Operating Differential Subsidy

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Definition: Operating Differential Subsidy

The operating differential subsidy(ODS) is a payment made by the federal government of USA to the owner-operator of a qualified American flag vessel to cover certain costs. ODS program has been superseded in 1997 and succeeded by Maritime Security Program.

The ODS program, governed by title VI of the 1936 act, is a key program in promoting the U.S.-flag merchant marine. The purpose of ODS is to place operating costs of U.S.-flag vessel operators on parity with costs incurred by their foreign-flag competitors. Since the Merchant Marine Act of 1970, all modern cargo vessels are eligible for the ODS program.

Essential ODS contract requirements

The ODS program is run through contracts between Maritime Administration and vessel operators, Regular, long-term ODS contracts are written for 20 years. Interim ODS contracts (to cover periods when long-term contracts are being processed) and a special program--Soviet grain contracts-- are written for up to 1 year. These contracts require the ODS operator to comply with a number of obligations, including

1. Accrual and expenditure data taken from MarAd's annual report. As discussed later in this report, we found MarAd's accounting system inadequate to reasonably estimate accruals.

2. Maintaining U.S. citizenship.

3. Operating vessels in an efficient and economical manner.

4. Replacing overaged vessels as required.

5. Paying annual dividends in conformity with a conservative dividend policy.

6. Performing vessel maintenance and repair (M&R) in the United States, except in an emergency, if operators receive M&R subsidy.

Types of ODS programs

Under the 1936 act as amended, Maritime Administration has developed ODS programs for different types of services offered by U.S.-flag vessels. The liner subsidy program is the largest of the subsidy programs. From January 1, 1937, through September 30, 1980, Maritime Administration had paid $5.6 billion in liner subsidies and reported an outstanding liability as of September 30, 1980, of about $123 million. There were seven liner operators with 138 vessels in the liner subsidy program at the end of fiscal year 1980. In 1981 another liner operator entered the subsidy program leaving only one unsubsidized U.S. -flag liner operator in foreign trade.

The other operating subsidy programs are the Soviet grain and bulk cargo subsidy programs. The Soviet grain subsidy program was initiated to facilitate U.S. -flag vessel participation in U.S. grain sales to the Soviet Union. The bulk cargo program was initiated to provide subsidy to the bulk segment of the U.S.-flag fleet.

ODS cost elements

Costs covered by each of the three ODS programs are wages, M&R not covered by insurance, hull and machinery insurance, protection and indemnity insurance, and subsistence. Each is described below.

I. Waqes--Covers the difference in wage costs paid by U.S. operators and wage costs to operate the same vessel under a foreign flag. This subsidy accounts for approximately 87 percent of total ODS.

II. Maintenance and repairs-- Covers the difference between the cost of obtaining M&R in the United States and the cost of obtaining them in a foreign country. This subsidy has averaged about 5 percent of ODS.

III. Hull and machinery insurance --Covers the difference in net premium costs of insuring subsidized vessels and the composite premium costs of foreign competitive vessels. This subsidy amounts to less than 1 percent of ODS,

IV. Protection and indemnity insurance --Covers the difference in the fair and reasonable net premium costs incurred by U.S. operators and their foreign flag competitors. This subsidy amounts to about 6 percent of ODS.

V. Subsistence-- Covers the increased crew feeding costs incurred by U.S. operators operating a passenger vessel over costs incurred to operate the vessel in a foreign-flag service. While no U.S.- flag passenger vessels in foreign service exist, four combination passenger/cargo vessels are eligible for subsistence subsidy. This subsidy amounts to less than 1 percent of ODS.

VI. In addition to these general ODS costs, the Soviet grain subsidy program covers stores, supplies, and expendable equipment; fuel; other miscellaneous vessel expenses; vessel depreciation; and certain interest expense.



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