3Vessels of 80-ft beam and over. Source: Panama Canal Co., "Annual Report, 1976." Future traffic predictions also suggest Canal reaching capacity-projected canal 1995 2000 transits [All types] 13,201 15,400 16,100 17,600 19,400 21,300 26,800 Theoretical canal capacity. Source: Based on Paddleford, Norman J., and Stephen R. Gibbs, Maritime Commerce and The CONCLUSIONS There are decisions that need to be made concerning Canal capacity and size. The treaties will provide the framework for rationally addressing these decisions. STATEMENT BY RICHARD N. COOPER Mr. Chairman and Members of the Committee: I appreciate the opportunity to the new Canal arrangements. The programs that Under Secretary Solomon and I will discuss today are entirely separate and independent from the new treaty, although the idea of having this associated package arose during the last few weeks of the treaty negotiations. Secretary Vance and Ambassadors Bunker and Linowitz have already described for the Committee the provisions within the Treaty which will provide for Panamanian participation in Canal revenues. The arrangements we discuss today are not directly related to the Canal but, rather, are an expression of our friendship and cooperation with the people of the Republic of Panama and reflect our interest in the economic well being of that country. As this Committee is aware, the discussion of economic arrangements associated with the Treaty were among the most difficult issues encountered in the negotiations. Panama's negotiators proposed that the United States pay Panama a large initial lump-sum payment and a very sizable annuity, either of which far exceeded the most optimistic estimates of gross Canal revenues. The Panamanian negotiators sought to justify these proposals by assigning high economic value to the economic and security benefits derived by the United States from the Canal, without comparable benefits to Panama. They further suggested that, as a counterpart to United States investment in the Panama Canal, Panama had provided its unique geographic location, much of its prime land and water resources, as well as the labor of its people to the Canal effort. Panama also cited the low remuneration received by Panama under the present treaties and the value to our security interests of the military bases and the new neutrality arrangements. In a more compelling argument, Panama's negotiators maintained that Panama's national priority lies in the rapid social and economic development of its people with wide distribution of the benefits. Both the economic provisions within the Treaty and the economic arrangements outside it are based on our shared recognition of the special relationship created by the interest in the Canal. Panama's development would serve the interests of the United States by fostering the stability which is the underpinning for an open, safe, efficient and accessible Canal before and after the expiration of the treaty which you are now considering. Giving the Panamanians a stake in the operation of the Canal makes political and economic sense-it will ensure Panamanian cooperation in the efficient running of the Canal operation while also building broad political support for the enterprise in Panama. The broader program for improved economic cooperation with Panama rests on a similar assumption-that improving the welfare of an increasing number of Panamanians will result in a stable political climate in which the sound administration of the Canal can continue. As was covered in earlier testimony, for the purposes of the annuity payments in the treaty, the economic provisions in the treaty reflect the United States position that the Canal operating revenues would be the source of financing. The purpose of this formula is to give Panama an equitable share of Canal benefits and assure a vital Panamanian interest in the efficient operation of the Canal. The arrangements outside the treaty also reflect the perception that Panama and the United States have mutual interests, specifically, in fostering economic development and the well being of the Panamanian people. Since we believe that Panamanian development during the new treaty period could serve as a means of promoting an environment helpful in the operation of the Canal during and after the new treaty period, the United States Negotiators arranged for the Panamanian negotiators to meet with representatives of the Departments of State and Treasury, A.I.D. and the Export-Import Bank to discuss Panama's development needs. Out of these discussions emerged a program which will be undertaken outside the treaty; which will introduce no special assistance devices and which is subject to all applicable procedures under existing programs. Its contents were outlined to the Panamanian Government in the form of a diplomatic note signed by Secretary Vance on September 7, the date of the signing of the two treaties concerning the Panama Canal. I understand that a copy of this diplomatic note has already been provided the Committee. The note outlines a program, to be undertaken on a best efforts basis, which seeks to enhance Panamanian development with the participation of the private sector in the United States as well as Panama. It is composed of the following elements: Up to $200 million in Export-Import Bank loans, loan guarantees or insurance over a 5-year period subject to approval by the Bank; Up to $75 million in A.I.D. Housing Guarantees over a 5-year period; and A guarantee by the Overseas Private Investment Corporation of $20 million in United States private capital to the Panamanian National Finance Corporation (COFINA) for use in productive projects in the Panamanian private sector. is The Secretary's note of September 7 also proposes issuance of repayment guaranteed under our Foreign Military Sales Program not to exceed $50 million over a 10year period. This aspect of the program is to assist Panama in assuming its increased responsibility for Canal defense during the new treaty period. It too designed to further the spirit of cooperation between the two countries. Like the other parts of the program outside the treaty, the Military Sales Program is not a grant to be financed by the American taxpayer. The only appropriations required would be to cover 10 percent of the annual program in the form of deposits in special reserve account. a Under Secretary Solomon will discuss the Overseas Private Investment Guarantee and the Eximbank program. I would like to expand on the rationale for the A.I.D. housing guarantee program proposed in the Secretary's note. The purpose of the A.I.D. housing program