DEPARTMENT OF THE NAVY, OFFICE OF THE SECRETARY, Washington, D.C., November 2, 1965. Hon. WARREN G. MAGNUSON, Chairman, Committee on Commerce, U.S. Senate, Washington, D.C. MY DEAR MR. CHAIRMAN: Your request for comment on S. 1858, a bill "To promote the replacement and expansion of the United States nonsubsidized merchant and fishing fleets," has been assigned to this Department by the Secretary of Defense for the preparation of a report thereon expressing the views of the Department of Defense. This bill would authorize the Secretary of Commerce to enter into contracts with qualified persons for periods not to exceed 20 years in connection with new construction or substantial reconstruction of merchant vessels. It would also permit the Secretary of the Interior to enter into contracts with qualified persons for periods not to exceed 20 years in connection with the new construction of fishing vessels. The contract thus entered into would include provisions, among others, that vessels will be built or substantially reconstructed in shipyards in the United States and will be of a type, size and speed suitable for use on the high seas or the Great Lakes. The bill also requires, in section 3(e): "that any vessel constructed, acquired, or substantially reconstructed under contract negotiated under section 1(a) will be of a type which the Secretary of the Navy certifies is suitable for economical and speedy conversion into naval auxiliary or otherwise suitable for use by the United States in the event of war or national emergency." While this bill is of more than passing interest to the Department of the Navy, the Department of the Navy, on behalf of the Department of Defense, defers to those other offices with a primary concern, principally the Department of Commerce. This report has been coordinated within the Department of Defense in accordance with procedures prescribed by the Secretary of Defense. The Bureau of the Budget advises that, from the standpoint of the Administration's program, there is no objection to the presentation of this report on S. 1858 for the consideration of the Committee. For the Secretary of the Navy. Sincerely yours, M. K. DISNEY, U.S. DEPARTMENT OF JUSTICE, OFFICE OF THE DEPUTY ATTORNEY GENERAL, Hon. WARREN G. MAGNUSON, DEAR SENATOR: This is in response to your request for the views of the Department of Justice on S. 1858, a bill "To promote the replacement and expansion of the United States nonsubsidized merchant and fishing fleets." The bill has been examined, but since its subject matter does not directly affect the activities of the Department of Justice we would prefer not to offer any comment concerning it. Sincerely, RAMSEY CLARK, Deputy Attorney General. FEDERAL MARITIME COMMISSION, Hon. WARREN G. MAGNUSON, DEAR MR. CHAIRMAN: This is in reply to your request of May 11, 1965, for the views of the Federal Maritime Commission with respect to S. 1858, a bill to promote the replacement and expansion of the United States nonsubsidized merchant and fishing fleets, and S. 1940, a bill to amend the Act of July 8, 1940, relating to the transportation of the remains, families, and effects of Federal employees dying abroad, so as to restore the benefits of such Act to employees dying in Alaska and Hawaii, and for other purposes. Inasmuch as the bills do not affect the responsibilities or jurisdiction of the Commission, we express no views as to their enactment. The Bureau of the Budget has advised that there would be no objection to the submission of this letter from the standpoint of the Administration's program. Sincerely yours, JAMES V. DAY, Vice Chairman. Senator BARTLETT. The first witness will be Mr. William F. Ragan and Malcolm McLean of Sea-Land. STATEMENT OF MALCOLM MCLEAN, SEA-LAND SERVICE, INC., ACCOMPANIED BY WILLIAM F. RAGAN, RAGAN & MASON, WASHINGTON, D.C. Senator BARTLETT. Gentlemen, glad to see you. Who wants to lead off? Mr. RAGAN. Mr. McLean will. Senator BARTLETT. Will you have a statement to follow? Mr. McLEAN. Mr. Chairman, my name is Malcolm McLean. I am chairman of the board of Sea-Land Service, Inc., a steamship company operating in the domestic, coastwise, intercoastal, and trades with our noncontiguous States and territories. I appear today in support of S. 1858. By way of background, it should be noted that Sea-Land Service, Inc., presently operates 16 vessels, 15 of which are trailerships. We have in service for our vessels, in excess of 4,000 containers, which may be translated to a cargo capacity in excess of 100,000 tons. We presently work out of 23 terminals, ranging from New York to Florida, to Puerto Rico, the gulf coast, the west coast of the United States, and to the terminals at Seattle, Anchorage, and Kodiak. We presently serve approximately 20 ports, and in excess of 37,500 shippers. In addition to the vessels which we now have in service, we expect to have, within the next 18 months, 11 additional vessels in operation, which will more than double our cargo capacity. Thus, we at SeaLand feel when we speak in support of this legislation, we speak with some authority. Mr. Chairman, I became associated with the shipping industry in 1955. Almost immediately after my affiliation with the industry, I began to hear cries that the domestic shipping industry was