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 annually 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

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 ports 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:

Annual payments to the Republic of Panama.
Public buildings and grounds_

Highways-

Sewers

Personnel administration__

General correspondence and records.

Department of Finance_.

Hospitals__.

Dispensaries

Quarantine and immigration_

Sanitation

Schools

Libraries

Physical education and recreation_

Police section__

Fire section___

Courts__.

Total__.

Net expenses $430,000.00 335,504, 30 682, 132.83 36, 676.99

624, 452.99

179, 924.90

409, 634.62 2, 661, 826. 26 256, 977.72 93, 265. 21 564, 816. 78 1, 233, 346. 19

48, 999. 74

213, 256. 63

966, 651. 24

437, 175. 84

46, 916. 29

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

would be assessed against the total enterprise rather than exclusively against the tolls as under the existing system. One method of distributing such costs among various elements of the enterprise would be on the basis of gross revenues. This method has the merit of simplicity and the merit, also, of recognizing changes in the going-concern value of the enterprise.

The Bureau of the Budget report and the President's approval would certainly constitute an endorsement of allocating this expense in this manner. The bill drafted by the Canal authorities, however, does not provide for the allocation of the net expenses of sanitation and civil government on the basis of this method, but provides (p. 21) :

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 gross revenues of the said corporation exclusive of the cost of commodities resold, and exclusive of revenues arising from transactions with the said corporation or from transactions with the Canal Zone government.

The exclusion of the cost of commodities resold as inserted in the bill by the Canal authorities relates to the operation of commissaries on the Canal Zone which do a very large business. There appears to us no reason why, in the pricing of the articles sold through the commissaries under which very favorable prices are made available, there should not be an element to cover the cost of civil government "in lieu of taxes" under the theory evolved by the Bureau of the Budget and upon the same gross revenue pro rata basis as is applied to all other business operations of the Canal Company. Certainly these commissaries avail themselves of police and fire protection, the use of the highway systems, and so forth. Commercial enterprises are always taxed for these facilities. We have no objection to the exclusion in this computation of intergovernmental department transactions as suggested by the Canal authorities. The bill should be amended so as to conform to the budget's report, as approved by the President, by the elimination of the language excluding the cost of commodities resold, i. e., the commissaries operation. We present herewith an amendment designed to carry the recommendation into effect and urge that it be accepted by the committee.

3. The Thatcher Ferry: The Thatcher Ferry operation illustrates a philosophy which has apparently pervaded the administration of tolls policy in the past, and is being carried over in the present bill. It gives rise to apprehension as to the administrative problems which may be faced in allocations of cost to nontransit activities unless there is a specific mandate by Congress.

The bill authorizes the corporation to operate the Thatcher Ferry free of charge to its users. The cost of operation would be borne by the Panama Canal Company, whose expenses substantially represent the transit tolls base. We understand in a communication to your chairman, the Bureau of the Budget has agreed to deletion of the provision. If deleted, the ferry would be operated by the civil government-still free of charge. While we do not have exact figures on the cost of operation of the ferry and the published accounts of the Panama Canal are significantly silent on the subject, we do know from such accounts that it involves the direct employment of 100 personnel in addition to overhead expenses; that in 1949 it transported almost 3,000,000 individual passengers and the following vehicular traffic:

69057-50-5

and that ownership, operation, and maintenance of three vessels is involved. We estimate the cost of operation to be in the neighborhood of $500,000 per anum.

In the past, such costs have gone into the Canal accounts and represent a basis for charging tolls against commercial vessels.

This ferry proposal is diametrically opposed to the President's recommendation based on the Bureau of the Budget report that the Panama Canal Company should be compensated for any service it furnishes at prices reasonably expected to cover the cost of performing the service.

Before the Canal was built, in order to pass over dry land between northern and southern sections of the country, it was necessary to proceed along the summit of the continental divide.

The Rio Grande and its outlet to the Pacific Ocean could not be forded at any point south of the present location of Miraflores Locks. The area over which the ferry is now operated was tideland and swamp, subject to the Pacific tidal fluctuations we understand of apporximately 24 feet.

