Mr. FUGATE. And the military pays approximately $60,000.

Mr. BAILEY. $60,000?

Mr. FUGATE. Yes.

Mr. BAILEY. For what purpose?

Mr. FUGATE. For services presumably rendered by them.

Mr. BAILEY. Which we contend is a very small part of the services they really obtain.

Mr. FUGATE. There would be a difference there of about $340,000 or $350,000.

Mr. BAILEY. On those figures there certainly would.

Mr. FUGATE. That would be a further charge against the operation of the Canal.

Mr. BAILEY. I understand the philosophy, Mr. Fugate, is to divide the commercial operations from the military operations-let the military pay for the services they get and let the Canal Company pay to the military for the services the military renders to the Canal, and the same thing in reverse. If the Canal Company gets services from the military, it should compensate the military for those services. If the military gets services from the functions that are operated by and at the expense of the Canal, then the military compensates the Canal Company for those services. It is an effort to put each on its own sound basis. That is the philosophy of the Bureau of the Budget's report, with which we concur.

As I said, we concur, with minor exceptions. The bill does not follow the recommendations of the Bureau of the Budget, and then there is the simple case of dividing your capital.

Now, if you are going to divide expenses between the functions they serve, I cannot see how you can avoid dividing the interest, and that means dividing the capital. After all, interest is nothing but expense. I am in the banking business, as you are, and we know that interest is

expense.

Mr. FUGATE. True enough.

What is the situation with reference to intercoastal shipping now? Mr. BAILEY. The intercoastal shipping is somewhere around 30 percent of its normal amount. I know that you are familiar, sir, because it has been talked of here in the committee. When we have difficulty the Home Fleet is the first fleet thrown into the breach as military support vessels, and the international situation does not look too well this morning.

Mr. FUGATE. An increase in tolls would be injurious to the operation of the intercoastal service?

Mr. BAILEY. It certainly would. It is hanging on by its eyelashes right now.

Mr. FUGATE. There are some 60 or 65 ships in operation.

Mr. BAILEY. Approximately that.

Mr. O'TOOLE. Mr. Bailey, you appear as a representative of the National Federation of American Shipping?

Mr. BAILEY. Yes.

Mr. O'TOOLE. Would the National Federation of American Shipping be in favor of the ceding or selling the actual waterway of the Panama Canal to a private corporation with the idea of having something similar to the Suez Canal set-up, a private corporation taking care of the actual operation and maintenance and assuming the obliga

tions for the waterway itself and its incidentals and charging the military, naval, and commercial vessels of the world tolls? Would you people be in favor of that?

Mr. BAILEY. Mr. Chairman, as you say, I represent a large segment of people, and no such proposition as that has ever been considered by them. What we are talking about here is the effect of dividing the commercial completely from the military and civil government functions, which I take it you think would happen if the Canal were sold and operated by a commercial company.

Now the experience at Suez has not been too happy, and I do not know what the views of the industry would be on a question of that kind. It would take more thought than I could give here at this table, and it would take a conference with more people than I have available in order to answer that question intelligently.

Mr. O'TOOLE. I still do not hear you say whether you would be in favor of it or opposed to it.

Mr. BAILEY. My answer is that I cannot answer it here, as I represent a large section of people, and I would have to confer with them. I take it that you believe the effect would be approximately the same if the commercial company operated it but, very frankly, we are asking only for a division of the Government and civil government and the military from the commercial operation, and that the commercial operations pay for themselves and for nothing else.

Mr. O'TOOLE. Do you think their tolls could be lowered and it could be more cheaply operated under such a set-up?

Mr. BAILEY. I could not say at the moment.

Mr. O'TOOLE. There was a lot of talk yesterday about the military and naval vessels going through the Canal without tolls. Every bit of insurance on every ton of shipping that goes through the Canal is paid by the shipper or the steamship company. Do the steamship companies consider the military and naval forces of this country as a sort of insurance?

Mr. BAILEY. Yes; they are insurance of a character. Of course, going back to your first question, the Suez Canal last year paid dividends last year equal to about 40 percent on the original sales value of their shares. There is a big argument about Suez. That is a com mercial enterprise operated for profit, and there is a big controversy over that situation now.

