Panama Railroad Company. These amount to approximately $38,000,000;

2. The costs of operating and maintaining the Canal; and

3. Approximately 50 percent of the net costs of civil government, health, and sanitation.

A fair share of the costs, including interest and depreciation, of operating and maintaining the Canal would be allocated to national defense by (1) excluding from the interest base the value of properties "properly allocable to national defense"-that is now provided for by Public Law 808-(2) requiring that the Company be compensated or receive credit for the cost of transiting military and Government vessels through the Canal; and (3) requiring that the Armed Forces pay for any other services such as school facilities. The Company and the Canal Zone Government would be expected to reimburse the Armed Forces and other Government agencies for any services which are now received without charge.

It is sincerely believed that the enactment of H. R. 8677 is essential to bring about a more logical grouping of the functions now administered by The Panama Canal and the Panama Railroad Company, to provide a sounder basis for determining toll rates and other charges, to facilitate operations, and, in general to promote the more effective administration of the Panama Canal enterprise.

Mr. O'TOOLE. On page 3 of your statement in the first paragraph

you say:

The Commission on Organization of the Executive Branch of the Government recommended that "straight-line business activities be incorporated so as to secure greater flexibility in management and simpler accounting, budgeting, and auditing methods."

Will you clarify that?

Mr. SEIDMAN. That, I think, is found in the report on Federal Business Enterprises. I think it is on page 13 under the heading "Defects in the organization of unincorporated business enterprises." This is the report of the Hoover Commission, Mr. Chairman. Do you want me to explain what was meant by that?

Mr. THOMPSON. What is the number on that?

Mr. SEIDMAN. This [indicating] is the Report on Federal Business Enterprises. The Commission's reports are unnumbered. The recommendation is Recommendation No. 3. This is a definite recommendation of the Commission:

We recommend that the straight-line business activities be incorporated so as to secure greater flexibility in management and simpler accounting, budgeting, and auditing methods.

Mr. FUGATE. I observe that you make no reference whatsoever in your paper to the sections dealing with the codification.

Mr. SEIDMAN. No; I do not. I think that is covered in a letter which the Director of the Bureau of the Budget sent in response to the request of the committee chairman. In view of the letter from the Director, I felt that it was not necessary for me to comment further on those sections, in my statement.

Mr. FUGATE. It is your view then they are not necessary?

Mr. SEIDMAN. That is correct.

I might point out in connection with the statement that Governor Newcomer made that this act would not become effective for approxi

mately 1 year after its passage, except for one provision. It would take approximately 1 year to accomplish the transfer contemplated by this bill. That would seem to provide adequate time to secure passage of the codification provisions during the next session.

Mr. THOMPSON. If no change is made in the present Panama Canal organization, won't you be able to go into those books and set a reasonable basis for tolls?

Mr. SEIDMAN. I think it would be somewhat difficult because the accounting system of the Panama Canal-and it is provided by law under the Budget and Accounting Act, and provisions of law now applicable to the Panama Canal-is not upon a businesslike basis. They do not keep accounts similar to those that business corporations maintain.

I think the General Accounting Office has indicated it is very difficult to determine expenses, revenues, and costs from the present accounts. That is not in any sense a criticism of the Panama Canal; that is due to the fact they are trying to operate a business under the type of accounting system that is designed for a governmental type operation, which is not revenue producing and not expected to be selfsustaining.

In that connection, I might just quote from the report from the General Accounting Office:

The General Accounting Office has criticised the accounts produced under this hybrid system as, in most cases, falling far short of the kind of factual determination and presentation of revenues, costs and expenses, and net profits or losses, necessary for accurate reporting and as an effective tool for management control.

Mr. THOMPSON. That is the opinion of the General Accounting Office?

Mr. SEIDMAN. That is correct.

Mr. THOMPSON. And the Bureau of the Budget subscribes to that? Mr. SEIDMAN. That is correct.

