3. "In many (developing countries) the trends of nationalism are leading to dominant government ownership of the major mining properties, resulting in reduced profitability of foreign-owned enterprises, more value added processing under governmental control and the exclusive marketing of output by a governmental agency."

4. "The short and mid-term effects of the (energy) crisis primarily result in modest increases in direct costs, but greater increases will follow in indirect costs of required materials, the production of which consume energy."

Escalating capital costs, e.g. equipment costs, add to economic risks. The result is the profitability of many projects is eroded by such unanticipated burdens as the capitalization of interest payments in addition to unanticipated cost overruns. Account of this problem should be taken, when evaluating the equity and reasonableness of governmental political risk insurance or guarantee provisions. Companies engaged in deep seabed mining would not be immune in spite of the great difference in the operations.

A few recent illustrations make the point. When sponsors of the Tenke-Fungurume copper-cobalt project in Shaba province, Zaire, were negotiating Eurodollar financing in 1974, total cost estimates for bringing the mine on stream by 1978 were about $417 million. By March 1975, after $110 million had actually been spent, estimates of capital expenditure had climbed to $660 million. In 1976, the projected cost was $800 million. By January 1977, by which time a total of $230 million had been spent, all further development was suspended. The lending institutions were reluctant to undertake further commitments to disburse funds. Such financial disasters on land based projects could be repeated. They clearly discourage investment in similar projects. The story adds to the importance of obtaining such minerals from such alternative sources as deep seabed deposits.

There are other examples of vastly increased costs for projects that managed to reach commercial production. Let us examine the case of the Cuajone copper mine in Peru, which began limited production last year. The 1969 estimate of cost, when the company signed an agreement with the government, was $350 million (for mine and smelter expansion). By November 1973 the capital cost estimate had risen to $550 million. By the end of 1974 the capital cost estimate was $620 million. The figure was $656 million in November 1975. The final Cuajone financing totaled $726 million. Already burdened by a much less attractive Discounted Cash Flow than when work began, the private corporation's owners must also worry lest the government of Peru subject the mine to creeping expropriation at some future date. In such cases of escalating costs, tax rates and depreciation allowances under present laws add to the companies' woes for they do not take the effects of inflation into account. Commercial banks, however, do: the investment companies pay a floating rate of interest which is set at a fixed premium above some base interest rate that moves somewhat in line with inflation.

Such experience indicates that a political risk guarantee to the extent provided for in the proposed bill may not be adequate. It certainly need not be costly to the U.S. government since the administration will in effect set the level of potential loss to the investor, if any, in the treaty terms that it agrees to.

This trend discourages private investment in minerals projects, especially when price outlooks are low, and reenforces the need for the source diversification, insurance and guarantees by the government of net importing, developed countries to assure adequate long-term supply against otherwise uninsurable political risks. 5. In reference to the wisdom of proceeding with a U.S. law that can be extended internationally rather than to wait seemingly without end for the signing of a LOS treaty including a regime for deep seabed mining, I can only reiterate a still valid quotation from my 1974 testimony that recent history bears out: a great power loses the respect of other nations if it does not move forward unilaterally to protect its own interests. Neglect of such interests, even if motivated by the loftiest of concerns about international brotherhood and enrichment of the law of nations, is viewed as a manifestation of weakness, which other countries will exploit.' 6. After reading all the available major studies on the subject of potential commodity cartels, I concluded in my testimony on April 23, 1977, that "the authors of many recent studies are more concerned about supply disruptions and/or high prices in a number of minerals found in deep seabed nodules than is suggested by the general conclusion of the National Commission (on Supply and Shortages) or what seems to be the common view of allayed concern *** All of these studies ranked high in terms of criticality minerals found in manganese nodules." Review of the most current literature strengthens this finding.

7. In reference to the argument that if the United States developed seabed minerals, we will threaten those nations whose economies are based on the export of land-based minerals, I provided comments in a letter to Senator Metcalf, dated

March 25, 1974. I wrote: "* I find it difficult to understand the logic (of those accepting this argument) We do not damage the interests of many developing nations by increasing the supply of key minerals, (when) the demand for (them) will grow rapidly during the next few decades."

Since this testimony, the World Bank has decided to embark on an extensive program of loans to the mining industry of developing countries. That should satisfy the concerns of those who still fear that the interests of less-developed, mineral producing nations are being neglected.

In a report dated May 4, 1977, by the staff to the President of the World Bank, which was subsequently accepted unanimously by the Governors of the Bank, it is proposed to increase the lending by the World Bank and IDA in the minerals sector as a whole to $750-$800 a year by 1980. The amount would exceed the previously planned program for that year by $600 million. Also, the International Finance Corporation of the World Bank has at present under active consideration a number of projects in least developed countries. The Bank believes that the corporation should have no problem in providing $50-$75 million annually over the next five years from its own resources. It is also proposed to increase the lending in this sector by the Inter-American Development Bank and Asian Development Bank to $400-$500 a year by fiscal year 1980 for the two regional banks together.

