STATEMENT OF FRAZER BAILEY, PRESIDENT OF THE NATIONAL FEDERATION OF AMERICAN SHIPPING-Resumed

Mr. FUGATE. You are familiar with the operation of the Canal and its receipts and disbursements over the years?

Mr. BAILEY. Yes, Mr. Fugate; generally speaking, I am.

Mr. FUGATE. Are you familiar with the report that was made by Mr. Jordan, of the General Accounting Office, in 1949 for the committee? It was a committee appointed by Judge Bland.

Mr. BAILEY. No; I do not know that I am.

Mr. FUGATE. As a matter of fact, he worked for some 90 days for the committee and compiled certain information, which information was made available to us and we have it.

In your statement yesterday you indicated that you had no serious objection to the bill which is presently under study, with the possible exception of three items.

Mr. BAILEY. That is correct, sir-three items, plus the division of the capital investment.

Mr. FUGATE. Regarding the division of capital investment, I would like to interrogate you.

Mr. BAILEY. Yes.

Mr. FUGATE. In the report that I have just referred to, which covered the entire operation of the Canal from 1921 to 1948-—that is, from the time that the actual capitalization was set up-it shows that the capital was about $522,000,000, and there are various other figures according to the authorities that set them up.

Mr. BAILEY. That is the amount stated in the Governor's report for 1949.

Mr. FUGATE. During that period the tolls for the entire operation were $636,000,000 plus.

Mr. BAILEY. I do not attempt to carry the figures in my head, sir.
Mr. FUGATE. The yearly average, as we show it, was $22,000,000.
Mr. BAILEY. That is approximately my understanding.
Mr. FUGATE. That includes tolls, both commercial and free.
Mr. BAILEY. No free tolls, according to my understanding.
Mr. FUGATE. They are shown in this report.

Mr. BAILEY. You have the report.

Mr. FUGATE. He projected for us the operation of the Canal for the year 1949. He shows tolls for that period of $20,000,000; and, since we know what the tolls were, he was substantially correct. There were free tolls of $2,462,000.

Mr. BAILEY. Yes.

Mr. FUGATE. That makes a total of $22,686,000.

Mr. BAILEY. Yes.

Mr. FUGATE. Then there are civil revenues of $121,189, which gives a gross revenue of $23,000,000.

The expenses, as he shows them here for the Canal operation, would be $19,000,000.

Mr. BAILEY. We say approximately $20,000,000.

Mr. FUGATE. His figures are approximately $20,000,000.

Mr. BAILEY. I have not seen his report.

Mr. FUGATE. He shows salaries paid to the Army and Navy of $429,000. I want you to take particular notice of that figure "$429,000," because I want to ask you some questions about that.

That shows total expenses of $20,000,000.

Earnings before interest, $3,524,000.

Interest on Canal bonds paid by the Treasury, $1,494,000, which leaves a net, before interest is charged, of $2,000,000.

Calculating the interest on the capitalization of $522,000,000 would show interest in the amount of $13,000,000. I am using round figures. Mr. BAILEY. I understand.

Mr. FUGATE. With $2,000,000 to be applied to that as net from the operation. That shows an interest deficiency for 1949 of $11,000,000. Mr. BAILEY. I have no doubt that his report shows that. I have never seen it, but I have no doubt.

Mr. FUGATE. That is substantially the way the 1949 report of the Governor of the Canal Zone stands up. The point that I want to make is this: You say that the operation of the Canal, if you have a 50-50 division of the capitalization at 2.3 percent, would give relief to the shipping industry; is that true?

Mr. BAILEY. Yes. Not that alone. If I may say so, because of the manner in which they have kept the accounts and the manner in which they have charged civil government and military government to the accounts, I would not be surprised at any amount of deficit they may be able to show.

Mr. Jordan was a former employee of the Canal Zone and made the report. I think it is fair to say that he was relying on a continuation of past practices of management and accounting at the Canal.

Mr. FUGATE. As a matter of fact, over the period from 1921 to 1948, they showed an average deficit of $3,000,000 for the entire period. Mr. BAILEY. On their method of accounting, yes; but we are talking about a new method of accounting, and a new method of management. Mr. FUGATE. Is it your opinion that a division of the capitalization on a 50-50 basis would put it on a balanced operation?

Mr. BAILEY. Yes.

