The compliance with the law is based upon a comparison of world prices with the price that our shipyards have to attain to make a profit in the world market.

Mr. MCCLOSKEY. Certainly we would want to know which of our shipyards were not efficient and which were before we made that determination, would we not?

Mr. GUTMANN. Yes.

I would think that Maritime Administration would know which shipyards require a greater subsidy than others. But I do not have that information at this time.

Mr. MCCLOSKEY. I am only operating on historical recollection. On the west coast, our cost of labor and materials were such that we did not compete with the Gulf Coast States or even the east coast as far as shipbuilding costs.

Do you have any data on that historically or at present?

Mr. GUTMANN. No, we do not. We have not attempted to make a comparison of relative efficiency of the various participants in the industry.

Mr. MCCLOSKEY. Have you made any analysis of the Maritime Administration reports, of shipyard costs and efficiencies as compared with your own stuides here?

Mr. GUTMANN. Mr. Kezar and Mr. Horan, have we done anything on this?

Mr. HORAN. No, sir.

Mr. MCCLOSKEY. I would like to pursue this further, but rather than take the time of the committee at this point, I think perhaps we can make an appointment with you to discuss how we might frame a further direction to GAO to give us an independent analysis of this efficiency as it relates to operation construction subsidies.

Mr. GUTMANN. Very good.

I would appreciate that opportunity to talk with you.

Mr. MCCLOSKEY. Let me just ask one or two more questions, if I may, Mr. Chairman.

About this series construction that you saw in Sweden with 12 ships, do you have any opinion as to how many ships in a series is required in order to obtain these efficiencies?

Mr. GUTMANN. We were told a minimum of 10 would be desirable. Mr. MCCLOSKEY. Do you find any specific problems or problem areas in title V of the Merchant Marine Act which would require change or in which change might be suggested?

Mr. GUTMANN. I am sorry, sir.

Problem areas in connection with what?

Mr. MCCLOSKEY. Title V of the Merchant Marine Act, the construction subsidy statute.

Do you have any statutory recommendations at this time?

Mr. GUTMANN. Well, our only recommendation would be that the Congress consider modifying that legislation, to give the Maritime Administrator greater flexibility in administering the subsidy program, so that he can indeed subsidize construction of ships for the foreign market and subsidize the operation of foreign-built ships.

Mr. MCCLOSKEY. Well, assuming that we permitted the construction subsidy of ships to then be sold in the foreign market, do you have any suggestion as to how we might recapture that ship?

Is it possible to sell a ship, make it subject to some restrictions such as the effective control fleet program?

Mr. GUTMANN. I do not know, but I would think it would be very doubtful.

Mr. MCCLOSKEY. You are saying, in effect, that in order to make the shipbuilding base efficient and profitable, it would be worth the construction subsidy even though we lost the ships in the event of any national damage?

Mr. GUTMANN. Yes, sir.

Now, we would not want to do that to the extent that it can indeed threaten our national interests, our national security. It would only be what we could spare after the Maritime Administration and Department of Defense completed their deliberations and decide what the appropriate size of our industrial base should be and the kind of vessels that we should be prepared to construct, then we could exercise the flexibility in administering the subsidies that we recommend.

Mr. MCCLOSKEY. What was the time frame of the investigation that resulted in your report of February 12, 1975?

Mr. GUTMANN. We started in the spring of 1973, perhaps a little earlier, in terms of preliminary work here in Washington.

Mr. MCCLOSKEY. Well, the spring of 1973 and February of 1975 is almost 2 years.

Mr. GUTMANN. Yes, sir.

Mr. MCCLOSKEY Did you have complete access during that time. period to deliberations and internal memoranda of the Defense Department, the Commerce Department, with respect to shipbuilding base?

Mr. GUTMANN. I do not know of any problem we had there.

We were aware of the fact that the Department of Defense was making its plans on the basis of one set of assumptions, contingency plans, and the Maritime Administration on another.

Mr. MCCLOSKEY. Did you have full access to both those contingency plans and assumptions of both the Department of Defense and the Maritime Administration?

Mr. GUTMANN. I will ask Mr. Horan if he encountered any problems during that review.

Mr. HORAN. We had full access.