"* programs on this scale are capable of supporting a substantial proportion of the investment projects likely to come forward by 1980: $4-$4.5 billion by IBRD/ IDA, $2.3 billion by IADB and ADB together and $500 million by the IFC for a total of $6.5-$8 billion. If they materialize, this support would be for minerals projects in LDC's and not for deep seabed mining, for the World Bank is turning more towards assisting the least advantaged of nations."

Since LDC's with mineral resources are to receive more concessionary and other loans in the minerals sector, the argument that U.S. development of deep seabed minerals would threaten their economic outlook is even less tenable than it was a year ago, taking account of projected demand for minerals. It should be noted that internal reports of the World Bank indicate a preference for making loans to development banks and corporations of governments not private ventures. Clearly, U.S. taxpayers will be called upon to provide a large percentage of the funds through the federal budget. This should be taken into account in evaluating the equity of the political risk provisions of the proposed legislation.

Next, I would like to address several economic issues that I did not address or fully develop in my earlier testimony.

An important test of the adequacy of any U.S. legislation to induce large investments by U.S. mining companies and supporting private lending institutions in deep seabed mining projects is the removal or negative of major financial disincentives not borne by other industries. It manifestly would be counterproductive for the U.S. Congress to pass a law establishing a regime designed to permit U.S. mining companies to move forward on high risk, nodules projects but with such limited incentives or even disincentives to private investment that major projects could not proceed. Such action would weaken our negotiating hand at future LOS conferences when we attempt to insure opportunities for private contractors to counteract or balance the potential powers of the international authority that are sought by the Group of 77 Less Developed Countries.

Recently, the United States government has been taking into account with greater realism the need for governmental guarantees and insurance to encourage direct investments outside of the United States, especially in lower income nations. I call your attention to recent House subcommittee hearings on legislation to use insurance of the Overseas Private Investment Corporation (OPIC) as more of a tool to help promote mining and energy projects abroad partly to help expand and diversify world supplies, and spur ecomonic development. It also appears that Congress will delete earlier requirements that OPIC phase out its insurance of currency and expropriation risks by 1979 and its war coverage a year later. As you know, OPIC primarily insures U.S. investors in about 80 developing countries against such political risks as expropriation, war and currency nonconvertibility. The acting president of OPIC, Rutherford Poats, is reported in the Journal of Commerce as having testifed before a Congressional subcommittee that OPIC is considering modifying its underwriting policies to improve its insurance services for the mining industry. He said OPIC hopes to finance both the pre-investment and subsequent stages of minerals projects. But OPIC is not a provider of insurance to projects under international waters.

Previous testimony probably pointed out that the 90 percent compensation entitlement in the proposed Deep Seabed Minerals Resources Act is in accordance with the political risk insurance standard of the Overseas Private Investment Corporation (OPIC) for investments in land-based resources. After recent conversations with

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OPIC officials and Congressional sources, my reading of the provisions of the bill indicate that they are less generous, when full consideration is given to evolving OPIC insurance and guarantee standards. Of course, I am taking into account compensation premiums to be paid by companies into the Deep Seabed Mining Fund. OPIC has asked Congress to cover 100 percent (rather than 90 percent) of loans from institutional sources against political risks of expropriation, war and currency inconvertability. This is a risk transfer device applicable to large, contingency situations covered by an insurance company that is provided for a premium. I understand this proposed change has already been reported out favorably by a House subcommittee. In addition, OPIC has a financing program of guarantees which apply only to loans, e.g., loans from insurance companies, pension funds and banks. The guarantee covers 100 percent of the institutional loans. It has been granted in the case of large land-based mining projects, e.g., $48 million for a project in Indonesia.

