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Mr. FUGATE. Why exclude the commodities?

Governor NEWCOMER. Because if you include the cost of commodities sold, it will inflate beyond reality the revenues derived by the corporation from these other sources. and exclusive of revenues arising from transactions within the said corporation or from transactions with the Canal Zone government.

Governor NEWCOMER. Those are intracorporation transactions. For instance, if the accountants for the new corporation also keep the accounts for the Government side of this organization, the Government would pay those accountants for that work. Those revenues of the corporation from sources like that would be excluded under the provisions of this bill. It is not real revenue from any source other than the Government.

Mr. FUGATE. The commissaries do operate at a profit?
Governor NEWCOMER. At a small profit at this time.
Mr. FUGATE. Under this bill the profits would be excluded?

Governor NEWCOMER. The profits would be included. For instance, the railroad buys a refrigerator in the United States for $160. It takes it down there and sells it to a customer for $200. The $160 would be excluded from the receipts of the corporation in determining this ratio. The $40 profit, although that would not be completely profit because there would be handling charges, but the cost of that particular item resold would be excluded from the account in determining this appropriate share to be borne by the corporation as distinct from the ships that transit the canal.

Mr. THOMPSON. I would like to ask Mr. Bailey this question: Would the same formula we have discussed, the meat-ax formula, which is approximately the same that we find in the bill-apply to interest?

Mr. BAILEY. If we divide the capital base, Mr. Thompson, then the interest for the purpose of computing tolls will

be charged only on that part of the base which remains in the Canal Company's accounts as an investment for commercial-transit purposes.

If I may revert just a moment, I do not understand that the commissary is operated at a profit. The theory of the budget report is that alĩ these functions shall be self-sustaining and will be priced in order to recover their costs. We do not see why the cost of civil government is not a proper part of the cost of the commissary. We said yesterday we saw no reason why intergovernmental transactions should be used as a basis for prorating the civil-government costs. We still say that. But we do think that this commercial operation of commissaries should bear its proportionate share of the cost of the civil government, and that should be included in the pricing, and the pricing should be such as to recover the cost. It is not supposed to be operated for a profit to be credited against the operation of the Canal.

Mr. THOMPSON. Your contention is that they are not charging all the proper expenses in the price of the merchandise sold?

Mr. BAILEY. Unless they include their proportionate share of the civil-government costs.

Mr. THOMPSON. Have you ever heard the suggestion that the part allocated, the capital allocated, to the national defense should be on a user basis?

Mr. BAILEY. I have, sir. The Government uses the Canal about 10 percent. About 10 percent of the vessels passing through the Canal

but we

in peacetime are Government vessels, and if we accept the user philosophy, then we are saying in effect that the Canal was built 90 percent for commercial purposes and 10 percent for national defense, which we think the whole record concerning the purposes and the concept of the Canal will refute.

Mr. THOMPSON. You stick for your 50-percent basis?

Mr. BAILEY. The Bureau of the Budget says it is so nearly balanced they cannot tell which is primary. If it is 90 and 10, I think you could tell which is primary.

Mr. THOMPSON. Ås to the national defense adjustment in connection with the capital, we have already tried to get a comparison with other great Federal agencies like TVA.

Mr. BAILEY. Yes.

Mr. THOMPSON. Do you know of any basis on which we could form an opinion?

Mr. BAILEY. Mr. Thompson, I think the argument will be made by our railroad friends and perhaps by others

Mr. THOMPSON. Are they your friends! ?

Mr. Bailey. They are my friends. We do not always agree, are still good friends. I think they will argue, as will other industries, that you cannot find an industry in the United States which does not have some element of national defense in it, and I think that is a fair statement.

On the other hand, I think you have to recognize that these other interests were not created for the purpose of national defense. It was not a part of the concept. They were private enterprises for profit. That was the purpose for which they were created, and that was not the concept under which the Canal was built. It was built as a joint concept-defense and commerce. It was built by the Government. We have plenty of canals. I could show you the aggregate investment of the United States in canals is approximately one-third the cost of the Panama Canal, where no tolls are charged, and all the operating costs and all the investment costs are borne by the taxpayers, but we are not suggesting anything of that character.

Mr. THOMPSON. Foreign ships do not use those canals.

Mr. BAILEY. Well, if the foreign ships come into the Lakes through the St. Lawrence they do.

