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the military value of the Canal and its value is measured in a reasonable and logical way.
This brings us to a consideration of what the costs are which must be met by the tolls and other revenue from the Canal enterprise in order to make it self-supporting. These costs were well described in the report of the special committee where it said (pp. 72–73):
The expenses that should in the future be met from the revenues of the Panama Canal enterprise as a whole may be summarized as follows:
1. Interest at 3 percent per annum upon the investment in the Canal enterprise as a whole. The present amount of that investment has been found to be $475,214,870.49 upon which an annual interest at 3 percent would amount to $14,256,446.11.
2. The net annual operating expenses of the Canal enterprise, other than the Panama Railroad and the other property of the Panama Railroad Co.
3. A depreciation reserve for Canal property other than that included in Canal business properties and that owned by the Panama Railroad Co.
4. A funded surplus to be set aside from earnings to provide for normal necessary property betterments and replacements.
It will be noted that interest on investment is not distinguished from current operating costs, depreciation reserve or the others listed above. It would seem to be beyond question that interest on investment, which is nothing more than the cost of capital, is just as legitimate and true a cost as the cost of current operations and maintenance of the project once it had been brought into being. The shipping interests have suggested that the item of interest on the investment be omitted from the costs to be covered each year by tolls and other revenue. The singling out of this particular item merely tends to confuse the issue. The only difference between this item and any of the others is that it is a constant sum rather than a variable one. The issue should be faced squarely by recognizing that the suggestion of the shipping interests is nothing more than a request for a $15,000,000 a year subsidy predicated primarily on the premise already demonstrated to be an unsound one, that the Panama Canal was built principally as a military defense measure.
The shipping interests have suggested several other changes in policy the effect of which would be to increase the amount of the annual subsidy by an additional 4 or 5 million dollars. This would result from the suggestion that only one-half of the cost of what Mr. Bailey refers to as multiple-purpose services, functions or facilities, be charged to the operation of the Canal. These services, functions or facilities, under which Mr. Bailey lists such items as schools, police, fire, hospital, and sanitation, are just as necessary to the operation of the Canal enterprise as any other costs, and no more justification exists for eliminating these costs than the interest on investment. The same principles are involved and the suggestion should be rejected for the reasons set forth above. Dr. Parmelee will discuss certain other data presented to the subcommittee by Mr. Bailey.
At the outset I mentioned that the principle to eliminate interest on investment was predicated on two propositions, first, that the major justification for building the Canal was for military measures and the second was that no part of the charge had been assigned to the national defense as yet.
I am dealing now with that second proposition. An analysis of the second reason advanced by the shipping interests for the exclusion of interest on investment as a part of the cost of operation of the Canal to be met in the future, namely, that no part of the cost of its construc
tion or of its operation has heretofore been charged to national defense, shows quite clearly that it does not constitute a valid basis for adopting their suggestion. While in theory no charge has been imposed on Government vessels for the use of the Canal and no credit has been allowed for the forgiven tolls, such a policy has not in practice resulted in commercial vessels paying more in tolls in the past than they would have paid if a credit had been allowed for the forgiven tools. This is the only point of significance, and Dr. Parmelee will develop for you the facts and figures which will demonstrate that even if a credit had been allowed for the forgiven tolls on the Government vessels the financial operations of the Canal would still show a deficit.
In brief summary and conclusion, it seems to us that this subcommittee should recommend that the policy presently followed by the Papama Canal Administration of including interest on investment and other necessary costs in their entirety as a part of the cost of operation of the Canal to be recovered through the imposition of tolls should be continued. By so doing the Government would avoid the unwise step of conferring a very substantial subsidy upon foreign shipping and would avoid action in derogation of the national transportation policy declared by Congress, calling for equality of treatment among the various modes of domestic transportation. This would be a reaffirmation of the sourdness of the long-established policy of keeping the Panama Canal enterprise on a self-supporting basis.
On the other hand, we think the subcommittee might well consider making a recommendation that there be a change in the policy with regard to the question of allowing a credit in the amount of forgiven tolls. In this manner all users would be called upon to bear, in proportion to their use, the total cost of operation of the Canal, which would appear to be the soundest and most accurate way of measuring the comparative values of the Canal in the performance of its several functions.
