who has paid 100 percent on construction of his vessel and has gotten no construction subsidy or anything else or any help from anybody. Mr. DOWNING. He is operating a Ship Sales Act ship, is he not? Mr. PESSEL. Yes, sir; he is operating some of those and some of the others. There are both types. So, a simple solution perhaps would be to let the operator, whose ship gets to be 25 years old, pay back the construction subsidy until it is paid off and then let them do what they want to do with it.

Mr. DOWNING. Just let him continue payments?

Mr. PESSEL. Until he reaches 100 percent of the payment that the Government made originally. It would take about 50 years to do it. Mr. TOLLEFSON. May I have a question, there? Are you saying that this bill if enacted into law would make it possible for sidized operator to operate in competition with you without having paid back all of his construction-differential subsidy?

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Mr. PESSEL. Yes, sir; and he could amend his subsidy contract according to section 3 of the bill, getting permission to operate his vessel in the domestic trade, which is now protected under 805 (a) permission.

Mr. TOLLEFSON. Under present law, the subsidized operator can operate in competition with you in the coastwise or intercoastal trade by not receiving the operating subsidy for that leg?

Mr. PESSEL. Yes, sir.

Mr. TOLLEFSON. And by paying back a percentage of the construction-differential subsidy?"

Mr. PESSEL. But he has also had, what Mr. Mailliard has pointed out, the advantage of interest-free money, which we haven't had. Mr. DOWNING. But you do not have the obligation to replace your ships, do you?

Mr. PESSEL. If you are in the business you obligate yourself to stay in business, Mr. Downing. We have to stay in business and are staying in business, and when the inference is made that nobody sees how we are going to replace ships we are going to replace them all right. We will make it. We are doing far more than other people are doing now to rebuild ships and plan for the future.

Mr. DOWNING. I think you are doing a grand job, but you do not have the direct obligation of replacing those ships that the subsidized operators do.

Mr. PESSEL. That is correct, but, as someone else pointed out, that ship is supposed to be replaced by a new ship and not used in the old fleet and especially against the domestic operator because all the history of the merchant marine indicates that the domestic operator is always protected against the subsidized operator. This is a real exception.

Mr. DOWNING. Spell out again how this will hurt you.

Mr. PESSEL. American President Lines or States Steamship or anyone else who has a vessel that has reached 25 years of age can stop refunding the construction-differential subsidy, whether they have paid it all or not, and put it in direct competition with us without any holds at all.

Mr. DOWNING. It is in competition with you now?

Mr. PESSEL. It may be, yes, but under certain rules. Now they are taking the rules away and it can do anything it wants to. That vessel can come into our trade and stay in that trade from San Francisco

to Los Angeles to Honolulu and come back again. They can do anything they want to. It is a free vessel and that is what we say is unfair.

Mr. DOWNING. You mean Maritime does not have control?

Mr. PESSEL. There is a section 805 (a) of the act now that protects us and a hearing has to be held if a subsidized operator wants to put a vessel that has received construction differential or operating subsidy into the trade.

The CHAIRMAN. To get it clear, you contend that he has not paid back fully his construction subsidy on that part of his domestic operation. You do not contend that he has not paid back the full construction subsidy when you put them all together?

Mr. PESSEL. Yes, sir. We do contend that he can't possibly pay all the domestic portion back.

The CHAIRMAN. How?

Mr. PESSEL. The ship won't last that long.

The CHAIRMAN. The Maritime Administration says he has paid it back.

Mr. PESSEL. He hasn't paid all of it back.

The CHAIRMAN. What is the part he has not paid back?

Mr. PESSEL. He will have about 80 percent left after 25 years according to the mathematics.

The CHAIRMAN. Eighty percent of what?

Mr. PESSEL. The total construction subsidy that the Government paid. He will still have that benefit.

The CHAIRMAN. Give me an example. How does that work out? We are under the impression that he has paid back the total cost. Mr. DOWNING. Take a $10 million ship, for example.

Mr. PESSEL. Here is an example. In depreciation of a ship on the 25-year basis, the first year is 4 percent; the second year 4 percent; the third year 4 percent. After 25 years, his vessel is fully depreciated or 100 percent is depreciated. Now, at the same time he returns subsidy to the Government, construction subsidy to the Government for the domestic portion of, say, 1 percent annually.

We are taking an example of 1 percent annually. At the end of 25 years, he will have paid 1 percent annually or 25 percent of the total domestic construction subsidy portion that he was paid in the first place.