The types of uninsurable risks that must be faced by a potential investor in deep seabed mining would be far broader than conventional investment risks, especially if processing is accomplished in another country. The most disturbing of these risks is the establishment of an international authority by treaty that would, according to the terms of the treaty or by subsequent action by the authority, result in the exercise by the authority of the power to deny the profitability of a private operation, limit its duration, permissable level of production or its market access, or require the transfer of private technology without adequate compensation. You may recall the "serious points of substantive difficulty" that representatives of the United States Government stated that they have with the latest 'composite' text prepared by Chairman of the First Committee, Paul Engo. This is reported in the "Delegation Report of the Sixth Session of the Third United Nations Conference on the Law of the Sea, May 23-July 15, 1977.” Since no a priori assurance can be given by the U.S. government to private companies or banks as to the content of a future international treaty that might be accepted or the power to be granted to a Seabed Authority, investors have to place a high probability on the prospect that many difficulties will remain unresolved or many more concessions will have to be made by U.S. negotiators if a treaty is finally to be agreed to. This means that seabed mining investments will only proceed if protection against potential losses due to unique political risks is assured before large financial commitments are made. I know that you have received competent testimony from bankers and insurance executives on the proposed "compensation" provisions of this bill. But to assure myself that there is a genuine need for special incentives and protection for participating U.S. mining companies, I made a non-random sample of the views of international banker friends. My findings will not startle you. Without the provisions for adequate government insurance, no deep seabed mining project could be financed and stand on its own. It's impossible and even pointless to try to estimate interest rates in this case: no rates would be high enough because of the risks related to the uncertain provisions of a further international treaty or treaties, or the inforeseeable decisions of an international authority that operates on the basis of one-nation, one-vote. In theory, a major oil company could borrow the required money on the strength of its general balance sheet, but this would be a high risk decision that would be extremely difficult for the Board of Directors of a public corporation to make, particularly when alternative investment needs are taken into account.

The major oil companies, with a developing capability in deep seabed mining, face horrendous capital expenditure requirements in the energy field.

While oil companies historically had financed 85 percent of their capital spending programs with internally generated funds, leaving 15 percent to be financed by external capital markets, this situation has changed. By 1975 the industry was financing only about 67 percent of its capital needs internally. The percentage will probably decline further because of tax changes and other government-imposed restrictions on the ability of the oil industry to internally generate funds.

The tremendous concurrent demands for capital expenditures to meet energy demands-for conservation, conversion, production, etc.-will make the long-term debt market tight for firms with lower credit standings than oil companies and companies in energy-related fields, e.g., railroads to transport coal and utility companies. This category of firms that will have added problems in raising long-term, external capital includes mining corporations.

As I read the bill in detail in an attempt to estimate the many financial burdens placed on U.S. companies that would presumably be its beneficiaries, I am struck by their number and their open-ended nature. There are license and permit fees; costs to respond to departmental and public comments; costs of reacting to environmental impact studies and rules; costs of responding to antitrust reviews; minimum expenditures for exploration; added costs of using U.S. flag ships, processing on U.S.

territory and possible sales to the U.S. of processed minerals (unless exempt by the Secretary), premium payments to a Deep Sea Mining Fund and contributions to a special fund to be used to make the U.S. contribution to an international regime that is established under a future international agreement. In a few cases there are guidelines, but in most cases there are no limits to the amounts that may be imposed upon the company. Has anyone made these estimates?

The total burden on a participating company will clearly have a significant, adverse impact on any Discounted Cash Flow (DCF) and profitability calculations, if they can reasonably be made, in view not only of these uncertainties, but also of possible interpretations of present U.S. Federal tax laws made by the IRS and of changes that may be made in these laws in the next few years.

A representative of the Treasury Department in testimony at Senate Hearings on ocean mining attempted to summarize briefly how present tax laws would theoretically operate with respect to ocean mining. This testimony may have left the incorrect impression that in practical economic terms the tax treatment for ocean mining would be significantly different than for domestic mining if S. 2053 were enacted. The tax picture for ocean mining is largely the same as for domestic mining when the economic realities of ocean mining and the effect of enactment of S. 2053 are taken into account. Further, any possible tax discrimination against ocean mining would readily be remedied by the inclusion in S. 2053 of a provision such as section 107 of H.R. 3350 which assures domestic tax treatment of ocean mining. A comparable provision is found in Sec. 10, S. 2085.

On the one hand the Administration interprets U.S. tax law to mean that a U.S. individual or corporation engaged in deep seabed mining is subjected to U.S. taxes but on the other hand is denied a number of benefits enjoyed by a mining activity on U.S. territory. To restate a few of the points made in this testimony: according to present U.S. tax laws exploration expenses are not to be deducted but must be capitalized and recovered through depletion, accelerated depreciation would be limited, investment tax credit would not be available, percentage depletion "if available at all" would be at a lower rate than for domestic deposits. The Administration offers policy remedies in principle, which are really unnecessary. But even if they are granted after a laborious process involving additional Congressional Committees, they would still fall far short of non-discrimination.

INVESTMENT TAX CREDITS AND ASSET DEPRECIATION RANGE ALLOWANCES

According to the Treasury Department, assets used in ocean mining would be "used predominantly outside of the United States," and would therefore not qualify for investment tax credits and certain depreciation deductions. As a practical matter, ocean mining would be eligible for these tax benefits. I understand that provisions in the current tax laws would qualify the assets of presently contemplated ocean mining ventures for investment tax credits and the asset depreciation range (ADR) system. In essence, these provisions would provide for domestic tax treatment of ocean mining vessels documented in the United States, and for domestic tax treatment of any asset (other than a vessel or aircraft) used in international waters located in the northern portion of the Western Hemisphere. All presently contemplated commercial recovery operations which would be eligible for a permit issued pursuant to S. 2053, if enacted, would fall within the ambit of these provisions and would receive domestic tax treatment.

