deviations from established procedures, to which both he and the General Accounting Office strongly objected. Commissioner McKeough testified that, had he known at the time of the determinations the facts which were revealed at the hearings, he would have dissented in the cases of the American Export Lines and of the American President Lines.

Gen. Philip B. Fleming, the present Chairman of the Commission, testified that he was not a member when the determinations in question were made, and consequently did not feel qualified to discuss Commission actions prior to his appointment.

Construction-differential subsidies

The special report of the Comptroller General, in charging that the Commission acted without convincing evidence, alleged that such evidence was not even in the hands of the staff, since the computations were based on unproved assumptions, improper selection of data, mathematical errors, and inconsistencies, to such an extent that they were virtually worthless. Thus, even if the Commissioners had acted with full knowledge of all calculations, the evidence required by the statute would have been lacking. In attempted substantiation of this allegation the special report analyzed at some length the calculations employed by the staff. While these data do not readily lend themselves to a nontechnical summary, certain general observations can be drawn with respect to the evidence adduced at the hearings.

In each case the task of the staff was to determine the difference between shipbuilding costs in America and in a representative foreign shipping center. The resulting figure represented the percentage of domestic cost to be borne by the United States Government.

American President Lines, Ltd.-In this case the representative shipbuilding center selected was Holland. The unadjusted foreign cost determined by the Commission was the result of an arithmetical average of four calculations, a device described by the person responsible for it as "the poorest way to take an average dumbest and most brute force way of doing it."

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Of the four calculations, the basis for one was subsequently lost and could not be recalled with any accuracy. Of the remaining three, the first involved such steps as a division of the cost of machinery equally between material and labor, in support of which the Commission's statement offered a 1935 report which in fact did not justify such a break-down; a ratio for higher productivity of labor in the United States based solely on the respective times required to deliver a vessel in Holland and the United States, respectively; an assumption that foreign and domestic material costs were the same, despite information that the cost of ships plates in Holland exceeded the American cost by 60 percent; and a figure for profit and overhead reached by averaging two figures, one of which apparently included only overhead and the other clearly included only profit; and a mathematical error.

While the Commission did not deny these facts, it maintained that the assumptions were reasonable in the development of an estimate and were not properly subject to an accounting audit. A Commission estimator testified that the 50-50 labor-material break-down was based in part upon subcontractors' reports; that, given reported mark-ups from foreign costs to foreign sales prices, it

was irrelevant whether the latter figures included profit and overhead; and that ships plates were a minor item, percentagewise, in ship construction and a generalization from their relative costs was therefore unjustified. It should be noted that no such generalization had been suggested.

The second calculation was based on an incomplete report in a British publication of the costs of the Dutch-built ship being compared with the American ship; the result was increased by 21⁄2 percent to bring the cost up from that of a ship built to foreign standards to that of a ship built to the higher American standards. Finally, the break-down of costs of the American, rather than the foreign, ship was accidentally employed, and the estimator multiplied when he should have divided. At the hearings a Commission spokesman maintained that the choice of the wrong ship made little difference, since the break-down of costs in the two ships would have been similar.

The third-calculation estimated the cost of the Dutch-built ship by averaging a figure given in a British publication and one supplied by the Commission's foreign representative; the latter figure did not include hotel equipment. Among adjustments which were made was an increase, this time of 5 percent, to bring the costs up to those of American standards of construction.

The adjustments which were applied to the average of the four calculations included a deduction of 81⁄21⁄2 percent to lower construction costs from those of American standards to those of foreign standards. Thus a factor incorporated in two of the calculations at 21⁄2 and 5 percent, respectively, was removed from the average at 81⁄2 percent. The only explanation offered for this procedure was that the calculations were made independently in different divisions of the Com

mission.

Another adjustment to the average was a deduction to reduce the percentage of profit included in the foreign sales price, a percentage which had been uniformly applied in previous Commission determinations. This departure from precedent, for which no sound justification could be offered, was criticized both by Commissioner McKeough and by the chief estimator of the Division of Cost Analysis. The latter testified that he concurred in the change only after he was threatened by a superior. The two adjustments above discussed resulted in a substantial decrease in the estimate of foreign costs and consequently a substantial increase in the subsidy granted American President Lines.

