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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. BURDICK. I have no statement.
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 flag.
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 Canal 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 January 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 (f) 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.
If and when H. R. 8677 has been made to conform to the recommendations of the Bureau of the Budget as approved by the President of the United States, the shipping interests which we represent have only one major difference with its provisions. We are quite prepared to pay tolls for the transit of commercial ships based upon the cost of performing the service under good accounting practices and including interest at rates suggested by the Bureau of the Budget on a capital investment divided equally between national defense and commercial use. We are not suggesting that the taxpayers of the United States provide funds to defray the cost of transiting commercial vessels. We do object to having this traffic burdened with military and other expenses unrelated to commercial transits. With the single exception of a fair and equal division of the capital investment, the philosophy of the report of the Bureau of the Budget is to divide the commercial, the civil government and the military activities and to have each self-supporting and self-sustaining. The important difference between shipping and commercial interests who use the Canal to get their products to market on the one hand, and the Bureau of the Budget report on the other, is the question of interest upon capital investment.
I will not burden this committee with the numerous statements by high Government and military officials beginning from the time the Canal was conceived down to and including its exteremely valuable usage in World War II, as to its military-defense character. I need not point out that its actual and potential military usage was one of the controlling reasons why it was constructed. The supporting evidence of its vital effectiveness in times of national emergency is outstanding. What may be the weapons and warfare of future wars if we are so unfortunate as to become involved, no human knows. Certainly we must be prepared with facilities to meet every eventuality. That the Canal at Panama will constitute such a defense facility of great potential military value is nowhere denied. The highest United States Government officials responsible for building the Canal, and the military authorities who utilized it in times of necessity, without exception lay great stress upon its military characteristics and value. For the record we respectfully submit an exhibit of these statements from high Government sources and ask that it be incorporated as a part of the record, rather than take the time of the committee by a long recital at this time.
If I may digress for a moment, my friend, Governor Newcomer, said a moment ago that the Canal certainly has justified itself as a commercial utility.
Now I do not think the Governor intended to imply that it had not justified itself as a national-defense utility. If there is any question on that point, I would like to supplement the record with reports from the present Governor and his predecessors.
At the time of the official opening of the Canal in 1921 a special committee appointed by the Secretary of War to advise on matters relating to the Panama Canal, stated in part:
A great part of the cost of the Canal is for things that are admittedly military and in capitalizing the Canal for commercial purposes these must of course be omitted. But in addition to them there is a great part of the cost that must be written off for the Canal would not have been constructed as it is purely for commercial purposes and the question now arises as to how much of the cost of
the Canal proper ought to be set up as the amount upon which a return ought to be demanded.
The subsequent accounting policies of the Canal authorities have been so varied and so inconsistent that we will not burden this committee with a recitation. We have included it in the exhibit to which I have just referred.
In 1928 and 1929 the Canal authorities recommended increasing the capitalization of the Canal and also increasing the rate of interest. This was during the years in which the Canal accounts were showing a profit. In 1931 the Governor reported a profit of 7.1 million dollars. In 1932, however, as a result of changes in capital accounting methods, he corrected his report for the prior year 1931 to show a loss of 0.8 million dollars.
As we have stated in earlier presentations before the Congress, if the principle of charging to the military a fair and equitable share of dual purpose services and facilities had been followed, and if there had been written off to national defense a fair and proportionate share of the capital investment, then the entire commercial investment in the Canal would have been completely amortized as of January 1, 1949, including 3 percent interest charges on such commercial investment.
Interest today amounts to over $15,000,000 per annum as against a total balance of slightly over $20,000,000 per annum for operating expenses including depreciation. The computed interest charge alone on the basis of today's volume of transits and Canal accounting methods is the equivalent of approximately 75 cents per ton on laden vessels. The Bureau of the Budget recommended a change in the rate of interest, to a rate designed to reimburse the Treasury for its cost (about 2.3 percent), but that will still leave the interest charge at about $11,000,000 per annum, or about 55 cents per ton for laden vessels, providing commercial vessels must stand interest on the total investment in the Canal for both national-defense and commercial purposes.
Those responsible for the introduction of H. R. 8677 will probably contend that the capital charges attributable to national defense are fully recognized through the proposal to charge tolls on the transit of Government vessels. With this position we disagree.
It is fallacious to endeavor to measure the national-defense value of any utility on a user basis. Battleships have been built, forts have been constructed, aircraft have been designed and operated without ever having been used in actual combat. No reasonable person will contend that due to lack of combat utilization they should not be charged and paid for from military appropriations. The expense of stand-by facilities which have an actual, legitimate, and potential defense value is properly a part of national-defense costs and expenses. Whether or not facility should or should not be charged to national defense turns not on the question of its use but upon the question of the purpose for which it was built or acquired.
With this in mind, the matter is well summarized in the report of the Bureau of the Budget of January 31, 1950, which was approved by the President of the United States and transmitted to the Congress. This report, on pages 8 and 9 states:
Whether any part of the capital costs of the Canal should be allocated to national defense presents a problem to which there is no positive answer. The Canal admittedly does serve a dual purpose-defense and commerce
defense is put first
However, any attempt to establish which purpose was primary at the time the Canal was built would be an utterly fruitless undertaking.
It would not seem to require much argument by American shipping and American shippers who use the Canal, that if the purpose for which the Canal was constructed, as reported by the Bureau of the Budget were so evenly divided that it is impossible to determine which of the two objectives were primary, there exists ample justification for charging off to national defense one-half of the total cost of building and improving the interoceanic waterway.
In suggesting an equal division of the capital base of the Canal Company, we are not referring to certain establishments and facilities at Panama which were constructed exclusively for defense purposes. The purely military installations and the third-locks project are two such examples. There is no disagreement but that their capital and operating expenses have no relation to the Canal Company for commercial purposes or to transit tolls. While it contains no such provision, we believe that the language of the report of the Bureau of the Budget as approved by the President sustains our position that the interoceanic waterway and its ancillary facilities and appurtenances should have their capital cost divided equally between commercial and military.
I might say that report says that the operating expenses of such dual-purpose facilities should be divided, and I cannot see the difference between the operating expenses and the investment costs on which interest is charged.
Mr. Allen asked the witness, Mr. Seidman, about the meaning of the words "national defense." I think it is only fair, and I believe Mr. Seidman will bear me out, he says, "including the amount of the investment in national defense," and that he meant exclusively national defense and was not talking about items which had both a national defense and a commercial value when he talked about excluding them in this statement from the capital base.
It would in fact appear obviously inequitable to continue to charge into the Canal accounts interest on the total capital investment as the basis for commercial tolls. Please bear in mind that, while this has been the practice in the past, United States Government vessels have been provided free transit. The defense of the United States is a matter of Nation-wide concern. The expenses therefor should be borns by the Nation which it defends and not to be saddled in disproportionate amount upon any individual industry or facility. We very respectfully ask adoption of an amendment which we are now offering instructing that one-half of the capital cost of building and improving the Canal be written off or otherwise absorbed as an expense item of national defense and that hereafter the interest charges on only the remaining capital representing its proportionate commercial value be used, along with actual operating, maintenance, and depreciation costs in arriving at a fair and equitable rate of transit tolls.
Page 8 of my statement, beginning with the last paragraph and running down through the first paragraph on page 10, relates to the elimination of the items of the codification. The shipping industry does not have any interest in those items, and there is no objection