The Internal Revenue Code confers eligibility for investment tax credits and ADR on "any vessel documented under the laws of the United States which is operated in the foreign or domestic commerce of the United States All ocean mining vessels operating under the authority of a permit issued pursuant to section 102(c)(2) of S. 2053 must, by the terms of the restrictions on a permit imposed by that section, fall with the vessel provision quoted above. Because vessels will account for one-third of project capital costs, their eligibility for investment credits and ADR has substantial tax consequences.

The Internal Revenue Code also provides for the investment tax credit and ADR eligibility of:

Any property (other than a vessel or an aircraft) of a United States person which is used in international or territorial waters within the northern portion of the Western Hemisphere for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or deposits under such waters.

The term "northern portion of the Western Hemisphere" as used above means:

1 Testimony of Helen B. Junz, Deputy Assistant Secretary of the Treasury before the Senate Committeee on Commerce, Science, and Transportation; and the Senate Committee on Energy and Natural Resources, Subcommittee on Public Lands and National Resources, September 19, 1977 (hereafter "Treasury Department Statement").

The area lying west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but not including any foreign country which is a country of South America.

Since only United States citizens are eligible for S. 2053 permits and presently contemplated mine sites are within the northern portion of the Western Hemisphere, the entire water-borne portion of an ocean mining investment would receive a full investment tax credit and ADR allowance. The balance of the capital investment would be for assets physically located in the United States; without question such assets would receive domestic tax treatment.

DEPLETION ALLOWANCE ELIGIBILITY

The Treasury Department testimony states: "Because there are no clear ownership rights to deposits in the deep seabed, it is not likely that under present laws deep seabed mining would have the requisite economic interest to qualify for depletion allowances."

Treasury's opinion relates only to present law and does not take into account the impact of S. 2053, if passed. Treasury's testimony might be misunderstood to mean that ocean miners will not qualify for depletion allowances or that only the owner of minerals in place qualifies for depletion deductions. Ownership of a deposit in place is not a prerequisite to eligibility for a depletion allowance. Only an economic interest in the deposit is required.

Ocean miners operating under permits issued pursuant to S. 2053 would possess the legally secured right to mine and remove manganese nodules and to reduce them to possession and ownership. This legal right to mine the deep sea coupled with an investment of $500-700 million in a mine site and associated sea and land based assets creates a real economic interest in the nodule deposits covered by a permit. Such an economic interest would qualify ocean miners for depletion allowances. Whether an interest is depletable depends more on investment economics than on legal technicalities. Mineral lessees are entitled to depletion allowances when they possessed the right to extract and to market minerals, though they did not own the minerals in place.

A depletable interest must meet the following requirements: (1) The taxpayer acquires an "interest" in the deposit by "investment"; (2) he secures the right to income from the deposit by legal relationship; and (3) he looks solely to the income from extraction for a return on his investment.

As noted above, the type of "interest" to be acquired by investment is economic in nature and not legal in nature. Ocean miners, who will bear the complete capital costs of a mine site, make the kind of investment that is essential to all mining. The full capital investment required for mining consistently has been held to confer an economic interest in the deposit in place. Also joint venturers who share development investment both may claim depletion deductions, though neither own the minerals in place.

Permits issued under S. 2053, if enacted, would confer the right to engage in commercial recovery. These permits would constitute the relationship by which income from a mine site would be secured. The fact that permits rather than leases are involved is of no importance. The allowance for depletion is not made dependent upon the particular legal form of the taxpayers interest in the property to be depleted. Permits which carry the right to exploit natural resources many times have been held sufficient to secure depletion allowances.

Adequate protection of an income interest must allow a miner sufficient opportunity to remove a substantial amount of the mineral deposit to which he looks for a return on his investment. Ocean mining permits which are exclusive against all U.S. citizens would allow substantial mining, and thus adequately secure the right to mine manganese nodules.

The I.R.S. appears to take the position that an investment in the legal right to mine is required before a depletable interest is created.

The requirement of an investment in a legal right to mine rather than in an economic interest in the minerals in place has already been expressely rejected by the Supreme Court. The tax court has twice refused to predicate depletion allowances on an investment in a legal interest and has instead relied on the fact that an investment created an economic interest in minerals in place. A depletable interest has been found solely because the use of land for operations relating to river dredging (an investment of land) created an economic interest in the dredging. It has been held that the investment created an interest in the minerals in place without relying on an investment in a legal instrument.

Even if an investment in a legal instrument is necessary, an ocean miner makes an investment when he provides legal consideration for a permit; i.e. complying