must be ``built in the United States,'' one commenter requested
clarification that the phrase ``built in the United States'' has the
same meaning in this context as it does for Vessels.
MARAD Response: The Shipbuilding Act does not explicitly address
this question of geographic locations of a yard. There is no
requirement that the components of a shipyard facility be
geographically contiguous. A shipyard might have supply depots or
machine shops several blocks away or farther from its main structures
and these geographically separate buildings would, obviously, still be
considered part of the yard. For purposes of shipyard modernization and
improvement projects, the test that MARAD uses is whether the
facilities at multiple locations, whether owned or leased, are part of
the common enterprise, whether their activities are wholly or almost
entirely devoted to the construction, repair, rehabilitation,
refurbishment or rebuilding of any Vessel, and whether the shipyard
applicant has management and control over the project and the personnel
employed at each of the locations, whether owned or leased. The
regulation is consistent with MARAD's position and, with this
clarification, need not be amended.
MARAD agrees that the legislative requirement that the floating
shipyard facility be built in the United States is intended to meet the
same standard as U.S.-flag Vessels built with Title XI. Accordingly,
the definition of a Vessel, floating drydock, or barge that constitutes
a General Shipyard Facility has been amended to require a showing, in
the yard's application for a shipyard modernization Guarantee, that it
meets the section 298.11(a) standards with respect to a Vessel deemed
to be of U.S. construction.
(q) Modern Shipbuilding Technology. Many shipyards commented that
Title XI financing should be available to a shipyard for any item that
will enhance the shipyard's competitiveness and capabilities even
though such items do not constitute the ``best available proven
technology, techniques and processes'' as ``Modern Shipbuilding
Technology'' is defined. It was argued that an application for
financing should not be rejected because, standing alone, it does not
``advance the state-of-the-art.''
MARAD Response: MARAD agrees that the intent of the statute and
regulation is to allow flexibility in determining whether a project
promotes the purpose of the Shipbuilding Act and whether it constitutes
AST/MST. An application for a Guarantee should not be rejected merely
because it does not ``advance the state-of-the-art'' or exceed the
``best available'' processes of shipyards around the world. It is
MARAD's interpretation of the statutory term that it will be sufficient
if a proposed project substantially advances the state-of-the-art or
best available processes of an applicant shipyard and makes it more
competitive internationally. The regulation has been rewritten to
clarify MARAD's position.
(r) Mortgage. Several commenters noted that the reference to 46
U.S.C. 31322 was confusing and recommended that it be changed to 46
U.S.C. 31301. Another commenter recommended that the rule should permit
the use of valid security interests as a reasonable substitute when
mortgages are not available. An additional commenter argued that MARAD
should delete its reference to ``first mortgage'' as it relates to AST/
MST, arguing that MARAD would then retain its flexibility to allow co-
financing with pari passu mortgages. Another commenter suggested that
the use of the word ``enforceable'' before ``preferred mortgage'' was
unnecessary.
MARAD Response: The reference in section 298.2(r) has been amended
to refer to section 298.2(x), Preferred Mortgage, which sets out in
detail the requirements, among other things, for a foreign mortgage on
an Eligible Export Vessel, relying on 46 U.S.C. 31301. The rule already
provides in section 298.31 for the use of other security interests when
Mortgages are unavailable or inappropriate. MARAD believes that it may
have a first Mortgage and still enter into pari passu relationships.
Such relationships are often the rule in co-financing arrangements. In
any event, there is nothing in Part 298 that would preclude MARAD from
accepting other security interests in addition to, or instead of, a
Mortgage. The use of the word ``enforceable'' before Preferred Mortgage
is surplus and has been removed, given the requirements regarding
Mortgages in section 298.31(a).
(w) Person. One commenter suggested that the definition of
``Person'' be expanded to include entities that are recognized under
the laws and regulations of a relevant jurisdiction that might not fit
neatly under MARAD's definition. No examples were offered.
MARAD Response: MARAD believes that, in the absence of any examples
of a deficiency in the definition, the existing definition of Person,
which includes an ``individual'' and ``unincorporated organization,''
among many others, is sufficiently broad to encompass any applicant
likely to apply, whether a U.S. or foreign entity. To ensure that the
definition is completely clear, however, MARAD has added the phrase
``or other acceptable legal business entity,'' after the words
``unincorporated organization'' in paragraph (w).
(x) Preferred Mortgage. With respect to a Preferred Mortgage, one
commenter stated that the reference to 46 CFR 221.43 is incorrect and
suggested that it should refer to section 221.31.
MARAD Response: The reference to section 221.43 is incorrect, and
it should be to 46 CFR 221.23(d). Furthermore, MARAD notes that the
interim final rule inadvertently deleted former provision (s)(4)(vi).
That provision has been restored in the final rule and is redesignated
as paragraph (x)(1)(iv)(F). Also, paragraph(x)(3) has been amended to
recognize that a Mortgage or other security interest on a foreign-
documented Vessel can qualify as a Preferred Mortgage pursuant to 46
U.S.C. 31301(6)(B).
Section 298.2(bb). Most commenters objected to the provision
precluding U.S. citizens from owning Eligible Export Vessels. They
viewed the provision as discriminating against U.S. citizens and giving
unfair preferences to foreign owners. Almost all of those objecting
argued that the prohibition against U.S. citizens owning Eligible
Export Vessels went beyond the provisions of the statute and some
argued that it was inconsistent with the intent of Congress to
eliminate ``burdensome citizenship requirements.'' By contrast, one
commenter contended that the prohibition of ownership by U.S. citizens
was consistent with congressional intent. Some argued that the statute
eliminated all citizenship requirements except for fishing vessels and
oceanographic research or instruction or pollution treatment abatement
or control vessels. Some commenters were concerned that MARAD's
regulatory stance would limit the customer base and improperly
restrict, rather than expand, the true scope of the Shipbuilding Act.
One commenter asserted that the proscription of U.S. ownership could be
easily evaded by imaginative corporate structuring and the use of
charters. Finally, it was argued that MARAD should encourage U.S.
ownership of Eligible Export Vessels as a matter of national security.
MARAD Response: There is no statutory preclusion to U.S. companies
participating in the Eligible Export Vessel program. The Vessels will
be delivered in the United States from a U.S. shipyard to a buyer for
operation in worldwide trade under the documentation of a country other
than the United States, as the statute requires. A number of
``American'' companies are, in fact, multi-national companies, and
regularly order Vessels from foreign shipyards. Congress intends
American shipyards to enter into the international market, and no sound
reason exists to preclude U.S. shipyards from competing for this
portion of the international commercial business. Accordingly, MARAD
has removed the prohibition on U.S. ownership from the definition of an
Eligible Export Vessel.
Section 298.3 Applications
Certain shipyards were concerned about the disclosure provision in
subsection (d), Confidential information, concerning the disclosure
requirements of the Freedom of Information Act (``FOIA''), 5 U.S.C.
552, for two reasons: (1) That in international circles, financing
applications are treated with strict confidence; and (2) the added
expense of lawyers' fees for opposing a FOIA request render the Title
XI programs non-competitive.
MARAD Response: MARAD has no authority to amend the FOIA or the
Administration's policy that it is to be liberally construed in favor
of disclosure. On the other hand, while MARAD has not modified this
section, it will continue to refuse to disclose information that is
deemed by MARAD to be confidential, pursuant to legal authority
interpreting the meaning of FOIA exemption (b)(4), because it would be
likely to cause substantial harm to the competitive position of the
person from whom it was obtained. MARAD is, of course, also bound by
the Trade Secrets Act, 18 U.S.C. 1905, for unauthorized disclosures by
Government officials of proprietary information that is exempt from
disclosure under the FOIA, which, among other things, makes it a
criminal act to release certain financial information such as a
company's balance sheets, bids, or other proprietary information.
With respect to paragraph (e), Priority, some shipyards expressed
concern that it accords unjustified priority to (1) ``naval and
military auxiliary'' vessels, (2) Vessels seeking domestic Title XI
financing (in that MARAD must review applications for financing for
Eligible Export Vessels in light of those for domestic vessels), and
(3) shipyards engaged in naval vessel construction as well as pilot
programs for shipyard modernization and vessel construction.
MARAD Response: As a matter of maritime policy, MARAD accords
priority for ``naval and auxiliary'' Vessels only in the domestic Title
XI program. As for any impact on domestic Vessels, MARAD is required by
statute to review applications regarding Eligible Export Vessels in
light of the same standards as apply to Vessels to be documented under
U.S. law. See section 1103(g)(1) of the Act. Any relief in this regard
must come from Congress.
Regarding the priority for shipyards engaged in both naval
construction and pilot programs for shipyard modernization, such
priority reflects the intent of Congress in facilitating the conversion
of shipyards that have previously engaged in naval construction to
commercial activities. The Title XI legislation is part of the National
Shipbuilding Initiative, which also includes a technology development
program for innovative commercial ship design and production processes
and technologies. MARAD intends to administer the Title XI program in a
manner that achieves the purposes of the National Shipbuilding
Initiative.
In addition, the priority in paragraph (e) for General Shipyard
Facilities that have engaged in naval vessel construction is mandated
by section 1359(a)(3) of the Shipbuilding Act with respect to amounts
appropriated by the Secretary of Defense and available for transfer to
the Secretary of Transportation.
Section 298.10 Citizenship
This section sets forth the citizenship requirements for Title XI
applicants and certain other parties that must establish U.S.
citizenship prior to acquiring a legal or beneficial interest in a
Vessel financed under Title XI of the Act. The exceptions to this
requirement are Eligible Export Vessels and Eligible Shipyards.
One commenter stated that Section 298.10 should be deleted because
Title XI of the Act no longer contains a citizenship requirement.
