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INVESTIGATION OF PANAMA CANAL TOLLS
TUESDAY, APRIL 19, 1949
HOUSE OF REPRESENTATIVES, COMMITTEE ON MERCHANT AND MARINE FISHERIES, SPECIAL SUBCOMMITTEE TO INVESTIGATE PANAMA CANAL TOLLS,
Balboa Heights, Canal Zone. The following is a record of hearing held this date in the board room of the Administration Building, Panama Canal, Balboa Heights, Canal Zone.
Present: Representative Clark W. Thompson, chairman of Special Subcommittee on Panama Canal Tolls; Gen. F. K. Newcomer, Governor, the Panama Canal and president of the Panama Railroad Company; John Drewry, counsel, Committee on Merchant Marine and Fisheries; Representative Tom B. Fugate; Representative Edward A. Garmatz; Representative Victor Wickersham; and William H. Dunlop, Chief, Plans Section and Budget Coordinator, the Panama Canal-Panama Railroad Company.
Mr. THOMPSON. What brought about the proposal which came to the committee from the White House that the tolls of the Panama Canal should be increased?
STATEMENT OF GENERAL F. K. NEWCOMER, GOVERNOR OF THE
PANAMA CANAL AND PRESIDENT OF THE PANAMA RAILROAD COMPANY
General NEWCOMER. For a number of years, the Panama Canal has been concerned with the rising costs of operating the Canal and the failure to compensate for this by increased revenues from the users of the Canal. The matter really came to a head during the hearing before the House Appropriations Committee in 1947 with the then Governor Mehaffey, during which the Appropriations Committee expressed the opinion that tolls should be increased to partially compensate for the increased costs of operations and adopted a resolution to that effect. That action by the Appropriations Committee was followed promptly by a recommendation of the Governor to the President that the tolls be increased to the maximum permitted by existing law; namely, from $0.90 to $1 per Panama Canal net ton for laden vessels, from $0.72 to $0.80 per Panama Canal net ton for vessels in ballast and from $0.50 to $0.55 per ton of displacement for other floating craft.
Mr. Fugate. By laden you mean carrying freight?
Mr. FUGATE. When the proposal was made there was an immediate complaint from the shipping industry, as I understand it.
General NEWCOMER. That is my understanding. It is my understanding that the shipping interests propose an entirely new policy with respect to tolls;
namely, that there be no interest charged on the investment in the Panama Canal. They, as an incident to this thought, are of the opinion that the so-called costs of the Canal that can be ascribed to the national defense aspects of the project have not been properly considered in arriving at the basis for tolls. If some value be ascribed to national defense and that part of the capitalization written off, it would follow, of course, that the interest charge would be decreased by that amount, and if the entire project be written off to national defense, there would be no interest charges and that phase of their contention would automatically be taken care of and The policy with respect to the return on the investment would be settled along those lines. We say that the costs directly attributable to national defense have already been considered and are not included in the present capitalization of $516,000,000.
Mr. FUGATE. What do you mean by that, Governor? Have not been considered
General NEWCOMER. They have been considered. The cost is directly attributed
Mr. FUGATE. They have not been charged for that
General NEWCOMER. Yes, in the sense that the cost of the works here for the purpose of defending the Canal are not included in that capitalization. That is the actual cost of the defense, and, of course, the capital costs of the military establishments spent here in the way of their military posts, quarters, storehouses, and other facilities and directly connected with air operation do not appear in the capitalization of the Canal.
Mr. FUGATE. That is partially offset by the transiting of the Canal by the Army and Navy vessels. That is another factor in our operating costs not connected with capitalization.
General NEWCOMER. We look at the Canal as an international public utility that has been built at the expense of the citizens of the United States. That they are entitled to a reasonable return on the money that they have invested here. It is an obligation of the users of the Canal to pay that return regardless of their nationality; that if it is proposed to reduce tolls for the benefit of American shipping, and certainly it is not proposed to do that for the benefit of foreign shipping, and that is considered to be the correct policy of the United States, that the more direct way of assisting American shipping is to subsidize them to the extent that they require that subsidy in order to continue operation, not to subsidize world shipping by bearing the cost of operating the Panama Canal at the expense of the United States. At present some 58 percent of the ships transiting are foreignowned. There is the question raised by Mr. Fugate as to what consideration is to be given to the use of the Canal by those vessels of the United States which are transited without payment of tolls under the decision of the Attorney General in 1915; namely, that warships of the United States and ships carrying troops and supplies of the United States, shall be passed through the Canal free of tolls. Until the Second World War, that was not a material feature in our operations and it did not amount to so much as to materially affect our income. During the Second World War it reached very considerable proportions. We roughly estimate that the value of those free tran
sits during the war was about $38,000,000. If the Canal in its bookkeeping took credit for the receipt of that amount of tolls, it would be à substantial increase in the revenues of the Canal during that period, and the Canal would at the present time have come much nearer to the return of 3 percent on the investment than it actually has. In this opinion of the Attorney General in 1915, the Attorney General stated that not only should ships of the type mentioned be: transited without payment of tolls, but also the Canal should not take credit for that operation in its bookkeeping of the operations.
