I wanted to suggest that in your review of possible revised procedures for determining construction-differential subsidies you take into account the range and average of bid prices in this country for evaluating against the weighted averages among the proposed five foreign shipbuilding centers. It seems to me that this would be most pertinent to the subject you have under consideration. Gentlemen, if we could conclude, we only have an hour, but if it is necessary we will go another date.

The first witness is Mr. Purdon.

If the witnesses could make a general statement and then file their full statement it might serve to expedite the matter under consideration.

STATEMENT OF ALEXANDER PURDON, EXECUTIVE VICE PRESIDENT, UNITED STATES LINES CO.

Mr. PURDON. Mr. Chairman, may I have the privilege of having some of my associates join me?

The CHAIRMAN. Yes.

Mr. PURDON. Mr. Nemec, Mr. Teige, Mr. Nuse.

Thank you, Mr. Chairman. My name is Alexander Purdon. I am executive vice president of the United States Lines. I appear before your committee today principally as chairman of the Vessel Replacement Committee of the Committee of American Steamship Lines. My associates who join with me are Mr. Frank Nemec, executive vice president of Lykes: Mr. Peter Teige, vice president of American President Lines; and Mr. Nuse, of the J. J. Henry Co. in New York who is our expert on foreign pricing.

We appreciate the opportunity to appear before your committee in support of H.R. 10053 and H.R. 10058, and in deference to your request, Mr. Chairman, I will summarize a few of our views and my associates will do the same and we will ask that these statements be put into the record.

I believe you have already indicated that this will be done.

We support the extension of the present ceilings as called for in

the bills.

In the colloquy yesterday in which the bills call for a 3-year extension and the Maritime Administration supported a 1-year extension, the Chair suggested a compromise of a 2-year extension. That compromise is very acceptable to us, Mr. Chairman and members of the committee, and we would support a 2-year extension of the present ceiling.

As our testimony will illustrate and as the testimony yesterday illustrated also, the present construction differential determinations are clustering around the 55-percent ceiling presently.

Some of our testimony will be directed toward the trend in this differential as between American and foreign shipbuilding centers. We have somewhat of a problem here, and I must be candid with you about it. The time of the extension is really less significant than having an appropriate ceiling and under our contracts with the Maritime Administration we have to contract to replace ships at set periods looking far into the future. This is very necessary from the Government standpoint to have an orderly replacement program. In the kind of shipbuilding market that we have domestically and worldwide, however, this leads to the possibility that at the time

your number comes up, so to speak, on the replacement schedule, might be exactly the time when the differentials are the widest and it is possible that some of us will find, I would hope it would not be so, that when we come up to our replacement obligations the ceiling would be 55 and the actual differential may be in excess of that.

I do not know how you can anticipate this perhaps, or how you can correct for it; but I would suggest the only logical answer to that and the only equitable answer would be to defer the requirement of placing a construction contract until the actual differential and the ceiling are in line. I think this is an important consideration.

I am not asking for legislation on this. It seems to me a logical, good, business approach to the problem and we will be talking to the Maritime Administration about it.

We appreciate the suggestion, Mr. Chairman, that the matter of the new procedures be subject to later examination. We have made our voice known on this to the Maritime Administration and we will be happy to explore it further with them and with you.

All I want to say beyond that is, that the 1936 act and the construction subsidy provisions of it have accomplished great things. It has produced for the United States the most competitive fleet in the world. We have more 20-knot cargo liners than all foreign merchant fleets combined. All of the ships that our companies are planning now are 20-knot ships or better. They all have very advanced cargo gear. I believe that all now programed have a high degree of mechanization or automation, as you wish to call it. But in going into this field of mechanization which has a great advantage to the United States in the reduction of the operating subsidies we incur substantially greater capital costs. So, to reduce the operating subsidy we make a higher capital investment. We do not object to this. We think this is progress.

We support the principle that the United States must have a strong shipbuilding industry, as the act intended it should.

