Mr. Moor. Yes, sir. Would you like to ask me in what terms specifically?

Senator BREWSTER. In tonnage, I presume, or ships.

Mr. Moor. In terms of numbers of ships, I believe that we still have, or at least did have in the last maritime statistics I saw, the greatest number of ships. In terms of active ships, which is the difference between total ships and the reserve fleet ships, it seems to me that we were probably about eighth or ninth, to the best of my knowledge. And I do have it specifically here, if you would care for me to put it in the record.

Senator BREWSTER. You might get the exact information for the record.

Mr. Moor. Yes, sir.

(The information referred to follows:)

U.S. POSITION IN THE WORLD-MERCHANT MARINE

For dry cargo freighters of 1,000 gross tons or over the U.S. Merchant Marine stood first in the world as of June 30, 1965 according to figures published by the Maritime Administration. Considering only the privately owned part of the fleet, the U.S. stood second in deadweight tonnage, a good measure of the carrying capability of the fleet, and seventh in numbers of ships. The specific data are shown below:

1 Source material limited and unreliable.

Source: Marad Report No. MA R-560-20, Oct. 26, 1965.

Senator BREWSTER. In terms of shipbuilding, do you know where the United States now stands?

Mr. Moor. I do not know exactly, sir. I would like to correct this for the record, but I believe it is about 12th, to the best of my knowledge.

Senator BREWSTER. Would the generalization be correct that U.S. merchant marine is falling behind, is becoming obsolescent, if not obsolete?

Mr. Moor. Well, there is no question but that the U.S. merchant marine fleet is aging. The better vessels of the U.S. merchant marine fleet are I think the best in the world. The total quantity is probably comparable with the total quantity. Without evading the tenor of your question, sir, I would like to make the point that Secretary McNamara feels very strongly that this course of action he is embarking upon is the type of action or the course of action which will stimulate and help the effective national growth of the U.S. merchant marine.

So I believe his strong statement as to the dependency of the Defense Department in its posture on a strong merchant marine and his desires to secure his ocean freight service by competitive price competition are perfectly consistent.

Senator BREWSTER. Should the United States become involved in two situations, one in South Vietnam and one elsewhere, which is certainly not beyond the realm of possibility, would our existing merchant marine fleet be sufficient for the needs of the military?

Mr. Moor. I have testified in classified hearings, Mr. Chairman, where we have compared the total availability of sealift that we consider in our plannings, against our requirements under the contingency requirements, and while I can't elaborate upon that discussion here, my answer would be yes.

Senator BREWSTER. I presume that you would expect to cut expenses by your competitive procedures. What saving would you expect to realize at the present rate of sealift?

Mr. Moor. Well, I think the best way I can answer that is by saying that where we have-and in my statement I mentioned since 1961 some $4 billion of defense annual procurement has been shifted from noncompetitive, sole source procurement to price competition-in that area we have secured in excess of a 25-percent reduction. In the experience we have had in the last year with price competition, in the North Atlantic, the rate differential from existing shipping contract rates has approximated 28 percent.

We would expect, therefore, on the basis of the available data to us, as we are looking at it, that we would reduce our total overall costs of shipping by something comparable to that which has been our experience in other areas.

Senator BREWSTER. Have you analyzed the financial statements of U.S.-flag berth lines to see what effect on their earnings a 25-percent cut in MSTS cargo would have?

Mr. Mooт. Yes, sir, we have to the extent that they have become available to us, we have analyzed the financial statements of at least a fair share of the U.S. shipping industry, 12 to 15 companies.

Senator BREWSTER. Both subsidized and unsubsidized carriers?
Mr. Moor. Both subsidized and unsubsidized.

Senator BREWSTER. What do you believe would be the effect of a substantial cut in the rates on the earnings of the companies?

Mr. Moor. Our position, or our belief would be somewhat as follows: Current rates are the same for all members of the industry, whether they are very cost effective or whether they are marginal operators. We believe, and the Secretary has made this very clear, that industries doing business with the Department of Defense should make a profit. It is good for the Department of Defense, as well as for the country. It assures prompt delivery and quality performance. On the other hand, the Department of Defense does not believe, and the Secretary has so stated, that all members of all industries doing business with the Department of Defense, despite their range of effectiveness in operating at low cost, should be making a profit.