May I say, in round figures, that the interest charge today on the full capital base that they are talking about, at 3 percent, would be approximately $15,000,000 per year in interest. If you reduce the interest rate to 2.3 percent, which is the cost to the Treasury, as recommended by the Bureau and approved by the President, the annual interest rate would be $11,500,000 per year. If we divide the capital base, we reduce the interest charge one-half, which gives you an interest charge of $5,750,000.

If to that you add approximately $20,000,000 operating expenses, you get $25,000,000, or $25,750,000; and if you deduct them from the dual services the proper charge to the military and civil governments you will take off about $4,000,000, which will give you $21,000,000, or approximately the revenue at the present rate of tolls. That is how it works out, sir.

Mr. FUGATE. Under the provisions of this bill, there are certain mandatory features. One is that the revenue from the operation of the Canal must pay first the cost of the Canal Zone Company.

Mr. BAILEY. As I understand the bill, after the charges have been made which are proper against the users of these facilities, then the remaining deficit which represents what they term "net civil government cost" will be paid by the business enterprises which will be incorporated into one corporation-namely, the Panama Canal Com

pany-and the Panama Canal Company will then distribute that net residue of civil government expenses, including sanitation, between the operation of the Canal, the railroads, the steamship companies, the commissary, and whatever other business activities are conducted by the Panama Canal Company.

We pay that under the theory stated by the Bureau of the Budget as "in lieu of taxes." Presumably, under their theory, business activities pay for the cost of government.

Now, the net cost of government would be distributed under their philosophy over all the business actiivties which in turn would be incorporated in the Panama Canal Company, and there distributed on a gross revenue basis. That is my understanding of it.

Mr. FUGATE. It says in section 19, page 16 of the bill:

The Corporation is further obligated to pay into the Treasury as miscellaneous receipts amounts sufficient to reimburse the Treasury, as nearly as possible (1) for the annuity payments under article XIV of the convention of November 18, 1903, between the United States of America and the Republic of Panama, as modified by article VII of the treaty of March 2, 1936, between the said Governments *

Mr. BAILEY. That is the rental which goes to the Republic of Panama for the use of the Isthmus.

Mr. FUGATE (reading):

(2) for the net costs of operation of the agency known as the Canal Zone Government.

Mr. BAILEY. That is the net cost, sir, and the net cost is after there has been a user charge made to the various users of these facilities to the extent that it is proper to make them.

The then residue of civil government costs, which they term "net"and I think that is the meaning of the term "net"; and the Bureau of the Budget will confirm that-but, when that net amount is arrived at, it must be paid by the Canal Company to reimburse the civil government corporation, or body, for their total costs, they having had appropriations to cover the cost, and this is a reimbursement.

Then the Canal Company takes the net cost of civil government, and, upon the theory it is in lieu of taxes which business activities would otherwise pay, they distribute it over the business activities of the Canal Company comprising transit operations, the operation of the railroad, the operation of the steamship company, the commissary, and any other business activities that are carried on by the Canal Company.

Do I make myself clear?

Mr. FUGATE. I do not quite follow you.

Mr. BAILEY. In what respect, sir?

Mr. FUGATE. If there is profit from the operation of the Canal, or if the revenues from the Canal are greater than the cost of the Canal Zone government, then it must be paid.

Mr. BAILEY. If the Canal Zone government, which comprises the civil government functions-sanitation and the like-runs at a deficit, they cannot make user charges sufficient to cover those costs. They will then have a deficit. That deficit is to be paid by the Panama Canal Company, which operates the Canal, the railroad, the steamship company, and the commissary. They, in turn, distribute that cost against those business activities.

In other words, the element, the civil government of the Isthmus, goes into the pricing of the affairs on the railroad, of the affairs of the shipping companies, of the tolls that go through the Canal and of the sales price of items sold for the commissary. So, it is distributed. over that, and it is borne by those activities in proportion to their gross revenue.

Mr. FUGATE. How did you arrive at the figure of 50 percent?

Mr. BAILEY. I arrived at it, sir, by the meat-ax theory. The report of the Bureau of the Budget says, in determining national-defense value and commercial value, they were not able to say which was primary. Now, if it is so equally balanced that you cannot say which is the greater, or primary, I think there is justification for saying it is 50-50. If it is not 50-50, I have no way of determining. I do not think there is any scientific mathematical method of arriving at it, but I have arrived at it on this basis-if you cannot tell which is primary, it is pretty well evenly balanced.

