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To wipe out the deficit of that period, therefore, would have required an increase of 38.5 percent in the then applicable toll rate of 90 cents per ton, which would have raised it to $1.25 per ton.

A still further tabulation for the latest 2 years of operation, 1947 and 1948, which I do not here present in detail, shows a deficit equivalent to 50.1 percent of the total revenues, including in total revenue an allowance for toll-free traffic. To wipe out or balance the deficit for these two postwar years would have required an increase of 50 percent in the current toll rate of 90 cents per ton, raising it to $1.35

per ton.

The tabulations I have presented, and have described and analyzed, support the conclusion that the existing Panama Canal toll rate of 90 cents per ton is unduly low, when measured by current cost levels and by factors of relative use. My table 1, based on the use and cost factors of the whole period since the opening of the Canal, indicates a deficiency of 12.9 percent. Table 2, based on the experience of the last 10 years, and therefore a truer reflection of currnt cost and use factors, indicates a deficiency of 38.5 percent. To make up this deficiency, it would have been necessary to increase the toll rate from 90 cents to $1.25 per ton during that 10-year period. A still further tabulation, based on the years 1947 and 1948 alone, would call for an increase in the toll rate to $1.35 per ton.

In this same connection, the following statement from the annual report of the Panama Canal for 1948 is highly significant. The report described Presidential Proclamation No. 2775, which was signed on March 26, 1948, and prescribed a schedule of increased toll rates for the Panama Canal. The report then continued (p. 44) with the following statement, which is very conservative in the light of the heavy increase in costs to which it calls attention:

In the past 10 years operating expenses have increased more than 90 percent and it is apparent that an increase in the rates of toll as provided by Proclamation No. 2775 will be necessary to insure sufficient revenues to meet operating expenses and a 3 percent interest charge on the net capital investment.

I close with another reference to the 1948 report (p. 44), which stated that the current toll rates were “set at a level designed to produce, in conjunction with other revenues, a sum which would meet operating expenses and an interest charge of 3 percent on the net capital investment.” It is clear from this statement, from the accounting methods applied by the Canal authorities for many years, and from the historical concept of Canal operations from the every beginning, that the Panama Canal has been regarded as a business enterprise, insofar as its use by the commercial shipping of the world is concerned. Applying such a viewpoint, and crediting the toll exemptions on all Government transits against Canal expenses, commercial users should in all fairness contribute the remaining expenses. Otherwise, they are in receipt of a substantial subsidy, the major part of which accrues to foreign shipping.

Furthermore, in the light of the increase of 90 percent in Canal operating costs since 1939, which is emphasized by the Canal Governor in his latest report, the very conservative upward revision from 90 cents to $1 approved by the President and implemented by him in his Proclamation No. 2775 seems certain to prove inadequate to meet current costs. That revision does, however, constitute a step in the right direction and should be allowed to become effective without

further postponement. As I have already shown, on the basis of experience over the last 10 years, the toll should be $1.25 per ton, and on the basis of the last 2 years, $1.35 per ton.

Reference has been made in these hearings to the fact that there is a very heavy commercial use made of the Panama Canal by foreign shipping. This is strikingly brought out by statistics in the 1948 Annual Report of the Canal, at pages 11 and 12. Only 2,035 of the total of 4,678 oceangoing commercial vessels transiting the Canal in 1948 were of United States registry; of the total amount of tolls paid by oceangoing ships, $9,672,081 was paid by United States ships, and $10,284,512 by ships of 32 foreign countries. Thus foreign shipping lines accounted for 56.5 percent of the total commercial use of the Canal, and paid 51.5 percent of the tolls collected.

And I might add, Mr. Chairman, as Mr. Prince has pointed out, that in quite a number of years in the past the foreign shipping has been much higher than the 56 percent.

The foreign nations utilizing the Canal in 1948 were located in many parts of the world. British ships led the list, with 1,041 transits. Next in order came Norway, with 324 transits, followed in order by Panama and Honduras, Sweden, the Netherlands, and Denmark. Even Russia was represented by 10 transits.

To the extent that we are operating the Panama Canal at a certain level of costs, and are charging commercial users less than their proportion of such costs, the shipping interests involved are being subsidized. The figures I have submitted regarding the greater use of the Canal by foreign than by American ships show that more than half of the Canal subsidy now enjoyed by commercial users inures to the benefit of foreign shipping. That subsidy, of course, is at the expense of American taxpayers.