That completes my prepared statement, Mr. Chairman.
Mr. THOMPSON. Let me ask you, Mr. Prince, just at the end of the statement you said:
we think the subcommittee might well consider making a recommendation that there be a change in the policy with regard to the question of allowing a credit in the amount of forgiven tolls.
As a matter of accounting, just how would you handle that?
Mr. PRINCE. I am not an accountant, and perhaps my opinion on that would not be worth very much.
I had in mind the Government vessels would not actually have to pay out of their own individual appropriation, for instance, the tolls they would normally have to pay if they had been charged as commercial vessels or charged, but that the Panama Canal would set up on its books a credit item under revenues of what the toll would have amounted to on those vessels, and then add to the actual tolls collected on the commercial vessels, and that would show the total revenue before you would calculate whether you had a deficit or a profit from the operation of the Canal.
Mr. THOMPSON. As a matter of fact, for example, let us suppose that some day that traffic in the Canal reaches the point that all expenses are paid, including the 3-percent interest. Then, we have to provide over and above that, if we consider the forgiven tolls, that
presumably for the following year you might recommend a cut in the toll charge. Would that not be the real effect of it?
Mr. PRINCE. Well, sir, assuming that you would want to change the toll on a very limited experience, yes. Now, I take it the tolls have not been charged on a year-to-year basis, and you might feel that the experience of 3 or 4 years would justify it. Mr. THOMPSON. I certainly agree with you. Mr. PRINCE. That is correct; yes, sir.
Mr. THOMPSON. What would you do with the surplus? Would you forgive it in future tolls, or would you apply it against the indebtedness, or what would become of it?
Mr. PRINCE. I don't think you would take the surplus and for the future establish the tolls and return any amount which would be less than the actual expense by that amount. You have an accumulated deficit over the years.
If you want to apply it to anything, you can wipe out that deficit, but I think your object would be to set tolls, on the basis of the estimate of traffic which would proceed through the Canal in the next 4 or 5 years, to the return toll revenue, taking into account that that would be paid by Government vessels, or revenue sufficient to meet the anticipated total cost of operation of the Canal, including interest on investment, current operating expenses, taking all of the costs of the Canal and then letting all the users meet those costs. If you have got several different types of users using it, that is a different proposition. If the total sum that the users pay exceeds the total cost of the Canal, then you have got a self-supporting enterprise. Otherwise, you do not.
Mr. THOMPSON. Any questions, Mr. Fugate?
Mr. FUGATE. Mr. Prince, have you made a study sufficiently to ascertain whether or not your suggestion that the revenues would be equal to the expenses if you gave credit to all of the users of the Canal? Mr. PRINCE. For what period? You mean as up to now? Mr. FUGATE. For a particular period. Mr. PRINCE. For the future? Mr. FUGATE. Yes, sir.
Mr. PRINCE. We have made no study of prospective traffic, but Dr. Parmelee will present a few figures as to the past periods to bring them up to the present time.
He will take the period of the entire operation of the Canal, the last 10-year period and then the last 2-year period, and he will show you how far they would miss meeting the expenses, even after allowing credit for the forgiven tolls.
No, you will not meet the expenses today because your costs of operation have gone up tremendously. In every other business the cost of operation during the past 5 or 6 years has gone up, and so far as the Canal is concerned the cost of operation has gone up approximately 90 percent, and under the same level the traffic is not going to meet those expenses.
Mr. FUGATE. Then, under your suggestion, you would continue to run a deficit?
Mr. PRINCE. I cannot quite answer that in the terms you have expressed it.
Under my suggestion, this committee might well give a credit; allow a credit for the forgiven tolls. That alone would not be sufficient at a 90-cent-a-ton toll to meet the cost of operation.
If you had applied that during the wartime period, you would have reduced the amount of the deficit shown very materially, and we think that would have been a way of showing the value of its use for military purposes.
Mr. FUGATE. I would assume from that that it is your view that tolls should be increased so as to more nearly meet the costs of operation?
Mr. PRINCE. That certainly is our view. We have always thought in the first place it is a sound process that the Canal enterprise should be solved separately. Now, if you adopt that as a policy you want to pursue, necessarily there must be an increase in the toll rate. You don't have to see figures to know it. Dr. Parmelee will present the financial facts to you. I don't want to go into the toll details, because he will do that.