in dire straits. These cries were true then, and to some extent are true today, although the voice is perhaps more faint because since that date several companies have departed from the trade. I will not bore the committee with the statistics of what the domestic trade was, since these figures are already known to the committee. I will merely refer, as a matter of incorporation by reference, to the committee print of this subcommittee on August 29, 1960, dealing with the decline of the coastwise and intercoastal trade. In that report it will show that in 1939, there were 143 privately owned dry cargo vessels in the domestic trade. Based upon Maritime Administration figures, as of March 31, 1965, today there are but 25 dry cargo vessels in this trade, of which 22 are common carriers. However, of this 22, 17 basically are industrial carriers and common carriers really in only one direction. In 1939, there were 235 pri vately owned vessels in the dry cargo coastwise segment; today there are 18, but only 4 of these are common carriers. I will also point out to you, although it is difficult for me to know precisely, that there have been at least 13 governmental studies, over the past 10 years, of what is wrong with the domestic shipping industry. These studies have resulted in not one single constructive suggestion. Legislation was introduced in the last session of Congress (S.1773 and S. 1774) which, unfortunately, apparently was too controversial for final activity. These bills would have helped. S. 1858 will help. Mr. Chairman, I come here today, not asking for construction subsidy, not asking for any operating subsidy, but merely that this bill, which is already in law for one segment of our shipping industry, be enacted into law for the balance of the industry. This bill, from our viewpoint, will represent the greatest single achievement in promoting the domestic merchant marine since the passage of the Merchant Marine Act of 1936, which, of itself, has been of questionable assistance. I will tell you, Mr. Chairman, and I do so with full knowledge that it is part of the record of this hearing, that if this bill is enacted, my company is prepared to enter into contracts with the Secretary of Commerce, obligating us to construct in excess of $100 million worth of new vessels, in American shipyards, all of which will be privately financed: and, Mr. Chairman, when we commit to $100 million worth of new vessels, keep in mind that this is, in fact, a commitment of at least $200 million because of the complementary construction that will be necessary, such as containers, cargo vans, chassis, and other related physical equipment. In appearing in support of this bill, we do not wish to leave the impression that this bill creates a panacea, but we do feel it is a great step forward. We do not feel that the domestic merchant marine is by any means beyond hope or is even a dying industry. We do not feel that the hope of this industry rests with subsidies. We do feel that where companies involved are willing to exercise initiative and imagination and are willing to seek new remedies for old ills, that the domestic merchant marine, a vital segment of our national transportation system, can be rehabilitated. We do suggest, in connection with this bill, one amendment which would allow deposits from January 1 of the year the bill becomes law. We trust this bill will be enacted in 1965, and thus, deposits could be made of revenues earned commencing January 1, 1965. suggest this only because it will get the program started 1 year sooner. Therefore, we suggest that a new section be added to the bill, which would read: We SEC. 10. EFFECTIVE DATE.-For purposes of this legislation, deposits in the Capital Reserve Fund, may be made from revenue earned, from January 1 of the date of the year of enactment. In closing, I wish to say I appreciate the opportunity of appearing before this subcommittee today, and I will be happy to answer any questions that you may have. Senator BARTLETT. Thank you, Mr. McLean. I will admit that you startled me when you tell the committee that if this piece of paper, S. 1858, is translated into law, that your company is prepared to build $100 million worth of new vessels. That would be the largest single building order in quite some time, would it not? Mr. McLEAN. As far as I know, it would, yes, sir. You know, there is nothing wrong with the domestic shipping industry that a little bit of help won't cure, technological energy, work, finance. We are now opening terminals or building and constructing terminals which involve a lot of money just for the port facilities alone in Boston, Philadelphia, Baltimore, Charleston, Jacksonville, Mobile, New Orleans, Houston; three in Puerto Rico, San Juan, Ponce, and Mayaguez; Oakland, Long Beach, Kodiak, Alaska, and we believe in this industry. We know that the commerce this year will move provided you put the system and economics in it to make it move and it takes money to do all of this. And when you are operating in industry that has a cloud over it insofar as the public financial community is concerned, there is no amount of selling that you can do that will remove that cloud and the only thing that you can cure it with is have some earnest money to put down on new