Mr. O'TOOLE. Do you not think that the average steamship company receives in the long run more protection from the Army and the Ñavy than the average citizen of Sioux City?

Mr. BAILEY. He might receive more than the citizen in Sioux City, but maybe not the citizen in San Francisco, New York, Galveston, or Brooklyn.

Mr. THOMPSON. Mr. Bailey, the allocation of the various different expense items continues to confuse me. Do you have a copy of the bill there?

Mr. BAILEY. Yes.

Mr. THOMPSON. In section 25, page 20, there is this language:

(b) Tolls shall be prescribed at a rate or rates calculated to cover

Regarding the meat ax system of taking 50 percent of the cost of operation, how does that theory jibe with the theory written into the bill?

Mr. BAILEY. Of course, Mr. Thompson, the way the bill is drawn interest on the total investment at the Canal would be charged against the whole account. That is the large question that we are propounding here. There has been no recognition of the national-defense value of the Canal in the capital account, and tolls at 2.3 percent would be charged against the whole capitalization, whetever it is determined to be, and that would be a part of the toll base. Therefore, there would be an increase in the toll base if they maintained the same system. But they are not maintaining the whole system, according to the Bureau of the Budget. They are now ready to separate these dual service accounts which have heretofore been charged against tolls. They are prepared to divide those. We say that they should go one step further and divide the other item of expense, namely, interest which accrues from the capital investment, being all charged against the commercial toll operations of the Canal.

Mr. THOMPSON. In this section (b) to which we are referring, the only thing that you are at variance with is the amount of interest that is to be charged. Do you know on what capital account interest is charged?

Mr. BAILEY. On the total net investment of the Canal, according to my understanding. We say all of these costs that you mention here; that is, the operating costs of the Canal, for transit purposes. Mr. THOMPSON. Do you know what the investment, subject to interest, would be?

Mr. BAILEY. We have an account as of last year which said that the net investment cost of the Canal, the way they figured it, is $522,000,000.

Mr. THOMPSON. Is there any difference of opinion on that?

Mr. BAILEY. I think that there are some items in that account that the budget feels do not belong in that account and should be deleted. We will come to some other figure-maybe $500,000,000; maybe $475,000,000, but taking $500,000,000, $500,000,000 at 3 percent is $15,000,000 a year.

Mr. O'TOOLE. In this intricate system of bookkeeping that our Government runs, has any allowance ever been made for transformation of that territory from a jungle to a salable piece of real estate?

Mr. BAILEY. There are certain charges for sanitation and such included in the Canal account. I do not know what other expenditures there have been, Mr. Chairman.

Mr. THOMPSON. There is a little difference of opinion about the investment figure.

With the permission of the chairman, I would like to ask the Governor if we have an exact figure on what the investment subject to interest would be under the formula laid down under H. R. 8677 and Public Law 808?

Governor NEWCOMER. My recollection is the interest would be based on an investment of $534,000,000, less about $20,000,000-the investment in what is referred to as the civil-government part of the plant. It would be in round numbers $500,000,000.

Mr. THOMPSON. $534,000,000, less the civil-government investment? Governor NEWCOMER. The investment in the plant devoted to the civil-government functions-approximately $20,000,000.

Mr. THOMPSON. It would come out $514,000,000—the capital subject to interest.

Governor NEWCOMER. That would be approximately it. That $20,000,000 investment in the Government facilities is not accurate. We have not really studied that to the point of getting it down to an accurate figure, but that is approximately correct.

Mr. BAILEY. I have in my hand the report of the Governor-balance of these accounts as of July 1, 1948. The net figure is $522,956,147.72. That includes $10,000,000 working capital among a lot of itemshighway and other items which we think do not belong in an account of this character for transit purposes.

Mr. THOMPSON. Those items that Mr. Bailey just mentioned, are those the ones you are talking about when you say the $20,000,000 comes out?

Governor NEWCOMER. Yes. I think that Mr. Bailey has the report of 1948.

Mr. THOMPSON. That is right.

· Governor NEWCOMER. The capital investment is larger now than it was then because of additions.

Mr. THOMPSON. What are those conditions?

