There has been criticism of the management of the shipbuilding and ship repair programs during these hearings. We in Navy fully appreciate the concerns which are manifested by these criticisms. I will attempt to address these concerns shortly, but first I think that we should also emphasize the clear and impressively positive record that has been compiled. The Navy and the shipbuilding industry have, in partnership, achieved remarkable successes over the past 20 years. Our ballistic missile submarines, attack submarines, and nuclear carriers surpass qualitatively and technologically any ships built by any country in the world. Innovative shipbuilding techniques and shipyard modernization efforts initiated during the lean years when the U.S. Navy was the mainstay of the private shipbuilding industry have contributed to the favorable competitive position in which that industry is now placed.

Series production of our DD-963 Spruance class destroyer is underway, award of contracts for the patrol frigate-PF-class of combatant ships has been initiated, the first two of our vitally important amphibious assault ships-LHA-have been launched, and our ship research and development initiatives remain forward-looking and creative. None of this could have been accomplished without the strength and expertise of the American shipbuilders, and I would like to think that the guidance, leadership, and vision of the responsible officials of the Navy Department played an important role in the process, and continue to do so today.

Besides these very positive accomplishments, I am sure that any discussion of problems within the Navy's shipbuilding and ship procurement programs must also include an awareness of the unique features of these programs features which distinguish them in substantial degree from those administered by our sister services. First, there is simply the size of the Navy/USMC procurement effort: We annually account for about 50 percent of the DOD procurement budget. In fiscal year 1974, ship procurement alone comprised $3.4 billion, or about 20 percent of all DOD procurement. Second, our large combatant ships are not stamped out of an assembly line as are car bodies or wing sections. Shipbuilding, particularly that which deals with warships, remains a labor-intensive industry, not as susceptible to standardization and economies of scale as that of most other large-scale industrial activities. Finally, it takes a long time for us. to build a capital ship-4 or 5 or more years. The keel for the nuclearpowered aircraft carrier Nimitz was laid in June 1968. We expect this ship to be delivered in summer of 1975, about 7 years after the start of construction. In effect, the Nimitz and its sister ships are the most complicated thing ever built by man in the truest sense of the word. and this fact illustrates a third distinguishing feature of warship procurement the very long lead times required to deliver the final product. Such a requirement, of course, imposes on us the necessity for the long-term commitment of very substantial sums of money. This, in itself, is a significant management problem in normal times; in inflationary periods such as that which we are now experiencing, severe economic dislocations result, both in planning and in administration. The difficult claims problem we are now addressing arose in good part from this conjunction of events with requirements peculiar to ship procurement programs.

Mr. Chairman, in any discussion of shipbuilding, I ask that we keep two items in mind:"

America has done some very good things in the shipbuilding field. These have resulted in positive accomplishments in which Navy and industry can jointly take pride;

Shipbuilding and ship procurement is like no other American industrial effort-its product and its requirements are unique. We consider shipbuilders are great national assets. We assign a high priority to getting along with them and assuring them of a "fair profit for a fair effort."

With the foregoing in mind as perspective for the discussion in which I will now embark, it is nevertheless apparent that some of our management concepts and practices need serious rethinking. Many of our problems are of our own making and thus require early solution. The substantial increase in commercial shipbuilding demand in this country since 1970 has impacted our production base, but our most severe problem today is the inflationary climate which now prevails worldwide.

We have for the last several months been injected into a period of inflation which poses a far more serious problem than many of those which have been discussed in the hearings to date. While the solutions we are seeking to improve the contractual and business relationship with industry-which I shall discuss subsequently-may be expected in due course to provide help in that quarter, we are now faced with a severe planning and budgeting problem. The shipbuilding program for the next few years is very large, and differences between anticipated and actual economic escalation have caused large upward revisions in our estimates of funds required. The U.S. Government can, and will, attack inflation problems vigorously, but during the solution period, we must adhere to a rational approach to the planning and budgeting process. I would like to draw your attention to chart No. 1 which shows the severity of the escalation in the material and labor indexes which reflect shipbuilding costs and, in particular, I would like to point out that a large percentage of the change has occurred this year. You will note the big jump both in labor indexes and also in material indexes. These latter were a little slower in getting going, but in the fourth quarter of fiscal year 1974 they approached 18 percent.

Mr. BENNETT. Have you made analysis of how much of that was stimulated by our Federal subsidy-one nobody has ever addressed in this hearing. It is unfair probably to ask you this. It just runs through my mind. I have heard this tremendous up-build in mercantile ships and commercial ships, and yet I think some of it is stimulated by the Federal programs. I wondered if any thought has been given to that. That is something we should think about a little bit. In other words, we may be stimulating ourself into difficulty, although I favor that legislation. Maybe it has been a little too abrupt or something. Nobody here, I guess, has any figure on how much of this private shipbuilding has been stimulated by Federal subsidies.

