into the yards, before they and their invaluable skills are lost forever to the shipbuilding industry. Some of my colleagues and I have very definite opinions on the matters under inquiry, but there will be opportunity to voice these as the hearing proceeds. Because of their pertinence to one phase of the discussions, however, I would like to insert in the record at this point some correspondence between my predecessor as chairman of this subcommittee, Senator John Marshall Butler, and officials of Commerce, Maritime, and Navy; also correspondence between Congressman Thor C. Tollefson and members of the House Merchant Marine and Fisheries Committee and the Maritime Administrator. This correspondence deals with the controversy as to whether or not the tankers for charter to the Navy are special-purpose vessels and therefore entitled to 100 percent insurance of 87% percent of their cost. This point, I am sure, will be discussed at length by various of those who will testify. I probably will have something to say on it myself. Also, I am sure, there will be mentioned the trade-in tanker program, authorized under Public Law 574, for which funds in the amount of $26 million were provided as a starter. Some progress has been made on this, but I believe its possibilities are well worth further exploration. (The documents above referred to are as follows:) UNITED STATES SENATE, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, October 22, 1954. Hon. SINCLAIR WEEKS, Department of Commerce, Washington, D. C. DEAR MR. SECRETARY: I have recently received several inquiries from people interested in submitting bids in connection with the 15 tankers to be built by private parties and long-term chartered to the Military Sea Transportation Service. You will recall that those tankers are provided for by Public Law 575 of the 83d Congress, 2d session, and bids are due to be received by MSTS on November 19, 1954. In such instance, the question has been about the same; that is, "whether if the Secretary of Defense would certify that those vessels are essential to national defense, the Secretary of Commerce would be authorized by section 1103 of Public Law 781, 83d Congress, 2d session, to issue Government insurance of 100 percent of the principal of and interest on loans and mortgages covering up to 87%1⁄2 percent of the owner's actual cost of construction?" Another way of stating the same question would be, "Are these tankers 'special-purpose vessels' within the meaning of Public Law 781?" My first response to all such inquiries was that the language of the statute itself, plus its legislative history, must contain the best answer. However, in view of the fact that bids are due so soon, if the statute is ambiguous, and if the legislative history fails to resolve the doubt, it might be helpful for you to know my own views as chairman of the subcommittee to which the bill was assigned. Except for the so-called special-purpose vessels, Public Law 781 limits Government insurance of private loans and mortgages to 90 or 75 percent of the owner's actual cost of construction. However, section 1103, Public Law 781 provides: "That in the case of special-purpose vessels certified by the Secretary of Defense to be essential to national defense, the Secretary of Commerce may insure 100 percent of the principal of and interest on any such mortgage eligible for insurance as hereinafter provided and upon such terms as the Secretary of Commerce may prescribe." The term "special-purpose vessel" is not defined in the statute. However, in our report (Calendar No. 1817, Rept No. 1804, 83d Cong., 2d sess.), a copy of which is attached, we said the following in the first paragraph, page 6: "It should be noted that these special-purpose vessels the size and speed of which must be approved by the Secretary of Commerce to be eligible for mortgage aid under section 509 of the Merchant Marine Act, 1936 (46 U. S. C. 1159), and in respect of which the minimum down payment by the mortgagor required by that section would be 121⁄2 percent of the cost of such vessel." I find nothing ambiguous in that language. It is true that on the preceding page of the report, we made the following statement: "However, it was learned that there were certain special-purpose vessels (roll-on, roll-off type ships of a heavy lift design somewhat similar to the Sea Train vessels) which certain shipping companies were prepared to contract for promptly if the bill, as introduced, were enacted, and if the Secretary of Commerce found the applicants otherwise eligible for the benefits of title XI." I am told it might be contended that the only "special-purpose vessels" to which we intended section 1103 of Public Law 781 to apply were roll-on, roll-off type ships. It seems to me that this argument lacks merit since it would require one to ignore the fact that we used the limiting word "certain" before referring to "special-purpose vessels" of the roll-on, roll-off type. Furthermore, it would emasculate the broader and more specific definition of the term "special-purpose vessels" which we purposely employed on page 6 of our report. Leaving the language of the report for a moment and turning to the vessels themselves, for the purpose of ascertaining what, if anything, makes them "specialpurpose vessels," the following characteristics persuade me that they have a very special purpose, quite different from that which a commercial operator normally would have in mind if he were designing tankers for his own use: 1. These vessels may never be operated commercially As you know, these vessels are being built not for the purpose of commercial operation but for chartering to the Navy for ten years. Since the Navy may exercise its option to purchase, it is possible they will never be operated commercially. 