Governor NEWCOMER. Some additional housing that was built. We transferred to the capital account of the Canal a certain amount of floating plant that was bought for the third lock development. We have now transferred that to the Canal as a replacement for worn-out plant, and that has increased the capital investment. A number of items have added up to $10,000,000 or $12,000,000 in the last 2 years.

I would like to correct what I said about "approximately $500,000,000." Under the terms of this bill there are certain credits that would be given as a result of dividends that have been paid in by the Panama Railroad Company. Roughly speaking, I think about $38,000,000. That would reduce the capitalization still further to possibly around $450,000,000 or $460,000,000.

Mr. THOMPSON. That is more nearly the figure that I had in mind. Mr. FUGATE. Where does that figure come from?

Governor NEWCOMER. Under the terms of this bill, and as taken in cohnjunction with the bill that incorporated the Panama Railroad Company, credit would be taken for the dividends that have been paid by the Panama Railroad Company, plus a $10,000,000 deposit that the railroad has made with the Treasury, plus the value of some lands that were donated by the railroad to the Republic of Panama several years ago, totaling, as I remember, about $38,000,000. The effect of that would be to reduce the investment of the United States in the combined function of the railroad and the Canal.

Mr. FUGATE. Under the act of 1948 certain transfers were made relative to the Panama Railroad?

Governor NEWCOMER. Certain business functions were authorized to be made from the Canal to the railroad.

Mr. FUGATE. The capitalization of the railroad then was $1. Governor NEWCOMER. Yes. The railroad gave a receipt to the United States. for $1.

Mr. FUGATE. Then you made certain transfers.

Governor NEWCOMER. That $1 is the amount on which the railroad is supposed to be paying interest. That is the investment of the United States now in the railroad. Actually the net worth of the railroad is between $10,000,000 and $50,000,000. It has been built

up from the revenues of the railroad. In addition to that it paid to the Treasury about $24,000,000 in dividends.

Mr. FUGATE. The $10,000,000 which you say is the net worth, or the assets of the railroad, would be deductible from the total capitalization of the Panama Canal Company?

Governor NEWCOMER. I would not like to answer that question. I am not sure how that would be treated.

Mr. SEIDMAN. I think that I can answer that. The interest charge of this company, as in the case of other Government corporations, is not based on net worth. It is based on the cost of the money to the Treasury. In the case of the Panama Railroad Company, they have paid back to the Treasury far more than the Government has invested in that enterprise, and that is the philosophy on which we will credit the amount of the dividends they have paid in over and above the Government's investment against the capitalization of the Panama Canal Company.

Mr. FUGATE. That would reduce the capitalization of the Panama Canal Company to that extent?

Mr. SEIDMAN. That is correct. The capitalization of the Panama Canal Company would be reduced, one, by the amount of the investment in civil government and health and sanitation facilities—and they are now included in the interest base-and then they would be further reduced by the amount of dividends and extraordinary expenditures or losses of the Panama Railroad Company, which I think, as the Governor estimated, are approximately $38,000,000. So, as the Governor has indicated, the interest base for the new Panama Canal Company would probably be somewhere between $450,000,000 and $460,000,000. I do not think we could give an entirely accurate figure at the moment.

Mr. FUGATE. I would like to ask the Governor, in view of the fact that he drew the bill and has knowledge of it, on page 21, lines 1 to 3, are these words:

Together with the facilities and appurtenances relating thereto, including interest and depreciation

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What do you mean by interest and depreciation? Is that with reference to operating and maintaining the Panama Canal.

Governor NEWCOMER. We mean interest on the net investment on those facilities that have been considered essential for the operation of the Canal. Under this bill that would exclude those facilities that are directly related to civil government and sanitation.

Mr. FUGATE. That is the point I want to determine; whether or not there is a segregation there.

Governor NEWCOMER. As we estimate at the moment, that would be a reduction of about $20,000,000.

Mr. FUGATE. You say:

and an appropriate share of the net costs of operation of the agency known as the Canal Zone government.

What do you mean by appropriate share?

Governer NEWCOMER. That is defined in the next sentence reading:

In the determination of such appropriate share, substantial weight shall be given to the ratio of the estimated gross revenues from tolls to the estimated total gross revenues of the said corporation exclusive of the cost of commodities resold. * * *