Another commenter stated that the intent of Congress was to eliminate
the citizenship requirement for all vessels financed under Title XI,
not just Eligible Export Vessels. One commenter stated that the
citizenship requirement in the 1936 Act applies only to a ``fishing
vessel or oceanographic research or instruction or pollution treatment,
abatement or control vessel or Eligible Export Vessel.''
A commenter pointed out that the parenthetical phrase in new
paragraph (e), Exemption, should exclude ``operators'' in order to
exempt those entities from being required to prove U.S. citizenship.
Another recommended deletion of this section because all U.S.
citizenship requirements have been deleted for Title XI and stated that
as long as U.S. Coast Guard requirements are satisfied, MARAD should
impose no additional requirements on U.S. citizens that could result in
discrimination and additional costs.
MARAD Response: The position of MARAD is that Section 1101(b) of
the Act (46 App. U.S.C. 1271(b)), which was not amended by the
Shipbuilding Act, requires that Vessels, other than Eligible Export
Vessels, be owned by citizens of the United States as defined by
section 2 of the Shipping Act, 1916, as amended, 46 App. U.S.C. 802,
(the ``Shipping Act''). There is no legal requirement that a shipyard
be owned by a Section 2 U.S. citizen. Review of the Shipbuilding Act
and Title XI does not support the commenter's suggestion that the
citizenship requirement for Vessels only applies to ``fishing vessels
or oceanographic research or instruction or pollution treatment,
abatement or control vessel.'' Likewise, a review of the legislative
history of the Shipbuilding Act reveals no statement to eliminate the
citizenship requirement for all Vessels financed under Title XI. The
statute explicitly requires Section 2 citizen ownership of such
Vessels, other than Eligible Export Vessels. If a bareboat charterer or
other operator desires possession and control of U.S.-flag Vessels, the
Shipping Act requires that it be a U.S. citizen or obtain MARAD's prior
approval to charter or operate the Vessel. Consistent with that
requirement, it has always been MARAD's policy that Title XI Vessels
may not be bareboat chartered to, or be operated by, non-U.S. citizens.
There is no reason to change this position now. Accordingly, bareboat
charterers and other ``operators'' of U.S. flag Vessels will remain
subject to section 298.10(a). No amendment to paragraph (e) is
warranted in view of MARAD's disposition of the citizenship issues.
Section 298.11 Vessel Requirement
Concerning paragraph (a), United States Construction, certain
shipyards claimed that many component parts are manufactured abroad and
are not available in the United States, and others pointed out that
U.S. Coast Guard U.S-built requirements relate to vessels operating in
the coastwise trade, which are the most restrictive of all.
Accordingly, they recommended excepting Eligible Export Vessels from
these requirements; or that foreign made components are excepted so
long as they are ``physically joined'' in this country; or amendment of
this section to permit use of foreign made components so long as they
do not exceed 49 percent of the Vessel's weight.
MARAD Response: Paragraph (a), United States Construction, has been
amended to remove the requirements for fabrication in the United States
of components of the hull and superstructure for Eligible Export
Vessels. Corresponding changes in Secs. 298.13 and 298.21(c) will make
it clear that even though foreign components of the hull and
superstructure may be included for Eligible Export Vessels, these costs
will not be eligible for Title XI loan Guarantees. The intent is to
allow hull and superstructure components from worldwide sources so as
to allow the maximum integration of foreign and U.S. shipyard
production as U.S. shipyards may desire for economic and/or competitive
reasons in order to penetrate the international commercial market,
without financing the foreign components of the hull and
superstructure. Nonetheless, consistent with MARAD's policy since 1986,
raw and improved products, such as unshaped, unmolded and unpunched
steel can be imported and used in the production of the hull and
superstructure without being excluded from Actual Cost as they are not
deemed to be ``components'' of the hull and superstructure.
Paragraph (c), Class, condition, and operation, was amended in the
interim final rule to allow Vessel classification by members of the
International Association of Classification Societies (IACS) ``to be
ISO-9000 certified'', rather than restricting classification authority
to the American Bureau of Shipping (ABS). With respect to Vessel
classification, all but one commenter favored allowing Vessel
classification by all members of the IACS; the ABS stated that this
amendment would be contrary to law at 46 U.S.C. 3316(b) and could place
the government's security in serious jeopardy.
One commenter stated that the statute only requires the ABS, and
not other IACS members, to be ISO-9000 certified. Another commenter
proposed that IACS members should be certified to the ``IACS-Quality
System Certification Scheme (QSCS),'' rather than the ISO-9000
standard. As to compliance with laws and regulations, several
commenters requested that the provision be clarified to state that
Eligible Export Vessels need comply only with all applicable laws,
rules and regulations of the country of registry, and treaties and
conventions to which the country of registry is a party, or the laws of
the ports it serves.
MARAD Response: MARAD disagrees with the comment that MARAD is
required to recognize solely the ABS as its agent in all matters
related to Vessel classification. It is MARAD's position that it has
the authority under section 1104A(b)(6) of the Act to set
classification standards for Eligible Export Vessels without relying on
the classification standards of ABS. Section 1104A(b)(6) of the Act
specifically states that the guaranteed vessel ``shall be in class A-1,
American Bureau of Shipping, or shall meet such other standards as may
be acceptable to the Secretary * * *.'' There was nothing in the
subsequent enactment of 46 U.S.C. 3316(b) that either explicitly or
implicitly repealed MARAD's ``other standard'' authority. That phrase
is not limited to a different ABS class than A-1, as ABS contends. For
instance, ABS does not class all Vessels eligible for Title XI loan
Guarantees. MARAD does not believe that the government's security will
be in serious danger if the Vessel is not maintained in Class A-1 ABS,
so long as it is classified by an IACS member in accordance with MARAD-
approved standards.
However, MARAD does not agree that the QSCS standard is more
appropriate than the ISO 9000 standard. MARAD believes that the ISO
9000 series reflects a broader and more appropriate set of
classification standards, and should be required. MARAD agrees
essentially with the comments about the applicability of U.S. laws and
regulations and has modified this provision accordingly to clarify that
Eligible Export Vessels need not comply with all U.S. laws and
regulations as to Vessel condition and operation, but must be
constructed in accordance with the requirements of the International
Maritime Organization that are in force at the time of the Vessel's
delivery.
Section 298.12 Applicant and Operator's Qualifications
One commenter suggested that this section be expanded to include
the concept that a shipyard may be the applicant for Guarantees for
Eligible Export Vessels and may be the initial party to the
documentation, with the ultimate purchaser assuming the obligations of
the contracts as a party upon delivery of the Vessel. Another commenter
stated that the information required with regard to the identity and
ownership of the applicant by paragraphs (b)(1)(v) and (vi), which were
not amended by the interim final rule, is primarily relevant to
establishing citizenship and should not be required of applicants for
Eligible Export Vessel Guarantees. A commenter stated that the content
of this section does not recognize certain structures for corporate
entities that exist only in foreign countries, e.g., a ``Gmbh'' under
German law, and suggested that there be a separate section for foreign
applicants. That commenter also stated that the required disclosure in
paragraph (c)(4) of whether the applicant or a predecessor has been
``in default . . . with others'' during the past five years needs
clarification and should be limited to a default with respect to a
financial instrument that gave rise to a right of the non-defaulting
party to receive accelerated payment.
With respect to the information sought by MARAD in paragraph (c)
concerning the applicant's structure, business applications, activities
and management, a commenter remarked that the expense to the
``smaller'' applicant may be burdensome, particularly where legal and
accounting services are required, which services are excluded from the
project's Actual Cost, and that the Secretary's ``waiver authority'' in
section 298.13 (``Modified requirements'' in paragraph (h)) should be
amended to exempt such applicants for Guarantees for Eligible Export
Vessels from having to provide such information. Another commenter
stated that the information required by paragraph (f)(2) concerning all
management personnel of an Eligible Shipyard applying for a Guarantee
for AST/MST is too broad and should be limited to senior supervisory
personnel of the shipyard.
MARAD Response: A shipyard can be an applicant for a loan Guarantee
under the existing regulations. The shipyard would, like all
applicants, be required to demonstrate successfully that it meets the
regulatory requirements for the program, i.e., that, among other
things, it is creditworthy to be the Obligor for the guaranteed
Obligations, has an economically sound use for the Vessel, and can
offer sufficient collateral for the guaranteed Obligations. Building a
ship solely on the speculative hope that it could be sold would not
qualify. A shipyard, like any qualified Obligor, could transfer the
Title XI obligation before or after delivery to a qualified purchaser
with the consent of MARAD. No amendment to the regulation is necessary
as such transfer is allowed as a matter of contract.
Paragraph (b) prescribes the type of information an applicant is
expected to provide about its identity and ownership, depending on the
structure of the organization. The example (``Gmbh'') cited by the
commenter is the term used to denote a German limited liability
company, generally comparable to a U.S. corporation. Such a company
would file under paragraph (b)(1) of the regulations. To accommodate
all possible applicants, MARAD has added a new paragraph (b)(4) stating
that MARAD will inform any entity that does not fit the other
descriptions in paragraph (b) concerning the information it should
submit about its identity and ownership. MARAD will consider the
comments it has received with regard to information required by
paragraph (b)(1)(v) and (b)(1)(vi), regarding ownership of capital
shares, when preparing the subsequent rulemaking concerning the
administration of the entire Title XI program.
MARAD sees no reason to change the present wording of paragraph
(c)(4) requiring business data for small firms. The proposal that MARAD
limit the information it receives on defaults to defaults on financial
instruments that give rise to accelerated payments is far too limited.
