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Another example would be the trans-Isthmian cable, which cost approximately $660,000. The construction of the cable was larger than would have been required for strict commercial use. They laid it over a circuitous route rather than a direct route along the railroad for defense reasons which were not attributable to commercial use. I think it is generally believed that about 50 percent of the cost of the trans-Isthmian cable would properly be allocated to national defense.
Mr. ALLEN. Are those items you have mentioned, such as the cable and the additional plant, included in the total investment that the Governor mentioned of some $535,000,000 ?
Mr. SEIDMAN. The cable is now in the Panama Railroad Company as far as the telephone system is concerned. The excess plant capacity of the Mechanical Division is included in the Canal investment.
Mr. ALLEN. Could you give me an estimate of the percentage of investment in national defense which is involved in that total figure of $535,000,000 ?
Mr. SEIDMAN. I do not think that it would be very great because previous studies indicated that the only feature of the Canal considered to be attributable to national defense was the width of the locks, which was an item of about $5,000,000. I think it was at the request of the Navy Board that the lock width was set at 110 feet rather than 100. There may be other items such as the Mechanical Division, but most of the defense items are not included in the Canal investment. It would not be a substantial figure.
Mr. ALLEN. For practical purposes, the interest at the going rate on the capital investment in the Canal, with or without the exceptions, would be about the same.
Mr. SEIDMAN. No. The investment in hospitals, schools, and civilgovernment facilities are now in the interest base. They will be excluded under the new formula. I do not know exactly what the figure is on that.
Mr. ALLEN. Will they be excluded as an investment in civil-government facilities, or as an investment in national defense ?
Mr. SEIDMAN. They will be excluded as investments in civil-government facilities. The investment base will be for the Panama Canal Company, and the schools and hospitals will be in the new Canal Zone Government, so there would not be any question of their being in the interest base.
Mr. SHELLEY. On page 5 in the last sentence of the second paragraph you say:
The Congress will, of course, have an opportunity to examine the tolls policy in connection with its review of the business type budget to be submitted annually by the company.
Can you elucidate on that a little more; it is more of a possible review of it?
Mr. SEIDMAN. No; it is a going review. That, we believe, is one of the advantages of the new arrangement—that the Panama Canal Company will come in with a business type budget which is more informative and will pertain to a business operation more than the present budget. It is not merely a question of a request for appropriations; or how much they spent last year. It is an excellent statement of financial condition—income and expense, capital expenditures, as distinguished from operating expenses, and so forth.
Congress, in going over that, would be able to determine-are the rates high enough to cover the cost of operation? That would be indicated in the budget statement which would be practically a balance sheet, or, on the other hand, you might say, “Your revenues are far exceeding your cost of operation and you should consider changing your policy with respect to rates."
Also, of course, the Congress may act upon how much should be paid in dividends by the corporation.
Mr. SHELLEY. It is in the review by Congress we are to determine the budget submitted, which will be in advance of the levying of the tolls.
Mr. SEIDMAN. That is right. You would not change the rates from year to year in any event. I think over a period of years, seeing what the income statement was and the expense statement, you could determine from that whether the tolls were too high or too low, or what the reasons were for the toll policy. There may be many reasons why the Congress might have the Canal operate at a loss for a certain period, or at a profit, depending upon the circumstances.
Mr. SHELLEY. In view of the statement of the Governor and the answers that Mr. Seidman gave to Mr. Allen, I get the impression most people minimize the importance of the Canal or the part it plays as a national-defense feature. I would just like to reverse the approach. If the Canal were abandoned or shut down and not operating, would that fact have any impact or effert upon our national defense?
Mr. SEIDMAN. It would have a tremendous effect upon our national defense. There is no question about that. In our view there would be justification for making a capital allocation if the practice were continued of not requiring military vessels and other Government vessels to pay tolls, or have them credited as revenues of the corporation. However, if you do have them pay tolls, or there is a credit for Gov
a ernment and military tolls, then they are assuming not only a part of the cost of operating and maintaining the Canal but part of the expense of the interest on investment, depreciation, and part of the expense of the Canal Zone Government. You are allocating to national defense in accordance with the use of the facilities.