This point was well emphasized by Governor Ridley of the Panama Canal before this committee in 1937, in the appearance I have already cited. In the quotation I am about to make from his statement, as well as in the one I previously cited, he includes the cost of construction as an element of cost chargeable to commercial users. He said:

It is felt, therefore, that tolls for the use of the Canal should be established at rates which will provide for reimbursing the Government for the cost of constructing, operating, and maintaining the Canal; and any plan which falls short of completely reimburshing the Government for these costs must be recognized as constituting a subsidy to the vessels using the Canal to the extent of the resulting deficit. The benefits of such a concealed subsidy, if the Canal is operated at a loss, will not accrue to American vessels alone, since foreign-flag vessels will partake of the subsidy in a considerably greater degree than American vessels.

Mr. Chairman, that concludes my direct statement.

However, I would like to make å very brief rebuttal statement, if I may, supplementing my direct statement, and comment briefly on the appearance before your committee in the last 2 weeks of Mr. Frazer Bailey.

Mr. THOMPSON. Very well.

Mr. PARMELEE. Mr. Frazer Bailey, president of the National Federation of American Shipping, appeared before this committee in these proceedings on May 23, and again on June 6. In the course of his statement on May 23, he submitted a tabulation of Panama Canal receipts and expenses for the fiscal year 1948, in which he eliminated all interest charges, and at the same time credited Canal operations with the toll value of the free transits through the Canal. He pro

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posed, in effect, that the Government should offer the use of the whole Canal property to commercial users without charging any return on the capital invested in that property, and at the same time charged the Government for that portion of the annual operating expenses represented by the ratio of the toll exemptions to total revenues, including such exemptions in the revenues.

I need not repeat in detail what has already been said about the virtually universal acceptance of a return on capital as an integral element in the cost of conducting any enterprise. That point has been made many many times, in various reports of and about the Canal, and an allowance for interest appears in the annual reports of the Canal authorities.

Almost any enterprise could be shown to be profitable if it could obtain its capital free of charge. The Panama Canal enterprise can also be made to show a profit if no interest charge is made. The results obtained by eliminating interest from the calculations are arithmetically correct, but are not in accord with sound business practice.

In his appearance on June 6, Mr. Bailey submitted a wholly different set of calculations. The committee will recall these two sheets which Mr. Bailey submitted for the record on that occasion, and I would like to comment briefly on them.

Mr. THOMPSON. Very well.

Mr. PARMELEE. They included not only the year 1948, but also every preceding year back to 1922, thus covering a period of 28 fiscal years. These calculations were set out in two tables, labeled schedule A and designated as pages 1 and 2 of that schedule.

Briefly, Mr. Bailey adopted the following steps as the basis of his calculations. I shall first indicate the steps

in what seem to me to be their logical order, and then discuss each step in some detail.

Step 1. Capital investment: Mr. Bailey adopted a wholly inadequate figure of $275,000,000 as the investment in the Canal, as of December 31, 1921. He adds nothing to this total for investment subsequent to that date, but on the contrary amortizes it year by year out of the net profits his calculations produce. I shall comment in just a moment on that $275,000,000, but remind you at this point that the figure used by the Canal authorities is $516,000,000 as ccompared to the $275,000,000 Mr. Bailey used.

Step 2. Annual expenses: Mr. Bailey takes the net expenses of operating the Canal and its collateral business and municipal activities, sets aside the cost of Canal operation and maintenance as a proper charge against commercial users, and divides the remaining expenses by two. He charges canal operating and maintenance costs, plus one-half of the remaining expenses, against the commercial users, the other half being in effect charged against the Government as a defense cost.

Step 3. Forgiven tolls: Mr. Bailey also charges the Government with the amount of forgiven tolls, that is, the amount of the toll exemptions as reported.

Step 4. Interest: Mr. Bailey charges commercial users with interest at 3 percent on the capital investment; but, as that investment is taken at only $275,000,000 in the fiscal year 1922 and is amortized year by year out of the net profits claimed by him, the interest charge is gradually reduced, until it disappears.

Step 5. Amortization of capital: In 27 of the 28 years covered by Mr. Bailey's schedule, he develops a net profit, using the methods I have described. He applies this net profit each year to the capital, and thus amortizes it, claiming that it is now completely amortized.

I shall now consider these five steps in somewhat greater detail.

1. Capital investment: The amount of capital invested in the Canal as of December 31, 1921, is taken by Mr. Bailey as $275,000,000. This compares with a net investment of about $500,000,000 on that same date, as reported in the annual reports of the Panama Canal. The latest corresponding total is $516,000,000.

According to footnote 7 to the schedule, the value of $275,000,000, as of the end of 1921, was established by the Special Panama Canaí Commission of that year; that is, 1921. It is true that that Commission reduced the stated amount of investment in the Panama Canal as a commercial enterprise, and that for the years from 1921 to 1931 the annual reports of the Canal carried more than $110,000,000 in the accounts as National defense expenditures." This reduction was reviewed by the United States Bureau of Efficiency in 1931, which reached the conclusion that the deduction was mistakenly made and was not justified. The conclusion was accepted by the Canal administration and by the Secretary of War.

