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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 up 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.
Mr. THOMPSON. Thank you very much, Mr. Prince.
We will next hear from Ďr. Parmelee.

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.

Transportation service by water across the Isthmus of Panama competes with railroad transportation in the United States, and especially with the service rendered by our transcontinental railroad lines, all of which are members of the Association of American Railroads.

The railroads have a twofold interest in the Canal and its operations. They are heavy taxpayers, and as such contribute to the subsidies that other transportation agencies are enjoying at the hands of the Federal Government. They constitute also the largest and most widespread transportation agency in the United States and, as I have said, compete for traffic with ships using the Canal in intercoastal trade. In both capacities, that of taxpayers and that of transportation agencies, the railroads have a right to expect the Government to operate the Canal on a sound business basis, in such manner as to eliminate unfair competition and preserve the objectives laid down by Congress in its declaration of national transportation policy.

The Panama Canal was constructed and has already been operated for a dual use: Military defense and commercial. Both uses are important. It would be idle to speculate whether the Canal would have been constructed for defense purposes alone, or for commercial purposes alone. The fact is that both purposes were united in the decision to build the project.

It has been a recognized principle from the beginning that commercial users of the Canal should, by payment of tolls for the privilege of transit, meet their fair share of the costs of Canal construction and operation. The only question imvolved is to determine what are the costs of construction and operation, and what reasonable proportion of those costs should be charged to commercial users.

Operating costs, including maintenance and depreciation, have always been included in the annual costs of the Canal. An interest charge on the capital invested in the Canal has also been included, properly regarded as the annual charge made for the use of such capital. Carrying charges on captial constitute a part of the annual cost of conducting any business enterprise, as much so as current expenditures for maintenance and operation. This principle was adopted and endorsed by the special committee of three independent and neutral experts who recommended the present toll rate in 1937 (S. Doc. No. 23, 75th Cong., 1st sess., February 24, 1937), and has been supported by the Canal authorities for many years, as I shall show.

Mr. Prince in his statement has .considered the question of an equitable distribution of Canal costs between the commercial users who pay tolls for the use of the Canal and Government vessels which transit the Canal toll-free. As he explained, we think it reasonable to utilize the realtive use made of the Canal by commercial and Government vessels as a basis for allocating Canal costs, including current operating and maintenance expenditures and an allowance for interest on the net investment in the Canal.

In this way, effect is given to the military value of the Canal, and its value is measured in a reasonable and logical way. Furthermore, such a basis is easy to apply in actual practice and is in line with the general theory of cost accounting developed for the railroads and other transportation agencies.

I have applied these principles to the statistics of Canal operations, and set forth in the annual reports of the Governor of the Panama Canal, and proceed now to outline the results of such a calculation.

The Canal a business enterprise: The committee has before it the question of tolls on the Panama Canal. For a period of years, since March 1, 1938, the toll rate has been 90 cents per net Panama Canal ton. Thus existing toll rates, and the charges resulting from such rates, have remained unchanged for more than 11 years, whereas during the same period the cost of maintaining and operating the Canal has increased substantially. According to the Annual Report of the Panama Canal for 1948 (p. 44), operating expenses have increased more than 90 percent during the past 10 years.

Against this background of greatly increased costs, the question of a fair and reasonable rate of tolls for the future becomes of great importance. The solution rests largely on the answer to certain fundamental questions, foremost of which is the question whether the Government shall obtain a return on its investment in the Canal. On this point, a significant statement was made by Governor F. K. Newcomer of the Panama Canal, in his appearance before this committee on April 19, 1949. He answered the question very clearly as follows:

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.

This concept of the Canal and its function, which seems to us a sound one, has been recognized and applied by the Canal authorities for many years. For example, Col. C. S. Ridley, then Governor of the Panama Canal, made the following statement before this committee on March 18, 1937 (hearings on Panama Canal tolls, H. R. 3417, 75th Cong., 1st sess., pp. 9-10):

The principle is now well recognized that the Panama Canal is not to be regarded as a public improvement from which no direct return is to be expected, but it is to be considered and operated as a great utility of international character, constructed and maintained by the United States for the benefit of all nations upon the terms of equality prescribed by treaty, for which all commercial vessels using the Canal may be expected to pay tolls which are commensurate with the costs incurred in the construction, operation, and maintenance of the Canal.

Note that Governor Ridley specifically included the cost of construction in his list of costs chargeable to commercial users. The cost of construction, a capital cost, is met by an annual interest charge on such capital cost.

The special committee of experts, in their report to which I have already referred, covered the same point in a statement (p. 84) which has already been quoted by Mr. Prince. That statement was to the effect that the Panama Canal enterprise as a whole should be selfsupporting

Annual reports of the Governor of the Panama Canal, which contain a wealth of information regarding the physical and financial operations of the Canal, have accepted and applied the same concept of the Canal as a business enterprise, so operated as to produce the closest possible balance between receipts and expenditures. Thus the annual report for 1948 (p. 113), the latest report now available, describes the Canal as of a quasi-business nature, and refers to other industries in the corporate field as being comparable. The same thought was expressed by Governor Newcomer to this committee on

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April 19, as I have already pointed out, when he denominated the Canal as an "international public utility.” I shall later show in connection with the international character of the Canal that it is utilized by the commercial shipping of foreign nations to a greater degree than by American shipping.

