A federal effort to promote the construction of more U.S.-flag ships has produced an uproar in the maritime industry over the disclosure that a Houston ship operator has sold millions of dollars in federal subsidy rights for ships that he never built.
In what critics describe as a novel attempt to profit from the trading of federal subsidies, ship operator C. C. Wei last month won Maritime Administration approval to sell the rights to federal operating subsidies for three ships to American President Lines, a major steamship company.
Wei was asking $2 million for the subsidy rights on each ship, according to an attorney who was approached by the ship operator. Experts say the federal subsidy could total as much as $3 million per ship in a single year. The rights are especially valuable because they can be used on three foreign-built ships, although most federal operating subsidies are reserved by law for ships built in the United States.
Transportation Secretary Elizabeth Hanford Dole, who oversees the maritime agency, has held up approval of the subsidy sale until at least May 16 following formal protests by two competing shipping companies.
One of the protesting companies, Sea-Land Service Inc., charged that the sale is a "perversion" of federal policy that will create a "futures market" in maritime subsidies, allowing the holders of such rights to reap millions of dollars in windfall profits without building any ships.
Maritime Administration spokesman Walter Oates said the agency sees nothing wrong with Wei or any other ship operator selling the subsidy rights, which were granted under a one-time federal program that expired 2 1/2 years ago. "There's nothing to prevent it," he said.
To receive the subsidies, U.S. operators must detail their wage rates, overtime pay, maintenance expenses and other costs and compare them with those of foreign competitors on the same routes. The government makes up the difference, the bulk of which is the wage gap with foreign seamen who may earn as little as $100 a month.
Oates said the sale is in keeping with the Reagan administration's effort to promote the construction of U.S. ships at foreign shipyards, where costs are about one-third those in domestic yards.
Wei won federal approval for his subsidy sale in early April, just weeks before the ship operator caused the biggest default in the maritime agency's history. The agency must pay $128 million for Wei's default this week on two ships, the Jade Phoenix and Golden Phoenix, because it guaranteed the financing to build and refurbish the vessels under a separate construction subsidy program.
Officials at Wei's company, Falcon Shipping Group, did not respond to requests for comment. Wei's attorney, former Maritime administrator Robert Blackwell, also could not be reached.
A spokesman for American President Lines said the other companies' objections to the subsidy sale are "strictly a competitive challenge." He said American President Lines would build three container ships at roughly $40 million apiece to replace aging vessels in its fleet, but has no firm site or timetable for construction.
The controversy over the subsidy rights underscores the problems that have faced U.S. policy makers in their efforts to prop up an increasingly weak domestic shipping industry, according to maritime experts.
In 1981, the Reagan administration persuaded Congress to end a $107 million federal program that directly subsidized construction in U.S. shipyards. Since then, no more than a handful of commercial vessels have been built in domestic shipyards, causing a slump that industry officials say could destroy domestic shipbuilding.
But the end of construction subsidies created new difficulties for most ship operators, leaving them increasingly dependent on the Maritime Administration's program of operating subsidies for U.S.-built vessels. Under the program, ship operators receive $370 million a year in direct subsidies, most of which goes to six major companies.
This year, for example, American President Lines is receiving $67 million in operating subsidies for 23 ships.
To encourage ship operators to replace their aging fleets, Congress approved a one-year "window" during which the maritime agency could promise operating subsidies to domestic companies that agreed to build ships abroad. The agency granted subsidy rights for 36 new ships during the 1981-82 "window" period; 23 of those ships have been built or ordered.
Ten days before the program expired on Sept. 30, 1982, the agency approved Wei's two-paragraph application to build six bulk carriers abroad. Spokesman Oates said he believes Wei was required to provide detailed estimates of his construction plans, but that the agency could not provide these documents.
Wei never built the six ships. Last month, he sold three subsidiaries that owned half the subsidy rights to American President Lines, an Oakland-based company that hauls appliances, textiles and other cargo from the West Coast to the Far East.
The American President Lines spokesman said his company has built nearly all its ships in domestic shipyards, but bought the subsidy rights to build ships in the Far East because "you can't afford to build a ship in the U.S. today." He would not disclose how much the company paid for the subsidy rights.
Richard Kurrus, a Washington maritime lawyer, said Wei previously had tried to sell the subsidy rights to another shipping firm he represents for $2 million per ship. Kurrus declined to identify the client, who he said rejected Wei's offer.
"He's been trying to peddle them all over the industry," said Kurrus. "He's approached several companies."
Lee Rice, president of the Shipbuilders Council of America, complained that "the only asset these companies had was the right to build the ships. Congress never intended that these rights should be transferred . . . It's a sham."
Some critics contend that Maritime Administrator Harold E. Shear approved the subsidy sale in an unsuccessful effort to help Wei prevent the more costly default on the two Phoenix ships. Oates denied any connection between the subsidy sale and the impending default.
American President Lines says that at least two other companies have transferred operating subsidy rights. But Oates said it was the first such sale involving a company whose only asset was the subsidy rights.
Sea-Land and Lykes Bros. Steamship Co., which are opposing the subsidy sale, compete with American President Lines on Pacific routes that largely involve ships with no federal operating subsidies. Sea-Land long has claimed to be an industry leader in building ships without federal operating subsidies.
Sea-Land charged in its petition to Dole that the subsidy sales were "unprecedented and bizarre transactions" that would increase costs to the taxpayers significantly. Sea-Land also said that the Maritime Administration did not publicly disclose the arrangement until 11 days after it was approved.
Oates defended the sale, noting that the Reagan administration has proposed legislation to grant U.S. ship operators the permanent right to obtain operating subsidies on foreign-built vessels.
Transportation Department spokesman Robert Marx refused to comment on the matter while it is under review. "We would be potentially prejudicing our case if we talked about it," he said.