At the present time an excellent bridge is located immediately south of Miraflores Locks at a point affording a shorter means of travel from Panama City to the north of Panama than any existing overland or by fording before the construction of the Canal. This bridge was completed in 1942. Yet the operation of the ferry continues; its cost is included in the accounts which form the basis of tolls, included in an item called "dredging division."

If such a ferry system is desirable in the public interest or in the interest of the military, there appears no reason why a fair and equitable charge should not be made. If any of its services are required in connection with the operation of the Canal itself, then the tolls base should include the proportionate cost of such services, but we suggest that it is completely unfair to provide such additional facilities on a free basis and to charge all of its costs to the Canal Company and ultimately as a component part of transit tolls for commercial vessels.

There is another matter which should be brought to your attention: The United States makes annual payments to the Republic of Panama of $430,000 per annum for the Canal Zone area. Under H. R. 8677, these are to be reimbursed to the Treasury by the Panama Canal Company. It is not clear that such reimbursement is to be allocated among all of the business activities of the Panama Canal Company. In any event, the operation of the Canal itself for transit purposes will bear a substantial part of this cost. It does appear clear that it is not contemplated that the military shall bear any part of this annual payment.

The latest report of the Governor shows that 95.3 square miles of land area in the zone is assigned to naval and military reservations. It would not appear inconsistent with the policy outlined in the budget report to charge a portion of these annual payments to military ex

penses. In any event, this rental payment, if that is what it amounts to, plus the priority given Government combatant ships, and so forth, might be considered an offset against any contention that Government vessels are paying a disproportionate toll if a part of the capital investment has been written off to national defense.

As the committee is aware, there has been introduced in the Senate by the senior Senator from Washington, Senator Magnuson, a bill, S. 3650, which is very brief, and which incorporates the basic principles of fair and equitable commercial transit tolls at Panama. Nothing in Senator Magnuson's bill is in conflict with the principles for which the shipping industry through this federation is contending.

The Senate bill goes to the crux of fair and equitable transit tolls at Panama without involving any of the questions of reorganization, operation of military government, and commercial activities or codification of laws, and so forth. The Senate bill with a few minor implementing amendments would, we believe, cover the shipowner's case. However, we recognize the desire of the administration, of the Bureau of the Budget, and of the President, to set up sound organization, accounting and tolls computation, and we are supporting the provisions of H. R. 8677 with amendments suggested for this purpose. We are grateful, however, to Senator Magnuson for having clearly highlighted the basic principles involved in the matter of computing fair and equitable commercial transit tolls. If the Army insists upon the inclusion of a vast amount of codification of law and other encumbering provisions, and not cooperating with the implementation of the Bureau of the Budget's report as approved by the President, then this committee could very well give consideration to simple implementing amendments to the Senate bill in the interest of effecting with reasonable promptness an equitable situation of commercial transit tolls at Panama.

In view of the past history of the segregation of accounts and accounting methods employed in the Canal Zone, the shipping industry is necessarily concerned as to strict compliance with the philosophy of the Bureau of the Budget report as approved by the President. One example of our reason for apprehension may be briefly stated: When the Congress authorized funds for the construction of the third locks project, these were deemed to be exclusively for military purposes and unrelated to the commercial activities. The Congress directed that all costs connected with the third locks project--and this included provision for a bridge-should not be included in the capital base of the Panama Canal for interest purposes. Notwithstanding this direction, last year there was transferred from the "Third locks project" according to the "Capital" account of the Panama Canal an amount of 1.45 million dollars representing the depreciated capitalasset value of the Miraflores Bridge. This occurred during the year 1949, more than a year after the question of Canal operating, accounting, and tolls computation had been raised, while congressional committees were investigating the subject, and the Government and representatives of the Panama Canal had appeared before congressional committees and testified. Meanwhile, the free operation of the Thatcher Ferry continued and its expenses were borne by the Canal. Following the precedent in the case of the administration of the ECA Act, we suggest that this committee constitute itself into a "watchdog committee," that the Canal authorities be required to submit