Section 802 as it now stands is deficient in a number of important respects. These deficiencies, including lack of any termination dates for requisition and lack of any provision for returning ships requisitioned under section 802, have long been of concern of shipowners. Therefore, it is my intention to describe these deficiencies and support the provisions of S. 1184. The purposes of S. 1184 are to amend section 802 so as to: 1. Conform section 802 with amendments to section 510 of the act as amended by Public Law 86-575. The latter is the provision which extended the statutory life of vessels delivered by shipbuilders after January 1, 1946, to 25 years; 2. Permit the former owners of vessels taken by the United States under this section to reacquire any such existing ships after their national service is ended; 3. Provide for resale to former owner of a ship which at the time of acquisition was subject to a Government mortgage, upon the same terms and conditions contained in such mortgage and provides for the same eligibility for mortgage insurance under title XI as existed at the time of acquisition; and 4. If while in the possession of the Government vessels are lost of otherwise rendered unsuitable for return to commercial service, th bill gives the former owners a preference in acquiring similar ship from the United States. Before discussing each of these objectives I should like to poin out that section 802 applies only to vessels on which a constructio subsidy has been paid. Other vessels may be requisitioned by th Government under section 902 which not only provides just compens tion to the owners but makes provision to enable former owners promptly reacquire ships when the Government no longer needs the Evidently the framers of the 1936 act considered that the Gover ment was to have special rights in vessels built with constructi subsidy. It should be emphasized however that construction su sidies are paid to and for the benefit of shipbuilding yards and 1 for the benefit of the shipowner. There is ample legislative histo and many official statements can be found to sustain this positi Construction subsidy is not intended to directly benefit the shipown The Government pays the excess up to a limit of 55 percent of difference between foreign and domestic costs. The shipowner compensated only for the additional costs imposed by the requ ment that he build his ships in American yards of American m rials. This is a wise policy designed to maintain a healthy Ameri shipbuilding industry. It is not a subsidy to shipowners. Nevertheless, the burden of section 802 which relates to vessels b with construction subsidy paid to shipyards falls entirely upon shipowners. We do occupy a unique position in that our nati policy is based on a Government-industry partnership. Thus w not intend to take exception to basic premise of Government req tion under section 802. We merely wish to demonstrate in discus the objectives of S. 1184 that times have changed since this prov was enacted so that a revision of the section to make it less on on the industry is not only warranted but can be accomplished equity and fairness to both Government and industry. We have now entered upon a peacetime vessel replacement pro unparalleled in our Nation's history. It involves the constructi some 300 new vessels at a total cost estimated at some $4 billion. These ships are the most modern in our merchant marine. They include innovations designed to enhance efficient and economic operation. They will contribute substantially to our military and economic strength. The Government is indeed making a substantial contribution but it should not be forgotten that industry's capital expenditure constitutes a tremendous financial burden which will sorely tax our financial resources and add a staggering debt burden. As section 802 now stands, the owner of a vessel subject to the 802 restriction who sells such a vessel to a private buyer as part of his replacement program suffers immediate handicaps. The purchaser of such a vessel, irrespective of its age, must agree that forever after the Government may acquire the vessel at its lowest residual, fully depreciated value. There is in effect a cloud on the title which will obviously be reflected in the selling price. If the owner elects not to sell to a private buyer but trades his vessel or vessels in under section 510 of the Merchant Marine Act of 1936, the impediment of section 802 does not apply. If the traded-in vessel is then traded-out by the Government to a private purchaser under the Vessel Exchange Act, the new owner is subject to section 802 only until the end of the vessel's statutory life. Putting the two examples side by side, this means that when an owner sells a vessel subject to 802 to another owner, he passes along to the second owner the 802 restrictions which run with the title thereto. This reflects in the price he obtains for the vessel or that subsequent owners may obtain for the vessel. But if the same vessel is traded in to the Government and then sold by the Government under the Vessel Exchange Act, the Government could expect a better price for the same vessel because the 802 restriction ends with the statutory life. It should be remembered that not all vessels are subject to section 802-only those built with construction differential subsidy. Identical vessels sold at similar prices under the Merchant Ship Sales Act do not have this impediment. It has been estimated that as between otherwise comparable vessels the existence or nonexistence of the section 802 impediment may make a difference of over $100,000 in the sales price. This disadvantage to owners can be illustrated by a statement in a circular letter dated February 16, 1961, from A. L. Burbank & Co., Ltd.