Mr. THOMPSON. Yes; that is a little different. They are Canadian vessels.

Mr. BAILEY. That is correct. We must realize these corporations which have an element of national defense in them, be they railroads or steel plants, or whatever they are, have had a write-off of a certain amount of their assets for national defense during the last war. The records of the War Production Board show that approximately $6,500,000,000 was written out of wartime taxes for assets that were created for war purposes, but unquestionably have a joint use value.

Of that amount, $1,400,000,000 was enjoyed by the railroads, so they all have had some element of their capital costs borne out of the expenses of war operations.

Mr. O'TOOLE. I believe that is all. Thank you very much.

Gentlemen, the committee will now call upon former Senator Joseph Ball, representing the Association of American Ship Owners.

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69057-50—6

STATEMENT OF FORMER SENATOR JOSEPH BALL, REPRESENTING

THE ASSOCIATION OF AMERICAN SHIP OWNERS

Mr. BALL. Mr. Chairman, my name is Joseph H. Ball. I am vice president of the Association of American Ship Owners, which has offices at 90 Broad Street, New York, N. Y., and at 1713 K Street NW., Washington 6, D. C. Our association is composed of some of the oldest and best-established companies operating American-flag ships. None of them has received any subsidy under the Merchant Marine Act, 1936. They are engaged in both the foreign and domestic trades.

Several members of our association are in the intercoastal trade and use the Panama Canal constantly. Most of them use the Canal at times, and all of them are interested in the question of Panama Canal tolls and administration and therefore in H. R. 8677.

Naturally, shipping companies would like the Panama Canal tolls as low as possible, because the round-trip cost of transiting the Canal, now from $12,000 to $15,000, is a substantial item in operating costs, particularly to the intercoastal lines which are just beginning to revive following their complete elimination during World War II and which are facing stiff competition from railroad and trucking companies. How important Canal toll costs are to the intercoastal lines is indicated by a 1939 study made by the Maritime Commission. The study showed that during the preceding 5 years the intercoastal com

5 panies had shown a net aggregate loss of $4,000,000. During the same period they had paid a total of approximately $25,000,000 of Canal tolls.

I am sure I need not further emphasize to this subcommittee the importance of operating costs among problems of intercoastal line.

Our association supports the Budget Bureau recommendation that the business and governmental functions in the Canal Zone be separated, and I shall therefore confine my testimony to the provision of H. R. 8677 dealing with Canal tolls, sections 24 and 25, beginning on

We have no objection to section 24, which transfers the authority to fix tolls and basic rules of measurement to the Panama Canal Company, subject to final approval by the President. The transfer of authority retains the present provision in the law requiring 6 months' notice, by publication in the Federal Register, of any proposed change in toll rates or measurement rules.

Our association does take exception to the Budget Bureau's recommendations as to the method of computing toll rates and to section 25 of H. R. 8677, which would implement those recommendations. Section 25 proposes the following changes in existing law:

1. It eliminates both the minimum and maximum toll rates for laden vessels, which are now 75 cents and $1 per ton, respectively.

2. Where the present law contains few standards to guide determination of toll rates, the proposed new subsection 412 (b) would require that tolls be fixed at a rate calculated to cover, as nearly as practicable

A. All costs of operating the Panama Canal and the facilities and appurtenances relating thereto;

B. Interest and depreciation on the capital investment in the Canal and ancillary facilities (rate not specified); and

page 19.

C. A share of the net costs of operation of the civil government of the Canal Zone proportionate to the ratio which gross Canal tolls bears to the net revenues from all other business operations of the Panama Canal Company. Although H. R. 8677, in lines 5 through 11, page 21, refers to gross revenues from tolls and also to total gross revenues of the corporation, it provides that in computing gross revenues from other business operations the cost of commodities resold and revenues arising from transactions within the corporation and from transaction with the Canal Zone government shall be deducted. That has the effect of reducing the revenues from business operations other than the Canal to a net rather than a gross basis. The result would be to load almost the entire cost of civil government onto Canal tolls and exempt residents of the Canal Zone from paying more than a very nominal part of the cost of civil government.

3. Transit tolls on vessels owned or operated by the United States, which now transit the Canal free, would be computed and treated as part of Canal revenues in fixing commercial tolls, but the President would be given discretion to decide whether such vessels actually would

pay tolls.

