Operating differential subsidies: problems and alternatives for the United States

Abstract

In this paper a proposal for a Competitive Rate of Return (CRR) based operating-subsidy system is made as an alternative to the existing US foreign-cost parity ODS system. Such an alternative, if adopted, could be successful in meaningfully relating US government maritime subsidy programmes to the legitimate financial needs of the industry. From the operator's viewpoint, the risk of drastic revenue fluctuations is removed, yet adequate opportunities are provided for firms with above average performance to be rewarded for their efficiency in higher than average profits. Similarly, poorly run firms have an opportunity to lose money, in spite of government subsidies. From the government's viewpoint the CRR programme guarantees the provision of essential shipping services at the lowest possible cost. Because of substantial incentives to the operator on both the revenue and cost side of his profit equation, it is more likely that long-run government operating subsidies can be reduced under CRR than under the present system. Although the CRR system has been described for use in determining subsidies for both bulk and general cargo carriers, it has been recommended that this system be considered first for implementation in the case of bulk vessels, because of the newness of the bulk subsidy programme. In additon, the 1970 Act gives MarAd the flexibility to initiate such a programme for bulk vessels without the necessity of new legislation.