Mr. SHELLEY. Is it not a fact that historically the Canal was first proposed as a national-defense measure!
Mr. SEIDMAN. I think that you could find as many statements on one side as you could on another. I think that it would depend upon whom you were talking to, whether the Military Affairs Committee or the Merchant Marine and Fisheries Committee.
Mr. FUGATE. Mr. Seidman, I find that you wrote a memorandum on April 23, 1947, to Mr. Arnold Miles, and you said this:
The Panama Canal, the Panama Railroad Organization, is a museum of administrative antiquities.
I would like to know if you think by reorganization and administrative changes any remedy has been found.
Mr. SEIDMAN. I think that substantial progress has been made. I think that that statement would not, in any sense, be true today.
Mr. FUGATE. It would not be true today?
Mr. SEIDMAN. No; it would not. I think the reorganization which will
go into effect on July 1, 1950, will take care of at least a substantial part of the problem.
Mr. FUGATE. In 1949, under the direction of the special committee, Mr. Jordan from the GAO made the accounting for us which was issued during the year, and he set up the capital investment in the Panama Canal at $522,956,000. Governor Newcomer said that he considered the capital investment at about $534,000,000, which would be some $12,000,000 more. Do you know why that would be !
? Mr. SEIDMAN. I do not know the specific answer, but there may have been additional investments in Canal facilities since Mr. Jordan made his report. There is one item that I might mention that is not included in the Bureau of the Budget's report. That would be the question of the interest during the construction period.
In 1937 the special committee recommended that that interest should be computed on a simple-interest basis rather than compounded. I think up until now it has been included in the Canal accounts on a compound-interest basis. In our opinion, there is little justification for compound interest during construction. We think that interest during the construction period is a very proper part of the capital cost, but it should be computed on a simple-interest basis. I think that makes the difference between $128,000,000, which is the present figure, and approximately $115,000,000, which interest on construction would be on a simple basis. Mr. Jordan may well have computed the interest on a simple basis.
Mr. FUGATE. The difference that I spoke of is only $12,000,000.
Mr. SEIDMAN. The difference is that between $115,000,000 and $128,000,000, approximately $12,000,000 or $13,000,000. That may account for it.
Mr. FUGATE. This is as of June 30, 1948, 2 years ago.
Mr. SEIDMAN. I think that Mr. Jordan has used the simple basis for computing interest.
Mr. THOMPSON. I merely want to comment, Mr. Seidman, in line with Mr. Shelley's question whether the Canal was commercial or national defense, that this is just one of the very interesting and very controversial issues you get into whenever you undertake a study of the Panama Canal. The first Canal was projected, as the Governor stated, in the 1600's. It goes way back there, and national defense had nothing to do with it.
The French Canal, parts of which are still to be seen close to the present Canal, had nothing to do with national defense. The overland railroad which was used by the gold-rushers was not for national defense. When the present Canal was constructed the pinch of national defense certainly had a lot to do with it. It is just exactly that very problem that we are trying to straighten out by accounting methods. With the present system you cannot figure it out to save your life. That, I think, is what has touched off all this.
Mr. SEIDMAN. That is correct. There is an analogy here to the TVA. It was stated in the TVA Act that one of the purposes for which the TVA was created by Congress was national defense. There is a provision in that act for writing off a part of the capital cost to national defense as well as other purposes, such as flood control and navigation. I do not think there is any question but that the TVA
has been very important in terms of national defense of the United States. I do not think we would have had Oak Ridge located where it is if it were not for TVA. TVA up to the present has never made any allocations for national defense; however, they have charged the military for power and the Atomic Energy Commission. That is what we are proposing here—that the Armed Services should pay for what they receive and in accordance with use, and that any additional costs which are incurred strictly because of defense should be written off.
Mr. THOMPSON. I think there may be misapprehension on the part of some as to perhaps the hidden purpose of the legislation, which would be to take the control of the Canal away from the Department of the Army and give it to someone else. Of course, that is in the background of the Bureau of the Budget's original recommendation on the subject—that it should be transferred to the Department of Commerce. It might be timely to observe that the President can do that between now and noon by an Executive order. That has nothing to do with this legislation whatever. If he did that this legislation would still be needed, perhaps even more so.