is to provide housing to lower-to medium income groups in less developed countries. The program provides a full faith and credit U.S. Government guaranty to private U.S. lenders who make loans for housing projects in less developed countries. The program demonstrates the valuable contribution of private capital and foreign investment to the social and economic development of such countries. The 5-year program proposed for Panama in the economic cooperation proposal would-as other elements of the package-fit within existing statutory authorization. The guarantee program was proposed in the early 1960's and is designed to be self-sufficient and has not required Congressional appropriations. Total current housing guarantee authority is $1.055 billion. The proposed Panama program would conform to the statutory limitations of $25 million per year to any one country and an average annual face value of $15 million. In other words, we are using existing programs-which are proven tools for furthering U.S. interests in many overseas economic areas-to strengthen Panamanian development and the cooperative relationship between the two countries. Panama has had several successful A.I.D. housing guarantee projects. To date, A.I.D. has guaranteed a face amount of approximately $26 million in loans. Another $15 million project is now under consideration. This represents an 11-year course of activity involving 8 projects. The United States and Panama have agreed that the Canal should continue to be operated in an efficient manner and every effort should be made to ensure that the Commission is designed to run in a businesslike fashion. This is an important shared interest since the economic provisions of the new treaty as well as the operating cost of the Canal are to be sustained from Canal revenues. The Commission should be structured as a self-sustaining business which would finance the payments to Panama under the treaty as operating expenditures. The Executive Branch will submit to the Congress implementing legislation to the treaty which will execute these requirements. Finally, I would like to say a few words about the treaty provisions concerning the sea-level Canal. Both Panama and the United States are committed to study jointly the feasibility of such a canal. Any arrangement for the construction of a sea-level canal must be agreeable to both countries. Panama agreed that no third country be permitted to build a sea-level canal in Panama except with our consent. In exchange, Panama asked the United States to agree to limit any sea-level canal construction to Panama. This was an acceptable stipulation-as the Committee is aware-in light of the 1970 study by the Interoceanic Canal Commission which concluded that the two preferred routes for a sea-level canal excavated by conventional means are both in Panama. Again, it appears to us that the interests of both countries are secured by the outcome of the negotiation. That concludes my statement. I welcome your questions. STATEMENT BY THE HONORABLE ANTHONY M. SOLOMON I am pleased to be here to discuss the economic aspects of the Panama Canal Treaty and the economic cooperation arrangements. You have already heard testimony on the annuity and royalty payments Panama will receive according to the new treaty. My understanding is that these payments represent Panama's share of the benefits from operation of the Canal: they will be paid out of Canal revenues, and not out of U.S. tax revenues. These payments provisions will also serve U.S. interests by enlarging Panama's stake in the secure and efficient operation of the Canal. In addition to the payments provisions of the treaty, we have extended to Panama, as Under Secretary Cooper has noted, an offer of economic cooperation involving as much as $295 million in U.S. loans, guarantees, and insurance, which I will presently discuss in detail. The benefits to Panama from the financial provisions of the treaty and the economic cooperation arrangements will be significant and timely. In the decade prior to 1974 Panama's GDP increased at an annual average rate of 7.3 percent. In 1974, however, economic growth abruptly slowed to 2.6 percent, and last year there was no growth. A major cause of Panama's economic slowdown was uncertainty over the future of the Canal, resulting in a marked decrease in private investment (which increased only slightly in 1974 and 1975 and fell by 25 percent in 1976). In addition, worldwide recission, the increase in the price of oil, and the recent decrease in sugar prices also contributed to Panama's large current account deficits. The Government of Panama attempted to maintain overall investment levels by increasing public investment to offset the decline in private investment. As a result, the central government budget deficit increased from $69 million in 1973 to $122 million in 1976. This, combined with borrowings to finance Panama's current account deficits, caused total public sector debt to rise from $0.6 billion in 1973 to $1.4 billion in 1976. There is reason, however, for some optimism about the future of Panama's economy. Panama has negotiated two stabilization agreements with the IMF (one last year and one in March 1977), and has taken steps to reduce the government deficit and limit public sector debt. World economy recovery will help to narrow Panama's current account deficit. Above all, the single most important factor in bringing returned vigor to the Panamanian economy will be settlement of the Canal issue, and the resulting restoration of a favorable investment climate in Panama. We expect that, as a consequence, foreign and domestic private investment will rise appreciably, leading to increases in employment, reduced budgetary pressure on the Panamanian government, and improvements in its external accounts. Panama's new economic program and settlement of the Canal issue are the fundamental requirements for returning Panama to its former path of economic growth. The payments provisions of the new treaty and the economic cooperation arrangements are ancillary to these developments, but we believe they will provide the extra boost to contribute to Panama's long-term economic development. This is of importance to the United States, in the sense that economic stability and an improved standard of living in Panama will strengthen the ability of Panama to act as our partner in the Canal enterprise, bearing its share of the responsibilities. We have designed arrangements for economic cooperation with this goal in mind, selecting financial assistance programs which are nonconcessional, befitting Panama's stage of