Mr. ALLEN. On page 6 of your statement, paragraph 1, beginning at the middle of the page, you say:

Under the existing formula, revenues from tolls, together with profits from the Canal's business operations and miscellaneous civil revenues, are expected to produce an amount sufficient to cover—

1. Interest at the "going" rate (approximately 2.3 percent at the present time) on the capital investment in the Panama Canal, excluding the amount of any investment in national defense and civil government facilities. * * *

I am wondering if you could tell me whether the Canal itself is considered in any part as an investment in national defense, or is the investment in national defense entirely separate from the Canal?

Mr. SEIDMAN. I think, as the Governor pointed out in his statement, fortifications and things of that kind, and military installations, are not in the Canal investment at the present time. There are some facilities in the Canal which might be identified as being there for the purpose of defense which you would not have there if the Canal were operated strictly for commercial purposes. An example of that might be the Mechanical Division, where they maintain plant capacity over and above that required for commercial use.

Now the cost of the additional plant would, in our opinion, be a national-defense expenditure rather than an expenditure required for commercial purposes.

Another example would be the trans-Isthmian cable, which cost approximately $660,000. The construction of the cable was larger than would have been required for strict commercial use. They laid it over a circuitous route rather than a direct route along the railroad for defense reasons which were not attributable to commercial use. I think it is generally believed that about 50 percent of the cost of the trans-Isthmian cable would properly be allocated to national defense. Mr. ALLEN. Are those items you have mentioned, such as the cable and the additional plant, included in the total investment that the Governor mentioned of some $535,000,000?

Mr. SEIDMAN. The cable is now in the Panama Railroad Company as far as the telephone system is concerned. The excess plant capacity of the Mechanical Division is included in the Canal investment.

Mr. ALLEN. Could you give me an estimate of the percentage of investment in national defense which is involved in that total figure of $535,000,000?

Mr. SEIDMAN. I do not think that it would be very great because previous studies indicated that the only feature of the Canal considered to be attributable to national defense was the width of the locks, which was an item of about $5,000,000. I think it was at the request of the Navy Board that the lock width was set at 110 feet rather than 100. There may be other items such as the Mechanical Division, but most of the defense items are not included in the Canal investment. It would not be a substantial figure.

Mr. ALLEN. For practical purposes, the interest at the going rate on the capital investment in the Canal, with or without the exceptions, would be about the same.

Mr. SEIDMAN. No. The investment in hospitals, schools, and civilgovernment facilities are now in the interest base. They will be excluded under the new formula. I do not know exactly what the figure is on that.

Mr. ALLEN. Will they be excluded as an investment in civil-government facilities, or as an investment in national defense?

Mr. SEIDMAN. They will be excluded as investments in civil-government facilities. The investment base will be for the Panama Canal Company, and the schools and hospitals will be in the new Canal Zone Government, so there would not be any question of their being in the interest base.

Mr. SHELLEY. On page 5 in the last sentence of the second paragraph you say:

The Congress will, of course, have an opportunity to examine the tolls policy in connection with its review of the business type budget to be submitted annually by the company.

Can you elucidate on that a little more; it is more of a possible review of it?

Mr. SEIDMAN. No; it is a going review. That, we believe, is one of the advantages of the new arrangement-that the Panama Canal Company will come in with a business type budget which is more informative and will pertain to a business operation more than the present budget. It is not merely a question of a request for appropriations; or how much they spent last year. It is an excellent statement of financial condition-income and expense, capital expenditures, as distinguished from operating expenses, and so forth.

Congress, in going over that, would be able to determine-are the rates high enough to cover the cost of operation? That would be indicated in the budget statement which would be practically a balance sheet, or, on the other hand, you might say, "Your revenues are far exceeding your cost of operation and you should consider changing your policy with respect to rates."

Also, of course, the Congress may act upon how much should be paid in dividends by the corporation.

Mr. SHELLEY. It is in the review by Congress we are to determine the budget submitted, which will be in advance of the levying of the tolls.

Mr. SEIDMAN. That is right. You would not change the rates from year to year in any event. I think over a period of years, seeing what the income statement was and the expense statement, you could determine from that whether the tolls were too high or too low, or what the reasons were for the toll policy. There may be many reasons why the Congress might have the Canal operate at a loss for a certain period, or at a profit, depending upon the circumstances.