-a firm of ship brokers offering for sale an American-flag C-3 turbine ship. The letter states: We believe the vessel's superior condition coupled with her freedom from section 802 will justify a premium price. Even if the proposed legislation is enacted, private venders will not be on a completely even basis with sales by the Government under the Vessel Exchange Act. The duration of the impediment will have been conformed, but under section 802 it is the construction cost which is depreciated whereas under the Vessel Exchange Act the basis of depreciation is the price paid for the traded-out vessel. As more and more vessels approach the end of their statutory life, this distinction becomes increasingly important, but conforming the period of the impediment at least tends to reduce the disparity. Let me now discuss each of the objectives I have listed: 70827-61-3 1. Conform section 802 with amendments to section 510 of the act as amended by Public Law 86-575. The latter is the provision which extended the statutory life of vessels delivered by shipbuilders after January 1, 1946, to 25 years. The purpose of this amendment is to conform the period of applicability of section 802 to the provisions of section 510 as amended by the Vessel Exchange Act, Public Law 86-575. It has been contended but disputed that section 802, as it now stands, is without limit and may run forever with the title of the ship. The Vessel Exchange Act of July 5, 1960, Public Law 86-575, when originally introduced, had the same basic fault. However, as a result of the hearings, this fault was recognized and the bill was amended and eventually enacted so as to be applicable only if the vessels were acquired by the Government "at any time within 20 years of the date of construction." In reporting the bill-Senate Report No. 1275, 86th Congress, 2d session-Senator Engle explained: The new provision in subsection (5) limiting the acquisition restriction on any traded-out vessel to the 20-year life of the vessel is designed to prevent a cloud on title and a burden on property which would stem from such indefinite restrictions. The principle therein adopted is also incorporated in S. 1184 in that the provisions of section 802, as amended, would be applicable to vessels only during their statutory life. This provision is eminently fair and removes a burdensome handicap on present owners. 2. Permit the former owners of ships requisitioned by the Government under this section to reacquire such vessels after their national service is ended. Since the act makes no provision for the former owners to reacquire their ships after their national use is completed, this legislation is proposed to correct this deficiency. The bill before you seeks no undue advantage but merely proposes to restore vessels requisitioned under the provisions of section 802 to their former owners under conditions similar to those which governed their requisition for service by the United States. Recognizing, however, that extended periods of emergency or war service are likely to take a greater physical toll of the ship than would normal commercial operations, the bill incorporates an additional allowance for rigorous use computed at 3 percent per year of Government use in accordance with the provisions of the Merchant Ship Sales Act of 1946. With this exception, this purpose of S. 1184 is to provide the means of restoring vessels requisitioned under section 802 to their former owners as equitably and as expeditiously as possible so that, upon the termination of Government service, the former owner will have a reasonable opportunity to reestablish his shipping service in the best interests of the peacetime commerce of the United States. The manner in which the bill will operate is illustrated by the following simplified example: Original cost of new ship to owner (after payment of construction-differential Depreciation (in this example taken at $200,000 per year): Taken by United Normal depreciation... War service allowance (for period of war service) 3 percent X $5,000,000.. Price paid by United States to former owner. Price paid to United States by former owner on return of ship.. NOTE.