MARAD collects this information in order to discover needed information
about the applicant's creditworthiness and its business experience and
status. Information about its defaults, such as defaults on overdue tax
liability or even on technical security defaults, can give MARAD
valuable information on which to make a decision. For similar reasons,
MARAD rejects the suggestion that it amend paragraph (h) to exempt the
``smaller'' applicant from describing its structure, activities, and
management. The requested information is necessary for making a proper
evaluation and assessment of the applicant regardless of its financial
and organizational size.
MARAD does agree with the comment proposing that the information
sought by paragraph (f)(2) concerning management personnel of an
Eligible Shipyard is too broad. Accordingly, MARAD has amended the
provision to limit the information to that concerning senior
supervisory personnel in the yard.
Section 298.13 Financial Requirements
A commenter stated with respect to paragraph (a)(2)(i), which was
not amended by the interim final rule, that the exclusion from the cost
of the project (Actual Cost) of foreign equipment and services, unless
a waiver is specifically granted, should be deleted, along with the
section 298.32(a)(6) required provision in the documentation for use of
articles, materials, and supplies of U.S. growth production or
manufacture, because these are Buy American provisions that are
obsolete (by virtue of a 1986 amendment to section 298.11(a)). With
respect to Eligible Export Vessels, comments in behalf of U.S.
shipyards cited many reasons militating against exclusion of non-U.S.
components from Actual Cost, e.g., few U.S. suppliers have the approval
of classification societies other than ABS, and obtaining an equivalent
certificate could be expensive (i.e., a 5-10 percent differential), and
could result in undesirable exceptions to the ship's class that would
put the U.S. shipyard in an unfavorable position vis-a-vis its foreign
competitors; foreign shipowners want local components for ease of
replacement and repair; foreign shipowners and designers designate the
use of specific components which the shipbuilder cannot reject; many
advanced ship types require components that are not available from U.S.
sources but are from foreign sources; and many components of AST/MST
are not available on the U.S. market.
Based on these assessments, it was recommended that MARAD delete
the third sentence in paragraph (a)(2)(i), which requires the exclusion
of all foreign-made components from Actual Cost, as well as an obsolete
Buy American provision remaining in section 298.32(a)(6), which
requires only articles, materials or supplies of U.S. growth or origin
to be used in a Title XI Vessel.
A commenter also objected to the requirement in paragraph (a)(2)(i)
for the applicant to submit supporting data, suggesting that MARAD add
a provision stating that where a contract is competitively bid, the
applicant is not required to submit supporting data, such as the cost
of materials or worker hours, regarding the contract price, since the
competitive bidding process should satisfy MARAD that the contract
price is fair and reasonable. It is asserted that many shipyards do not
bid a contract on such a basis and the requirement to supply such
information to MARAD adds unnecessary administrative costs to the
shipyard. A commenter stated that paragraph (a)(3), Financing, should
be harmonized with paragraph (g) with respect to the treatment of
subordinated debt and equity since the latter provides that
subordinated debt may be included in equity, while the former disallows
its inclusion.
MARAD Response: With respect to the export program, MARAD has
determined that the requirements in the third sentence of paragraph
(a)(2)(i) and the provisions of sections 298.32(a)(6) and
298.32(b)(5)(ii), relating to foreign equipment and materials, should
be amended. These provisions were inadvertently left unamended in the
regulations in 1986. With one important exception, foreign components
will no longer be excluded from the Actual Cost of a Vessel. The
exception is that foreign components of the hull and superstructure of
any Vessel, including an Eligible Export Vessel, are excluded from
Actual Cost; this will ensure that significant Vessel construction and
reconstruction that is financed by the United States will be performed
by U.S. yards. MARAD will still need to be apprised of the use of
foreign components and will not exclude them from Actual Cost,
recognizing that many components are not available in the U.S. market
or are not available in a cost or delivery competitive basis. MARAD
will allow the value of such foreign components in the hull and
superstructure to be used as owner-furnished equipment in meeting the
equity requirements of section 298.13(a)(3).
MARAD declines to adopt the proposal that it not require applicants
to submit supporting data, such as labor costs and worker hours,
regarding a construction contract where the contract is competitively
bid. Generally, shipyards must prepare backup data to assure against
doing business at a loss. Hence, in virtually all circumstances, the
supporting data are already available, which are all that MARAD is
reviewing. Further, as guarantor, MARAD needs to make an independent
determination that the costs reflected in the Obligations are fair and
reasonable, and has a statutory responsibility to ensure that it is
guaranteeing no more than the statutory limit of allowable costs. A
competitively-bid contract may reduce the likelihood of MARAD's
guaranteeing inflated contract prices, but MARAD does not regard that
procedure as an adequate safeguard. Without conducting its own analysis
of the cost of the project, MARAD would not be able to determine
whether (1) it was impermissibly guaranteeing ``soft costs''; (2)
subsequent changes and extras were fair and reasonable; or (3) the
contract price exceeded the fair and reasonable cost of the Vessel,
despite the competitive bidding process.
With respect to the comment that paragraph (a)(3) should be
harmonized with paragraph (g) with respect to the treatment of
subordinated debt as equity, MARAD believes that the rule could be
improved with the addition of language cross-referencing the two
provisions. Accordingly, it has added directly after the word ``debt,''
in the penultimate sentence of paragraph (a)(3), a reference to the
discretion of the Secretary, provided in paragraph (g) of this section,
to allow subordinated debt as equity.
With regard to Primary financial requirements at Closing in
paragraph (d), a commenter for shipyard interests stated that the
factors upon which the existing financial requirements for a project
are based, and which are made applicable under the interim final rule
to a General Shipyard Facility owning AST/MST, do not appear to apply
to such technology, and suggests that there should be a separate
concept demonstrating how use of modern shipbuilding practices will
enhance the shipyard's competitiveness. That commenter was also
troubled by the fact that financial requirements are generally required
to be based on U.S. Generally Accepted Accounting Principles (GAAP),
but that many potential applicants will not have GAAP-based accounts
and that restatement to GAAP would be prohibitively expensive and time
consuming. This includes the requirement to file MARAD Form MA-172.
According to another commenter, since Actual Cost of a Title XI
project, including AST/MST is made up of items that are usually
capitalizable under GAAP, and costs of research and development must
generally be expensed, in order to stimulate and encourage the
development and construction of AST/MST MARAD should allow research and
development costs to be included in Actual Cost. Another commenter
representing shipyard interests argued that the requirement that a
shipowner's equity be at least 50 percent of its long term debt,
exclusive of Title XI debt, is unsatisfactory, adding that this
standard will preclude many potential international shipowners from
using U.S. shipyards, since in the international market, use of such
factors as value of the collateral, possibly with some recourse, is the
normal practice. Furthermore, it was argued that there are subsidies
available through the European Union and the Australian government that
tip the scales against Title XI financing. Accordingly, that commenter
recommended that paragraph (d)(1)(ii) be amended to the effect that the
Vessel will serve as the sole security for the Guarantees; that in a
highly leveraged transaction, additional security should be considered;
and that applicants with a well established market share and a solid
trading and revenue profile be required to maintain equity of only 15
percent of total long term debt.
Another commenter argued that MARAD's minimum working capital, net
worth, debt to equity ratios, and other financial ratios are too
conservative when applied to the construction of AST/MST, particularly
in the first year when expenses are high. It was alleged that such
severe financial restrictions will thwart the purpose of Congress in
advancing and assisting the transition of U.S. shipyards to modern
shipyard facilities. One commenter noted that use of the term ``Owner''
of technology in new paragraph (e)(3) may be limiting because the
General Shipyard Facility may be a ``Lessee'' of that technology.
Another commenter stated that MARAD should allow more flexibility
in reviewing the financial strength of the applicant as MARAD's equity
to debt test provides no flexibility for evaluating potential financial
structures as is now used in the export market, particularly by U.S.
aircraft manufacturers for exporting aircraft, nor would it appear to
allow MARAD to review and approve a financing structure utilizing a
foreign sales corporation.
MARAD Response: MARAD is not persuaded by the suggestion that the
primary financial requirements at Closing should not apply to a General
Shipyard Facility because they do not apply to AST/MST owned by a
General Shipyard Facility. These financial requirements are criteria
used to measure how adequately a company is capitalized to undertake
the business it intends to pursue. MARAD needs that information for
AST/MST projects just as it needs the information for other Title XI
projects to assure reasonable prospect of repayment of the underlying
debt.
Regarding the requirement for a restatement of accounts in GAAP
format, modern financial analysis requires accurate and standardized
information. Companies seeking loan Guarantees for multimillion dollar
projects should be prepared to demonstrate their creditworthiness in a
reliable and standard manner. Thus far, it has been MARAD's experience
with the Eligible Export Vessel program that the requirement for GAAP
accounting has not proved an undue burden on applicants.
Accordingly, MARAD declines to adopt the suggestions that it
deviate from its normal financial terms, such as debt to equity ratios
or a minimum net worth test for Eligible Export Vessels or shipyards.
MARAD believes that these traditional tests, set forth in paragraphs
(d) and (e), are useful in determining the creditworthiness of an
applicant to function in the marketplace and make its debt service
payments. As appropriate, MARAD can modify the existing requirements as
provided under paragraph (h), Modified Requirements. MARAD also is not
convinced to adopt the suggestion that it allow research and
development costs to be included in Actual Cost. The financing of
``soft costs,'' such as research and development costs, exceeds the
financing of the specific project, which is all that is authorized to
be financed.
MARAD has not adopted the suggestion that the financed Vessel be
treated as the sole security for a Guarantee because in some
circumstances that collateral will be insufficient to secure the
Government's interest. MARAD has a fiduciary responsibility to ensure
that the Government has received sufficient security for its loan
Guarantees. Too often, unfortunately, the proceeds of defaulted Vessels
sold to recover MARAD's payments under its Guarantee have not been
sufficient. On the other hand, the current regulations state that
``under normal circumstances'' a financed Vessel or shipyard technology
will be adequate security for the Guarantee. The same regulations
authorize the Secretary to require additional collateral if it is
determined that the Mortgage ``is not sufficient to provide adequate
security.'' See section 298.31(c).