development, and directed at meeting Panama's present economic needs for low-income housing and a revived private sector. The U.S. will benefit additionally from these economic arrangements, through participation by U.S. investors and business in the Eximbank, OPIC and housing investment guarantee programs the arrangements entail. I would now like to turn to the two aspects of the treaty effort in which I had a direct role. Treasury did not directly participate in the treaty negotiations. My contribution was to recommend economic cooperation arrangements, and to provide advice on the financing arrangements for the new Panama Canal Commission. ECONOMIC COOPERATION ARRANGEMENTS The proposed economic cooperation arrangements consist of: (1) an offer by the Overseas Private Investment Corporation to guarantee up to $20 million in borrowings in the U.S. capital market by the Panamanian development bank, (2) an offer by the Export-Import Bank to provide up to $200 million in loans, loan guarantees and insurance for individual U.S. export sales over a five-year period; and (3) a pledge by the Administration to consider providing up to $75 million in housing investment guarantees over a five-year period. In addition, we will provide up to $50 million in guarantees over a ten-year period under our Foreign Military Sales program. These particular arrangements were selected not only for the benefits they are expected to bring to both the U.S. and Panama, but also for the reasonable level of risk they present and their compatibility with the financial assistance programs involved. All of these offers are subject to compliance with legal and managerial requirements, and, as necessary, availability of funds. The housing guarantee aspect of the economic cooperation arrangements and the FMS offer have been addressed by Under Secretary Cooper. As for the offer by Eximbank to provide up to $200 million in loans, guarantees and insurance, I would like to point out that the portfolio risk to Eximbank as a result of its offer will be small. With an additional $200 million to Panama over five years, exposure in Panama will amount to less than 1.37 percent of Eximbank's total existing portfolio. Project risk will be controlled in the usual manner, since each transaction will be subject to the normal Eximbank's financial, legal and engineering criteria-including Eximbank's statutory requirement to find a reasonable assurance of repayment. Once the Canal issue is settled and investment in Panama accelerates, Panama will become an expanding market for U.S. exports. This projected market expansion is expected to give rise to more applications for Eximbank support, and Eximbank has indicated that its business in Panama could well amount to $200 million over the next five years. A guarantee by the Overseas Private Investment Corporation of $20 million in borrowing by the Panamanian development bank would raise OPIC's exposure in Panama to only 8.5 percent of its total existing portfolio, a reasonable level of portfolio risk. The risk to OPIC will be further reduced by a Government of Panama guarantee. OPIC has also stipulated that its offer to Panama depends on terms being negotiated which are acceptable to the OPIC Board. This will be the first time OPIC has participated in financing the expansion of a government-owned development bank, although OPIC is permitted to do so by longstanding OPIC Board policy guidelines. The Panamanian development bank, COFINA, is engaged in supporting the development of private enterprises in Panama through project lending. This function is both wholly compatible with OPIC's mission and in accord with our view that it should help strengthen the private sector of Panama's economy. FUTURE FINANCING OF THE PANAMA CANAL COMMISSION Turning now to the financial aspects of the Canal operations, an essential point in negotiating the treaty was that any new entity established to operate the Canal must be self-financing over the life of the treaty. Our negotiators made it clear to the Panamanians that any arrangements which did not conform to this principle would not be acceptable to the U.S. I assure you that we will continue to be guided by that principle. The Administration will make every possible effort to see that costs of the Canal operation are contained and that revenues are sufficient to cover liabilities. However, as a normal provision for management flexibility, I feel it is appropriate for the Panama Canal Commission to have the authority to borrow, as does its predecessor agency, the Panama Canal Company. Thus, the Administration will request a continuation of this authority in the implementing legislation. I believe the following guidelines should be followed by the Commission in its borrowings. First, any borrowing by the Panama Canal Commission should_be strictly limited to an amount sufficient to support the Commission's operations. The Commission should not have the authority to borrow for any other purpose, such as the general economic development of Panama. Second, all borrowing should be at a rate of interest equal to the cost of money to the U.S. Treasury for the period of time under consideration. Third, the repayment schedule will be tailored so that all borrowings will be fully repaid before the expiration date of the treaties. Mr. Chairman, this concludes my formal statement. I will be happy to answer any questions the Committee may have. STATEMENT OF HOWARD F. CASEY Mr. Chairman and Members of the Committee, I am Howard F. Casey, Deputy Assistant Secretary of Commerce for Maritime Affairs. I appreciate this opportunity to appear before the Committee on behalf of the Department of Commerce and the Maritime Administration to assist you in your deliberations on the recently signed Panama Canal Treaty and the Treaty Concerning the Permanent Neutrality and Operation of the Panama Canal. Our interest in the two treaties relates primarily to the provisions regarding the commercial operation of the Canal and their potential effect on the U.S. Merchant Marine. Although both treaties contain articles that will govern future Canal operations, it is the Panama Canal Treaty that relates most directly and substantially to our concerns. The Panama Canal has great economic significance for the United States and, in particular, the U.S. Merchant Marine. Indeed, this significance has been increased by the present necessity of shipping Alaskan crude oil through the Canal. Moreover, the Canal is beneficial for our Latin American neighbors and many other nations of the world. The Panama Canal Treaties are evidence of this national and interna |