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

20-knot cargo liners as the rest of the world combined. This superb fleet of high-speed CASL ships is entirely engaged in the commerce of the United States and provides a shipping service to the American exporter/importer which is the best of any in the world. It is the best now and it is improving daily. Daily and from each the three coastal areas of the United States the American importer and exporter is getting express service which is the envy of the world.

Fact No. 3: In the early 1970's, when the CASL building program is completed, we will have the newest and the most modern fleet of cargo ships flying the flag of any nation.

Fact No. 4: As the result of the recent thrust in the field of shipboard mechanization we have a fleet which technically is second to none-indeed, with the exception of Japan, we have left the rest of the world at the post.

A retrofit program, soon to be initiated, will advance shipboard mechanization on ships built during the past several years and will insure that these new ships will remain competitive over their long future lives.

Fact No. 5: American liner operators have been pioneering in the development of better and more efficient cargo-handling techniques. Given the right climate, improvements in this area could be sweeping and rapid, but even at present, the American-cargo-liner fleet has more and better cargo-handling equipment than any nation in the world.

No. 6: U.S. shipbuilding activity continues at a low ebb, and in terms of numbers or tonnage our entire shipbuilding program is not large compared with some of the building and procurement programs of other maritime countries, but the subsidized lines are building new ships at the rate of about 17 a year. And a recent CASL study shows that these 17 ships are about 25 percent of the total world production of cargo liners of reasonable size and speed. Twenty-five percent of the entire production of the entire world. For this purpose, our study included worldwide orders for ships of this type-liner ships, that is having capability of sustained sea speeds of 17 knots or more.

Current U.S. production of higher speed liner ships-19 knots or more is about 75 percent of the entire world production.

No. 7: In American-flag-liner fleet in 1962 earned about 36 percent of the cargo revenues in our liner trades in addition to carrying practically all military cargo moving by commercial transport.

No. 8: American-flag ship operators earned or conserved foreign exchange amounting to almost $1 billion in 1962, thereby greatly aiding our Nation's crucial balance-of-payments problem. Of this, the liners contributed more than two-thirds with the subsidized lines alone, the CASL group, alone having net earnings of foreign exchange aggregating more than $500 million in the foreign trade.

No. 9: At December 31, 1963, the subsidized operators had contracted for a total of 117 ships costing the companies more than $700 million— the companies alone are pledged for $700 million-leaving 178 vessels to be contracted for prior to 1975 at a corporate cost of more than $1.2 billion more.

This total of about $2 billion is the largest private shipbuilding program in the history of the United States.

Then, Mr. Chairman, my statement calls attention to a number of problems. These problems are in the area of rate of return to the

industry which is not adequate; also freight rates are too low; for example, for the year 1962 the entire CASL freighter operation returned only $1.39 per payable ton of cargo. This is remarkably low earning record involving all CASL lines.

There are other problem areas. We need more commercial cargo, we need labor peace, and the freight rate conference system, laws and regulations, need overhauling, but it is not our intention to discuss them here today.

There was some reference yesterday to the replacement program. On pages 5 and 6, we outline the present status of it by years, indicating the extent to which we are committed as in future years. All too often, Mr. Chairman, I think we overlook the fact that aside from the contractual commitment we now have which is to build 295 vessels at a cost of about $2 billion, the CASL lines acquired prior to the inception of this program, about 30 mariners which cost them an additional $150 million, they are all in operation today and are a fine complement to the new ships which are being built.

Now, lest this committee or Government or anyone else get the idea that CASL is cash rich, we have developed in the next several pages a projection of the application of our reserve funds to future shipbuilding commitments. I will not go over this now with the committee but I do think a couple of the conclusions are significant.

One fact, the funded debt, the borrowed capital, which CASL puts at risk will have increased during the period from 1957 to 1967 from $180 million to a total of $640 million or a ratio of from 272 percent to 67 percent of the projected stockholder equity investment in the business.

This is a very significant increase. Now the other major fact which I think is important is that by the end of 1967 the CASL companies will have pledged, will have dedicated all available resources to the shipbuilding program. There are a number of charts attached to this statement which illustrate this and I would like just for 30 seconds to call your attention to chart No. 4. It is the very last sheet in this statement and furnishes for the committee a comparative condensed balance sheet of the entire industry for the year 1957, actual figures; for the year 1962, actual figures; and the projected situation at the end of 1967.

You will notice that seemingly we still have a very ample cash reserve in our reserve funds at the end of 1967, but all of this $203 million is already earmarked for the purposes of the act or in fulfillment of shipbuilding contracts which will then be executed.

Mr. Chairman, I hope I have not taken too much of your time. We support the purposes of the bill with the reservation that Mr. Purdon attached thereto. And thank you.

The CHAIRMAN. Mr. Nemec's statement will be placed in the record at this point.

(The statement referred to follows:)

STATEMENT OF FRANK A. NEMEC, VICE CHAIRMAN, VESSEL REPLACEMENT ComMITTEE, COMMITTEE OF AMERICAN STEAMSHIP LINES, AND EXECUTIVE VICE PRESIDENT, LYKES BROS. STEAMSHIP CO., INC.

My name is Frank A. Nemec. I am executive vice president of Lykes Bros. Steamship Co., Inc., and a vice chairman of the Vessel Replacement Committee -of the Committee of American Steamship Lines.

Mr. Purdon has summarized the basic statutory reasons justifying enactment of the bills before you. Mr. G. F. Nuse, of J. J. Henry Co., Inc., will describe discernible trends in the price of building ships-both here and abroad. I propose to cover some of the more critical business and operating reasons which justify extending the present ceilings on construction-differential subsidies.