Section 298.14 Economic Soundness
A commenter argued that the new requirement in the interim final
rule in paragraph (a)(2)(i) for disclosure of the ``number, type, and
buyer of Vessels'' for which AST/MST ``will be used'' is unduly strict
since a shipyard may be modernizing to attract a market segment rather
than a specific buyer. Another commenter stated that satisfying the
existing Title XI requirement in paragraph (b)(3) that the internal
rate of return (IRR) analysis show a minimum return of 10 percent,
based on the total project cost, would be difficult for the applicant
to show in the case of the construction and development of new and
innovative AST/MST facilities and equipment, and will discourage
operators of General Shipyard Facilities from taking initial steps in
the direction of greater productivity and efficiency.
MARAD Response: MARAD recognizes that many shipyards may modernize
to attract a market segment rather than a specific buyer, but MARAD
believes that a shipyard's sound economic planning involves making
reasonable business projections about the number and type of Vessels
that can be reasonably sold and the number and types of potential
buyers that can be expected to purchase them. Most businesses make such
cost-benefit estimates and analyses of their business activities,
especially before they commit substantial amounts of capital to expand
their business. Additionally, MARAD does not believe that the IRR test
will pose an insurmountable difficulty to shipyards since most shipyard
projects would not be undertaken unless they were projected to have a
minimum internal rate of return of 10 percent.
Section 298.17 Evaluation of Applications
One commenter suggested adding a fourth consideration for Eligible
Export Vessels, in new paragraph (b) of the interim final rule, ``the
export credit terms offered by foreign governments,'' while another
commenter states that the new provision regarding factors considered in
determining the applicant's equity requirements is not necessary as it
is within the scope of the economic soundness finding in section
298.14, and should be deleted.
MARAD Response: The list of items that the Secretary is required to
consider in determining the amount of an applicant's equity was not
intended to be exhaustive. MARAD will also consider all relevant
factors, including the export credit terms offered by foreign
governments, the convertibility of foreign currency, foreign sovereign
guarantees, corporate parent guarantees, and other credit enhancements
in determining the amount of applicant equity. It was deemed
appropriate, however, to give notice to the public of some of the
primary items MARAD would consider. Accordingly, MARAD has amended
paragraph (b) to indicate that ``the Secretary shall consider, among
other things, the following'' items.
Section 298.18 Financing Advanced or Modern Shipbuilding Technology
Two commenters argued that paragraph (a), Initial criteria, should
be deleted as there is no requirement in the Shipbuilding Act that
MARAD make a finding that the guaranteed financing will aid in the
transition of U.S. shipyards, and encourage modernization or support
increased productivity. A shipyard requested that there be included in
paragraph (b) a definition of ``Technological Life'' of an asset when
used to determine the duration of a Guarantee for AST/MST.
MARAD Response: Although there is no requirement in the Act that
the Guarantee of shipyard financing aid in the transition of those
yards, encourage modernization, and support increased productivity, the
Secretary is clearly authorized to impose such a requirement as a
matter of policy. Section 1112(a) of the Act authorizes the Secretary,
``subject to the terms the Secretary shall prescribe,'' to Guarantee an
Obligation for AST/MST. The Secretary has the authority to prescribe
terms so long as they are reasonable and are consistent with the
purposes of the Act. One major purpose of the Shipbuilding Act was to
encourage yards in their efforts to make the transition to commercial
activities. It is clear that the initial criteria of section 298.18(a)
are reasonable and are consistent with the policies of the Act.
MARAD is not yet able to include a definition of a ``technological
life'' for a shipyard asset being financed. Although the request is
understandable, MARAD will determine, on a case-by-case basis, what the
technological life of financed assets is likely to be. In general,
MARAD does not desire to have its Guarantees extend longer than the
``reasonable useful life'' of the collective assets which comprise this
technology (the AST/MST).
Section 298.19 Financing Export Vessels
Paragraph (a), Transmittal to Secretary of Defense, requires the
Secretary of Transportation to give the Secretary of Defense notice of
receipt of an application. The Secretary of Defense may disapprove the
loan Guarantee for reasons of national security. As to the requirement
for review by the Secretary of Defense, one commenter urged that it
should be clear that the Secretary of Defense can only disapprove the
loan Guarantee based on national security interests and for no other
reason. In addition, the commenter stated that the 30-day review period
pursuant to which the Secretary has the right to exercise a veto is too
long, given the need to streamline the approval process. Accordingly,
the commenter recommended seven days. One commenter suggested that, to
avoid confusion, the third reference to the Secretary in the second
sentence of paragraph (a) should include the words ``of Defense.''
Paragraph (b), Determinations by the Secretary, sets forth the
determinations that must be made in order to issue an Eligible Export
Vessel loan Guarantee. Paragraph (b)(1) requires the Vessel to be of at
least 5,000 gross tons if the loan Guarantee commitment cost is made
available from funds transferred from the Secretary of Defense. Several
commenters suggested that MARAD should make it clearer that Vessels
under 5,000 gross tons are entitled to be financed as Eligible Export
Vessels. In such instances, the loan Guarantee commitment cost would be
charged against the appropriated funds provided by the Department of
Transportation instead of the Department of Defense. However, one
shipyard argued that all Eligible Export Vessel projects should be
greater than 5,000 gross tons because the purpose of the statute is to
facilitate conversion from defense to commercial activities. It
asserted that to expend resources on relatively small Vessels, such as
yachts and service boats, would not maximize U.S. shipyards' potential
to compete in the commercial market. In addition, there would be the
added practical difficulty of administering monies from two sources
(Department of Defense and Department of Transportation) and the
administrative overlay would be too expensive.
Paragraph (b)(3) provides that Guarantees for Eligible Export
Vessels shall not be approved unless the Secretary determines that the
country to which the Vessel is to be exported, together with related
institutions, is sufficiently creditworthy. Numerous commenters
objected to the requirement that the Secretary make a determination as
to the creditworthiness of the foreign country to which an Eligible
Export Vessel is to be exported. They noted that the new statute does
not contain such a requirement and that the regulation does not clarify
what is meant by the country ``to which the Vessel is to be exported.''
The country could be the country of flag, the country where the owner
and/or operator is located, or the countries where the Vessel could
operate. Two commenters expressed concern that the creditworthiness
requirement, if applied to the country of flag, would apply to flag-of-
convenience countries where the Vessels will rarely call. One commenter
specifically noted that Liberia and Panama, two of the largest Vessel
registers, would be off limits pursuant to such a requirement. The
commenter stated that a lender can accept a Mortgage and registration
from a country with poor credit provided the overall project is sound.
Some commenters argued that the creditworthiness of a foreign
nation should not be a concern because the Secretary will have a
security interest in vessels or other collateral. Another commenter
suggested that where there is adequate security for the Guarantees,
MARAD's only other legitimate interest should be whether the country of
registry's legal structure provides for adequate enforcement of the
Mortgage or other security. One commenter noted that this is a
different loan program from those that would require some political or
country risk analysis and the provisions for a review by the Secretary
of Defense should be adequate to screen out deals that may involve
entities from countries whose interests are hostile to the U.S. or who
pose a threat to our national security. Another commenter noted that
the regulation does not identify the issues or elements to be weighed
by the Secretary in making a determination of ``creditworthiness'' nor
do they state the standards against which such elements shall be
measured.
MARAD Response: The role of the Secretary of Defense is established
by statute. See section 1104A(j)(1) of the Act. MARAD cannot alter the
time period established by Congress for review by the Secretary of
Defense or otherwise expand or contract that Secretary's authority. It
is, of course, clear that the Secretary of Defense may only disapprove
a loan Guarantee based on an assessment of ``the potential use of the
Vessel in a manner that may cause harm to the United States national
security interests.'' Id. MARAD concurs, however, with the comment that
the third reference in the second sentence of paragraph (a) to the
Secretary should include the words ``of Defense'' and has so modified
that sentence in the final rule.
MARAD concurs with the suggestion that it should clarify that
vessels under 5,000 gross tons can be financed as Eligible Export
Vessels with funds provided by appropriations to the Department of
Transportation instead of funds provided by the Department of Defense.
MARAD believes that it should exercise the broadest possible
flexibility to assure that U.S. yards can be stimulated to engage in
international commerce effectively. MARAD also believes that it may, in
fact, be very reasonable to finance smaller, ``niche'' vessels, and is
acting to preserve its authority to do so. Problems of administering
the monies from two different sources are negligible.
The objection of numerous commenters to the language of paragraph
(b)(3) as it applies to the creditworthiness of ``the country to which
the Vessel is to be exported'' is, in part, well taken. Some Vessel
owners will document their Vessel under a flag of convenience that
bears no commercial relationship to the country in which the shipowner
or charterer has its principal place of business. Of course, MARAD, as
mortgagee, is concerned about the enforceability of its security
interests in the various jurisdictions involved in the business plan of
the Vessel, including the enforceability of a mortgage under a flag of
convenience. However, the country of the ship's documentation is not
the issue here. The problems intended to be addressed by paragraph
(b)(3) deal with the creditworthiness of the country in which the
shipowner and its charterers have their chief executive offices and
have located a substantial portion of their assets. It is in those
places where MARAD will have to enforce deficiency judgments or pursue
enforcement of Guarantees. Among other things, these problems of
enforcement include (1) the convertibility and the stability of
currency from the shipowner's or the applicable (bareboat or time)
charterers' countries, (2) the likelihood of political violence,
expropriation, and government sanctioned repudiation of contracts, (3)
the ability to enforce contract rights in the juridical systems of the
shipowner's and charterers' countries, (4) the likelihood that MARAD
could enforce sovereign and corporate guarantees, (5) the existence of
acceptable lien filing and bankruptcy systems, and (6) the stability of
the banking systems. Accordingly, MARAD has revised paragraph (b)(3) to
state that ``Such Guarantee shall not be approved unless the Secretary
determines that the countries in which the shipowner, its charterers,
guarantors, or other financial interests, if any, supporting the
proposed transaction have their chief executive offices or have located
a substantial portion of their assets, present an acceptable financial
or legal risk to MARAD's collateral interests.''
