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FEDERAL SHIP MORTGAGE INSURANCE

FRIDAY, OCTOBER 20, 1967

U.S. SENATE,
SUBCOMMITTEE ON MERCHANT

MARINE AND FISHERIES,
COMMITTEE ON COMMERCE,

Washington, D.C. The subcommittee met, pursuant to notice, at 10:10 a.m., in room $110, New Senate Office Building, Hon. E. L. Bartlett (chairman of he subcommittee) presiding.

OPENING STATEMENT BY THE CHAIRMAN

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Senator BARTLETT. The committee will be in order. This morning the Subcommittee on Merchant Marine and Fisheries will hear testimony on two bills, S. 2211 and S. 2247, each of which eeks to enhance Federal assistance for the construction of certain ypes of vessels.

S. 2211 relates to vessels operating solely on the inland rivers and caterways and of not less than 1,000 gross tons with a speed capability if not less than 8 knots. By the proposed amendment to 46 U.S.C. 159, which is section 509 of the 1936 act, such vessels could qualify for title XI mortgage insurance of 8774 percent of actual cost rather han only 75 percent as is the present limitation for any vessel under hat speed capability and under 3,500 gross tons.

I understand that the river passenger boat Delta Queen must be Fetired from service by November 1, 1968, in order to comply with the passenger vessel safety bill which we passed last year and that S. 1211 would facilitate construction of a new vessel.

S. 2247 seeks a similar result for oceangoing tugs and barges through : proposed amendment to 46 U.S.C. 1274, which is section 1104 of the 1936 act, which would allow tugs of more than 2,500 horsepower and barges of more than 2,500 gross tons to receive title XI guarantees up to 8742 percent of actual cost.

As the bills read it is obvious that two different technical paths are being pursued to obtain essentially the same legal result. Perhaps both bills should seek to qualify the vessel types involved for 87% percent mortgage guarantee by amendment to the same section of the code.

The committee has received a communication from the Mississippi Valley Association in support of S. 2211 and it will be placed in the record at the appropriate point. Staff member assigned to this hearing: Stanley H. Barer.

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(S. 2211 and S. 2247 with agency comments follow:)

(S. 2211, 90th Cong., first sess.) AN ACT To amend section 509 of the Merchant Marine Act, 1936, as amended (46 U.S.C. 1159) to provide

for construction aid for certain vessels operating on the inland rivers and waterways Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 509 of the Merchant Marine Act, 1936, as amended (46 U.S.C. 1159) be amended by inserting after the words, “fourteen knots,” the following: "except in the case of a passenger vessel operating solely on the inland rivers and waterways in which case the vessel is designed to be of not less than one thousand gross tons and to be capable of sustained speed of not less than eight knots,”.

Passed the Senate November 7, 1967.
Attest:

FRANCIS R. VALEO,

Secretary.

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THE GENERAL COUNSEL OF THE TREASURY,

Washington, D.C., October 19, 1967. Hon. WARREN G. MAGNUSON, Chairman, Committee on Commerce, U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: Reference is made to your request for the views of this Department on S. 2211, “To amend title 46, section 1159, to provide for construction aid for certain vessels operating on the inland rivers and waterways."

Section 509 of the Merchant Marine Act, 1936 (46 U.S.C. 1159), authorizes the Secretary of Commerce, upon application of any citizen of the United States, to construct vessels for use in foreign or domestic commerce. The applicant is required to pay the Secretary not less than 25 percent of the cost of the vessel (1272 percent for vessels meeting certain size and speed requirements) and the balance is paid over twenty-five years with interest at 3% percent.

The Secretary is authorized under title XI of the Act to insure mortgages on vessels that meet the requirements of section 509 in the amount of 874 percent of actual cost with a down payment of 12% percent. For vessels that do not meet those requirements, insurance of only 75 percent of cost is authorized. The proposed legislation would amend section 1159 of title 46 to make certain vessels operating on inland rivers and waterways eligible for the lower down payment. However, since title 46 of the United States Code has not yet been enacted into positive law, the bill apparently is intended to amend the original statute, section 509 of the Merchant Marine Act, 1936.

The Department has no independent knowledge of the need for the assistance which would be provided by the bill to operators of vessels on inland rivers and waterways, nor of the need to stimulate the construction of such vessels.

The Department of Commerce has stated that no vessels are being or will be constructed under section 509. Thus the effect of the bill would be simply to make vessels operating on inland rivers and waterways eligible for insurance on mortgages up to 8742 percent of actual cost. In these circumstances, a more straightforward approach would be to amend the provisions of the mortgage insurance program to incorporate any necessary eligibility requirements.

