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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 a 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. Canal admittedly does serve a dual purpose defense and commerce

The

defense is put firstHowever, 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 in proving 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

to them unless they will burden and impede the progress of this legislation. We actually do not know the meaning or the significance of them, but I am very hopeful that the committee will not allow those sections to be included if their inclusion would prevent the treatment of this subject at this session.

If and when H. R. 8677 has been so amended and reduced in scope, and if and when recognition has been given to the national-defense value and facilities of the Canal by reduction of the capital investment for interest-computing purposes, there remain only three important features to which the shipping industry objects. In these The bill does not follow the recommendations of the Bureau of the Budget as approved by the President. We recommend that it should be amended to so conform. These three respects in summary are

1. No provision is made for charges to the military and other beneficiaries of services rendered and facilities provided.

2. The bill does not distribute the net cost of health, sanitation and civil government which is to be borne by the Canal Company, among its various business activities on the basis of gross revenues.

3. The bill does provide specifically that the Thatcher Ferry which transports some 3,000,000 passengers and 549,000 automobiles anmually shall be operated without the collection of any tolls or transportation charges.

Taking these items up separately :

1. Payments by the military and others for services and facilities: We understand that there is no substantial disagreement with the principle that charges should be made to the military and other beneficiaries for services and facilities provided. The report of the Bureau of the Budget states (pp. 14-15):

The Company (Panama Canal Company) should reimburse other Government agencies for goods and services it receives, including the payment of salaries of military personnel, and should be compensated for any services it furnishes to other agencies

The Canal Zone government, as the agency charged with exclusively governmental functions, should be financed by an annual appropriation from the Congress. However, the cost of operation in the long run should be recovered from (1) charges for services, such as school tuition, license fees, fines, and so forth ; (2) charges to the armed services for facilities used by their personnel, primarily schools and hospitals; (3) payment by the Company of the remaining bal

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We present herewith an amendment which would carry into effect this recommendation. We understand that the Bureau of the Budget has no objection to this amendment and, since the Bureau's report has the President's approval, that it will not meet with opposition from the executive department.

These expenses are not inconsequential. Purely military activities at the Canal are large and important parts of hemispheric defense arrangements. The bulk of the personnel of the Caribbean Defense

. Command is located at the Isthmus.

It is not an answer to say that, if there was no canal at Panama, military expenses under discussion would be eliminated. If we did not have substantial military strength on the Isthmus the Caribbean Defense Command would be located somewhere else in the area and presumably similar military expenditures would be incurred. Of course, the Military Establishment must be prepared to defend the Canal Zone and the Canal itself as vital national defense facilities. It is sim

ilarly required to defend vital defense facilities located in Alaska and the Pacific areas, as well as the vital defense facilities constituted by the norts of New York, San Francisco, et cetera.

While military population figures are not publicly available, it is clear that military personnel and their dependents constitute a substantial percentage of the Isthmian population. For example, 45 percent of the children in the white schools on the Isthmus are children of military personnel.

The Governor's reports have frequently justified additional expenses on the grounds of increases in military personnel.

The following table lists some, but not all, of the net expense items as shown in the 1949 report which are in the nature of dual purposes expenses-i. e., are partly attributable to military or civil government activities in the zone:

Net expenses Annual payments to the Republic of Panama

$430, 000.00 Public buildings and grounds.

335, 504.30 Highways.

682, 132. 83 Sewers

36, 676.99 Personnel administration--

624, 452. 99 General correspondence and records.

179, 924. 90 Department of Finance--

409, 634. 62 Hospitals -

2, 661, 826. 26 Dispensaries

256, 977. 72 Quarantine and immigration

93, 265. 21 Sanitation

561, 816. 78 Schools

1, 233, 346, 19 Libraries

48, 999. 74 Physical education and recreation.

213, 256. 63 Police section--

966, 651. 24 Fire section--

437, 175. 84 Courts-

46, 916. 29

Total_

9, 221, 558. 53 In some instances-e. g., schools, sewers, highways—the military pays no part of the items. In other instances-e. g., hospitals—the military pays charges at rates which are obviously inadequate to meet the cost of operation and maintenance. The net expenses shown are the balances after credit of such payments.

Appropriate charges should be made against the military and other beneficiaries of such services and facilities and credited against their operating expenses in accordance with the recommendation of the Bureau of the Budget, as approved by the President. We present herewith an amendment designed to carry this recommendation into effect and urge that it be adopted by the committee. Please bear in mind that, after crediting such "user charges” as are fair and equitable, the net cost of operation of facilities representing the function of civil government are to be borne by the Canal Company and distributed pro rata over all of its commercial activities upon the theory "in lieu of taxes," also as recommended by the budget and approved by the President.

2. Allocation of civil government, health and sanitation expenses among divisions of Panama Canal Company: The Bureau of the Budget report states:

Inasmuch as the Company will not pay taxes which it would be required to do if it were a private corporation, it should be expected in lieu of taxes to bear the net expense of civil government, health, and sanitation. This expense

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