STATEMENT OF HAROLD SEIDMAN, BUREAU OF THE BUDGET

Mr. SEIDMAN. I have a brief statement, Mr. Chairman, which I will read with your permission.

Mr. O'TOOLE. All right, you may proceed.

Mr. SEIDMAN. Mr. Chairman and members of the committtee, the President on January 31, 1950, transmitted to the Congress a report of the Bureau of the Budget and his recommendations with respect to the organization and operations of the Panama Canal and the Panama Railroad Company. The report and recommendations were prepared pursuant to House Report No. 1304, Eighty-first Congress, first session, which requested the President "to cause a study to be made of the organizational aspects of all phases of the Panama Canal, including the Panama Railroad, and that his recommendations of suitable changes be furnished to the Congress."

The President's recommendations may be briefly summarized as follows:

1. All of the business operations of the agency known as the Panama Canal, including the operation and maintenance of the waterway, should be transferred to the Panama Railroad Company whose name should be changed to Panama Canal Company.

2. The Panama Canal, under the new name of Canal Zone government, should continue to administer functions which are basically of a governmental nature such as health and sanitation. The Governor, as under present arrangements, would serve in a dual capacity as both the head of the Canal Zone government and president of the Panama Canal Company.

3. The proposed Panama Canal Company should reimburse other Government agencies for goods and services it receives, and be compensated or receive credit for any services it renders to other agencies, including the cost of transiting military and Government vessels through the Canal.

4. The Board of Directors of the proposed Panama Canal Company should be authorized to establish toll rates, subject to the President's approval.

5. Pending accomplishment of the proposed reorganization, immediate steps should be taken to delegate to the Governor of the Panama Canal authority to determine the internal organization of the Panama Canal.

6. Farly consideration should be given to the revocation of Executive Order No. 8232 which placed the Panama Canal under military control.

Considerable progress has already been made in carrying out the President's recommendations. Executive orders have been issued which rescind Executive Order No. 8232, transfer certain business operations of the Panama Canal to the Panama Railroad Company and delegate to the Governor authority to determine the internal organization of the Panama Canal. The Governor has utilized his delegated authority to institute a general reorganization designed to modernize the existing administrative structure of the Panama Canal so that it may meet more efficiently present-day operating conditions and the complexities that have developed in the conduct of the Canal's business. This reorganization will become effective on July 1, 1950.

To accomplish the basic reorganization of the Government's activities on the Isthmus, the President specifically recommended the enactment of legislation to (1) authorize transfer of the function of operating and maintaining the Panama Canal to the Panama Canal Company, as the successor to the Panama Railroad Company; (2) authorize the Company's Board of Directors to establish toll rates, subject to the President's approval; (3) permit the Company to retain and utilize toll revenues; and (4) authorize appropriations to the Company to cover losses which might result from changes in economic conditions. H. R. 8677 fully carries out the President's recommendations. The Commission on Organization of the Executive Branch of the Government recommended that "straight line business activities be incorporated so as to secure greater flexibility in management and simpler accounting, budgeting, and audit methods." By providing for the transfer of the Panama Canal business operations, together with the Canal itself, to the Panama Canal Company, H. R. 8677 is wholly consistent with the objective set by the Commission.

Within recent years it has been increasingly recognized that financial controls generally applicable to Government-type programs, such as civil government, health and sanitation, cannot satisfactorily be employed in the case of programs which are essentially of a business nature. This is reflected by the enactment in 1945 of the Government Corporation Control Act, which provides for new types of controls, such as the business-type budget and commercial-type audit, specially designed to meet the needs of programs of a business character. The grouping together of all business activities in the Panama Canal Company and all governmental activities in the Canal Zone government will insure that each will operate under the appropriate type of controls. The attempt to operate the business activities of the Panama Canal under procedures, accounting methods, and controls devised for nonbusiness programs is a major source of current complexities in financial administration.