2. Their size is limited to approximately 25,000 deadweight tons Apparently, as a result of the fact that industry witnesses vigorously urged that they be permitted to build these vessels up to 32,000 deadweight tons, S. 3458, as passed by the Senate on May 24, 1954, provided for tankers "not less than 25,000 nor more than 32,000 deadweight tons". However, on July 14, 1954, the House passed S. 3458 limiting the size to approximately 25,000 deadweight On July 23, 1954, this limitation was adopted by the conferees. tons. In this connection, it is worth noting that on March 30, 1954, Admiral Denebrink in testifying before the Armed Services Committee on S. 2788 (superseded by S. 3458) stated (p. 61) that he would "raise a strong objection" to changing the maximum size from 25,000 to 32,000 deadweight tons because, "The Navy Department wants these vessels of a special type as to size and speed". In the same vein, Admiral Denebrink in testifying before a House Armed Services Subcommittee said: * * * So I wish to assure the committee that the type of ship which we have specified is the type of ship which the military needs to fulfill its military commitments, and to go to a larger ship which would fit commercial requirements, is opposed by the Navy Department. (See House Armed Services Committee printed hearing No. 97, pp. 4996-4997, July 11, 1954.) 3. Their 18-knot speed at 80 percent of normal is special As I understand it, the Maritime Administration and the Department of Defense until recently had established 18 knots as the required speed for newly constructed tankers where old tankers were to be traded in. I am informed that about 2 weeks ago this speed requirement was reduced to 16 knots, primarily because the industry appeared unwilling to build new 18-knot tankers for commercial use. However, for the 15 tankers in question, the requirement of 18-knot speed at 80 percent of normal (not maximum) horsepower is unchanged. I am further informed that for commercial purposes, tankers would be designed so that the margin between the horsepower required to develop service speed, and the maximum horsepower, would be from 20 to 25 percent. The specification on the 15 tankers in question, however requires about a 371⁄2 percent margin between service speed horsepower and maximum horsepower. 4. Their permanent bunker capacity for 18,000 miles at 18 knots is special I am informed that this requirement, too, is very unusual, if not unique, for commercial tanker operations. I am sure you understand that in giving you my views as to whether these vessels are "special-purpose vessels" within the meaning of Public Law 781, I am not suggesting that it is either wise or necessary for you to extend 100 percent insurance coverage to them. That type of decision was left to your sound discretionary judgment. My only purpose is to convey to you my opinion that you have the power, under section 1103, Public Law 781, to issue 100 percent insurance of the principal of an interest on loans and mortgage covering up to 871⁄2 percent of the owner's actual cost of construction of the 15 tankers in question. Sincerely, JOHN MARSHALL BUTLER, Chairman, Senate Water Transportation Subcommittee. Vice Adm. FRANCIS C. DENEBRINK, NOVEMBER 22, 1954. Commander, Military Sea Transportation Service, Navy Department, Washington, D. C. DEAR ADMIRAL DENEBRINK: I am enclosing a copy of a letter which I recently sent to the Maritime Administrator concerning the applicability of mortgage insurance to the industry-built long-term charter tankers. I thought you would be interested in my views on this subject. I have not received a reply but when I do I will send you a copy. My only concern is that the Government get spirited bidding from all responsible parties who might be interested in building these ships. Accordingly, and without desiring any information about specific bids, I would like you at your early convenience and in connection with these long-term charter tankers to give me your estimate or opinion of the monetary difference, if any, which it will make tɔ the United States: (a) if no mortgage insurance is made available. (b) if 90 percent insurance of 87% percent of the owner's actual cost of construction is made available. (c) if 100 percent insurance of 87% percent of the owner's actual cost of construction is nade available. With kind regards, I am, Sincerely yours, JOHN MARSHALL BUTLER, Chairman, Subcommittee on Water Transportation. Hon. JOHN MARSHALL BUTLER, DEPARTMENT OF THE NAVY, MILITARY SEA TRANSPORTATION SERVICE, Washington 25, D. C. MY DEAR