Mr. FUGATE. You are cognizant of the fact that there have been charge-offs made heretofore?

Mr. BAILEY. And restored. There are no charge-offs that have not been restored when the Canal Company showed a profit. They put back the items that had been written off.

Mr. FUGATE. At the time of the construction of the Canal, or immediately thereafter, was there not a charge-off of some $100,000,000 plus?

Mr. BAILEY. And a restoration of it later, sir, including a capitalization of $129,000,000 for interest during the course of construction, which apparently they had not thought of before.

Mr. FUGATE. What effect would a reduction in tolls have on shipping?

Mr. BAILEY. It would help shipping. It would not be a decided factor. It would be one of many factors which we hope to accomplish in the restoration of our domestic shipping. Today we have a very small service between the Atlantic and the Pacific ports because of the small margin, if any, between operating costs and revenues.

The toll equalization, in addition to being a pure matter of equity, would help us in the restoration if we can make other economies for which we are striving. The other economies are in cargo handling, in terminal operations, and many others that the owners themselves are striving for. But that would be one factor of cost that would be lowered, which would be helpful, in addition to the pure factor of equity, as we see it. We are perfectly willing to pay all the cost that are directly chargeable to the transit. We just do not want to pay any of the civil government costs or the military costs beyond the necessity

for commercial transit.

Mr. FUGATE. Of course, you are cognizant of the fact that any changes in rates affect all shipping-foreign-flag shipping.

Mr. BAILEY. That is quite correct, and that is in accordance with the treaty that the Government of the United States has made.

Mr. FUGATE. What is your view on reduction of tolls and the effect that it would have on foreign-flag shipping in relation to American shipping?

Mr. BAILEY. As it would apply equally to both, I do not see it would disturb the competitive position, sir.

Mr. FUGATE. Would it not be a form of subsidy to foreign shipping? Mr. BAILEY. Not if we are doing what we propose to do-put the Canal on a pay-as-you-go basis for the cost of transit purposes and eliminate these other costs which we think would never go into the Canal account.

Mr. FUGATE. Putting the Canal on a pay-as-you-go basis can be done only by a reduction in the capitalization. Mr. BAILEY. That is correct, I believe.

Mr. FUGATE. There would be no other way.

Mr. BAILEY. Unless we can in some manner reduce these operating costs. We are in no position to say how much reduction could be made in operating costs. We think perhaps some can be made. We believe good efficient management will result in some reduction in operating costs, but we are in no position to say what that will amount to.

Mr. FUGATE. Certain changes in accounting have already been effected?

Mr. BAILEY. At the Canal?

Mr. FUGATE. Yes.

Mr. BAILEY. I am not familiar with any. There may have been

some.

Mr. FUGATE. Was not that statement made in reply to my question yesterday by Mr. Seidman? He said that changes had already been made; that there was a new system of accounting which affected the returns from the operations; did he not?

Mr. BAILEY. Mr. Seidman would know more about that than I, and I certainly hope that some have been made.

Mr. FUGATE. In the event no changes are made in the capitalization and this bill becomes law, where would American-flag shipping be? Mr. BAILEY. I think that we would have an increase in the tolls unless there can be a compensating decrease in operating costs.

Mr. FUGATE. Do you see any place that you could decrease, deduct, or change the operating costs in any item?

Mr. BAILEY. The only items I see about which I am competent to talk is where they charge military and civil government expenses to the Canal tolls. I do not know enough about operating canals to make suggestions to those gentlemen about efficiency and reductions in their costs.

Mr. FUGATE. Well, it has been shown over the years from the very beginning that an average of $300,000 has been paid by the Army and the Navy to the Canal Zone in the way of salaries, and in 1949, $429,000. Under the provisions of this bill, that would not obtain. Mr. BAILEY. I believe the bill says they will pay the military salaries that are connected with the transit operations of the Canal. That is my understanding of it. They will pay that part of the military salaries that are necessarily connected with the transit operations of the Canal.

Mr. FUGATE. It will show a balance of sometihng over $350,000 as of 1949 in favor of the Canal.

Mr. BAILEY. I do not quite understand you.

Mr. FUGATE. Let me put it this way: The Canal pays something over $400,000.

Mr. BAILEY. To the military for the use of military officers.