I will close, Mr. Chairman, at that point, and ask that Mr. Nemec continue in the same vein summarazing his statement.

Perhaps, Mr. Chairman, if we are permitted to make sort of a package presentation in this respect, we will be able to answer questions all at the end-again, in the interest of conserving time, although we will answer questions at any time the committee desires.

The CHAIRMAN. I will have Mr. Purdon's statement placed in the record at this point.

(The statement referred to follows:)

STATEMENT OF ALEXANDER PURDON, CHAIRMAN, VESSEL REPLACEMENT COMMITTEE, COMMITTEE OF AMERICAN STEAMSHIP LINES, AND EXECUTIVE VICE PRESIDENT, UNITED STATES LINES Co.

My name is Alexander Purdon. I am executive vice president of the United States Lines Co. I appear before your committee today as chairman of the Vessel Replacement Committee of the Committee of American Steamship Lines. CASL, as our committee is commonly known, is an association of all the 15 lines operating cargo and passenger liner services on essential trade routes under operating-differential subsidy contracts.

The members of CASL support H.R. 10053 and H.R. 10058 and I am authorized to say that our position is endorsed by the American Merchant Marine Institute and by the Pacific American Steamship Association.

Accompanying me as industry witnesses in support of the bills are Mr. Frank A. Nemec, executive vice president of Lykes Bros. Steampship Co., Inc.; Mr. Peter N. Teige, vice president of American President Lines, Ltd.; and Mr. G. F. Nuse, of J. J. Henry Co., Inc., naval architects and marine engineers.

The basic purpose of the 1936 act was aptly summarized by your committee in House Report No. 1715, where your committee stated:

"The act provided for a system of construction and operating differential subsidies designed to place American steampship operators on an equal footing, as nearly as possible, with their foreign competitors, and at the same time require that ships be built in American shipyards and operated by American citizen personnel, notwithstanding the great difference between American and foreign construction and operating costs."

H.R. 10053 and H.R. 10058 are specifically concerned with subsection (b) of section 502 of the Merchant Marine Act, 1936. As it now reads, subsection (b) authorizes payment of construction differential to domestic shipyards in amounts which shall not exceed 55 percent of domestic construction costs (60 percent in the case of reconstruction, reconversion, or reconditioning of passenger vessels). Unless further extended, these ceilings will revert to 50 percent after June 30, 1964. The bills before you would extend that date, and therefore the existing construction-differential ceilings, for an additional 3 years until June 30, 1967. The testimony to be presented will demonstrate that the current determinations of construction differential are clustering around the 55-percent ceiling and may, in the future, exceed it. The situation is very flexible and your committee may well decide after hearing all of the testimony that a 2-year extension would be better than a 3-year extension. In any case, whatever the term, I hope the committee will understand that if we reach a point where actual differentials greatly exceed the ceiling, it will be necessary for us to bring this to your attention even before the end of the extension period.

This subject is not new to your committee and the facts and reasons which justified the earlier amendments are equally, if not more, compelling today. The justification for adoption of the bills in question rests upon the record developed in recent years by your committee as updated in these hearings.

The subsidized steampship operator is not free, as other companies or other industries are, to purchase capital equipment where he can get the best price. In contrast, airline companies are permitted to buy aircraft abroad, railroads can buy capital equipment abroad, and some trucking companies buy trucks abroad.

The national interest in the maintenance of shipbuilding facilities underlies this policy. Since it would be inequitable and impossible for the subsidized operators to pay U.S. building costs, construction-differential subsidies are paid to the shipyards so that, in effect, the shipyard submitting the lowest domestic bid is enabled to deliver to the operator a ship at approximately the cost the operator would have had to pay if he had built the same ship in the low-cost foreign shipbuilding center. We are not here to complain about the shipbuilding policy in the 1936 act. We endorse it as necessary.