SENATOR BUTLER: In your letter of November 22, 1954, you requested my views with respect to certain aspects of mortgage insurance in connection with the program for the charter by the Navy of 15 large, fast commercial type tankers under Public Law 575, of the last session of Congress. Specifically you asked my estimate or opinion of the monetary difference, if any, which would arise to the Government— (a) if no mortgage insurance is made available. (b) if 90 percent insurance of 871⁄2 percent of the owner's actual cost of construction is made available. (c) if 100 percent insurance of 87% percent of the owner's actual cost of construction is made available. I had hoped to be able to base a reply to your inquiry on the results of the invitation for offers issued by me in connection with the proposed charters. However, the original offers, which were submitted November 19, 1954, were so few and, a that time, so lacking in details, as to prevent any satisfactory evaluation. It was hoped that as time went on the offerors would succeed in firming up their offer with substantiating data to permit a conclusion on the points raised by you. of this writing it seems unlikely that there will be submitted by the present offer ors, for some time at least, information acceptable as the basis of an estimate However, rather than delay further a reply to your letter, I should like to offe the comments that follow. A On the basis of such offers as have been submitted to me and on information developed in conferences held with the offerors, it is apparent that none of them is able to construct the proposed tankers for charter under the provisions of Public Law 575, 83d Congress, unless mortgage insurance is made available. Whether these offerors can qualify for financing under the mortgage insurance program is not known to me because the regulations under which such insurance will be available have not been determined, nor have the offerors furnished firm data to substantiate their financing plans sufficiently to permit a judgment on my part as to the reasonableness of their expectation of obtaining such insurance. Assuming that all of the firms that have made offers are able to qualify for mortgage insurance, and further assuming that their indicated financing and operating plans materialize, the Government probably could obtain charters for 14 of the proposed 15 tankers with mortgages insured at 90 percent of 87% percent of the owner's cost of construction. It is not possible to estimate what the "monetary difference" to the Government might be between its granting insurance and not doing so inasmuch as, without the insurance, none of the proposed tankers is likely to be available under the limitations embodied in Public Law 575, 83d Congress. Having your questions in mind, I have made it a point to have each offerer asked how much of a reduction in the charter hire rate to the Government would result if mortgage insurance of 100 percent rather than 90 percent of 871⁄2 percent of construction cost was made available. None of them has indicated that any reduction would result. Various offerers have stated, and I concur, that the savings to them of mortgage insurance of 100 percent rather than 90 percent of 872 percent of the construction cost would probably approximate $10,000 per year ($100,000 for the charter period) or about $0.03 per deadweight ton per month. It will be apparent from the above that the Navy probably will be unable to obtain firm offers for charters under the restrictions in Public Law 575, 83d Congress, unless, and until, the question of mortgage insurance has been settled in favor of the Government granting such insurance; that among the present offerers, enough represent that with mortgage insurance of 90 percent of 872 percent of construction cost, they can firm up their financial plans and submit offers to charter 14 of the 15 proposed tankers and that little, if any, saving will accrue to the Government in reduced charter hire if mortgage insurance of 100 percent of 871⁄2 percent of cost of construction is granted. I hope these comments will assist you in evaluating the situation confronting the industry and the Government in implementing this most important program. Sincerely yours, F. C. DENEBRINK, Vice Admiral, USN Commander Military Sea Transportation Service. JANUARY 31, 1955. Vice Adm. FRANCIS C. DENEBRINK, USN, Navy Department, Washington, D. C. DEAR ADMIRAL DENEBRINK: Thank you very much for your letter of January 19, 1955, in reply to my letter of November 22, 1954, concerning certain aspects of the interrelation between Mortgage Insurance and the Tanker Long Term Charter program. As you know, at the time of my earlier letter I was Chairman of the Water Transportation Subcommittee and wrote you in that capacity. Since Senator Magnuson is now Chairman of the Subcommittee on Merchant Marine and Fisheries as well as the Interstate and Foreign Commerce Committee, I am forwarding to him a copy of this letter and my file on the matter. The Water Transportation Subcommittee staff had been advised by representatives of almost all those who offered to charter the tankers in question that they would not be able to firm-up their offers unless 100 percent insurance of 87 percent of the cost of construction, or some other equally valuable assistance, were made available. The staff was also advised by various lending institutions that 100 percent insurance of 871⁄2 percent of the cost of construction was a necessary prerequisite to their participation in the program. Thus there would appear to be a conflict between my information and certain information upon which you based part of your recent reply. I have asked the subcommittee staff to recheck its information on this point; and accordingly, I would appreciate it if you would have a similar check made of your source material, advising me of the outcome at your early convenience. 