The organizational arrangements contemplated by H. R. 8677 have already been approved, in large measure, by the Congress. Public Law 808 (80th Cong.) authorized the Panama Railroad Company to undertake any of the business operations now performed by the Panama Canal, except operation of the Canal itself, and Public Law 223 (81st Cong.) authorized the President to transfer certain or all of such activities to the Corporation. Several transfers have been made pursuant to this authority. The operation of the Canal is certainly no less of a business operation than those activities which the Congress has already authorized the President to transfer to the Corporation. It is revenue producing, expected to be self-sustaining, and requires considerable operating flexibility. The transfer of the Canel to the Corporation, in accordance with the provisions of the present bill, is a logical sequel to the transfers authorized by the earlier enactments. The Panama Canal Company, like the present Panama Railroad Company, would be expected to operate primarily from its revenues and would be authorized to utilize all of its revenues in the conduct of its business. The present practice of paying tolls into miscellaneous receipts is not necessary to provide adequate control over the use of such funds. Adequate control can be secured through the business-type budget, which all corporations must submit annually

to the President and the Congress, and the commercial-type audit by the General Accounting Office. The commercial-type audit will have the added advantage of making available to the Congress and the public for the first time a complete picture of the Government's investment in the Panama Canal enterprise and the results of its operations.

In addition to carrying out the President's recommendations with respect to organization, H. R. 8677 makes a number of important. changes both in the procedures followed in prescribing tolls and in the formula employed in determining toll rates. The act of August 24, 1937, amending the Panama Canal Act, authorizes the President to set Panama Canal tolls at a rate not to exceed $1 per ton for laden ships. Six months' prior notice of an increase is required. H. R. 8677 provides that the Panama Canal Company shall prescribe the toll rates, subject to the President's approval. The Company is required to give 6 months' notice of any proposed changes in rates and to conduct a public hearing on the proposed changes. No ceiling is placed on the rate of tolls which may be levied.

If there is agreement as to the formula for establishing the toll rates and adequate business-type accounts and financial reporting, there is no sound reason for not delegating the rate-making function to the Company's Board of Directors as has been done in the case of other Government corporations such as TVA which set the rates to be charged for their services. Furthermore, if there is an agreed upon formula, it would be inconsistent to place a ceiling on the toll rates. There are two important safeguards provided in the bill. The first is the requirement for a public hearing, and the second for Presidential approval. Since tolls may have an effect on national transportation policy, review and approval of the rate by the President is believed essential. The Congress will, of course, have an opportunity toexamine tolls policy in connection with its review of the business-type budget to be submitted annually by the Company.

Under the existing formula, revenues from tolls, together with profits from the Canal's business operations and miscellaneous civil revenues, are expected to produce an amount sufficient to cover:

1. A 3-percent return on the capital investment in the Panama Canal, including the investment in civil government, health and sanitation facilities;

2. The costs of operating and maintaining the Canal;

3. The net cost of civil government, health, and sanitation, including the cost of school facilities provided for children of military personnel and personnel employed by the military; and

4. The cost of transiting military and Government vessels through the Canal.

Several basic changes are made in this formula by H. R. 8677 considered in connection with Public Law 808. Under the proposed new formula, revenues from tolls, would be expected to cover:

1. Interest at the "going" rate (approximately 2.3 percent at the present time) on the capital investment in the Panama Canal, excluding the amount of any investment in national defense and civil government facilities and extraordinary expenditures or losses incurred through national policy and not related to the Company's operations. There would be offset against the amount of the investment the dividends which have been paid into the Treasury by the

Panama Railroad Company. These amount to approximately $38,000,000;

2. The costs of operating and maintaining the Canal; and

3. Approximately 50 percent of the net costs of civil government, health, and sanitation.

A fair share of the costs, including interest and depreciation, of operating and maintaining the Canal would be allocated to national defense by (1) excluding from the interest base the value of properties "properly allocable to national defense"-that is now provided for by Public Law 808-(2) requiring that the Company be compensated or receive credit for the cost of transiting military and Government vessels through the Canal; and (3) requiring that the Armed Forces pay for any other services such as school facilities. The Company and the Čanal Zone Government would be expected to reimburse the Armed Forces and other Government agencies for any services which are now received without charge.