Section 298.20 Term, Redemption and Interest Rates
Several shipyards and other commenters proposed that the Secretary
should make liberal use of the maximum 25-year duration for Guarantees
in paragraph (a), and should disregard the provisions in the
Organization for Economic Co-operation and Development's (OECD)
Arrangement on Guidelines for Officially Supported Export Credits that
preclude financing for more than 80 percent of the contract price of a
Vessel and restrict financing to a maximum of eight and a half years at
a minimum interest rate of 8 percent.
Paragraph (c), Interest rate, was amended in the interim final rule
to allow the Secretary discretion with respect to Guarantees for all
transactions other than those for U.S.-flag Vessels owned by U.S.
citizens. Two commenters objected to the requirement that interest
rates for U.S. Vessels must be ``reasonable'' while there is no such
requirement for non-U.S. Vessels. One of the commenters observed that
while the intention of the legislation was to assist the shipbuilders,
the specifics are offensive when foreign owners are granted preferences
by the regulation. Another of the commenters stated that there is no
statutory basis for Secretarial discretion with regard to interest
rates for transactions other than for U.S. owned Vessels that is
similar to the discretion that exists in section 298.39 of the interim
regulations. That regulation is based on section 1111(a)(2) of the Act,
as amended by the Shipbuilding Act, allowing the Secretary to meet
export credit terms of foreign governments. Therefore, it was submitted
that the provision granting discretion in setting interest rates should
be eliminated.
One commenter noted that the word ``rates'' appears to be missing
after the words ``. . . taking into account the range of interest . .
.''. The commenter suggested that, at the end of the paragraph, the
words ``with respect to each application'' be deleted and the words ``.
. . with respect to the Obligations to be guaranteed'' be substituted
therefor.
MARAD Response: In issuing loan Guarantees pursuant to section
1111(a), MARAD is not subject to the OECD guidelines. Among other
reasons, the U.S. is not a party to the OECD Understanding On Export
Credits For Ships and, further, Congress intended MARAD to issue its
Eligible Export Vessel Guarantees according to the same terms and
principles it applies in the domestic program. MARAD notes that an OECD
agreement on shipbuilding subsidies was negotiated on July 17, 1994,
and still must be ratified by all parties thereto. If and when this
OECD agreement on shipbuilding subsidies goes into force, the terms of
the Title XI program will be modified to conform. In the meantime,
applicants shall be required to demonstrate their qualifications for
the current loan Guarantee program, on the basis of their
creditworthiness, the economic soundness of their proposed project and
the value of the proposed collateral.
MARAD agrees that there is an unnecessary appearance of unjustified
preference in the way interest rates could be approved for the various
programs and MARAD has removed in the final rule the last sentence of
paragraph (c) as requested. MARAD has also inserted the word ``rates,''
after the words ``taking into account the range of interest,'' in that
paragraph (c).
Section 298.21 Limits
Paragraph (a), Actual Cost basis, was amended in the interim final
rule to include reference to AST/MST and to add new paragraphs (14) and
(15) which, respectively, disallow payments for early equipment
delivery or non-capitalizable pre-delivery expenses for such
technology. Paragraph (b), Actual Cost items, sets forth the items
which comprise Actual Cost. One commenter advised that the citations to
the Act in paragraph (a) should be corrected to ``Section 1104A(b)(2)
or 1104B(b)(2)'' and ``Section 1103(A)(a)(5)''.
With regard to paragraph (b), Inclusion of owner furnished
equipment in Actual Cost Determination, one commenter stated that it is
appropriate to include as part of Actual Cost items the cost of owner
supplied facilities that are part of AST/MST, such as land, buildings,
drydocks, piers, etc., and the cost of upgrading, renovating,
refurbishing, and relocating such facilities. The rationale is that
such items play a role in construction of AST/MST that is as important
as owner-furnished equipment in the construction of a vessel and that
the value assigned to such items should be fair market value or a
percentage thereof. Several shipyards commented that, to the extent
that the regulations do not follow Cost Accounting Standard 404
relating to tangible capital assets constructed by a contractor for its
own use, they should be amended to do so in order to permit the
inclusion of indirect costs in the calculation of Actual Cost, i.e.,
general and administrative expense when in-house construction requires
planning, supervisory, or other significant effort by officers or other
personnel whose salaries are charged to G&A expenses.
With respect to new paragraph (b)(14), some commenters urged that
the concept of including payments for early delivery of a Vessel or
AST/MST should be reconsidered since there is clear economic value in
many cases for receiving early delivery, and speed in producing the end
result should be encouraged and not discouraged. This is especially
true when the need is considered for U.S. shipyards to accelerate their
delivery schedules to compete more effectively with foreign yards.
MARAD Response: The references in paragraph (a) will be corrected
to read ``section 1104A(b)(2) or 1104B(b)(2)'' and ``section
1103A(a)(5),'' respectively. Extending the Guarantee to land,
buildings, and other preexisting facilities is not accepted, as MARAD
has limited resources to finance the AST/MST vessel projects.
Moreover, as a general practice, MARAD has disallowed the inclusion
of indirect costs in the calculation of Actual Cost. MARAD's
appropriated funds are available for the direct costs of constructing
the asset; the inclusion of indirect costs carries with it the
potential for unjustified inflation of the Actual Cost to the detriment
of the taxpayer and the program. MARAD has not financed the payment of
premiums for early delivery of Vessels because these costs do not add
to the value of the collateral and, in any event, the value of the
premium should be recoverable by the shipowner as profit arising from
its operations.
Consistent with the amendments to sections 298.11(a), concerning
U.S. construction, and 298.13(a)(2)(i) with respect to Actual Cost,
MARAD has also adopted a specific, explicit exclusion of the cost of
such foreign components of the hull and superstructure, and the cost of
their foreign assembly, in a new paragraph (c)(16) of section 298.21.
Section 298.23 Refinancing
The section was amended in the interim final rule to provide that
refinancing of Title XI debt only shall be permitted for AST/MST. One
commenter noted that the refinancing limitation with respect to
technology is not imposed by statute and that refinancing of recently
incurred debt should be allowed. Several shipyards commented that the
provision regarding technology is too restrictive because it would
preclude the refinancing of a ``bridge loan'' incurred prior to the
receipt of Title XI financing.
MARAD Response: MARAD is of the opinion that it is not sound policy
to use a Government Guarantee to refinance existing shipyard debt. As a
matter of administrative discretion, MARAD has decided to use its
limited funds for the development and use of new technology by U.S.
shipyards not previously privately financed and for Vessel projects. On
the other hand, the refinancing of Title XI debt at a lower interest
rate benefits all participants, thereby reducing the government's
exposure under the guaranteed obligations. To clarify, however, that
the whole of section 298.23 applies to the refinancing of AST/MST, the
final rule has been amended by inserting the words ``or Advanced or
Modern Shipbuilding Technology'', where appropriate, in section 298.23.
Section 298.31 Mortgage
Paragraph (a), In general, was amended in the interim final rule to
include a provision for evidence of the Secretary's security interest
in AST/MST, which may be a form of security other than a Mortgage. That
paragraph also requires, with respect to a foreign Mortgage for
Eligible Export Vessels, that to ensure the validity and worldwide
enforceability of such Mortgages, the Secretary will require the
Obligor to obtain satisfactory legal opinions from foreign counsel. One
commenter stated that it is not clear whether a security interest that
is not a Mortgage can be used as satisfactory evidence for the
Secretary. The commenter suggested that MARAD specifically provide for
the use of security interests, in addition to Mortgages, in its program
for Eligible Export Vessels. The commenter argued that MARAD should
specifically allow this type of transaction and should not rely on the
``Exemptions'' provision in the regulations to permit other financing
structures.
Many commenters objected to the requirement for legal opinions as
to the worldwide enforceability of Mortgages because, generally, no
lawyer is able to give an opinion on the law with respect to any
jurisdiction other than that in which the lawyer is admitted to
practice. Furthermore, it was stated that there are some jurisdictions
where Mortgages cannot be enforced as a practical matter. The
commenters noted that this requirement adds an additional cost to a
transaction that needs to be financially competitive with non-U.S.
financing alternatives. Several commenters stated that in-house counsel
should be permitted to render opinions and that such practice is
commercially acceptable. One commenter noted that the focus should be
on the country in which the Vessel is registered and the country where
the owner has its principal place of business.
Another commenter argued that the Secretary should be authorized to
accept various types of collateral (i.e., land, buildings, equipment)
or a collateral package (i.e., a combination of first and second
Mortgages, assignments, etc.) for Title XI financing.
One commenter questioned whether it would be practical for the
Secretary to promulgate a standard mortgage for each country, because
there are so many differences from country to country. Another
commenter suggested that there are some countries where the Secretary
may not, by law, be a mortgagee and proposed that the regulation be
amended to permit the Secretary to appoint or designate an authorized
and eligible mortgagee to act on the Secretary's behalf. The comment
does not cite any examples.