If the proposed amendment of section 509 receives favorable consideration, however, the Department recommends that the opportunity be taken to bring the interest rate provisions of section 509 into conformity with the Administration's policy on interest rates in Federal credit programs. The President's Com- * mittee on Federal Credit Programs found that fixed interest rates, such as the 372 percent rate contained in section 509, produce perverse and unintended varia- . tions in interest rate subsidies as market rates vary, which result in inequities among borrowers using the program at different times and extraordinary demands for Federal loan funds at times of greatest inflationary pressures and overall , budget tightness. Thus the Committee recommended that Federal lending; agencies be permitted to vary the interest rate charged new borrowers from time to time at least as much as market rates and current Treasury borrowing costs vary. The Committee's report was endorsed by President Kennedy and reaffirmed as Administration policy by President Johnson in the issuance of Bureau of the Budget Circular No. A-70 on February 1, 1965.

Attachment B to Budget Circular No. A-70 contains standard language for interest rate formulas for use in Federal credit programs. In the absence of any justification for an interest rate subsidy such as would be provided by the 32

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fcent rate, the Treasury recommends that section 509 be amended to provide following standard formula interest rate language for self-supporting programs: Such loans shall bear interest at a rate not less than (i) a rate determined by Secretary of the Treasury taking into consideration the current average market eld on outstanding marketable obligations of the U.S. with remaining periods maturity comparable to the average maturities of such loans, adjusted to the arest one-eighth of one per centum, plus (ii) an allowance adequate in the bigment of the administering agency to cover administrative costs and probable kses under the program.' The Department has been advised by the Bureau of the Budget that there is objection from the standpoint of the Administration's program to the submisin of this report to your Committee. Sincerely yours,

FRED B. SMITH,.

General Counsel.

OFFICE OF THE SECRETARY OF TRANSPORTATION,

Washington, D.C., October 19, 1967. on. WARREN G. MAGNUSON, kirman, Committee on Commerce, S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: The Department would like to submit the following nments on S. 2211, a bill “To amend Title 46, Section 1159, to provide for instruction aid for certain vessles operating on the inland rivers and waterways." The bill would further amend Section 509 of the Merchant Marine Act, 1936, as to make certain vessels operating solely on the inland rivers and waterways gible for the reduced down payment provisions of the Section with respect to he acquisition of new vessels. Section 509 is incorporated by reference into ketion 1104 of the Merchant Marine Act, 1936, and the principal effect of the cendment would be to make title XI mortgage insurance available in the amount 8742 percent of the actual cost of the vessel. The Department has not been made aware of the need for general legislation promote the construction of vessels operating solely on the inland rivers and aterways. The Department's overriding objective is to assure that, where asible, Federal programs provide no undue economic advantage to particular ansportation modes. Further analysis is required to evaluate the possibility of ch an effect and, in addition, of the requirement for the more liberal promotional ogram contemplated by the bill. Therefore, the Department would not favor Lactment of S. 2211. The Bureau of the Budget advises that from the standpoint of the Adminisation's program there is no objection to the submission of this report for the nsideration of the Committee. Sincerely yours,

John L. SWEENEY, Assistant Secretary for Public Affairs.

(S. 2247, 90th Cong., first sess.) BILL To amend the Merchant Marine Act, 1936, to increase the Federal ship mortgage insurance

available in the case of certain oceangoing tugs and barges Be it enacted by the Senate and House of Representatives of the United States of merica in Congress assembled, [That paragraph (2) of subsection (a) of section 104 of the Merchant Marine Act, 1936 (46 U.S.C. 1274), is amended by striking de semicolon at the end thereof and inserting in lieu thereof a colon and the llowing: “And provided further, That in the case of any tug of more than two Lousand five hundred horsepower, and of any barge of more than two thousand e hundred gross tons, the obligation may be in an amount which does not ceed 8712 per centum of such actual cost;".] hat the fourth sentence of section 509 of the Merchant Marine Act, 1936 (46 U.S.C. 159) is amended by inserting immediately before the words "the applicantthe follow9:"or in the case of a tug of more than twenty-five hundred horsepower, and of any rge of more than twenty-five hundred gross tons.

OFFICE OF THE SECRETARY OF TRANSPORTATION,

Washington, D.C., October 19, 1967. Hon. WARREN G. MAGNUSON, Chairman, Committee on Commerce, U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: The Department has the following comments wit] respect to S. 2247, a bill “To increase the Federal ship mortgage insurance avail able in the case of certain oceangoing tugs and barges.'

The bill would increase the insurable mortgage obligation under Title XI O the Merchant Marine Act, 1936, to 8742 percent of the actual cost, for tugs o more than 2,500 horsepower and barges of more than 2,500 gross tons. Unde present law the maximum insurable mortgage obligation for these vessels is 71 percent.