62776-55- -2 Furthermore, one of the offerors, Mr. Gordon Duke, in a letter to Mr. Dona? Leavens, dated December 30, 1954, stated: "If the Secretary of Commerce should decide that he would insure only percent of an 87% percent mortgage on these tankers, then private owners could not afford to build them because a double payment of interest on the 10 percent uninsured portion of the mortgage is required and would add over $300,000 to debt service and thus about wipe out most of the cushion." At my request Mr. Duke furnished me a copy of this letter, which, I understand, he also furnished your staff. Your recent letter would indicate that contrary to Mr. Duke's conclusion, the difference would probably approximate $100,000 for the charter period or aber $0.03 per deadweight ton per month, rather than $300,000. Because of this difference in estimates I have asked Mr. Duke for further information. I would also appreciate it if you would furnish me with a more detailed breakdown of your $100,000 conclusion and an appraisal of the costanalysis contained in Mr. Duke's letter to Mr. Leavens. With kind regards, I am, JOHN MARSHALL BUTLER, United States Senator. Hon. JOHN MARSHALL BUTLER, DEPARTMENT OF THE NAVY, MILITARY SEA TRANSPORTATION SERVICE, of United States Senate, Washington, D. C. MY DEAR SENATOR BUTLER: I note from your letter of January 31, 1955, that representatives of some of the firms that have offered to charter large fast tankers to the Department of the Navy under the program encompassed by Public Law 575, 83d Congress, have indicated to you that they could not construct the tanker without obtaining mortgage insurance from the Government for 100 percent of 871⁄2 percent of the cost of construction. Shortly after the offers were submitted members of my staff interviewed representatives of each of the offerors and assed the specific question of whether his firm could construct the tankers offered with mortgage insurance for 90 percent of 87% percent of the construction cost. Al but one answered in the affirmative and that one did not condition his written offer on receiving any mortgage insurance although he orally stated that he would require 100 percent of the 872 percent coverage. However, recently severs others have indicated that mortgage insurance for 100 percent of 87% percent the construction cost is necessary. Regardless of their present position there is no doubt that in the beginning most of the offerors were convinced they could offer charters with mortgage insurance of less than 100 percent of 871⁄2 percent. As to the difference in cost to the Government in charter hire between mortgage insurance of 90 percent and 100 percent of 87% percent of construction cost again my estimate of $100,000 savings to the owner was based on estimates by the various offerors. Mr. Gordon Duke, whose estimate of $300,000 is quoted by you, originally concurred in the $100,000 estimate but later advised that the proper figure was approximately $300,000. Mr. Duke's last estimate is based on the assumption that with 90 percent of 871⁄2 percent coverage of construction cost by mortgage insurance furnished by the Government, the Government would not permit a reduction of the 10 percent of 87% percent of the borrowed capital o covered by Government insurance until after the full payment of that portion of the loan insured by the Government. This assumption, if true, would require the owner to pay full interest at perhaps a relatively high rate on the full 10 per cent of 871⁄2 percent for the entire term of the loan insured by the Governmen Mr. Duke also assumed that with mortgage insurance for 90 percent of the 87: percent of construction cost he will be required to borrow a substantial sum to keep on hand as a "cushion" against extraordinary off hire periods. The assumptions apparently account for his apprehension as to the great difference i costs to the owner under mortgage insurance of 90 percent and of 100 percent of 871⁄2 percent of construction costs. No other owner has made the same assumption as Mr. Duke. As the Secre tary of Commerce has announced no terms for mortgage insurance on vessels chartered to the Government for 10 years, I am not in a position to say whether Mr. Duke's estimate will prove more accurate than those of the other offeror It seems clear, however, that if an owner is permitted to pay off at any time uninsured borrowed capital from earnings in excess of that required to retire the |