MARAD Response: The regulations provide that ``Under normal
circumstances, a Guarantee shall not be endorsed on any Obligation
until the Secretary receives satisfactory evidence of a security
interest in one or more Vessels . . . .'' See section 298.31(a). The
existing regulations also specifically provide that ``In the case where
a Mortgage or a security interest on the financed assets may not be
available or enforceable, the Secretary shall require alternative forms
of security.'' Therefore, the existing regulations provide flexibility
to accept collateral other than ship Mortgages and in unusual
circumstances, for example, where a Mortgage is not available in a
foreign jurisdiction for a delivered Vessel, MARAD could accept another
type of security interest. No amendment to the regulation is necessary
in this connection.
The hallmark of a ship Mortgage is that, once foreclosed upon in
admiralty court in an in rem proceeding, the admiralty order
transferring possession free and clear of all liens is valid against
the whole world. The reference in section (a) was to this type of
``worldwide enforceability.'' Understandably, there are countries which
do not afford this comity and international recognition of judgments,
particularly those countries which do not have admiralty courts. Taking
into account the objections raised to the term ``worldwide
enforceability'' and the potentially burdensome legal costs entailed in
such an opinion, MARAD has amended this provision to require an
enforceability opinion only (1) As to the country in which the vessel
is documented, (2) the United States, and (3), in the case of dedicated
service (over specified trade routes), the country or countries
involved in this service, or if those destinations are too numerous in
MARAD's opinion, then only in the Vessel's primary port of operation.
After much deliberation, MARAD has decided not to accept the
suggestion that legal opinions be issued by in-house counsel. It has
long been a MARAD precondition for the issuance of a Guarantee that an
applicant retain outside, independent legal counsel, who are acceptable
to MARAD, to issue such a legal opinion to MARAD. Counsel are required
to opine, among other things, that the documents comprising the
guaranteed transaction have been duly authorized, executed, and
delivered and constitute the valid, legally binding, and enforceable
obligations of the Obligor and other Related Parties. We note that
other government agencies, most notably the Overseas Private Investment
Corporation and Export-Import Bank, when engaged in similar commercial
transactions, require that the applicants pay for an attorney to advise
the agency in addition to any that they may employ for themselves.
With respect to the argument that the Secretary should be
authorized to accept various types of collateral, including land and
equipment, second mortgages, assignments, etc., MARAD notes that
section 298.31(c) already states that if it is determined that a
Mortgage on a financed Vessel or AST/MST is not sufficient, then the
Secretary ``may require additional collateral, such as mortgage(s) on
other . . . assets, special escrow funds, pledges of stock, charters,
contracts, notes, letters of credit, accounts receivable, assignments,
and guarantees.'' No amendment to the rule is necessary to preserve
this discretion, which the Secretary has consistently exercised over
the life of the Title XI program.
In response to the query whether it would be practical for MARAD to
promulgate a standard Mortgage for each country, it should be stated
that MARAD has no intention of proposing a standard foreign mortgage.
MARAD may, however, over time compile a list of jurisdictions that have
satisfactory mortgage laws.
Finally, with respect to jurisdictions where the Secretary may not,
as a matter of law, be a mortgagee, MARAD will not issue a loan
Guarantee, unless some other acceptable form of security can be
provided.
Section 298.32 Required Provisions in Documentation
Paragraph (a)(1) was amended in the interim final rule to provide
for the furnishing of satisfactory insurance or a performance bond by
the manufacturer of AST/MST. Several shipyards commented that a
performance bond is not necessary where the manufacture of AST/MST is
concerned because the manufacturers are merely suppliers of goods and
services.
The proscription against work done outside the shipyard contained
in paragraph (a)(5) was not within the scope of the interim final rule,
but several shipyards have requested that MARAD amend the provision to
remove the prohibition against the use of Title XI proceeds for payment
of work done outside the shipyard unless the Secretary consents in
writing to such use. It was suggested that such language is probably
unintentionally too restrictive and should be modified by adding,
``except for customary and usual subcontractor or supplier off-site
prefabrication or fabrication of components where considered
appropriate for cost or risk containment purposes.''
Several shipyards have requested that MARAD amend paragraph (a)(6),
which requires that materials and supplies of the United States be
used, to delete this remnant of the former ``Buy American'' requirement
in section 298.11, which was amended in 1986.
With respect to paragraph (b)(4), which prescribes covenants by
shipowners, including citizenship requirements that were amended in the
interim final rule to exclude Eligible Export Vessels from compliance,
one commenter suggested that the word ``registry'' is confusing in that
while the term is common for documentation of foreign vessels in
foreign countries, it is a confusing term when used for documentation
of a vessel under the laws of the United States. The commenter
suggested substituting for the term ``registry'', the term
``documentation'', to correct the confusion. In addition, another
commenter suggested that ``compliance with the provisions of 46 U.S.C.
31301-31343'', is inappropriate with regard to Eligible Export Vessels
and reference to them should be stricken.
MARAD received several comments by shipyards about paragraph (b)(8)
that requires the Obligor to maintain insurance on Title XI assets,
suggesting the regulation be amended to allow shipyards to self-insure
if those shipyards can demonstrate their financial well-being to the
satisfaction of the Secretary. Paragraph (b)(9) requires covenants for
Eligible Export Vessels to maintain additional types of insurance as
may be required against such risks as those of a political, financial,
or economic nature, to reflect any risk of the foreign country
associated with the shipowner. One commenter expressed concern that
compliance with this regulation may be impossible because the Vessel
may be purchased by one foreign national, sold to another foreign
national, and flagged yet in another country.
MARAD Response: MARAD believes that paragraph (a)(1) is written
with sufficient qualifications to ensure that, in a proper case, MARAD
will not require a performance bond. In the case of mere suppliers of
goods that need not be specially constructed to meet the shipyard's
specifications, a performance bond would not be required. Accordingly,
MARAD has not found it necessary to amend the regulation further to
achieve this result.
With respect to paragraph (a)(5), concerning the constraints on
work done outside the shipyard, the commenters misapprehend MARAD's
practice. MARAD merely needs to be aware of offsite prefabrication or
fabrication practices; MARAD does not discourage that practice. The
requirement for written approval has not posed a problem for other
projects and it is not anticipated to pose a problem.
The Buy American issue concerning paragraphs (a)(6) and (b)(5)(ii)
were addressed earlier in the discussion concerning section 298.13.
Accordingly, those provisions have been amended.
As to paragraph (b)(4), MARAD agrees with the commenter who
suggested that Eligible Export Vessels should not be required to comply
with the provisions of 46 U.S.C. 31301-31343, Commercial Instruments
and Maritime Liens. Instead, the regulation has been amended to state
that the Obligor shall covenant with the Secretary that the Mortgage on
its Eligible Export Vessel shall comply with the definition of a
``preferred mortgage'' under 46 U.S.C. 31301(6)(B), to wit, it shall
comply with the mortgage laws of the foreign country where the Vessel
is documented and shall have been registered under those laws in a
public register. In addition, paragraph (b)(4) has been modified to
state the requirement for ``maintaining United States documentation of
the Vessel or documentation under the laws of a country other than the
United States with regard to an Eligible Export vessel'', instead of
``registry'' of the Vessel.
Insurance of the Title XI assets is a critical and essential part
of the Title XI program. Self-insurance by shipyards as to its
collateral is considered by MARAD to be unduly risky. Finally, MARAD
does not agree that compliance with the provisions of section (b)(9) on
certain insurance for Eligible Export Vessels is ``impossible.'' In
domestic Title XI projects, such insurance has been procured. The
requirement is not invalidated by the possibility of subsequent
transfer of the Vessel because such transfer requires MARAD's prior
consent. MARAD's consent will not be given unless the proposed
purchaser agrees, among other things, to obtain the required insurance.
Section 298.34 Construction Fund
Paragraph (b) was amended to include disbursements from the
construction fund prior to delivery of the AST/MST. Several shipyards
have suggested that in the international market place, the shipowner
may, at its own risk, contract with the shipyard for construction prior
to obtaining the loan or loan Guarantee, and pay for the initial stages
of construction with the required 12.5 percent equity (87.5 percent
Guarantee) or the 25 percent equity contribution (75 percent Guarantee)
at that time. Thereafter, once the Secretary has authorized its
commitment, such equity expenditures would be credited as the equity
contribution. Thus, it was proposed that section 298.34 should be
amended to authorize such interpretation of equity contribution.
MARAD Response: The proposed practice is consistent with those that
MARAD follows under the regulation as drafted, and no additional
amendments in this respect are necessary.
Section 298.35 Reserve Fund and Financial Agreement
Several shipyard commenters have stated that there is a need for
clarification of the calculation to determine the amount of required
deposits into the Reserve Fund because existing regulations do not
provide a shipyard with enough facts to make an informed decision with
respect to the total cost of Title XI financing. In addition, the
Reserve Fund deposit requirements, as written, do not address how net
operating revenue will be determined in conjunction with the shipyards'
AST/MST assets.
MARAD Response: MARAD agrees and has amended Section 298.35 to
provide for a simple calculation of net income deposits into the
shipyard's Title XI Reserve Fund. Such calculation will be set at 2
percent of net cash flow, as defined by GAAP, and as shown on its
audited financial statements.
Section 298.36 Annual Guarantee Fee
Several shipyard commenters have suggested that MARAD waive the
Guarantee Fee if the interest provided for under Title XI is greater
than that provided for overseas under OECD financing in order to meet
international competitiveness.
MARAD Response: The Secretary has no authority to waive the
statutorily-required Guarantee Fee. On the other hand, MARAD has
authority to match export credit terms offered by foreign governments
if those offered are more favorable than under Title XI. To date, MARAD
has not had occasion to exercise that authority.