He therefore believes that the defense business should encourage the more effective operators, and by encouraging the more effective operators, allow them to expand their business to become more effective in the commercial areas, particularly in this ocean freight service.

We are and have been examining many proposals both from subsidized and nonsubsidized operators in the Department of Defense whereby the proposals that are submitted for new, imaginative, creative ocean cargo lifting offer both the Department of Defense and the operators, as well as of course the public, distinct advantages, lower cost to defense, more effective lift, better use of national resources and of course the combination resulting in the public taxpayer interest. We believe that what we are proposing will result in a more profitable industry and in a more effective industry to the advantage of all parties concerned.

Senator BREWSTER. If we accept the proposition that the American merchant marine is necessary to U.S. security, and we subsidize it, which we do, because this is the only way under present economic conditions we can keep it going, then if we cut the rate or tariff that the MSTS pays, will not the United States have to pick up the tab out of the other pocket, on an increased subsidy for the subsidized lines? Mr. Moor. Again I am a little out of my depth, Mr. Chairman, but I believe you will find the operating differential subsidy is not based on total revenue. It is based on cost differentials of wages, maintenance, insurance, et cetera. So I would not expect the absolute amount of subsidy would be affected by what we are proposing.

Senator BREWSTER. Will not this new policy have an adverse affect on the nonsubsidized lines, insofar as their income will certainly be cut and they will not pick up any subsidy to help them, as the subsidized lines do?

Mr. Moor. In a certain respect, nonsubsidized lines have a distinct advantage over the subsidized lines. Here I am talking about berth line service. They have much greater flexibility in changing trade routes. We would expect that what we are doing here might result in aggressive management among the nonsubsidized lines seeking undertonnage trade routes, rather than staying with overtonnage trade routes, which they have the absolute right to do, of course.

I am sure you also appreciate that the 50 percent of our lift is without reference to any operating subsidy whatsoever. All of our contract lift does not include any operating differential subsidy. So that the combination of flexibility of nonsubsidized lines, the new techniques that are available to the nonsubsidized lines, and, as I mentioned before, we are receiving proposals from such lines, as well as the contract carriage available to such lines, leads us to believe that, while on the surface you have to accept the fact that a nonsubsidized line is in a less competitive position than a subsidized line, we would expect it would not necessarily react to their financial detriment.

Senator BREWSTER. Sir, on the top of page 6 of your statement, you refer to a new steamship line. Will you tell us what you refer to? Is this the Sapphire Line?

Mr. Moor. This is the Sapphire line, sir.

Senator BREWSTER. Have you been into their financial statement? Is it true they lost about $500,000 a year in their first 6 months of operation?

Mr. Moor. I have not personally examined their financial statement. It is my understanding, as a result of my specific question, that they are making a profit these days.

Senator BREWSTER. Is this one particular line being given special or favored treatment by MSTS?

Mr. Moor. If by that you mean are we giving them cargo preference, the answer is decidedly "Yes," and we would so intend, under our proposal, to provide cargo preference to the bidder who offers the best overall price, with other factors being considered, to the Gov

ernment.

Senator BREWSTER. Then is it very surprising to you that you would get a lower rate quoted, if you give one carrier its pick of the cargo and allow it to serve only a few ports?

Mr. Moor. Well, I think perhaps one of the basic intents in what we are proposing, Mr. Chairman, is to adjust the allocation of defense business, so it does become something that can be bid for on a cost compensatory basis by those carriers on those trade routes who are best capable of handling that business. So we would expect the cargo preference would follow as the advantage the more effective operator would naturally receive.

This is consistent with our approach, sir.

Senator BREWSTER. If you establish one carrier as the most-favored carrier, then don't you necessarily weaken the competitive and economic and maritime strength of other U.S. shipping lines?