Annual reports of the Canal include tabulations of revenues and expenses that supply a clear picture of its financial status. Such a tabulation, at page 142 of the 1948 report, includes receipts and expenditures for the whole period of operation, from 1914 to 1948, inclusive. An interest return on that net investment in the Canal is included in the tabulation as an element of annual cost. This inclusion of an interest charge is wholly justified, because it is an actual cost, and so long as the United States continues to have a public debt it is a direct and out-of-pocket money cost. To eliminate interest as one of the elements of cost on which Canal tolls are calculated would merely shift that cost from the domestic and foreign commercial users to the taxpayers of the United States, including, of course, the railroads.

I have drawn on the tabulation in the 1948 report for the calculations I shall submit. Before doing this, I would like to refer again, briefly, to the so-called dual-purpose nature of the Canal. The Panama Canal serves both the national security and the requirements of the commerce of the United States and many foreign nations. These are the two purposes, or functions, which led to its construction. The problem is to determine the current operating and capital costs of the Canal attributable to the two functions on a basis that will be reasonable and equitable. We have already suggested a basis for doing this, the relative use of the Canal by commercial users and by the Government. By commercial use I mean the transit by ships of all nations which pay tolls for the privilege. Government use includes the toll-free transit of military, naval, and other Government vessels of the United States, government vessels of the Republic of Panama, and war vessels of the Republic of Colombia, to which transit privileges are granted under special treaty provisions.

Allocation of Canal costs, 1914-48: In order to allocate Canal costs on the basis of use, it is necessary to adjust the standard financial statistics included in the Panama Canal reports in only one respect. The adjustment consists of crediting to Canal operations the amount of toll exemptions on Government transits. This amount is calculated and published each year in the Panama Canal report.

I submit two tabulations of receipts and expenses, which apply the method of cost allocation I have briefly described. Table 1 applies the method of the whole period of Canal operation to date, 1914 to 1948. That period includes both the First and Second World Wars. Table 2 applies the same method of cost allocation to the latest 10year period, 1939 to 1948, which includes the Second World War. This table more fully reflects recent and current costs and operating conditions. All the years shown are fiscal years.

As already stated, the annual report for 1948, page 142, includes statistics for the years from 1914 to 1948, inclusive. The same report, page 43, shows the approximate value of tolls which the toll-free vessels would have paid in 1948, at the prescribed rates, if tolls had been charged against them. A corresponding calculation appears in each of the preceding annual reports, with the exception of only 2

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years, 1940 and 1941. The aggregate amount of such toll exemption for earlier years I have tabulated by combining the annual amounts drawn off from each report. Including an estimate by me for the two missing years, the aggregate of such toll exemptions for the 35-year period 1914 to 1948 was $64,543,000.

Including this amount as a credit, the Canal Governor's consolidated account of Canal receipts and expenditures for the 35-year period 1914 to 1948 is shown in table 1. All the items, except the credit for toll exemptions, are drawn directly from page 142 of the Canal report for 1948.

TABLE 1.-Revenues, expenses, and deficit applicable to Panama Canal activities,

1914-48 Revenues: Tolls.

$574, 807, 937 Civil revenues.

7, 227, 926 Business profits.

26, 980, 571 Total revenues.

609, 016, 434

Net expenses.
Interest.

335, 482, 489 425, 025, 598

Total.

760, 508, 087

Computed deficit.

151, 491, 653 Credit: Toll exemptions-

64, 543, 000 Total..

86, 948, 653 Table 1 includes two items that do not represent actual cash transactions. One is a credit item, the allowance for tolls from which Government vessels are exempted, but which in the table is credited against Canal expenses as a measure of the use of the Canal for defense and general government purposes. The other is a debit item, being the charge for interest on net Canal investment.

As to the interest charge, the annual report for 1948, describing the accounting system under which the Canal operates, states (p. 113) thatsubsequent to the fiscal year 1920, a potential capital interest return of 3 percent has been considered as an unrecorded charge to expenses in determining computed surplus or deficit. This interest charge, the report explains, is in line with general accounting practice and with the accounting methods of the Interstate Commerce Commission. I quote the report (p. 113) on this point as follows:

The activities (of the Canal) being of a quasi-business nature, the accounting system has been adapted to conform as nearly as practicable to the principles and practices approved by the Interstate Commerce Commission and State boards regulating public utilities as well as to procedure followed by comparable industries in the corporate field.

This concept of the Panama Canal as a business enterprise has led the Canal authorities to set up an accounting system which, as pointed out in the annual report for 1948 (p. 143), includes in the accounts all revenues properly applicable to Canal activities, and charges against total revenue the net expenses, including charges for depreciation and interest on the capital invested, but excluding any charge to amortize the investment.

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