Mr. O'TOOLE. Thank you, Mr. Seidman. We appreciate the clarity of your statement.
We will now hear from Mr. Bernard F. Burdick.
Mr. O'TOOLE. We will now hear from Mr. Frazer A. Bailey, president of the National Federation of American Shipping, Inc.
STATEMENT OF FRAZER A. BAILEY, PRESIDENT OF THE NATIONAL
FEDERATION OF AMERICAN SHIPPING, INC.
Mr. BAILEY. My name is Frazer A. Bailey. I am president of the National Federation of American Shipping, Inc., which represents more than one-half of all privately owned deepwater shipping under United States ílag.
For the past 3 years the subject of Panama Canal tolls has been under study by congressional committees, executive departments, this federation, and others. We will not burden the record with repetition of detail data already disclosed by these investigations. In general these studies have shown
(a) That notwithstanding the Canal's value as a national-defense asset; and notwithstanding the defense purposes which motivated its construction; and the defense savings which it has effected in war and in peace, no part of the capital cost of building or improving the basic Canal has been charged to national defense. Interest on the entire capital investment is included in the Canal accounts which form a basis for commercial tolls.
And on that subject, in view of Mr. Allen's inquiry, the report of the Governor of the Canal Zone for the fiscal year ended June 30, 1949, showed an investment of $522,000,000, and included in that is $129,000,000 interest during the course of construction, which I understood Mr. Seidman to say was computed on a compound basis. It also includes many facilities on the Canal Zone which are dual-purpose facilities. They are used for national defense and for commercial purposes. One of the purposes of this bill is to divide the expenses
of national defense and the expenses of business enterprises, and it seems to me perfectly proper to divide likewise the investment accounts of national defense and the investment accounts of commercial enterprises.
(b) That very substantial operating expenses for schools, hospitals, highways, sewers, cemeteries, and so forth, for the military and others are not reimbursed, or are not adequately reimbursed by the military and others. Substantial sums representing the cost of operation and maintenance of these facilities are included in the accounts which form the basis for Canal tolls;
(c) That Government-vessel transits which constitute about 10 percent of all vessel transits in peacetime are entirely tolls-free, the expense of the facilities which perform such transits being charged into the Canal accounts where they become a part of the commercial tolls base.
My friend, Mr. Seidman, said that if we charged in the future a toll against Government vessels which transit the Canal, they would in effect be paying their part of the national defense operation and interest on the national defense investment.
While that is true, we must bear in mind that Government vessels are about 10 percent of the transits in peacetime. Therefore, we would be dividing the national defense value and the commercial value of the (anal on a 90-10 basis, which we contend is not a fair division.
One of the studies conducted by the special subcommittee appointed to investigate Panama Canal tolls under House Resolution 44, Eightyfirst Congress, first session, recommended
That the President be requested 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. Inasmuch as the problem has recently been considered by the General Accounting Office and the Bureau of the Budget, it is believed that this study may be concluded within the present calendar year and in any event, not later than Janiary 31, 1950.
On January 31, 1950, the Bureau of the Budget reported to the President and the President approved and transmitted to Congress a report and recommendations designed to eliminate some of the present inequities. The report recommended (a) that, in the organization of the Canal, transit and business functions should be separated from civil government, health, and sanitation functions and such transit and business functions should be operated by a Panama Canal Company on a business basis; (b) that the military and other recipients of services and facilities from the Canal Company and from the civil government should pay for the services and facilities at prices designed to reimburse cost; (c) that in lieu of taxes the net cost of health, sanitation, and civil government should be borne by the Panama Canal Company and be distributed among all business activities of the Panama Canal Company on the basis of gross revenues; (d) that Government vessels should pay tolls in the future; (e) that the Panama Canal Company should be charged with interest on capital investment at a rate designed to reimburse the Treasury for its cost—that is, about 2.3 percent at the present time; and (i) that tolls should be set at rates calculated to cover the cost of operation and maintenance of the Canal, depreciation, interest on capital investment, and the Canal's share of the net cost of health, sanitation, and civil government.