Mr. Moor. We think not, sir; because we would not expect that we would have a uniform rate. And, again, I am prejudging the development of the procedures, but it is not my belief that we would come out with a uniform rate. We would come out with a level of rates which means that, on a trade route, the carrier who offered the most favorable rate, all other factors being equal, would get that share of business that he could use or he could handle in the frequency of sailing on that

route.

But that is by no means to say that all our defense cargo would move by one carrier. This is manifestly impossible. So we would then move to the carrier who had the next most favorable rate, assuming they would both be compensatory. It is only at the far end of the spectrum, Mr. Chairman, that the military cargo would get thin, insofar as the marginal operators are concerned. And this is the intent of the Secretary.

Senator BREWSTER. I may be badgering you on this general point, but I would like you to address yourself to it again. You see no inconsistency in U.S. policy, where we subsidize our merchant marine industry to the tune of $200 million a year, believing it necessary, and then, in another facet of U.S. policy, we cut the tariff or rate that the military pays to transport cargoes on subsidized lines?

Mr. Moor. No, sir. We don't. I would like and you are not badgering me, by the way, because it is a point we have considered carefully and sincerely. I think you will find with the more expert witnesses that follow me that the basic purpose of both the construction and the operating differential subsidy is to place our U.S. merchant marine in competition, or at least in a competitive status, with foreign merchant marine lift.

What we are talking about in the Defense Department, does not consider foreign competion. You will note I mentioned in my statement that we are not concerned with world conferences which set rates for the mixed foreign and U.S.-flag lift of commerical cargo. We are

talking about the establishment of rates between one customer, the Defense Department, and U.S.-flag shippers.

We do not believe that this is inconsistent with our subsidy program. We do not believe it will affect the amount of the subsidy. We believe it will improve and encourage the U.S. merchant marine to become more competitive in their world movement of commercial cargo.

Senator BREWSTER. Now, sir, let me direct your attention to page 7 of your testimony, where you discuss the proposed subsection F.

You indicate that the continuation of present procedures would deny DOD cargoes to a substantial segment of the American-flag industry. What segment would be denied MSTS business by the passage of this legislation?

Mr. Moor. The wording of subsection F, Mr. Chairman, states that: To the maximum practical extent, U.S.-flag common carrier operators will be used by the Defense Department.

Currently, 50 percent of our lift is by contract carriage. If we went to the maximum practical extent on common carriers, under the wording of this bill, presumably, it would be to deny the 50-percent contract carriage operators the business they now have.

Senator BREWSTER. So the bill would be improved, if the wording were just generally U.S.-flag ships?

Mr. Moor. In this respect, yes, sir.

Senator BREWSTER. In the last paragraph of the same page, you state that operational flexibility would be eliminated. Well, hasn't DOD operated under this system of allocations for all of these last 20 years rather successfully?

Mr. Moor. Well, it is in this very area, sir, that we were discussing the cargo preference given the competitive operator; namely, Sapphire, a few minutes ago. The Department of Defense now has the management flexibility to allocate its cargo in that manner which it deems best in the public interest and in the national defense.

The wording, the mandatory wording, of subsection F means that we would have to take total lift and proportionately divide it up, which to us means there is hardly any stimulation for operators to become more cost effective, when you are assured or guaranteed a certain amount of U.S. defense lift. This is not the case today.

Senator BREWSTER. One final and very general question. Is the establishment and maintenance of a strong and powerful U.S. merchant marine necessary to the maintenance of U.S. power-economic and military—throughout the world?

Mr. Moor. Again, sir, Secretary McNamara has testified that he does not ever see the day where a great deal of defense cargo will not move by sea, which is about as far as I can go without getting into and discussing deployment strategy, or classified matters. There is no question but that Secretary McNamara is on record before this Congress as being very emphatic concerning his dependency upon an adequate merchant marine.

Senator BREWSTER. I do have another line of questioning that I want to go into, but, before I do, I will see if Senator Prouty has anything else.

Senator PROUTY. I have just one question. Mr. Secretary, has the proposed Defense Department policy on competitive bids been dis