American Export Lines, Inc.-The subsidy percentage of 45 percent approved in the case of American Export Lines was the result of two different subsidy figures recommended by two divisions of the Commission.

The former was based solely on the American President Lines case. Among estimates not used was one based on the Dutch-built ship Willem Ruys; another estimate based on this ship had been rejected at the outset as unreasonable and was not even included among the six considered estimates. Yet the memorandum in which the recommended estimate was presented to the Commissioners identified it as being based on the Willem Ruys, on which "considerable published

information * was available." It appeared that the American President Lines were not even mentioned in explanation of the recommendation.

Consideration of the basis of the estimate by the other division was complicated by the existence of two sets of calculations, both reaching approximately the same result, one supplied by the Commission to the General Accounting Office early in 1949 and the other produced at the hearings. The bodies of these calculations differed considerably in details, but in both it was assumed without tangible evidence that the Netherlands and the United States followed similar shipbuilding practices and were on a par in labor productivity. This latter assumption was at variance with the assumption made in the case of American President Lines.

As in the American President Lines case, the final subsidy was based on an estimate of foreign costs which included a decreased profit, despite evidence that Dutch shipyards were booked up for work until 1952, a situation scarcely conducive to "hungry" bids. An adjustment, 9 percent in this case, was made to convert from the American to the lower foreign standards of construction.

The Commission's announcement of approval of a 45-percent subsidy in this case caused the State Department's adviser on shipping for northern Europe to send the Commission a sharply critical memorandum which insisted that

No information secured by the Embassy or by the Maritime Commission's research representatives here will substantiate a differential of 45 percentand referred to information which would place the differential at a considerably lower figure. At the hearing a Commission spokesman stated that the data cited in the memorandum were not utilized because they had to be evaluated in the light of their author's— knowledge, background, his attitude, and his understanding of just how those figures are used to produce the results *. He is not a technical man. Earlier in the hearings this informant had been described by Commissioner Mellen as a "so-called foreign shipping adviser to the State Department" who was

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under the aegis and atmosphere of foreign merchant marines and under the aegis and atmosphere particularly of the British merchant marine and all British atmosphere aspects.

Yet in other instances reliance had been placed upon information obtained from this same source.

United States Lines Co.- In calculating the construction-differential subsidy in the case of the superliner, the procedure followed was unprecedented, since national defense features in the superliner were considered to be so extensive that a "commercial equivalent" devoid of such features was designed and its domestic cost of construction estimated before a comparison of foreign cost was made. The representatives of the Commission themselves differed as to the method by which the domestic cost was reached. The chief estimator of the Division of Cost Analysis insisted that the figure used was estimated by Newport News Drydock & Shipbuilding Co., and was in fact $500,000 higher than it was thought to be when it was introduced into further calculations by the Commission. On the other hand, the Chief of the Interdepartmental Office of Liaison maintained that the estimate was made by one of the divisions of the Commission

on the basis of cost data in the Newport News bid on the American Export Lines vessels, adjusted to the lower Bethlehem Steel Co. bid on those ships. The latter testimony agreed with the representation made in the memorandum which presented the figure to the Commissioners for their approval.

The cost of the "commercial equivalent" was then compared with the cost of the Caronia, a British ship. The chief estimator of the Division of Cost Analysis testified to authorship of a filed memorandum which stated that in his opinion there was lacking convincing evidence of a differential in excess of 33% percent. The task of estimating the cost of the Caronia was therefore entrusted to another individual. He and his assistant testified that whenever a choice was possible, a figure favoring the Government was employed, and that because of errors which had since been discovered their estimates of the cost of the Caronia were too high, and the construction differential was therefore unduly low. Nevertheless, their calculations produced a differential greater than 40 percent, a figure considered by the chief estimator of the Division of Cost Analysis to be excessive. The most controversial element of these calculations consisted of a percentage increase applied to a reported sales price of the Caronia to reflect rising costs since the date of its construction. This was hotly disputed as an inadequate estimate of escalation not only by persons within the Commission in this country but by the State Department's adviser on shipping for northern Europe and his assist

However, some of the data on which the foreign representatives

based their conclusions were questionable.

