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flected in construction subsidy percentages approved by Government in new ship contracts after comparing prices companies would pay to buy these ships in the low-cost foreign shipbuilding centers and in U.S. shipyards.

A brief summary of differentials recently determined by the Maritime Subsidy Board clearly illustrates this trend (calculated on low bid prices) :

Date of bid openings and calculated differential 1982:

Apr. 3------
July 16-
Sept. 17-

Percent -- 49.1 - 48.6

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--- 52.6

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1963 average per group---

53.5 The actual price differentials will vary with bids and market conditions, but because of certain built-in factors we believe the spread will continue to increase during the next several years. In any case, however, current construction differentials now approximate the 55-percent level and, in the light of this fact, the 50-percent statutory limitation would be restrictive and unrealistic.

Mr. Nuse is here with me today and, at the conclusion of my statement, will furnish additional information on recent price trends and current and prospective differences between the cost of constructing similar vessels in low-cost foreign shipbuilding centers.

All things being equal, American operators prefer to build their ships in American yards. However, just as in any other business, American steamship companies cannot ignore the important cost factor involved in higher capital costs.

Under these circumstances we believe that simple justice calls for removal of the limitations in the 1936 act so as to permit American owners to purchase their vessels at competitive world prices and to remove a possible impediment to the construction of these vessels in American yards.

HIGH CAPITAL COSTS Even without regard to possible additional capital costs imposed by present limitations in the 1936 act, the members of CASL are faced with a very difficult capital problem which stems from two main factors :

1. While the ship prices have declined from their post-Suez levels, they are still high and it is likely that the vast majority of the 178 ships yet to be constructed by CASL members will be built at or above these present cost levels. Unlike their foreign competitors who replaced their ships during this rise and therefore have averaged their costs, the American owner will be faced with the burden of replacing vessels at this new, higher price plateau.

2. The cost of vessels having comparable service utility is higher in the United States than in most foreign countries. This is due to a combination of factors involving higher American building standards, built-in defense requirements, accommodations dictated by American custom and practice, and possibly other factors, all of which result in increased costs. This disparity between our capital costs and those of our principal foreign competitors is already a matter of great concern to American shipowners. Disparity in capital costs

To illustrate the gravity of this problem, consider that in Japan today vessels directly comparable in cargo-carrying capacity and speed to present C 4 types being built for CASL but built to highest Japanese standards, with Japanese accommodations and with diesel engines, can be constructed for not more than $334 million. Recent price determinations have fixed the price of similar 0-4 ships built to American standards in Japan at about $5 million to CASL companies.

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This difference in cost, amounting to about $114 million before debt service, represents an excess capital cost that must be recovered by the American shipowner before his ship is competitively equal to the Japanese-built ship in the capital sense. The capital disability of the American owner is increased additionally by debt service involved in financing this additional capital cost, as illustrated by the following oversimplified example: Basic difference in price-Interest

------------------- $1,250,000

750,000 Capital disability of American shipowner----

----------- 2,000,000 The interest shown above is approximately 5 percent per annum on the average investment over 25 years and does not include compensation for risk or return on economic investment in the ship.

While the technical differences discussed above add to the cost of ships built in American yards, a substantial part of this large capital difference is attributable solely to present methods of determining shipyard subsidy.

. W

VESSEL RESTRICTIONS Government payments under title V of the act wisely were provided by the Congress to create and maintain an American shipbuilding industry in the face of lower foreign costs. These Government aids (whether called shipyard subsidies, cost absorptions by the United States, or constuction differentials) have been created for purposes of strengthening American shipbuilding facilities. While this is true, the 1936 act places serious restrictions on the shipowner who buys an American ship as contrasted with an owner who buys a ship built in foreign yards.

Under the act, the two principal restrictions on vessels built under the construction subsidy provisions are

1. Agreement of the American shipowner to maintain his vessel under American-flag registry for at least 25 years. This bars transfer of the ship to foreign-flag operation and thereby directly affects the value of the vessel by limiting access to world markets.

2. The vessel becomes subject to requisition at a price not in excess of depreciated construction costs. In times of inflation, this is an extremely

serious disability which is not applicable to vessels built in foreign yards. These matters are noted here merely to emphasize that companies building under title V incurred serious restrictions as contrasted with foreign-flag owners-even without the subsidy limitations now present in the act.

CONCLUSION CASL stands squarely in support of an adequate American shipbuilding industry and feels that this industry is necessary both to the domestic and foreign commerce and the defense of the United States.

Any limitation on construction-differential subsidy requiring shipowners to absorb part of the burden of supporting shipyards would be inequitable and in the long run will frustrate our national maritime policy.

In the case of nonsubsidized operators any such limitation probably would discourage future building and minimize hope of building and operating any such vessels under the American flag.

The member lines of CASL are already confronted with the problems of replacing most of their ships at high, current shipbuilding prices. Any factor which increases the burden of these high capital costs under depressed shipping conditions will affect its economic feasibility and may jeopardize the entire ship construction program.

Parity with competing foreign-flag ships is the fair and equitable foundation of the 1936 act.

At a time when American operators are facing serious problems in financing the high cost of replacement ships, complete parity in the purchase price of ships is essential to this program.

The bills which are before your committee will extend the present provisions of law and will help place American operators on a parity with their foreign competitors and further the interests of the shipbuilding industry.

Accordingly, CASL fully supports and endorses the purposes of these bills and urges their enactment.

CHART 1

CASL NET EARNINGS AND GAINS Adjusted for depreciation on replacement capital costs

(IN THOUSANDS OF DOLLARS)

1962 1961 1960 1959 1958 1957 1956

43,253 38,306 30.084 36,31.1 68,277 72,284 77.084

72,000 72,000 72,000 72,000 72.000 72.000 72.000

38,205 33,978 33.890 39,158 38,236 35,765 29,245

33.795 38,022 38.110 32.842 33,764 36,235 42.755

9.458

284
8,026
3,469
34,513
36.049
34,329

110.076 Less: Dividends paid in Cash ....................112,404

5,452 Net Erosion of Shipping Capital... 7,780

ADJUSTMENT FOR DEPRECIATION ON REPLACEMENT COST

YEAR

NET EARNINGS

AND GAINS

Depreciation on
Replacement Cost

of CASL Fleet

Less: Depreciation
Based on Present
Acquisition Costs

NET ADDITION

OR EROSION
OF SHIPPING
CAPITAL

Adjustment

Net for Period ...

(Al average role of 2.24%)
Other Adjustments - net.

ROTE, Depreciation on Replacement Capital Cour computed on follow

Met Capital Cont of 300 ship replacement program to CASL
Estimated $2/2 Billion • sey

2.000.000.000
Lass Residuel Scrap or Sales Valve
of and of useful 25 prorf • 10% 200,000,000

Nel 1,800,000,000
Yearly Depreciation 29 yoor lite 7 2,000,000

Source. Nel Eornings and Goins - Combined Report - CASL

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CHART 3

CASL
INVESTMENT IN SHIP REPLACEMENT PROGRAM
1955-1975 Number of Vessels and Cost to Operator
Vessels Built or -
Vessels to be

Vessels to be i
Contracted to be Built

Built for 1964-1967 | Built for 1968-1975
1955-1963

Total Vessels
Built or to be Built

1955-1975

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Noles: I. Estimated costs for vessels to be constructed ofter 1963 are bosed on current cost levels. In view of increasing cost trends

both in the U.S. and abroad actual costs may be significantly higher. 2 Chart based on current contract requirements adjusted for prospective charges.

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