buildings and the financial community will say, well if these folks are willing to put 30 percent down, they must believe in it, we will go the rest of the way. Now this bill would provide us with no relief insofar as taxes are concerned over the long pull, it would only relieve us of having to pay taxes immediately, which tax money could be put into new construction and then deferred for maybe 5, 10, 15 years. I don't know how long it will be deferred, but no money can come out of this company and go into the pockets of the stockholders without the same amount of tax being paid, as is paid today. So it is not a question of whether the Government is going to lose any income and it may lose some temporarily, but should the venture be successful, and it is successful, we are pretty proud of what we have done. We are successful to a degree, and we think maybe in terms of shipping we are successful to a pretty large degree. Nobody gets hurt. If we build $100 million worth of new construction of ships, the steel industry benefits, the shipyards benefit, labor benefits, the pipefitters benefit, it takes insurance to insure them, it takes a big manning scale to man them, it takes food to feed them, and by the time the ships get into operation the Government is getting as much money back through payroll deductions of withholding taxes, if nothing else, that would be offset by any tax deferment, and the way the industry is going unless something is done constructively to build it, the Government will never get any taxes out of what may be a real benefit so far as tax revenues are concerned to the Government. Senator BARTLETT. You said this bill wouldn't be a panacea but would be helpful. Would it be helpful to you, Sea-Land Co. similarly situated in respects other than those relating to tax deferment? Mr. MCLEAN. It would be helpful for us in relation to building. If we build these new ships, they are going to be large, fast ships. They will be the lead ships for the development of other areas. It takes a lot of cargo to fill 30,000-, 35,000-ton, new cargo ships. It means that once you put that ship in the water, you will then feed that ship from all of the areas not now served by the domestic shipper. Senator BARTLETT. Your ability to get that ship into construction and into operation is furthered, in your opinoin by this bill? Mr. McLEAN. Yes, sir. Senator BARTLETT. On account of the tax provisions only or for other reasons too? Mr. McLEAN. The tax provision is the key reason, because it takes money to build these ships. You can't finance them without it. Senator BARTLETT. You mentioned 30,000 ton, what will that cost on today's market? Mr. McLEAN. About $25 million the way we build. Senator BARTLETT. Does Sea-Land operate from the Atlantic to the Pacific coast and the other way around at this time? Mr. McLEAN. We operate from all of the Atlantic coast to practically all of the Pacific coast, including as far north as Anchorage, Alsaka. Senator BARTLETT. That is direct service? Mr. McLEAN. Direct service; yes, sir. Senator BARTLETT. You said Sea-Land has 16 ships, 15 of them being trailer ships. What is the other one? Mr. McLEAN. The other one is a converted ship that we converted to carry automobiles. Senator BARTLETT. Likewise, you said that the 1936 act has been of questionable assistance to the domestic merchant marine. Has it been helpful to you as an operator of this one company, in any particular way? Mr. MCLEAN. Not that I know of, maybe the broad policy of the promotion of shipping has been indirectly or intangibly helpful, but insofar as any benefits from the Merchant Marine Act of 1936, other than the protection of the coast wise routes, I don't know of any. Senator BARTLETT. You haven't had any dollar benefits, direct or indirect, so far as you are aware? Mr. McLEAN. No, sir. But, Mr. Chairman, we are not looking for any dollar benefits as such directly. We would like this indirect postponement of dollars; we would like to put it into new building; we would be paying in 1965 and put it into new building in 1966. As far as subsidy, maybe we are crazy, I don't know, but we are not looking for that. Senator BARTLETT. You are not asking for it at any rate? Mr. MCLEAN. We are not asking for it. Senator BARTLETT. What other companies, if you happen to know, give coast to coast service? Mr. MCLEAN. Well, there are a couple of captive companies; for example, Calmar, which is a subsidiary of Bethlehem Steel. They provide a service from Baltimore to the west coast. Senator BARTLETT. Common carrier service? Mr. McLEAN. Little common carrier, but mostly what would be considered private carriers. They are owned by a steel company. They provide a good service. Senator BARTLETT. What other company? Mr. MCLEAN. Weyerhaeuser Lumber Co., which provides a service bringing their lumber and plywood eastbound from the west coast, and they take some little bit of general cargo back. Senator BARTLETT. Yours is the only company then carrying general cargo, regularly? Mr. MCLEAN. Regularly: yes, sir. Senator BARTLETT. Mr. Foster? Mr. FOSTER. Mr. McLean, what is your understanding of the tax effect of the bill? You mentioned that it is tax deferment, and as I understand, you believe that this is not tax forgiveness, but strictly tax |