The special report further alleged that during one step in the process of comparing the cost of the Caronia with the cost of the "commercial equivalent" of the superliner the Newport News bid on the American Export Lines vessels, rather than the Bethlehem bid, was improperly employed. This allegation, which concerns a technical and involved mathematical process, was never fully answered by the Commission. General objections raised by the special report of the Comptroller General The special report of the Comptroller General made two other charges which applied generally to the three subsidy calculations considered. First, it was alleged that the practice of utilizing for purposes of comparison a foreign ship built to foreign standards was contrary to section 502 (b) of the act.

As originally worded, this section called for a comparison of the cost of constructing a vessel domestically with the cost of constructing it under "like plans and specifications" abroad. In 1938 the word "like" was amended to "similar." This change was justified by Joseph P. Kennedy, then Chairman of the Commission, on the ground that "like" might be interpreted to require the use of identical equipment-e. g., a General Electric turbine-in the two sets of plans and specifications.

Both before and after the amendment, the Commission's practice was to make comparisons on the basis of ships built at home and those built abroad to the same-i. e., American-standards. Thus the estimate of foreign costs included such items as safety devices, ratproofing, sanitary facilities, and the like, as to which American laws. were more stringent than were foreign laws. On July 16, 1948, however, the present general counsel of the Commission found no

legal objection to a differential arrived at by comparing a ship built in the United States to the higher standards with one built abroad to the lower foreign standards. This opinion noted that the purpose of section 502 (b) was to place American ship operators on a parity with their European competitors. Since it was assumed that the competitive value of a foreign ship was not impaired by its lack of American standards, it was concluded that the new procedure was in accord with the statutory purpose. For example, a competitive ship built abroad might differ from an American ship with respect to the berthing of crews and the extent of fire protection, but the two ships could legally be considered as having "similar plans and specifications." Accordingly, in the three cases under consideration, foreign costs were estimated on the basis of foreign standards. Since the general counsel's opinion was handed down after the early calculations had been made in the American President Lines and American Export Lines cases, American standards were first included in, then removed from, the estimates of foreign costs in these cases. As has been shown, in one case this involved an increase of 2% percent to convert to American standards and a decrease of 81⁄2 percent to reconvert to foreign standards.

The General Accounting Office argued that the amendment of "like" to "similar" in section 502 (b) was inconsequential and clarifying, and that the act clearly refers to the foreign and domestic costs not of building different vessels but of building the same vessel. It pointed out that in 1939 and 1948 legislative amendments which would have sanctioned the procedure now employed failed of enactment. The Commission maintained, however, that the amendments, had they passed, would have permitted greater discretion in the comparison of foreign and domestic costs than is now possible, even under a liberal interpretation of section 502 (b).

From its consideration of this subject, your subcommittee recognizes the existence of a serious legal question as to the proper interpretation of the statutory language. However, it appears that the revised procedure was adopted by the Commission in order that higher subsidies might be granted, and that persons within the Commission itself, including Commissioner McKeough, disapproved of this procedure and expressed strong doubts as to its legality.

The second general criticism of the special report of the Comptroller General concerned the escalation features of the contracts under consideration. In the American President Lines and the American Export Lines cases, the proposed contracts between the Commission and the shipbuilders were subject to increase or decrease according to prevailing economic conditions. The general counsel found no legal objection to contracts of sale to American President Lines and American Export Lines which were subject to change equal to the unsubsidized percentage of the increase or decrease in the construction contract prices. In the superliner case, however, although the construction contract was similarly subject to escalation, the sales price was "pegged"-i. e., not subject to change. Furthermore, on recommendation of the general counsel this feature was applied retroactively to the other two proposed contracts.

Although the Commission changed its position somewhat during the hearings, an opinion submitted by the general counsel acknowledged that the changes in the American President Lines and the