Section 298.39 Exemptions
Several shipyards have suggested that MARAD needs to codify
specific guidelines for exemptions from its regulations, and the
following standards should be added to allow greater flexibility: MARAD
(1) Should waive Guarantee and investigation fees where foreign
shipyards do not charge fees, or allow the applicant to include such in
its actual costs; (2) extend the life of the Guarantee beyond 25 years;
(3) authorize the inclusion of legal and accounting costs in Actual
Cost; (4) and finance more than 87.5 percent of the Actual Cost. In
addition, it was stated that the phrase ``not required by law'' in the
first paragraph of the section is ambiguous since the statute
specifically authorizes waiver of statutory requirements, and it should
be deleted for this reason. Commenters further suggested that MARAD
should have the flexibility to provide for waivers when, in the
judgment of MARAD, a waiver (1) Is required to provide effective
assistance to U.S. shipyards in competing in the global market; (2) is
not inconsistent with law; and (3) will not unduly affect the financial
interests of the United States, given the objectives of the program.
MARAD Response: MARAD declines to adopt these proposals as
unnecessarily diluting the force and effect of the regulation. The
exemptions are not intended to address MARAD authority under section
1111(a) of the Act to provide more favorable terms than specified by
Title XI in order to be compatible with export credit terms offered by
foreign governments. Any exercise of such authority will be on a case-
by-case-basis.
Section 298.42 Reporting Requirements--Financial Statements
Several shipyards have suggested that since they are wholly owned
subsidiaries and are included in the general audit of the parent
corporation, MARAD should accept such audits because independent audits
could be too costly to conduct for the shipyards.
MARAD Response: The regulation already preserves the discretion of
MARAD to allow the submission of consolidated audits in an appropriate
case and no amendment of the regulation is necessary to accommodate the
commenter's request.
Rulemaking Analyses and Notices
Executive Order 12886 (Regulatory Planning and Review) and Other
Requirements of Law
This rulemaking has been reviewed under Executive Order 12866, and
it has been determined that it is a significant regulatory action since
it is likely to result in a rule that may have an annual effect on the
economy of $100 million or more. It has also been determined to be a
significant rule under the Department's Regulatory Policies and
Procedures. Final Regulatory Assessments have been prepared and are
available in the docket for inspection or copying where indicated under
ADDRESSES. In summary, the Final Regulatory Assessments finds that the
cost of the Title XI program over the first two years is $144 million,
resulting in an average annual cost of $72.0 million. Assuming that
there is demand for maximum guarantees and guarantees will range from
70 percent to 87\1/2\ percent of actual cost of the vessel and shipyard
modernization and improvement projects, the value of the vessels,
capital goods and other assets produced over the first two years of the
program will be about $1.85 billion. Further, it is estimated that new
Title XI guarantees could generate 19,440 worker years of employment
for U.S. shipyard workers, which translates into employment for 9,720
workers over a period of two years.
This rulemaking document has been reviewed by the Office of
Management and Budget under Executive Order 12866, ``Regulatory
Planning and Review.''
Federalism
MARAD has analyzed this rulemaking in accordance with the
principles and criteria contained in Executive Order 12612 and has
determined that these regulations do not have sufficient federalism
implications to warrant the preparation of a Federalism Assessment.
Regulatory Flexibility Act
MARAD certifies that this regulation will not have a significant
economic impact on a substantial number of small entities.
Environmental Assessment
MARAD has considered the environmental impact of this rulemaking
and has concluded that an environmental impact statement is not
required under the National Environmental Policy Act of 1969.
Paperwork Reduction Act
This rulemaking contains reporting requirements that have
previously been approved by the Office of Management and Budget
(Approval No. 2133-0018).
List of Subjects in 46 CFR Part 298
Loan programs--transportation, Maritime carriers, and Mortgages.
Accordingly, the interim final rule amending 46 CFR Part 298, which
was published at 59 FR 15123-15133 on March 31, 1994, is adopted as a
final rule, with the following changes:
PART 298--[AMENDED]
1. The authority citation for part 298 continues to read as
follows.
Authority: 46 App. U.S.C. 1114(b), 1271 et seq.; 49 CFR 1.66
Sec. 298.2 [Amended]
2. Section 298.2 is amended as follows:
a. By amending paragraph (i), Eligible Export Vessel, to capitalize
the first letter of ``vessel'' in the definition.
b. By amending paragraph (w), Person, to add the words ``or other
acceptable legal business entity'' after the words ``unincorporated
organization''.
c. By amending paragraph (bb), Vessel, at the end of the paragraph,
by removing the words ``may not be owned by citizens of the United
States nor documented under the laws of the United States.'', and
adding the words ``shall not be documented under the laws of the United
States.''.
d. By revising paragraphs (f), (k), (q), (r) and (x) to read as
follows:
Sec. 298.2 Definitions.
* * * * *
(f) Depository means a bank or other financial institution
organized and doing business under the laws of the United States, any
State or territory thereof, the District of Columbia or the
Commonwealth of Puerto Rico that is authorized under such laws to
exercise corporate trust powers, is a member of the Federal Deposit
Insurance Corporation, and accepts deposits for purposes of
implementing the program authorized by Title XI of the Act; but in the
case of an Eligible Export Vessel can also mean, with the specific
approval of the Secretary, foreign branches, but not the foreign
subsidiaries, of such United States financial institutions.
* * * * *
(k) General Shipyard Facility means:
(1) For operations on land, any structure or appurtenance thereto
designed for the construction, repair, rehabilitation, refurbishment,
or rebuilding of any Vessel, including graving docks, building ways,
ship lifts, wharves and pier cranes; the land necessary for any
structures or appurtenances; and equipment necessary for the
performance of any function referred to in this paragraph; and
(2) For operations other than on land, any Vessel, floating
drydock, or barge built in the United States, within the meaning of
Sec. 298.11(a), and used for, or a type that is usually used for,
activities referred to in paragraph (k)(1) of this section.
* * * * *
(q) Modern Shipbuilding Technology means a technology to be
introduced into the shipyard that is comprised of the best available
proven technology, techniques, and processes appropriate to advancing
the state-of-the-art of the applicant shipyard, or exceeds the best
available processes of American shipbuilding, and that will enhance its
productivity and make it more competitive internationally.
(r) Mortgage means a first Preferred Mortgage on any Vessel or a
first mortgage with respect to Advanced Shipbuilding Technology or with
respect to Modern Shipbuilding Technology.
* * * * *
(x) Preferred Mortgage means:
(1) In the case of a mortgage on a Vessel documented under United
States law, whenever made, a mortgage that--
(i) Includes the whole of a Vessel;
(ii) Is filed in substantial compliance with 46 U.S.C. 31321;
(iii) Covers a documented Vessel or a Vessel for which an
application for documentation has been filed that is in substantial
compliance with the requirements of 46 U.S.C. Ch. 121 and the
regulations prescribed under that Chapter by the United States Coast
Guard; and
(iv) Has as the mortgagee--
(A) A State;
(B) The United States Government;
(C) A Federally insured depository institution, unless disapproved
by the Secretary for that Vessel;
(D) An individual who is a citizen of the United States;
(E) A Person qualifying as a citizen of the United States pursuant
to a provision of 46 App. U.S.C. 802; or
(F) A Person approved by the Secretary pursuant to regulations at
46 CFR 221.23(d); and
(2) In the case of a mortgage on an Eligible Export Vessel,
whenever made, a mortgage that--
(i) Constitutes a mortgage that is established as security on an
Eligible Export Vessel under the laws of a foreign country;
(ii) Was executed under the laws of that foreign country and under
which laws the ownership of the Vessel is documented;
(iii) Is registered under the laws of that foreign country in a
public register at the port of registry of the Vessel or at a central
office;
(iv) Otherwise satisfies the requirements of 46 U.S.C. 31301(6)(B)
to constitute a Preferred Mortgage; and
(v) Has the Secretary as the mortgagee, or such other mortgagee as
is permitted by the applicable foreign law and approved by the
Secretary.
* * * * *
3. Section 298.3 is amended by revising the third sentence of the
introductory text in paragraph (e) to read as follows:
Sec. 298.3 Applications.
* * * * *
(e) Priority. * * * In regard to shipyards, priority will be given
to applications from General Shipyard Facilities that have engaged in
naval Vessel construction and that have pilot projects for shipyard
modernization and Vessel construction, with respect only to funds
appropriated to the Secretary of Defense, pursuant to provision of
section 1359(a) of Pub. L. 103-160, 107 Stat. 1547. * * *
* * * * *
4. Section 298.11 is amended by revising paragraphs (a) and (c) to
read as follows:
Sec. 298.11 Vessel requirements.
* * * * *
(a) United States Construction. A Vessel financed by an Obligation
Guarantee is considered to be of United States construction if:
(1) With respect to a U.S.-documented Vessel:
(i) It is built in a shipyard or shipyards of the United States
within the meaning of section 505 of the Act;
(ii) All components of the hull and superstructure are fabricated
in the United States; and
(iii) It is assembled in a shipyard geographically located within
the United States.
(2) With respect to Eligible Export Vessels, the Vessel is
assembled in a shipyard geographically located within the United
States.
* * * * *
(c) Class condition and operation. The Vessel shall be constructed,
maintained, and operated so as to meet the highest classification,
certification, rating, and inspection standards for Vessels of the same
age and type imposed by the American Bureau of Shipping (ABS), or other
such standards as may be approved by the Secretary, or in the case of
an Eligible Export Vessel, such standards as may be imposed by a member
of the International Association of Classification Societies (IACS)
(classification societies to be ISO 9000 series registered) with
appropriate certificates required at delivery, so long as the home
country of that ICAS member accords equal reciprocity, as determined by
the Secretary, to United States classification societies. A Vessel,
except an Eligible Export Vessel, shall comply with all applicable
laws, rules, and regulations as to condition and operation, including,
but not limited to, those administered by the United States Coast
Guard, Environmental Protection Agency, Federal Communications
Commission, Public Health Service, or their respective successor
agencies, and all applicable treaties and conventions to which the
United States is a signatory, including, but not limited to, the
International Convention for Safety of Life at Sea. An Eligible Export
Vessel shall be documented in a country that is party to the
International Convention for Safety of Life at Sea, or other treaty,
convention, or international agreement governing vessel inspection to
which the United States is a signatory, and shall comply with the
applicable laws, rules, and regulations of its country of
documentation, all applicable treaties, conventions on international
agreements to which that country is a signatory, and the laws of the
ports it serves. An Eligible Export Vessel shall be constructed in
accordance with the requirements of the International Maritime
Organization.