We believe it self-evident that the statutory objectives of the Merchant Marine Act, 1936, are sound public policy. The historical role of U.S.-flag shipping in two world wars, the Korean crisis, the Suez crisis, and the current national balance-of-payments problem proves that development and maintenance of an American-flag merchant fleet and domestic shipbuilding industry are indispensable both to our national defense and economy.

In considering the bills before you, you may find it useful to assess some of the accomplishments of the American-flag operators, as well as the current achievements, plans, and commitments of the members of CASL in the construetion of vessels. They are substantial.

1. With the solitary exception of the United Kingdom, the United States cargo liner fleet is larger than that of any maritime power on earth.

2. Our cargo liner fleet includes more fast ships than any fleet in the world, and even today the privately owned CASL fleet includes five times as many 20-knot cargo liners as the rest of the world combined. This superb fleet of high-speed CASL ships is entirely engaged in the commerce of the United States and provides a shipping service to the American exporter/importer which is the best in the world.

3. In the early 1970's when the CASL building program is completed we will have the newest and most modern fleet of cargo ships flying the flag of any nation. 4. As a result of recent breakthroughs in the field of shipboard mechanization we have a fleet which technically is second to none-indeed, with exception of Japan, we have left the rest of the world at the post.

A retrofit program soon to be initiated will advance shipboard mechanization on ships built during the past several years and will insure that these new ships will remain competitive over their long future lives.

5. American liner operators have been pioneering in the development of better and more efficient cargo-handling techniques. Given the right climate, improvements in this area could be sweeping and rapid. But even at present, the American cargo liner fleet has more and better cargo-handling equipment than any nation in the world.

6. U.S. shipbuilding activity continues at a low ebb and in terms of numbers or tonnage our entire shipbuilding program is not large compared with some of the building and procurement programs of other maritime countries. But the subsidized lines are building new ships at the rate of about 17 a year. And a recent CASL study shows that these 17 ships are about 25 percent of the total world production of cargo liners of reasonable size and speed. For this purpose the study included worldwide orders for ships of this type having capability for sustained sea speeds of 17 knots or more.

Current U.S. production of higher speed liner ships (19 knots or more) is about 75 percent of the entire world production.

7. This American-flag liner fleet in 1962 earned about 36 percent of the cargo revenues in our liner trades in addition to carrying practically all military cargo moving by commercial transport.

8. American-flag ship operators earned or conserved foreign exchange amounting to almost $1 billion in 1962, thereby greatly aiding our Nation's crucial balance-of-payments problem. Of this, the liners contributed more than twothirds, with the subsidized lines alone having net earnings of more than $500 million in the foreign trade.

9. At December 31, 1963, the subsidized operators had contracted for a total of 117 ships costing the companies more than $700 million, leaving 178 vessels to be contracted for prior to 1975 at a corporate cost of more than $1.2 billion. This total of about $2 billion is the largest private shipbuilding program in the history of the United States.

This record of progress and solid accomplishment is no accident. It has resulted from the determination of the United States to have a liner fleet of modern design and able to carry a substantial portion of our foreign trade coupled with the willingness of private industry, operating under the long-term operating agreements authorized by the 1936 act to dedicate its capital, earnings, and abilities to this end.

But, I don't mean to leave the impression that all is well.

1. Ship prices to CASL are too high and cargo rates are too low. Consequently, industry earnings have been accomplished only at the expense of minimizing dividends to stockholders. Higher cargo rates and increased earnings will be required to fund future replacement costs and attract and retain necessary shipping capital.

(a) During the years 1956-62, CASL suffered a net erosion of shipping capital-based on present-day replacement costs-chart I.

(b) All freighter operations during 1962 returned a net profit of only $1.39 per payable ton-chart II.

2. Other problems remain, such as

(a) More commercial cargo is needed;

(b) The industry needs a prolonged period of labor peace; and

(c) The freight rate conference system and related Government laws and regulations need overhauling.

Despite these and other problems, it is clear that the 1963 act has worked well and that the subsidized fleet is a real source of maritime strength.

THE CASL REPLACEMENT PROGRAM

Since World War II, shipbuilding prices in the world market have risen substantially. Although prices have now stabilized at somewhat below the peak reached following the Suez crisis, the bulk of the CASL ship replacement program will be at these new high-cost levels.

CASL is now engaged in a major renewal of its fleet-a program which will require a total corporate investment and debt obligation of about $2 billion.1 Each of the replacement fleet (through a combination of additional size and speed) will have about 25 percent more cargo capacity than the ships being replaced.

The status of this large replacement program, on a contract commitment basis, is shown by chart III and summarized as follows:

NOTE. The above table does not include 29 20-knot mariner class ships built in the early 1950's which were acquired and converted by the CASL companies at a total cost of more than $150 million.

The foregoing is based on present cost levels and it is likely that these estimates will be significantly lower than actual replacement costs.

To correct any impression that CASL has accumulated excess idle cash reserves which could be used to substantially expand the U.S. liner fleet or pay more for ships, we have prepared a realistic analysis of CASL's resources related to this program.

Effect of future program

To show the impact of the vessel replacement program, chart IV compares condensed balance sheets of CASL at 1957, 1962 with a projected balance sheet at the end of 1967.2

1 The domestic cost of building this new fleet is estimated at not less than $4 billion and the total cost is estimated to be divided as follows: Government payments of shipyard subsidy, $2 billion; cash corporate commitments, $2 billion; total, $4 billion.

This is based on current CASL contract obligations, present cost of ships and continuance of earnings at 1957-62 level. This also presumes that Government will appropriate required amounts of shipyard subsidies.