In 1931, at the recommendation of the Secretary of War, and specifically approved by the President, the amounts written out of the commercial-investment account were reincluded. The same conclusion was supported by the report of the special committee in 1937, to which Mr. Prince referred, at page 60. Mr. Bailey is thus using an investment base which has since been reviewed by several Government agencies, has been wholly discredited, and the policy underlying it reversed by Executive order.

According to annual reports of the Panama Canal, the net investment in Canal property, as of 1921, was approximately $500,000,000, and not $275,000,000. Some additions have been made since 1921, so that as of July 1, 1947, the net total was $516,332,000. This amount, set out in detail in the 1948 report (p. 140), includes the investment in the Canal itself, and in the business structures and equipment the profits derived from which are credited to Canal operations. It includes also an allowance of $7,000,000 for working capital, which I might say Mr. Bailey made no allowance for. Accrued depreciation of $53,739,000 is deducted, before arriving at the net total of $615,332,000. This total, let us emphasize, does not include a large investment, amounting to nearly $150,000,000, in defense works, and in certain additions to the Canal, such as additional locks, which were made at the request of the military authorities and which are regarded as properly chargeable to defense rather than commercial use.

The committee understands, of course, that the current cost of defending the Canal properties, including the pay and subsistence of troops assigned to that function, is met out of appropriations for military and naval purposes, and does not appear in the Panama Canal reports at all.

2. Annual expenses: Mr. Bailey in page 2 of his schedule A sets up what he calls the dual-purpose expenses of Canal operations. This tabulation, briefly described, includes all the net expenses reported by the Canal authorities, exclusive of those designated as Canal

operation and maintenance. In the annual report for 1948, these expenses are listed in detail in table 27, pages 146–7. Mr. Bailey extracts from this table the following groups of expenses, and includes them in his tabulation of dual-purpose expenses, although he sets them up according to his own and somewhat different classification: Management.-

$110, 722. 94 Utilities and services (excluding air-terminal expense)

2, 625, 948. 95 Sanitation.

3, 411, 316. 50 Civil government

2, 856, 867. 17 Annual payment to Republic of Panama_

430, 000. 00 Total.

9, 434, 855. 56 The last item in this list, the" Payment to the Republic of Panama," is classified in the annual report as a Canal operating cost. Mr. Bailey, however, shifted the payment to his group of dual-purpose expenses. And, by the way, that annual payment to the Republic of Panama, according to the Canal authorities, is part of the cost of the Canal, and Mr. Bailey extracts that and takes only one-half of the sum and charges it to the cost of the Canal.

Similar adjustments were made by Mr. Bailey in the net expenses for all years back to and including 1922, and the results are shown in his schedule, page 2. One-half of these dual expenses, derived by Mr. Bailey according to the methods I have described, are charged by him to commercial users, ard one-half for defense purposes. That is, of course, a purely arbitrary apportionment, and hears no relation whatever to the fact that in normal times three to four commercial ships transit the Canal for each Government ship that uses it. I do not mean to imply that the ratio of Government to commercial use should be applied. These use factors, as I have shown in my direct statement, are fully taken care of by crediting Canal operations with the amount of toll exemptions.

3. Forgiven tolls: Mr. Bailey also credits commercial operations with the so-called forgiven tolls, or amounts which Government vessels would have paid, were they not exempted from tolls. Having already cut the capital investment by almost one-half, as an offset to the military use of the Canal it is a definite duplication of credits to make allowance, also, for the toll exemptions. Commercial users are thus relieved of a carrying charge on about one-half of the investment of capital in a facility constructed and maintained for their benefit, and at the same time the Government is charged with one-half of the so-called dual-purpose expenses, which are an integral part of the cost of operating the whole Panama Canal activity:

4. Interest charge: Mr. Bailey concedes that interest should be charged against the Canal investment, and accepts the 3-percent rate utilized in the annual reports of the Panama Canal. But he applies that interest charge only to the greatly reduced capital investment claimed by him. That investment, as I have already stated, is taken by him as being no greater than $275,000,000 in 1921. No additions are made for subsequent improvements, and he amortizes the investment claimed by him by applying against it the annual profits as he calculates them.

Inasmuch as a profit is derived for almost every year by his optimistic method of reducing the investment and the expenses and at the same time crediting Canal operations with the toll exemptions, the investment shows a rapid rate of amortization in his schedule. Înas

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