Mr. MCCLOSKEY. Yet, as you have rendered your report on February 1975, and as we commenced these hearings, I think, in June 1975, we were advised by both the Maritime Administration and the Department of Defense that they were undertaking a new study to test those assumptions and perhaps come up with new assumptions and contingency plans.

Do you have any ongoing review of these new assumptions and contingency plans, or are you waiting for them to be completed?

Mr. GUTMANN. We must wait for them to be complete, sir, before we will undertake to evaluate their deliberations.

Mr. MCCLOSKEY. What security classification were those plans and assumptions that you reviewed before your February report?

Mr. GUTMANN. It was on the level of secret classification.

Mr. MCCLOSKEY. You refer generally to a 90- to 180-day war and the 3-year war-the so-called short war-and the protracted war. You indicated that in the protracted war, the shipbuilding base could affect the outcome of the war within a year.

Is that possible?

Is there any ship we can build within a period of a year now? Mr. GUTMANN. I will again ask Mr. Horan who has more specific knowledge as to the type of ship, but I would say that the more simple cargo carriers could be constructed in a year.

More specifically, perhaps Mr. Horan has something to add.
Mr. HORAN. I am only relying on memory now.

We did discuss this issue with Maritime, and they did refer to the experience during World War II and the running off the Liberty ships. I believe it was a shorter time frame than a year. I think they were running them off after a startup period, a month or something like that.

Mr. MCCLOSKEY. That is a very crucial question. You indicate "once the startup," but if we got into a war, into a protracted war, say conventional weapon NATO war which they sometimes speak of, or conventional weapon war in Korea, do you have any judgment as to how long it might take, including both startup time, design time, and construction time before any ships could be completed which would affect the outcome of that war?

Mr. GUTMANN. I would think, sir, the present study undertaken by DOD and MARAD would address these specific questions that you have raised. They must know what the current status of the fleet is by type of vessel. They must make an estimate of what the needs would be in the event of an emergency and whether our inventory at the present time meets those needs.

If they do not meet the needs, what shipyards have to be prepared to meet those needs if an emergency should arise?

Mr. MCCLOSKEY. I just want to tell you that these hearings started in June, and we made a request in June for this kind of information from the Defense Department.

Now, in September, we have not got it yet. I wish I were more confident that Defense and MARAD did know these things and had known them before this committee started asking, and GAO made their report calling attention to the problem.

I hope you are right. We will find out from Defense and MARAD shortly if they did know these things. They have judgments. But you have no independent judgment at this point as to how long, if we went to war in Korea tomorrow, and someone crosses that line of demarcation, before the first ship that could affect the outcome of that war could be launched?

Mr. GUTMANN. No, sir.

Our study did not include those considerations.

Mr. FLYNN. Another important feature of the shipyard in time of war is the repair of ships that are damaged and also the bringing out of the reserve fleet.

So these facilities would be necessary in addition to construction of ships, to the important repair function as well.

Mr. MCCLOSKEY. The fact the shipyards are in existence. Did you reach any judgment as to whether, in the event of a protracted war, our present shipbuilding base is adequate for that purpose?

Mr. FLYNN. No, sir, we did not.

Mr. MCCLOSKEY. Are you aware of any Defense or MARAD studies on that point?

Mr. FLYNN. The studies, as we say, there was some disagreement between Defense and MARAD at the time as to the length of the war and the planning for it.

I think there was some determination that the base was adequate and other cases that it was inadequate. That is basically the reason for the new study is to come up with what the current requirements

are.

Mr. MCCLOSKEY. One last question.

The next witness to testify indicates the subsidy will have to be increased.

Is that your opinion?

Mr. GUTMANN. We do not have any current information on that, sir.

Mr. DOWNING. Mr. Zeferetti.

Mr. ZEFERETTI. Thank you.

A brief question.

On the bottom of page 2 it says, in your statement, that most U.S.flag merchant ships must receive an operating subsidy to compete with foreign trade and be eligible the ship must be built in the United States.

Then you go on and say that this intertwining of the two subsidy programs restricts the Maritime Administrator to choosing a mix of ships needed by the U.S. merchant fleet.

Are we saying, or are you saying, at this point-are you advocating at this point that this should be changed, that this subsidy restriction should be changed, and are you also indicating here that this restriction prevents us from dealing with the foreign markets, of getting the type of necessary foreign trade?

Mr. GUTMANN. Yes, indeed, we are, sir.