The economics of ocean freight movements are in the process of radical altera tion as a result of technological innovations which are changing the capabilitie: of oceangoing bulk carriers. The Department therefore believes that any difficulty which operators of oceangoing tugs and barges may encounter in obtaining financing would not be attributable to the present 75 percent ceiling on the maxi mum insurable mortgage obligation. More significant would be the financia community's recognition of the uncertain future role of the oceangoing tug and barge in the movement of bulk ocean freight. In these circumstances the Depart ment of Transportation believes that any rational modification of present mari tim e promotional programs cannot be undertaken in a piecemeal manner bu rath er should be evaluated and considered in the broader context of comprehensive Federal maritime policy reforms. Therefore, the Department would not favor enactment of S. 2247.

The Bureau of the Budget advises that from the standpoint of the Administra. tion's program there is no objection to the submission of this report for the consideration of the Committee. Sincerely yours,

John L. SWEENEY,

Assistant Secretary for Public Affairs. Senator BARTLETT. The first witness this morning, to testify on both bills, Mr. Carl C. Davis, General Counsel of the Maritime Administration.

STATEMENT OF CARL C. DAVIS, GENERAL COUNSEL, MARITIME

ADMINISTRATION, ACCOMPANIED BY JOHN R. TANKARD, ASSISTANT GENERAL COUNSEL, DIVISION OF MORTGAGE AND MARINE INSURANCE, OFFICE OF GENERAL COUNSEL, AND MARION PARR, DEPUTY CHIEF, OFFICE OF MARITIME PROMOTION

Mr. Davis. Mr. Chairman, I would like to be accompanied by Mr. John R. Tankard, Assistant General Counsel, in charge of the Division of Mortgage and Marine Insurance, and Mr. Marion Parr, who is the Deputy Chief, Office of Maritime Promotion.

Senator BARTLETT. That will be perfectly fine.

Mr. Davis. Does the Chair have any preference as to which bill I start on?

Senator BARTLETT. Oh, no; either one you care to.
Mr. Davis. All right, I will start on S. 2211.

I appreciate the opportunity to present the views of the Maritime Administration and the Department of Commerce with respect to S. S. 2211.

The bill would in substance amend section 509 of the Merchant Marine Act, 1936, so as to reduce, from 25 percent to 12 percent, the required down payment on vessels which are of not less than 1,000 gross tons and are capable of a speed of not less than 8 knots, and which

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sre to be operated solely on the inland rivers and waterways, but which are not to engage exclusively in the transportation of property on the Inland rivers and canals.

Section 509 of the Merchant Marine Act, 1936 (46 U.S.C. 1159) how provides that any citizen of the United States may apply to the Secretary of Commerce to have the Secretary construct a vessel for fihim—without construction subsidy-for use in foreign or domestic i commerce, except a vessel to be used exclusively for the transportafion of property on the inland rivers and canals. If the vessel is to be of not less than 3,500 gross tons and is to be capable of a sustained speed of 14 knots, the required down payment is 1272 percent of the construction cost and in the case of any other vessel the required down payment is 25 percent of the construction cost. The balance of the purchase price is secured by a mortgage which is payable over a | 25-year period with interest on the unpaid balance at the rate of 372 E percent per year.

Title XI of the Merchant Marine Act, 1936, provides that to qualify vessel for mortgage insurance, the down payment required is 25 bercent of the actual cost except that if the vessel would have been eligible for mortgage aid under section 509 with a down payment of 1272 percent, the required down payment is 1272 percent.

No vessels have been built under section 509 for many years. In prder to reduce appropriations, private financing has been required with mortgage insurance under title XI of the act. We understand hat the purpose of the bill is not to have any vessel built under section 509, but rather, through the incorporation by reference of its provisions in Title XI to reduce to 1242 percent the required downpayment for mortgage insurance purposes on vessels of the minimum speed and size stated in the bill which are to be operated solely on inland rivers and waterways but which are not to be engaged exclusively in the transportation of property on the inland rivers and canals.

Before he can grant title XI mortgage insurance, the Secretary must find that the project is economically feasible. The size and speed of the vessel and its intended use are factors that are considered in making this determination. It is possible that for some uses on inland rivers, vessels of the minimum size and speed specified in the bill would be economically feasible whereas those of greater size and speed would not be.

We are not aware that any general need exists for an increase in the mortgage insurance available for inland waterway operators. Further, the bill could distort the current competitive relationship between waterway operators, trucks, and railroads. With respect to the effects of the bill on these other modes, we defer to the Department of Transportation.

We have been advised by the Bureau of the Budget that there would be no objection to the submission of this statement to the Congress from the standpoint of the administration's program.

Senator BARTLETT. Why don't you go ahead with your next statement, and then we may have a question or two.

Mr. Davis. All right. I also appreciate, Mr. Chairman, the opportunity to present the views of the Maritime Administration and the Department of Commerce with respect to S. 2247.

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