So, at the end of the 25th year, he still has 75 percent benefit of that subsidy. He hasn't paid that back to the Government.

Now, of course, I think the stickler is in how often does he run domestic, how often does he pay back in a 25-year life and we say that even under present trade routes and permissions under 805 (a) permissions and grandfather rights, they can't possibly pay that all back in 25 years. There just isn't enough domestic in those foreign Voyages for that.

The CHAIRMAN. You are just talking about the domestic part of his trade route?

Mr. PESSEL. Yes, sir.

The CHAIRMAN. That he has not paid back?

Mr. PESSEL. Yes, sir. He pays a certain portion of it back, yes, sir, but he never pays all of it back in 25 years. That is what we say. Mr. DOWNING. Tell me, when you get your new construction, will you not make application for construction-differential subsidy?

Mr. PESSEL. No, sir. We can't.

Mr. DOWNING. You cannot?

Mr. PESSEL. No, sir; and we have put about $30 million into our old ships in reconstruction in the last 2 or 3 years.

Mr. DOWNING. Would not the better approach be to give you construction-differential subsidy for that purpose?

Mr. PESSEL. That is a very complicated subject, Mr. Congressman, and I am not so sure that that is the answer but it will certainly be heard when these bills that have been introduced by the various committees, both on the Senate and House sides.

Mr. DOWNING. Your fear is that when this vessels reaches the end of its statutory life, then it could engage in domestic trade in competition with you?

Mr. PESSEL. Exactly.

Mr. DOWNING. Without supervision by the Maritime?

Mr. PESSEL. Exactly.

The CHAIRMAN. It does have supervision by the Maritime.

Mr. DOWNING. He says that this is the weakness of section 805.

The CHAIRMAN. It does have supervision by the Maritime. He is required to have certain sailings.

Mr. PESSEL. That is right.

The CHAIRMAN. He is permitted to pick up certain cargo-
Mr. PESSEL. That is correct.

The CHAIRMAN (continuing). In the domestic trade; but he does not get his operating differential subsidy for that portion which is in the domestic trade.

Mr. PESSEL. Yes, sir; if the vessel is over 25 years old.

The CHAIRMAN. And, all along, he has been paying one twenty-fifth of it as 25-year-life vessel of the construction subsidy by which if Maritime collects it, he is bound to have paid his construction subsidy.

Mr. PESSEL. If he pays one twenty-fifth every year; yes, sir, but we don't think it is possible for them to make a 25-percent payment every year. It is not humanly possible for them to do that.

Mr. TOLLEFSON. Would the Chairman yield there?

The CHAIRMAN. Yes.

Mr. TOLLEFSON. What you are saying is that in any given year the subsidized operator will never pay the 4 percent to the Federal Government in repayment of the construction differential subsidy. All he will be paying will be a fraction of that 4 percent?

Mr. PESSEL. Exactly.

Mr. TOLLEFSON. To compensate for the leg of the domestic part of the voyage?

Mr. PESSEL. Exactly.

Mr. TOLLEFSON. And you suggested that a figure of, perhaps, 1 percent would be the most he would ever pay so that, at the end of 25 years, using your own figure, it is possible for the subsidized operator to have a vessel which cost him, picking a figure here, 622 percent of what your vessel cost you?

Mr. PESSEL. Exactly; and that is the disadvantage, in addition to interest-free money, too.

Mr. TOLLEFSON. The thing is, Mr. Chairman, as I understand his testimony that, while the bill mentions repayment of the subsidy at 4 percent per year over a period of 25 years, actually it is not 4 percent. It is at the rate of 4 percent; is that it?

Mr. PESSEL. Right.

Mr. TOLLEFSON. And that repayment is only for the domestic leg or legs of the voyage?

Mr. PESSEL. Yes.

Mr. TOLLEFSON. Just so that I get that clear in my own mind.

Mr. PESSEL. I have nothing to add, Mr. Chairman.

The CHAIRMAN. I must get this clear in my mind: You contend that the man has never paid back, throughout the 20 or 25 years, whichever formula was invoked

Mr. PESSEL. Yes, sir.

The CHAIRMAN (continuing). The return of the differential subsidy?

Mr. PESSEL. He can't pay back all of the total, is what I am saying;

in 25 years.

The CHAIRMAN. Mr. Alexander; is your testimony incorrect?

Mr. ALEXANDER. No, sir; I think the confusion here is due to the fact that we are talking about these subsidized operators who primarily operate in the foreign trade.

