Obligation Guarantees

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