-The foregoing example excludes the effect of depreciating construction subsidy so as to simplify the owner's position. A similar arrangement was enacted for the return of fishing vessels and vessels in the Great Lakes during World War II. Quite simply, the bill makes the United States the owner of a ship for the period of its national need and provides that any such ship may be reacquired by its former owner on a similar basis. In effect, under the formula of the bill, the United States pays for the use of the ship through: (a) normal depreciation, and (b) a war-service allowance. A very important purpose of this legislation is to make provision for the prompt return of vessels when no longer needed for national defense rather than to leave this problem for resolution after the termination of hostilities. It will be recalled that World War II was over on September 2, 1945, the Merchant Ship Sales Act was not enacted until March 8, 1946, and we did not get all of our replacement vessels until more than a year thereafter. This concept. of prompt delivery can be implemented by amending the first four lines of subsection (c) to read as follows: (c) If any vessel, which was acquired by the United States and to which the provisions of subsection (a) are applicable, [is to] can be released from Government service, such vessel shall be immediately offered for sale to the former owner from whom such vessel was acquired * * *. As to the third provision, it provides for resale to the former owner of a ship which at the time of acquisition was subject to a Government mortgage, upon the same terms and conditions contained in such mortgage and provides for the same eligibility for mortgage insurance under title XI as existed at the time of acquisition. Under present law when a ship subject to restrictions of section 802 is requisitioned for title, the owner receives depreciated cost price. Since title is taken by the Government, existing mortgages are paid off. If the Government itself has a mortgage on the vessel, that indebtedness is satisfied. If the Government has insured publicly held bonds under title XI of the act, the bondholders are paid. The former owner may have spent a great deal of time and money in arranging his financing, and his own investment may be as small as permitted by law-certainly not less than 25 percent of the cost of the vessel. At the end of a national emergency the former owner wishes to reestablish himself in shipping. But he has no Government loan available to him and his original vessel probably is no longer eligible for mortgage insurance under title XI. He has only his original capital funds. It is the purpose of this section to restore the former owner to his original financial status. If he had a Government loan on the original vessel he is entitled to purchase the vessel upon the same terms and conditions of the original mortgage. If his mortgage was insured under title XI or was eligible for such insurance, he retains those rights of insurance upon the same terms and conditions as he had before his vessel was taken from him. Thus he can restore his financial structure to that prior to requisition. In other words, substantial and valuable financing rights would be restored just as the vessel itself would be restored to preemergency condition except for unavoidable wear and tear. The former owner is neither better nor worse off than before the Government acquired his ship. The fourth provision: If while in the possession of the Government vessels are lost or otherwise rendered unsuitable for return to commercial service, the bill gives the former owners a preference in acquiring similar ships from the United States. We realize, of course, that during Government possession a vessel may be lost or so substantially altered as not to be returnable to its former owner. In such event, the proposed legislation provides a preference for its former owner to purchase from the Government a similar vessel on the same basis as he would have been able to reacquire his original ship. In summary, S. 1184 merely permits the return to the former owner of a vessel requisitioned for title under section 802 under terms and conditions similar to those prevailing when the Government requisitioned the vessel. Secondly, the bill recognizes the principle enunciated in the Vessel Exchange Act that such restriction should not run with title but rather with the statutory life. These proposals are simple and we believe eminently fair. They cannot be disadvantageous to the Government. They merely provide the shipowner with equitable treatment when national emergency forces the Government to requisition privately owned vessels. In view of the tremendous investment being made by owners in the replacement of their present fleets, we believe that the provisions of S. 1184 should be enacted in order to insure equitable treatment and adherence to the parity principle of the act. Senator BARTLETT. Thank you, Admiral. Do you have any questions, Senator Butler? Senator BUTLER. I would like to know the original purpose of the restrictive provisions in section 802. Is Mr. Stakem or somebody here from Maritime that could answer that question? Maybe, Admiral, do you know the answer? Admiral WILL. I don't think there are any really restrictive provisions in 802. Well, Senator, actually, I don't know what's behind it. Perhaps the Maritime might be able to answer. Mr. Ewers, would you know? Mr. EWERS. It was inherited from a previous statute because of the high prices that vessels had been sold at the outbreak of hostilities. |