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Heretofore in Canal bookkeeping, as the subcommittee knows, l'evenues from commercial tolls (no allowances has been made for free transits of the Canal), civil revenues, and net earnings of business enterprises have been lumped together and balanced against net appropriation expenses to determine net revenues, which have ranged all the way from $18,000,000 annually to a deficit of over $5,000,000 in 1944. Then the accountants have deducted an interest charge of 3 percent annually on capital (now figured at $516,000,000). Whereas net revenues since the Canal was first opened for operation in 1914 totaled nearly $274,000,000 to June 30, 1949, the 3 percent interest charge changed this into a net deficit of nearly $167,000,000 on that date.

To revert for a moment to the Budget Bureau Report: that report on page 8 correctly points out:

The most controversial aspects of tolls policy are (1) the interest charged on the capital investment; and (2) the question of whether any of the costs of construction, operating, and maintaining the Canal should be allocated to national defense.

The Budget Bureau study resolves the question of capital allocation cost between national defense and commercial use with a very brief discussion concluding that none of the capital cost should be allocated to national defense. It does recommend that the cost of currently free transits of Government vessels should be included in revenue of the Canal and enter into determination of toll rates.

The Budget Bureau study makes no mention whatever nor does H. R. 8677 make any allowance for a factor which we believe is worthy of consideration by Congress in fixing policy on this issue. That factor is the tremendous value of the Canal in serving the foreign and domestic commerce of the United States. The Federal Government has spent hundreds of millions of dollars improving our rivers and harbors, even building canals, to serve the commerce of the United States. No Federal tolls are charged to vessels using harbor facilities in New York, Boston, Baltimore, New Orleans, Savannah, San Francisco, and our other ports where the Army engineers at the direction of

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Congress have spent many hundreds of millions of dollars improving the harbors. Congress adopted this policy and authorized these expenditures, without levying a direct charge to those using them, on the theory that all of the commerce of the United States benefits from them and that therefore the benefits of such improvements were general enough so that their costs equitably could be spread over all the taxpayers. These harbors, incidentally, are open on the same terms to American-flag ships and foreign shipping, the thinking again being that it was the commerce of the United States, and not the ship operators, which benefited from the improvements.

In the discussion of the Canal tolls problem, much has been made of the fact that half or more of the shipping using the Canal is of foreign registry and that, therefore, foreign-ship operators would derive at least half the benefit of any lowering of tolls that might result from changes in the present formula on which toll charges are based.

But that argument overlooks the very important fact that approxi-. mately two-thirds of the total commercial tonnage transiting the Canal either originates in the United States, is destined for the United States, or both. If the transits by Government vessels of the United States were included, the percentage of tonnage transiting the Canal directly serving the commerce or defense of the United States would be more than 70 percent.

The percentage I have just mentioned is derived from tables in the 1948 and 1949 reports of the Governor of the Panama Canal. The figures are shown in exhibit A attached to my statement, which I ask to have included in the record. These tables show that of the total of 24,000,000 tons plus transiting the Canal in 1948, 16,000,000 tons either originated in the United States, was destined for the United States, or both. In 1949, the proportion was 17,000,000 out of a total of 25,000,000 tons. I cite these figures to show that, to the extent of at least two-thirds of the total tonnage moving through the Canal, that improvement serves the over-all commerce of the United States, just as directly as do the many harbors on the east and west coasts which have been improved with Federal funds. That seems to our association a fact which Congress could well take into account when writing into legislation the formula by which tolls in the future should be fixed.

The questions of how much of the capital cost of the Canal should be allocated to national defense, and the interest charged during construction and since, also seem to us to be issues that Congress should decide in legislation rather than leaving them to executive determination, as does existing law, which would be unchanged by H. R. 8677. The way in which these questions are resolved will affect directly not only our domestic merchant marine but also our whole foreign trade and commerce, and they should be decided by Congress.

The history of Canal accounting practices in itself demonstrates that this is a field of controversy where there is room for honest differences of opinion. The original construction cost of the Canal was $385,000,000. A Government commission in 1921 found that, of that cost, approximately $113,000,000 properly should be allocated to national defense. Subsequent commissions in 1931 and 1937 reversed that decision and found that the entire cost of $385,000,000 plus $129,000,000 interest during construction, plus $12,000,000 in payments to :

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