Mr. FUGATE. That is a very arbitrary decision, it seems to me, and certainly out of line with good accounting practice or good business.
General NEWCOMER. It, of course, was made at a time when conditions were entirely different from the present day. We did not have the naval or military ships or the amount of supplies or troops that were required to be passed through the Canal during this recent
There was no conception at that time of any such condition. Mr. FUGATE. Would it not be proper that we consider changing this policy now in the light of the changes of the war years?
General NEWCOMER. We take the position that it is a good policy to follow over a period of many, many years. We appreciate that we had an extraordinary condition during this war, but that over time in perpetuity, which is the time we expect to be here, that will level out to the point where it again becomes inconsequential and then too, you should not change the policy from time to time depending upon the peculiar condition of that particular time. In other words, to change the policy because of the amount of money involved at the moment is not a consistent line to follow and it would be a problem annually to determine what the credit should be, if any, and how that credit would, over short periods of time, affect the tolls that could reasonably be established.
Mr. FUGATE. In that connection, Governor, you are not taking into consideration the fact that there was considerable more wear and tear on the operations and obsolescence would enter into the question considerably. During this period of war, you were using this equipment here for national defense which would shorten the life of the machinery and equipment in the operation of the Canal. Did you overlook that fact?
General NEWCOMER. I think that we would be correct in saying that there was no increased wear and tear on the machinery of the Canal as a result of these operations during the war. What it amounted to was a substitution of the military use of the Canal in place of tbe commercial use.
Mr. FUGATE. But that would affect the life of it, though, from the standpoint of business operation because if you are going to charge against commercial shipping where commercial shipping did not get the benefit of it where tolls accrued through the Canal, then it affects the over-all picture.
General NEWCOMER. If the war had not occurred, the commercial use of the Canal presumably would have continued on about the same curve as it was before the war started and the facilities of the Canal would have been used to the same extent as they actually were but by a different type of vessel so that I do not believe it is correct to say that there was an extraordinary amount of wear and tear on the Canal machinery because of tbe war.
Mr. FUGATE. But there was a loss to the business operation from the lack of collection of tolls.
General NEWCOMER. That is true. We did not collect about $38,000,000 worth of tolls which, presumably, we would have collected from commercial users if the war had not intervened.
Mr. FUGATE. Then to that extent the operation of the Panama Canal as a business is affected.
General NEWCOMER. Yes, sir; you are correct.
Mr. WICKERSHAM. About what year do you think the Canal will reach its saturation point when the volume of shipping will exceed the capacity of the Canal?
General NEWCOMER. Based on the studies that were made prior to the war which indicated that about 1960, although estimates vary, would be the year when it would reacb its capacity, I would say roughly that that point has been set back about ten years due to the war. In other words, prior to 1970, something should be done to increase the capacity of the Canal for particularly commercial use if nothing more.
Mr. WICKERSHAM. I believe you said yesterday that the toll charge to commercial shippers represented approximately an amount equivalent to 2% days of sea expense whereas, if they went clear around Cape Horn, it would ordinarily take them 17 to 18 days.
General NEWCOMER. I would say that. Mr. Dunlop might correct me on the length of time to go around South America. Mr. DUNLOP. Eighteen days would be a reasonably fast passage.
Mr. DREWRY. What is the basis for this projected saturation point? Is that based on experience from 1910 to 1920, or 1920 to 1930, or just how is that curve arrived at?
General NEWCOMER. It is based, for one, on a study made by Dr. Johnson of the University of Pennsylvania, in about 1912 when the Canal was first opened and then restudied along with others in connection with the proposition of increasing the capacity of the Canal, as late as 1947, the object of these studies being estimates of world commerce, and, of course, using the experience that they had during the original study and the later ones. The studies are fairly uniform in indicating a trend of world commerce that will lead to the saturation point which I say now is maybe 1970.