Secretary MIDDENDORF. I think Admiral Gooding has been wrestling with that. We have had a number of inquiries on that subject.

Mr. BENNETT. If you don't have it now, it doesn't have to go in the record. I would like to know about it. It hasn't been really specifically addressed. It runs through my mind that we should bear in

mind that all of this private shipbuilding is not entirely free enterprise. It has been heavily subsidized by the Federal Government. Admiral GOODING. I can answer the question, sir. I think if one could discern any effect of the type you allude to in that last bar there, it would be down in the lower end. This situation is not unique to shipbuilding but countrywide. I expect one could not trace any effect of subsidy in that number.

Mr. BENNETT. In other words, you don't think the Merchant Marine Act of maritime subsidy legislation we passed, I think in 1970, is really primarily responsible for that?

Admiral GOODING. No, sir, I do not. However, it is significant that in the past 4 years, 43 percent of all MARAD subsidies went to three major shipyards and all of these subsidies were utilized in only eight private yards.

Secretary MIDDENDORF. We are using less than 2 percent of the Nation's steel, I believe, and we feel that wouldn't have a substantive impact. Some of the shipbuilders have told me that definitely wouldn't be the case. They are not competing.

Mr. BENNETT. All right.

Secretary MIDDENDORF [continuing his statement]. This situation has impacted the 1975 budget to such an extent that in the period since it was established and submitted to Congress it has become inadequate to fully fund approved programs. The compounding of these new estimates of escalation on multi-year programs will require obligating large amounts of capital. Chart No. 2 shows the impact of the anticipated escalation.

DEPARTMENT OF NAVY
SCN FUNDING

First, I would like to draw your attention to the bottom curve which is the current Navy shipbuilding plan stated in constant 1974 dollars. It shows a generally level ongoing effort. The upper curve shows the obligation level required in future years, starting with 1975, when escalation is taken into account. It shows the level required to fully fund the building program. There is obviously a funding deficiency for our 1975 and prior year programs. That deficiency, about $2 billion, represents additional funds needed for ships already approved. This

matter will be presented to the appropriate committees of the Congress after review by the Secretary of Defense and decision on the funding request. If the total deficiency for 1975 and prior years were to be added to the funds required for the 1976 building program, the total could come to over $6 billion.

Beyond 1975 the gap between the curves represents the impact of inflation on the buying power of our shipbuilding dollar. As you can see, in 1980 it takes about twice the amount of money to buy the same shipbuilding program as it did in 1974.

To illustrate the effect that inflation has had on a specific shipbuilding program, consider the funding required for the submarine tender (AS) program. The fiscal year 1972 and fiscal year 1973 budgets contained one AS in each year at a combined cost of $172.8 million. This estimate was constructed during a time when the inflation rate change from year to year was minor and predictable. Before these ships could go on contract, however, shipbuilding market conditions changed dramatically and the inflation rate increased such that they soon became underpriced. Using the latest actual BLS indices and our revised projections of these rates through 1980, these two tenders are now estimated to cost $289.6 million, which is an increase of 68 percent over the amount originally budgeted.

Mr. Chairman, I have spent some time discussing inflation because its insidious effects strike at the very core of the Navy shipbuilding effort, and I wished to emphasize to you how gravely we in the Department of the Navy view the problem. We must recognize the need for large increases in obligated funds or face the prospect of a continued decline in Navy force levels.

Today, to cover as wide a range of issues as possible, I have asked Admiral Holloway to address those of our concerns which deal with shipbuilding and ship repair requirements and of the relation of these requirements to national shipbuilding needs and capacity. In my own comments I will focus on contractual matters and on Government management procedures and practices-items that have attracted the bulk of the comment offered by the leaders of the country's private shipbuilding industry during the course of these hearings. In my view, the problem presently most affecting a healthy Government-industry relationship is that generated by the claims situation. With the assistance and perspective provided by the office of Deputy Secretary of Defense Bill Clements, we have made it a first order of business to reduce the shipbuilding claims backlog presently existing in the Department of the Navy. Claims processing is an extremely complex and difficult area, one where the judgments of competent and honorable men may differ sharply. In the past, our desires to move more rapidly and authoritatively in this area were characterized by what now might be seen as excessive caution, with the result that a large number of claims were ultimately referred to the Armed Services Board of Contract Appeals (ASBCA) rather than being