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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. United States now in the railroad. railroad is between $40,000,000 and

That is the investment of the Actually the net worth of the $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.

*

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 all 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

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. As to the national defense adjustment in connection with the capital, we have already tried to get a comparison with other great Federal agencies like TVÅ.

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, but we 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.

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 companies 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 page 19.

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

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