We believe if there was a little more flexibility, if we could sibsidize the U.S. construction of ships for export, we would have a more viable shipbuilding industry, we could develop more efficiencies through series production that would result from more orders for the shipyards to work on simultaneously.

So we think this committee and MARAD should consider whether or not such additional flexibility would be appropriate.

Mr. ZEFERETTI. You say foreign market or foreign yards are cheaper, cheaper cost for building of ships.

Have we done any study at all as to the amounts we are talking about, the averages, or how far apart are we from the foreign market?

Mr. GUTMANN. Well, that is indicated by the fact the subsidy has been in the neighborhood recently of 35 percent. This 35-percent subsidy is what it takes to make our ships priced competitively.

Mr. ZEFERETTI. Thank you, Mr. Chairman.

Mr. DOWNING. Mr. Anderson.

Mr. ANDERSON. No questions.

Mr. DOWNING. A final question.

Did you visit the new yard in, I believe, Goteburg, Sweden?
Mr. GUTMANN. No, sir, we did not get to Goteburg.

We visited the Kokums yard.

I think the Goteburg yard is perhaps a little more modern than Kokums, but we did not get up there.

Mr. DOWNING. You do not know the financial situation of the new yard in Goteburg?

Mr. GUTMANN. No, sir, we do not.

As you can imagine, those foreign shipbuilders are naturally reluctant to reveal to us what their status is. In fact, it was not easy to come to a good understanding of the full range of the various types of subsidy that was made available to foreign yards.

Mr. DOWNING. Thank you very much, gentlemen.
Mr. GUTMANN. Thank you.

[The following was submitted:]

QUESTIONS OF MR. DOWNING

CONSTRUCTION-DIFFERENTIAL SUBSIDY

Question. On page 12 you say "More effective use can be made of both U.S. shipyard capacity and available financial resources by encouraging construction of vessels in short supply and in renewing and modernizing existing fleets so that they may compete effectively throughout the world." Tell me, what are the current plans of your member companies for vessel acquisition or replacement?

Answer. Most companies keep their building programs confidential until they are ready to contract and hence, we do not have a detailed schedule of the plans at AIMS. After World War II, the replacement of the liner fleet was very cyclical with years of hiatus between construction periods. Although still somewhat cyclical, one such cycle having been completed in the last several years, there is now a better spread of replacement requirements and several Lines may be expected to commence replacement programs over the next few years. Without knowledge of specific plans, theh success of the barge type vessel would appear to generate interest in that type. Although there is a current glut in the crude carrier market, one can forsee a future need for product carriers. Also, U.S. shipyards appear to be most competitive building high technology vessels, with the LNG vessel being a prime example.

Question. Do you believe that the increased efficiency and productivity of our shipyards played an important part in the achievement of the 35 percent CDS level?

Answer. While not an expert on evaluating shipyard performance, I do believe that shipyard efficiency and productivity was one of a number of factors in reaching the CDS levels. Other factors were fortuitous. Today the shipyard can not meet that level on many vessel types, yet they are no less efficient. I reiterate that all the factors that enter into a U.S.-foreign differential are not under U.S. shipyard or even governmental control.

Question. Do you believe that some of your members would construct additional vessels if the CDS rate was higher than 35 percent?

Answer. Definitely, if the CDS rate was set at true parity.

Question. The current shipyard order book is a source of grave concern to many of us. Is this a deficiency in MARAD's building program, or does it primarily represent world conditions over which we have no control at the present time? Answer. At the time it was undertaken the MARAD program was reasonable and logical. The oil crisis and resultant decline in the tanker market are not matters over which MARAD can be expected to exercise control.

Mr. DOWNING. Our next witness is Mr. James J. Reynolds, president, American Institute of Merchant Shipping, Washington, D.C. Please identify your colleague.

STATEMENT OF JAMES J. REYNOLDS, PRESIDENT, AMERICAN INSTITUTE OF MERCHANT SHIPPING; ACCOMPANIED BY ALBERT E. MAY, VICE PRESIDENT, AMERICAN INSTITUTE OF MERCHANT SHIPPING

Mr. REYNOLDS. Thank you, Mr. Chairman.

I take the liberty of bringing to the table with me the vice president of the American Institute of Merchant Shipping, Mr. Albert May.