Mr. DREwry. The latest study, I assume, was based on the facts involved in recovery of world shipping since the war, shipbuilding, and so forth.
General NEWCOMER. Yes.
Mr. DUNLOP. As a matter of fact, in one of the studies we went into detailed analyses of trade routes. We considered individual countries and their economic development. We considered how far economic developments might go and what effect they might have on world trade routes everywhere. We keep all the data on cargo transiting the Canal classified in my office and check against these data and evaluate these estimates so that I think I can say that there was an exhaustive study of what might happen to the Panama Canal. The latest formal study prior to those made in connection with the studies for enlarging the Canal was made by Dr. Huebner although Dr. Jolinson made the original studies for the Isthmian Canal Commission.
General NEWCOMER. Mr. Dunlop, please gather a bibliography of those persons who have made studies of the capacity of the Panama Canal and the dates on which these studies were made.
The bibliography follows:
1. Dr. Emory R. Johnson, professor of transportation and commerce, University of Pennsylvania. Served as economist member of the Isthmian Canal Commission from June 1899 to March 1904, during which time estimates of potential traffic were made.
From 1911 to 1913, as Special Commissioner on Panama Canal traffic and tolls he estimated future traffic in a report to the Secretary of War dated August 7, 1912.
2. Maj. Clarence S. Ridley (major general, retired), who served as assistant engineer of maintenance of the Panama Canal in 1921 (and later as Governor, 1936-40) on December 21, 1923, submitted forecasts of future traffic for the information of Mr. Garrard B. Winston, Under Secretary of the Treasury.
3. Lt. Hans Kramer (brigadier general, retired) made a forecast contained in a professional paper entitled “The Isthmian Canal Situation,” published in the proceedings of American Society of Civil Engineers, volume LIV, No. 6, August 1928.
4. Gov. Harry Burgess and Maj. R. A. Wheeler, assistant engineer of maintenance (lieutenant general, retired) reported to the Secretary of War on future traffic on August 4, 1931. (H. Doc. No. 139, 72d Cong., 1st sess.)
5. Mr. Sydney B. Williamson made a forecast of future Panama Canal traffic which is contained in the report of the officer-in-charge of the 1929–31 Nicaraguan Canal survey. _(H. Doc. No. 139, 72d Cong. 1st sess.)
6. Dr. Grover Ğ. Huebner, professor of commerce and transportation, Wharton School of Finance and Commerce, University of Pennsylvania, made a forecast published December 31, 1936, by the President's Special Committee on Panama Canal Tolls and Vessel Measurement. The committee members were Messrs. Emory R. Johnson, George H. Rock and Arthur J. Weaver. (S. Doc. No. 23, 75th Cong. 1st sess.) Dr. Huebner collaborated with Dr. Johnson in the latter's studies of 1911-12.
7. Dr. Norman J. Padelford's study of September 7, 1944, entitled “The Future of the Panama Canal.” Dr. Padelford was professor of international law at Fletcher School of Law and Diplomacy (Tufts-Harvard) and also consultant to the State Department.
8. Dr. Roland L. Kramer, professor of commerce and transportation, Wharton School of Finance and Commerce, Unifersity of Pennsylvania, prepared af orecast dated March 31, 1947, as part of the Isthmian Canal studies, 1947.
Mr. FUGATE. In consideration of any increase or decrease in tolls for transiting the Canal, are we to take into consideration any new construction or any changes in broadening the use and extending the operation? Is it your opinion considering our resolution, that we are to give consideration to that?
General NEWCOMER. I think not for the purpose of determining what tolls should be at the moment. I think that that should be based on the present Canal and its cost of operations. Unquestionably, if a change is made in the Canal
(Mr. Dunlop was asked to insert some data with respect to increased cost of operation. This statement follows:)
INCREASED DIRECT OPERATING Costs AT THE ATLANTIC LOCKS WHICH ARE
INDICATIVE OF GENERAL CONDITIONS When a transiting vessel passes a line to the approach wall at the locks, its passage through the locks installation is handled by one lockage crew.
This crew operates the towing locomotives, the machinery which opens and closes the gates, and the valves which control the level of the water in the lock chambers. It handles all lines passed from the ship to the locks wall. At present there are three lockage crews at the Atlantic locks, two at Pedro Miguel locks and three at Miraflores locks. The number of crews at any time depends on the volume of traffic.