The Honorable John M. Slack carried over to a subsequent year which could result in the total frustration of a building program for lack of a financing package. The basic criteria for acceptance of a Title XI application is the validity and soundness of the project to be financed. Depending on the type of vessel involved, the maximum amount which may be guaranteed is either 75 or 87-1/2 percent of actual cost, which includes the construction contract price, design and inspection expenses, and net interest paid on the Title XI debt during the period of construction. Excluded from the guaranteeable amount are items such as legal, accounting and underwriting fees, interest expenses following construction, and pre-delivery vessel expenses. Maturity dates for these guaranteed obligations may not exceed 25 years from the vessel's delivery date, and lesser, more flexible terms and forms of obligations are increasingly common. Indebtedness is normally amortized on an equal payment of principal or a level payment basis, with semi-annual payments on the obligation being required. These and other requirements of the Secretary of Commerce are of course spelled out in considerable detail in the Code of Federal Regulations, and they are designed to fully protect the government's financial interest in each project that has been approved. The Title XI program is totally self-sustaining, since each recipient of its benefits is required to pay a substantial initial investigation fee, as well as an annual guarantee fee for the life of the obligation. These fees are paid into the Federal Ship Financing Fund which had a balance at the end of fiscal 1978 of $51 million and a projected balance at the end of fiscal 1979 of $96 million. From this Fund are deducted all of the salaries and other expenses incurred by the Government in administering the Title XI program, with the balance being available to make payments in the event of default. Prior to 1978, there had been only 10 defaults, involving a net cost to the Fund (not the treasury), after resale of the vessels, totaling $14.6 million or a loss ratio of less than a quarter of one percent. In 1978 and 1979 two companies defaulted on their bonds; however, there were sufficient funds to pay off the bondholders in full. It is estimated that at the close of FY 1980, the fund will have an unobligated balance of $155.7 million. Without Title XI guarantees, this nation would simply not have a viable maritime program. Our industry, over the past The Honorable John M. Slack fifteen years, has experienced a significant shift from labor intensive to capital intensive. Without these guarantees, the accounts of debt capital which is continually required to modernize and expand our fleets would either be unavailable, or be offered at rates and maturities which would make most projects economically impossible. The Title XI program is absolutely vital to the accomplishment of the nation's stated maritime goals and for our industry's very survival in the future. The Title XI program has an unbroken 40 year record of accomplishment. At the end of fiscal 1979, it is estimated that $6.5 billion will have been either guaranteed or committed for the financing of an estimated 5,000 cargo vessels, tankers, LNGS, barges, drilling rigs, tugs and shipboard lighters. By the end of fiscal 1980, this figure is estimated to be $7.3 billion with a corresponding increase in the total number of vessels and barges. The Title XI program is fully under the control of the Secretary of Commerce and under the purview of the Congress which periodically establishes the ceiling on outstanding obligations. This ceiling is currently at $10 billion. At no cost to the taxpayer and with minimal risk involved to the government, the Title XI program has been invaluable in assisting in the construction and maintenance of a modern merchant fleet. As presently constituted, it has the flexibility to maximize market pressures on interest rates and to tailor financing to the needs of the user or the project involved. During the past several years the Department of Treasury has on several occasions asked Congress to pass legislation authorizing the Federal Financing Bank at the Department of Treasury to regulate many aspects of government guaranteed loan programs. The Congress rejected this legislation, particularly with regard to programs such as Title XI which are already regulated and administered in great detail by other agencies of the government. The imposition of a limitation on Title XI commitments through the budgetary process would achieve part of the goal which the Congress rejected with the Federal Financing Bank legislation. Thus, we are opposed to the request in the present budget to limit the total aggregate amount of new commitments during FY 1980 to guarantee construction loans and mortgages to $1 billion. Requests for Title XI guarantees tend to come in groups and are not, and indeed cannot be, evenly spread out over a long series The Honorable John M. Slack Page 5 of years. The industry has cooperated insofar as practicable with government programs, placing orders for large numbers of standardized ships rather than ordering one or two ships at a time. With ships costing upwards of $80 million a piece for liners, a single order could total one-half billion dollars. If, due to the petroleum crisis, the administration should find it necessary to increase LNG imports, major loan guarantees would be required for groups of these vessels which individually may cost in excess of $150 million. Quite frankly, we are also concerned about the precedent being set. Even if the $1 billion limitation were completely adequate for FY 1980, we are concerned that a similar or different limitation in future Authorization bills might be totally inadequate. Each year the OMB and the Congress are given a progress report in the budget on the Federal Ship Financing Fund in which a full accounting of obligations and commitments are made. Certainly this is ample check on the stewardship of the administrators of the program. We urge that you delete the $1 billion limitation proposed in the FY 1980 budget as being an unnecessary constraint on the operation of the Federal Ship Financing Fund and the construction of vessels in U.S. shipyards. We appreciate the opportunity to offer our comments on this important portion of the appropriation process for FY 1980. Sincerely, Allt E. May Albert E. May Executive Vice President AEM/pc |