Essentially, the basic philosophy of the 1936 act is that American-flag operators shall be placed on a cost footing as equal as possible to the status they would enjoy if they were free to operate vessels under foreign flag and to construct, repair, and supply their vessels in foreign yards. In addition to construction subsidies to the shipyards, the act provides in title VI for the payment of operating-differential subsidies to qualified operators who in return, among other requirements, must employ American officers and crews on their vessels. Profits are not guaranteed, however, and only certain items of operating costs are subsidized, the principal one being the wages of the officers and crew to the extent they exceed foreign wages.

In order to appreciate the importance of the legislation before you, I think it desirable to take a look at some of the accomplishments of the subsidized American-flag operators and their future plans and commitments in the construction of vessels. The accomplishments are substantial. They testify to the wisdom of the framers of the 1936 act. Future plans and commitments, however, depend on sticking to the basic principles of the act and in this case the basic principle is the parity principle.

The American-flag liner fleet is not only a very effective military auxiliary carrying practically all of our military cargo, but, in commercial terms, it earned about 36 percent of the cargo revenues in our export-liner trades. In rendering this serivce to our commerce and defense, it also makes significant contributions

to the national economy through the employment and earnings of seagoing and shoreside personnel and through the maintenance of skilled workmen in our commercial shipyards. Little understood is the fact that, in addition, the American-flag operators earned or conserved foreign exchange in the neighborhood of $1 billion. The subsidized lines alone contributed at least half of this. In doing so, the industry makes a very substantial and seldom recognized contribution to the solution of our balance-of-payments problems.

The fleet operated by our members is the most competitive in the world. It has more 20-knot cargo liners than all foreign merchant fleets combined. We have embarked upon, and have contracted to undertake, a vast vessel replacement program on which we have already made an excellent beginning. As of December 31, 1963, the subsidized lines have contracted for a total of 117 ships, costing the companies more than $700 million. The program for the future calls for an additional 178 vessels to be constructed prior to 1975, at an estimated corporate cost of more than $1.2 billion.

In addition, as a result of recent developments in the field of ship automation, a program is under study to improve the mechanization, cargo-handling techniques and equipment on ships built during the past several years. This program will involve additional construction expense, but must, nevertheless, be undertaken in order to reduce operating costs and to insure that these newer ships will remain competitive over the balance of their useful lives. This program will, in the long run, result in substantial savings to Government and to the operators. The principal saving will be to the Government through reduction in operating subsidies.

These significant advances could not have occurred and in the future cannot be carried out in a statutory or financial or commercial vacuum. Certain hard facts are inescapable.

American-flag operators must always compete in the field of international trade with foreign-flag operators whose objectives and pursuits are similar to ours and who enjoy in those pursuits the advantage of substantially lower capital outlays and operating costs.

We will demonstrate that the construction differential has exceeded the statutory limitation in the past, and can, unfortunately, be expected to exceed it in the future. It is abundantly clear that our current construction program in American shipyards could not have been achieved and cannot be continued on a fiscally sound basis unless the shipyards obtain construction subsidy adequate to insure that the cost to the operator is completely consistent with the parity principle of the act.

During the early years of the act, section 502(b) limited the payment of construction subsidy to 50 percent of domestic shipyard costs. Prior to World War II, this limitation did not present any serious problems, because the differential between American and foreign shipbuilding casts then ranged from 30 to 40 percent. In recent years, however, facts developed by your committee and summarized in House Report No. 1715 dated June 1, 1960, revealed that the gap between American and foreign shipbuilding costs had steadily widened. For example, during the period 1957 to 1959, the differential ranged from 48 to 53 percent for cargo vessels, and as high as approximately 59 percent for the reconstruction and reconversion of passenger vessels.

This widening cost differential placed a serious burden on the American-flag operators, who had started upon major vessel replacement programs. It obviously was frustrating a basic purpose of the act and, if left unsolved, posed a threat to the vital objectives of maintaining and fostering an American-flag merchant fleet and a domestic shipbuilding industry.