The CHAIRMAN. This is right.

Mr. ALEXANDER. This repayment only applies to the domestic leg of their voyages and what Mr. Pessel is saying, I think, is that the average domestic leg of a voyage made by these subsidized operators would probably not be more than 25 percent of the total voyages made so that, in a year's time, it is almost inconceivable that the subsidized operator would be operating in the domestic trade more than 25 percent of the time; so that the repayment would only be, we will say, 1 percent instead of 4 percent because it only applies to the domestic leg. Mr. DOWNING. Mr. Alexander, do you have sufficient authority to regulate the routes of ships which have ended their statutory life? Mr. ALEXANDER. Well, as long as we are paying operating differential subsidy, we require the ships, for which we pay that, to operate on the essential trade routes and we do regulate all of those ships.

Mr. DOWNING. Does what Mr. Alexander stated conflict with your opinion?

Mr. PESSEL. No, sir; Mr. Alexander stated it much more clearly than I did.

Mr. DOWNING. So the Maritime Administration still has some control over the ships.

Mr. PESSEL. If they are going into the foreign trade; but they can go into a domestic trade without any payment, which is unfair competition to us.

Mr. DOWNING. In other words, they would not have an operating differential either?

Mr. PESSEL. They would have an operating differential on the foreign leg of it, yes; but they wouldn't have it after this bill.

Mr. DOWNING. Mr. Ewers seems to disagree with you.

Mr. PESSEL. I disagreed with a lot of things that Mr. Ewers said, too.

Mr. EWERS. May I just make a legal correction, sir? As long as an operator is receiving an operating-differential subsidy, on any part of his operation, he cannot engage in the coast wise trade without getting 805 permission. I don't care how old the ship is; in other words, the 805 says: No operating subsidy shall be paid to any operator who

engages in the domestic trade unless he gets permission from Maritime in writing. Their control is plenary at all stages of his operation. That is not an argument; that is a legal conclusion, and if you will read 805, you will see it reads that way. As one ship in your fleet is subsidized, Maritime controls your entire operation insofar as domestic operations are concerned.

Mr. PESSEL. That is beside the point so far as what we are talking about here is concerned. We are talking about the competition that a subsidized operator has with a domestic operator.

Mr. MAILLIARD. Mr. Chairman, I am sorry I had to leave for a few minutes, but let me ask you one question: We were discussing this question of the cost of the subsidized vessels but, is it not true that before the proposal here, section 2 of this bill, would become operative, the domestic carriers are going to have to find some means to replace their vessels, too? You cannot run them forever.

Mr. PESSEL. Yes, sir. While you were away, I categorically denied Mr. Ewers' statement which said that the domestic operators couldn't possibly replace their ships. I contend that we can, and without subsidy. Because somebody else thinks we can't do it is no sign that we can't. We are able to do it, and are going to do it, and we are not asking for construction differential subsidy either; we haven't so far. We are operating in a different manner. We are operating an entirely new concept of shipping.

Mr. MAILLIARD. One of the things that puzzles me about this is that, as I understand the 1936 act, the subsidies, both construction and operating, are tied very closely, as far as the philosophy of the act is concerned, to the replacement of those vessels at the end of their effective life.

Mr. PESSEL. Exactly.

Mr. MAILLIARD. This is one of the considerations for a subsidy contract, as I understand it.

Mr. MAILLIARD. When the Government or the operator estimates it suits the conveniece of both to continue to operate a ship under subsidy beyond the time at which there is a contractual agreement to replace it, this would be a situation not basically envisaged in the act. That would be an exceptional thing rather than the routine; would it not? Mr. PESSEL. Right.

Mr. MAILLIARD. That is where this particular problem arises.
Mr. PESSEL. Right.

Mr. MAILLIARD. That the ship has not been replaced as the contractual agreement was to replace it and because of that fact it could provide unfair competition to the domestic operator.

Mr. PESSEL. Exactly.

Mr. MAILLIARD. As I tried to say, to me it puts you on the horns of a dilemma. In a sense, the horsesense of not paying back more than the total amount of the construction subsidy for operation in domestic trade sort of makes sense. Why should you have to pay back more than it is worth? But that does not resolve this other problem, as I see it.

Mr. PESSEL. May I make a simple solution? A straightforward bill would provide that such payments of construction-differential subsidy shall terminate whenever the total of all such payments made with respect to domestic revenue earned by one vessel equals total