It is sincerely believed that the enactment of H. R. 8677 is essential to bring about a more logical grouping of the functions now administered by The Panama Canal and the Panama Railroad Company, to provide a sounder basis for determining toll rates and other charges, to facilitate operations, and, in general to promote the more effective administration of the Panama Canal enterprise.

Mr. O'TOOLE. On page 3 of your statement in the first paragraph you say:

The Commission on Organization of the Executive Branch of the Government recommended that "straight-line business activities be incorporated so as to secure greater flexibility in management and simpler accounting, budgeting, and auditing methods."

Will you clarify that?

Mr. SEIDMAN. That, I think, is found in the report on Federal Business Enterprises. I think it is on page 13 under the heading "Defects in the organization of unincorporated business enterprises." This is the report of the Hoover Commission, Mr. Chairman. Do you want me to explain what was meant by that? Mr. THOMPSON. What is the number on that?

Mr. SEIDMAN. This [indicating] is the Report on Federal Business Enterprises. The Commission's reports are unnumbered. The recommendation is Recommendation No. 3. This is a definite recommendation of the Commission:

We recommend that the straight-line business activities be incorporated so as to secure greater flexibility in management and simpler accounting, budgeting, and auditing methods.

Mr. FUGATE. I observe that you make no reference whatsoever in your paper to the sections dealing with the codification.

Mr. SEIDMAN. No; I do not. I think that is covered in a letter which the Director of the Bureau of the Budget sent in response to the request of the committee chairman. In view of the letter from the Director, I felt that it was not necessary for me to comment further on those sections, in my statement.

Mr. FUGATE. It is your view then they are not necessary?

Mr. SEIDMAN. That is correct.

I might point out in connection with the statement that Governor Newcomer made that this act would not become effective for approxi

mately 1 year after its passage, except for one provision. It would take approximately 1 year to accomplish the transfer contemplated by this bill. That would seem to provide adequate time to secure passage of the codification provisions during the next session.

Mr. THOMPSON. If no change is made in the present Panama Canal organization, won't you be able to go into those books and set a reasonable basis for tolls?

Mr. SEIDMAN. I think it would be somewhat difficult because the accounting system of the Panama Canal-and it is provided by law under the Budget and Accounting Act, and provisions of law now applicable to the Panama Canal-is not upon a businesslike basis. They do not keep accounts similar to those that business corporations maintain.

I think the General Accounting Office has indicated it is very difficult to determine expenses, revenues, and costs from the present accounts. That is not in any sense a criticism of the Panama Canal; that is due to the fact they are trying to operate a business under the type of accounting system that is designed for a governmental type operation, which is not revenue producing and not expected to be selfsustaining.

In that connection, I might just quote from the report from the General Accounting Office:

The General Accounting Office has criticised the accounts produced under this hybrid system as, in most cases, falling far short of the kind of factual determination and presentation of revenues, costs and expenses, and net profits or losses, necessary for accurate reporting and as an effective tool for management control.

Mr. THOMPSON. That is the opinion of the General Accounting Office?

Mr. SEIDMAN. That is correct.

Mr. THOMPSON. And the Bureau of the Budget subscribes to that? Mr. SEIDMAN. That is correct.

Mr. ALLEN. On page 6 of your statement, paragraph 1, beginning at the middle of the page, you say:

Under the existing formula, revenues from tolls, together with profits from the Canal's business operations and miscellaneous civil revenues, are expected to produce an amount sufficient to cover—

1. Interest at the "going" rate (approximately 2.3 percent at the present time) on the capital investment in the Panama Canal, excluding the amount of any investment in national defense and civil government facilities. *

I am wondering if you could tell me whether the Canal itself is considered in any part as an investment in national defense, or is the investment in national defense entirely separate from the Canal?

Mr. SEIDMAN. I think, as the Governor pointed out in his statement, fortifications and things of that kind, and military installations, are not in the Canal investment at the present time. There are some facilities in the Canal which might be identified as being there for the purpose of defense which you would not have there if the Canal were operated strictly for commercial purposes. An example of that might be the Mechanical Division, where they maintain plant capacity over and above that required for commercial use.

Now the cost of the additional plant would, in our opinion, be a national-defense expenditure rather than an expenditure required for commercial purposes.