Recognizing the urgent and serious nature of the problem, your committee recommended to Congress, and Congress in 1960 enacted, Public Law 86-607, under which the construction-differential subsidy limitation under section 502 (b) was raised from 50 percent to 55 percent for cargo vessels and to 60 percent for reconstruction, reconversion, and reconditioning of certain passenger vessels. At that time, your committee concluded, and Congress agreed, that the increase in the ceiling should be limited to a 2-year period ending July 7, 1962. This was done in order to provide opportunity for further review and evaluation of world shipbuilding conditions consistent with the March 1960 report of the Secretary of Commerce to the President that "The parity principle of equalizing competitive operating and shipbuilding costs is sound, and the Government should continue to support the merchant marine through subsidy to the degree necessary to maintain parity." (H. Rept. No. 1715, June 1, 1960.)

In the following 2-year period, however, construction subsidy determinations in certain instances continued to exceed the 50 percent level of the basic act. Your committee thence concluded in 1962 that differentials in excess of 50 percent would continue to exist. Consequently, pursuant to your committee's recommendations, the 87th Congress enacted Public Law 87-877, which further extended the time limit on the 55- and 60-percent ceilings until June 30, 1964. Again, Congress concluded that in the current pace of technological developments, extension should be temporary instead of permanent so as to afford opportunity for review.

This brings us to the present.

The gap between American and foreign shipbuilding costs has continued to exceed 50 percent, and on occasion the actual differential has breached even the temporary 55-percent ceiling. Moreover, the predictable facts establish that differentials above the basic 50-percent level will inevitably recur in the immediate and foreseeable future, and it is not at all unlikely that they will exceed 55 percent.

In summary, the 50-percent construction-differential subsidy ceiling in the basic act is as unrealistic and unjustifiable today as it was in 1960 and 1962. In view of the continuing and probably widening gap between domestic and foreign shipyard costs, reversion to the 50-percent ceiling after June 30 of this year would violate the parity principle of the 1936 act, would jeopardize the shipbuilding programs undertaken and planned by our members, and would in the final result frustrate one of the vital national objectives embodied in the 1936 act. We therefore support and urge enactment of legislation extending the construction-differential ceilings currently in force under section 502 (b) of the Merchant Marine Act, 1936, as amended.

The CHAIRMAN. Now, Mr. Tollefson?

Mr. TOLLEFSON. I think I prefer to wait until I have heard all the statements. It may be that some of the questions I would have in mind will be answered by the time you are all through.

Mr. PURDON. Thank you, Mr. Tollefson.

STATEMENT OF FRANK A. NEMEC, EXECUTIVE VICE PRESIDENT, LYKES BROS. STEAMSHIP CO., INC.

Mr. NEMEC. Mr. Chairman, my name is Frank Nemec, executive vice president of Lykes in New Orleans. I do have a prepared statement which with your leave I will file for the record.

Mr. Purdon has touched briefly on some of the accomplishments of the act. Occasionally, as close as we are to this industry, it is surprising to all of us to note the real progress which has been made by the liner companies under the 1936 act. It has been very considerable progress to which our companies and the Government have devoted very, very ample resources but the benefits have been great. We think it is important that all of us from time to time stand back and evaluate the real solid accomplishments of the 1936 act. In our day to day affairs we hear all kinds of carping criticism of what the act does or does not do, but seldom is there a real evaluation, a real judgment made as to the solid progress which has been made under the 1936 act.

Beginning at page 2 of my statement I have recounted for this committee nine of the more significant improvements, accomplishments, which have been made under the 1936 act. The first fact is that with the solitary exception of the United Kingdom, the U.S.cargo-liner fleet is larger than that of any other maritime power on earth.

The second fact: Our present cargo-liner fleet includes more fast ships than any other fleet in the world, and even today the privately owned CASL fleet includes five times as many-five times as many