Mr. SHELLEY. In view of the statement of the Governor and the answers that Mr. Seidman gave to Mr. Allen, I get the impression most people minimize the importance of the Canal or the part it plays as a national-defense feature. I would just like to reverse the approach. If the Canal were abandoned or shut down and not operating, would that fact have any impact or effect upon our national defense?

Mr. SEIDMAN. It would have a tremendous effect upon our national defense. There is no question about that. In our view there would be justification for making a capital allocation if the practice were continued of not requiring military vessels and other Government vessels to pay tolls, or have them credited as revenues of the corporation.

However, if you do have them pay tolls, or there is a credit for Government and military tolls, then they are assuming not only a part of the cost of operating and maintaining the Canal but part of the expense of the interest on investment, depreciation, and part of the expense of the Canal Zone Government. You are allocating to national defense in accordance with the use of the facilities.

Mr. SHELLEY. Is it not a fact that historically the Canal was first proposed as a national-defense measure?

Mr. SEIDMAN. I think that you could find as many statements on one side as you could on another. I think that it would depend upon whom you were talking to, whether the Military Affairs Committee or the Merchant Marine and Fisheries Committee.

Mr. FUGATE. Mr. Seidman, I find that you wrote a memorandum on April 23, 1947, to Mr. Arnold Miles, and you said this:

The Panama Canal, the Panama Railroad Organization, is a museum of administrative antiquities.

I would like to know if you think by reorganization and administrative changes any remedy has been found.

Mr. SEIDMAN. I think that substantial progress has been made. I think that that statement would not, in any sense, be true today. Mr. FUGATE. It would not be true today?

Mr. SEIDMAN. No; it would not. I think the reorganization which will go into effect on July 1, 1950, will take care of at least a substantial part of the problem.

Mr. FUGATE. In 1949, under the direction of the special committee, Mr. Jordan from the GAO made the accounting for us which was issued during the year, and he set up the capital investment in the Panama Canal at $522,956,000. Governor Newcomer said that he considered the capital investment at about $534,000,000, which would be some $12,000,000 more. Do you know why that would be?

Mr. SEIDMAN. I do not know the specific answer, but there may have been additional investments in Canal facilities since Mr. Jordan made his report. There is one item that I might mention that is not included in the Bureau of the Budget's report. That would be the question of the interest during the construction period.

In 1937 the special committee recommended that that interest should be computed on a simple-interest basis rather than compounded. I think up until now it has been included in the Canal accounts on a compound-interest basis. In our opinion, there is little justification for compound interest during construction. We think that interest during the construction period is a very proper part of the capital cost, but it should be computed on a simple-interest basis. I think that makes the difference between $128,000,000, which is the present figure, and approximately $115,000,000, which interest on construction would be on a simple basis. Mr. Jordan may well have computed the interest on a simple basis.

Mr. FUGATE. The difference that I spoke of is only $12,000,000.

Mr. SEIDMAN. The difference is that between $115,000,000 and $128,000,000, approximately $12,000,000 or $13,000,000. That may account for it.

Mr. FUGATE. This is as of June 30, 1948, 2 years ago.

Mr. SEIDMAN. I think that Mr. Jordan has used the simple basis for computing interest.

Mr. THOMPSON. I merely want to comment, Mr. Seidman, in line with Mr. Shelley's question whether the Canal was commercial or national defense, that this is just one of the very interesting and very controversial issues you get into whenever you undertake a study of the Panama Canal. The first Canal was projected, as the Governor stated, in the 1600's. It goes way back there, and national defense had nothing to do with it.

The French Canal, parts of which are still to be seen close to the present Canal, had nothing to do with national defense. The overland railroad which was used by the gold-rushers was not for national defense. When the present Canal was constructed the pinch of national defense certainly had a lot to do with it. It is just exactly that very problem that we are trying to straighten out by accounting methods. With the present system you cannot figure it out to save your life. That, I think, is what has touched off all this.

Mr. SEIDMAN. That is correct. There is an analogy here to the TVA. It was stated in the TVA Act that one of the purposes for which the TVA was created by Congress was national defense. There is a provision in that act for writing off a part of the capital cost to national defense as well as other purposes, such as flood control and navigation. I do not think there is any question but that the TVA