* * * * *
5. Section 298.12, is amended as follows:
a. By amending paragraph (f)(2), with respect to demonstrating
operating ability, by removing the words ``all management personnel,''
and inserting in their place the words ``all senior supervisory
personnel in the shipyard''; and
b. By adding a new paragraph (b)(4) to read as follows
Sec. 298.12 Applicant and operator's qualifications.
* * * * *
(b) Operator's qualifications. * * *
* * * * *
(4) Other entities. For any entity that does not fit the
descriptions in paragraphs (b)(1) through (b)(3) of this section, MARAD
will specify the information that the entity shall submit regarding its
identity and ownership.
* * * * *
6. Section 298.13, Financial requirements is amended as follows:
a. In paragraph (a)(2), Cost of the project, by revising the third
sentence of paragraph (a)(2)(i) and adding a new sentence immediately
thereafter to read:
Sec. 298.13 Financial requirements.
(a) * * *
(2) * * *
(i) * * * Each item of foreign components and services shall be
excluded from Actual Cost, unless a waiver is specifically granted for
the item, which waiver shall not be granted for foreign components of
the hull and superstructure. Although excluded from Actual Cost,
foreign components can be regarded as owner-furnished equipment that
may be used in satisfying the applicant's equity requirements imposed
by paragraph (a)(3) of this section.
* * * * *
b. In paragraph (a)(3), Financing, in the penultimate sentence, by
adding after the word ``debt'' and before the period, the words ``,
except to the extent allowed by paragraph (g) of this section''.
Sec. 298.17 [Amended]
7. Section 298.17, Evaluation of applications, is amended in the
introductory text of paragraph (b) after the words the ``Secretary
shall consider'' and before the words ``the following'' by adding the
words ``, among other things,''.
Sec. 298.18 [Amended]
8. Section 298.18, Financing Advanced or Modern Shipbuilding
Technology, paragraph (b), Other conditions, is amended in paragraph
(b)(1) by removing the words ``technological life of the assets being
financed,'' and inserting in their place the words ``reasonable
economic useful life of the collective assets which comprise this
technology,''.
Sec. 298.19 [Amended]
9. Section 298.19, Financing Export Vessels, is amended as follows:
a. In paragraph (a), Transmittal to Secretary of Defense, by adding
in the second sentence, after the word ``assessment of the Secretary''
and in the fourth sentence, after the word ``authority of the
Secretary'' respectively, the words ``of Defense'';
b. In paragraph (b), Determination by the Secretary, by revising
the second sentence of paragraph (b)(3) to read, ``Such Guarantee shall
not be approved unless the Secretary determines that the countries in
which the shipowner, its charterers, guarantors, or other financial
interests supporting the transaction, if any, have their chief
executive offices or have located a substantial portion of their
assets, present an acceptable financial or legal risk to MARAD's
collateral interests.''; and
c. In paragraph (b)(1), by adding a sentence at the end to read,
``Vessels of less than 5,000 gross tons can receive Guarantees with
funds appropriated to the Department of Transportation.''.
10. Section 298.20 is amended by revising paragraph (c) to read as
follows:
Sec. 298.20 Term, redemption and interest rate.
* * * * *
(c) Interest rate. The interest rate of each Obligation must be
determined by the Secretary to be reasonable, taking into account the
range of interest rates prevailing in the private market for similar
loans and the risks assumed by the Secretary.
Sec. 298.21 [Amended]
11. Section 298.21 is amended as follows:
a. In paragraph (a), Actual Cost basis, by removing the citations
to ``section 1104(b)(2) of the Act'' in the second sentence, and
``section 1104(a)(4) of the Act'' in the fourth sentence, and by
inserting in their places, respectively, the citations to ``section
1104A(b)(2) or section 1104B(b)(2) of the Act,'' and ``section
1103A(a)(5) of the Act''; and
b. In paragraph (c), by removing the words ``and'' at the end of
paragraphs (c)(13) and (c)(14), by removing the period at the end of
paragraph (c)(15) and adding in its place ``; and'', and by adding a
new paragraph (c)(16) to read as follows:
Sec. 298.21 Limits.
* * * * *
(c) Items excludable from Actual Cost. * * *
* * * * *
(16) The cost of foreign components and then assembly when
comprising any part of the hull and superstructure of a Vessel.
* * * * *
Sec. 298.23 [Amended]
12. Section 298.23, Refinancing, is amended by inserting after the
words ``Vessels'', ``Vessel'' and ``Vessel(s)'', respectively, each
place where they appear, the words ``or Advanced or Modern Shipbuilding
Technology'' and by removing the word ``vessels'' in the second
sentence and adding the words ``Vessels or Advanced or Modern
Shipbuilding Technology''.
13. Section 298.31 is amended by amending paragraph (a) as follows:
a. After the heading, ``In general'', designate the existing first
two sentences as paragraph (a)(1) and the third, fourth, fifth, and
sixth sentences as paragraphs (a)(2), (a)(3), (a)(4) and (a)(5),
respectively.
b. Revise newly designated paragraph (a)(2) to read as follows:
Sec. 298.31 Mortgage.
(a) * * *
(2) In order to ensure that the Secretary's Mortgages or other
security interests are valid and enforceable, the Secretary shall
require that the Obligor obtain legal opinions, in form and substance
satisfactory to the Secretary, from independent, outside legal counsel
satisfactory to the Secretary, including foreign independent outside
legal Counsel with respect to Eligible Export Vessels, which opinions
shall state, among other things, that the Mortgage or other security
interest(s) are valid and enforceable:
(i) In the country in which the Vessel is documented (or, in the
case of a security interest, in jurisdictions acceptable to the
Secretary);
(ii) In the United States; and
(iii) For vessels operating on specified trade routes, in the
country or countries involved in this service, unless the Secretary
determines that those destinations are too numerous, in which case, the
Secretary will instead require an opinion of foreign validity and
enforceability in the Vessel's primary port of operation.
* * * * *
14. Section 298.32 is amended by revising paragraphs (a)(6), (b)(4)
and (b)(5) to read as follows:
Sec. 298.32 Required provisions in documentation.
(a) Performance under shipyard and related contracts * * *
* * * * *
(6) Requiring that all components of the hull and superstructure of
a U.S.-documented Vessel be fabricated, and that all components of the
hull and superstructure of an Eligible Export Vessel shall be assembled
in the United States. If obligations will not be issued during the
period of construction of a Vessel, shipyard-related contracts shall
generally include the provisions specified in paragraphs (a)(2) and
(a)(3) of this section and this paragraph (a)(6).
(b) Assignments and general covenants from Obligor to Secretary. *
* *
* * * * *
(4) Covenants relating to the annual filing of satisfactory
evidence of continuing United States citizenship, in accordance with 46
CFR part 355, with the exception of Eligible Export Vessels and
shipyards with Advanced or Modern Shipbuilding Technology projects;
warranty of Vessel or Advanced or Modern Shipbuilding Technology title
free from all liens other than those specifically excepted; maintaining
United States documentation of the Vessel or documentation under the
laws of a country other than the United States with regard to an
Eligible Export Vessel; compliance with the provisions of 46 U.S.C.
31301-31343, except that Eligible Export Vessels shall comply with the
definition of a ``preferred mortgage'' in 46 U.S.C. 31301(6)(B),
requiring, among other things, that the Mortgage shall comply with the
mortgage laws of the foreign country where the Vessel is documented and
shall have been registered under those laws in a public register;
Notice of Mortgage, payment of all taxes (except if being contested in
good faith); annual financial statements audited by independent
certified or independent licensed public accountant.
(5) Covenants to keep records of construction costs paid by or for
the Obligor's account and to furnish the Secretary with a detailed
statement of those costs, distinguishing between:
(i) Items paid or obligated to be paid, attested to by independent
certified public accountants unless otherwise verified by the
Secretary; and
(ii) Costs of American and foreign materials (including services)
in the hull and superstructure.
* * * * *
15. Section 298.35, Reserve Fund and Financial Agreement, is
amended as follows:
a. The fifth sentence of paragraph (d) introductory text, Title XI
Reserve Fund Net Income, of this section is revised to read ``In the
case of Advanced or Modern Shipbuilding Technology, the Agreement shall
provide that within 105 days after the end of its accounting year, the
Company shall submit its audited financial statements showing its net
cash flow in a manner acceptable to the Secretary, in lieu of any other
computation of Reserve Fund Net Income specified herein for Vessels.'';
and
b. A new paragraph (e)(5) is added to read as follows:
Sec. 298.35 Reserve Fund and Financial Agreement.
* * * * *
(e) Deposits. * * *
* * * * *
(5) In the case of Advanced or Modern Shipbuilding Technology,
unless the shipyard as of the close of its accounting year was subject
to and in compliance with the primary financial requirements, the
shipyard shall make a deposit at two percent of its net cash flow, as
defined by GAAP, and as shown on its audited financial statements.
* * * * *
Dated: September 12, 1994.
By order of the Maritime Administrator.
Joel C. Richard,
Acting Secretary, Maritime Administration.
[FR Doc. 94-22865 Filed 9-14-94; 10:12 am]
BILLING CODE 4910-81-P