You know just from common knowledge what has happened to everybody's operating costs in any business. They have gone up 80 to 100 percent. The same is true of the Canal. They cannot operate at a toll rate of 90 cents a ton which they have been operating on since 1938 and then expect to meet all of the expenses entirely with the crediting of the forgiven-tolls help; but the use by the Navy is not so heavy, particularly at a time like this. It is not so heavy that it could make up that difference.
We think quite clearly that the President's proclamation should be allowed to go into effect, primarily as a step in the appropriate direction of meeting the deficit which will otherwise accrue from year to year and make the taxpayers make up this deficit, whereas the Panama Canal is perfectly capable of being a self-supporting institution.
It is just a question of whether you want to make it that way or whether you want to give a subsidy. Over half the total amount of the subsidy would go to foreign operators. Based on the proportion using it in the past, it has been as much as double the use by American ships. If you want to set up $50,000,000 a year as a subsidy and give 14 or 15 million dollars to foreign ships, I do not think that is sound, and we hope your recommendations will not lead in that direction.
Mr. THOMPSON. Mr. Miller.
Mr. MILLER. Assuming that we keep going to the point where it is necessary to increase rates, there will undoubtedly come a time when you strike a level of more diminishing returns.
How far away are the present rates from that?
In other words, how much could you increase the rates without having people say, "Well, we had better go around the Horn, we had better do this or better do that or the other thing”?
Mr. PRINCE. That is certainly a pertinent question. I do not think I am capable of giving a full answer, but I can suggest one or two considerations which will have a bearing on the question.
When the canal toll rate was recommended in 1937 by this special committee--the report of which I have referted to—they said that there were numerous considerations that they had to look at, and one was, What would happen to traffic which is marginal for the Panama Canal traffic from Europe headed toward the Far East; at what rate will it go through the Panama Canal and at what rate would it turn and go through the Suez Canal?
There has got to be some relation between the rates of those two canals if you are going to count on this marginal traffic that is of importance now.
The Suez Canal rate, as I understand it today is $1.60. I am saying that on the basis of testimony I heard before your subcommittee. I do not know it to be a fact myself.
If it is $1.60, I think that is considerably higher in relation to the present rate on the Panama Canal than it formerly was. That would indicate to me you have a substantial margin above the 90-cent so far as this factor of marginal traffic is concerned.
Then, when you come to the point of considering traffic which in no event would go through the Suez Canal, but going from North to South America or the Far East, when they are going to use the Panama Canal or go around the Horn, they offer the only two alternatives they have. I do not know for all of the routes what the difference is, but all of these figures I have been presenting to your subcommittee, down in the Panama Canal
Mr. THOMPSON (interposing). Involving the number of days' time?
Mr. PRINCE. I believe he says it saved, about 16 days of vessel operation to go through the Canal rather than go around the Horn. I think, so far as this traffic is concerned, you have a whale of a margin above 90 cents before you will turn that traffic around the Horn.
Other considerations, which are the same as considerations given with respect to any transportation agency, is the consideration of a rate that you can impose on the traffic and still have it move.
Undoubtedly it is a point at which if you put the tolls up to a certain rate traffic will not move. It may just tie
the traffic or go by some competitive form of transportation. I could not tell you what that is.
Mr. MILLER. You feel there is a considerable margin under the present situation?
Mr. PRINCE. I certainly think so; yes. You have the value of the dollar today compared with what it was before, with price levels, operating costs, and everything up 70 or 80 percent, and your total ratio must bear some relation to the other costs and the costs of the service.
Shipping rates have gone up, and I think those can bear some relation to those other costs. I do not think it does at 90 cents.
That is about as far as I should go in saying how much margin there is above the 90 cents.
Mr. MILLER. Thank you very much. That is a good answer.
STATEMENT OF J. H. PARMELEE, VICE PRESIDENT, ASSOCIA
TION OF AMERICAN RAILROADS, WASHINGTON, D. C. Mr. PARMELEE. Mr. Chairman, and gentlemen, my name is J. H. Parmelee. I appear for the Association of American Railroads. I am a vice president of that association, and for many years have been director of the bureau of railway economics, a department of the association. My headquarters are in Washington, D. C.