U.S. interest in Panama Canal

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U.S. interest in Panama Canal
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Table of Contents
    Front Cover
        Front Cover 1
        Front Cover 2
    Title Page
        Page i
        Page ii
    Table of Contents
        Page iii
        Page iv
    Hearings, statements, additional material supplied, and communications submitted
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    Back Cover
        Back Cover 1
        Back Cover 2
Full Text
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U.S. INTEREST IN PANAMA CANAL


HEARINGS
BEFORE THE

SUBCOMMITTEE ON THE PANAMA CANAL
OF THE

COMMITTEE ON

MERCHANT MARINE AND FISHERIES

HOUSE OF REPRESENTATIVES

NINETY-FIFTH CONGRESS
FIRST SESSION
ON
U.S. VITAL INTEREST IN THE PANAMA CANAL
JULY 25, 26, 27, 1977


Serial No. 95-10


Printed for the use of the Committee on Merchant Marine and Fisheries


U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1977


95-M8 0






















COMMITTEE ON MERCHANT MARINE AND FISHERIES


JOHN M. MURPHY, New York, Chairman


THOMAS L. ASHLEY, Ohio
JOHN D. DINGELL, Michigan
PAUL G. ROGERS, Florida
WALTER B. JONES, North Carolina
ROBERT L. LEGGETT, California
MARIO BIAGGI, New York
GLENN M. ANDERSON, California
E (KIKA) DE LA GARZA, Texas
RALPH H. METCALFE, Illinois
JOHN B. BREAUX, Louisiana
FRED B. ROONEY, Pennsylvania
BO GINN, Georgia
GERRY E. STUDDS, Massachusetts
DAVID R. BOWEN, Mississippi
JOSHUA EILBERG, Pennsylvania
RON DE LUGO, Virgin Islands
CARROLL HUBBARD, JR., Kentucky
DON BONKER, Washington
LES AuCOIN, Oregon
NORMAN E. D'AMOURS, New Hampshire
JERRY M. PATTERSON, California
LEO C. ZEFERETTI, New York
JAMES L. OBERSTAR, Minnesota
WILLIAM J. HUGHES, New Jersey
BARBARA A. MIKULSKI, Maryland
DAVID E. BONIOR, Michigan
DANIEL K. AKAKA, Hawaii


PHILIP E. RUPPE, Michigan
PAUL N. McCLOSKEY, JR., California
GENE SNYDER, Kentucky
EDWIN B. FORSYTHE, New Jersey
DAVID C. TREEN, Louisiana -
JOEL PRITCHARD, Washington
DON YOUNG, Alaska
ROBERT E. BAUMAN, Maryland
NORMAN F. LENT, New York
DAVID F. EMERY, Maine
ROBERT K. DORNAN, California
THOMAS B. EVANS, JR., Delaware
PAUL S. TRIBLE, JR., Virginia


CARL L. PERIAN, Chief of Staff
ERNEST J. CORRADO, Chief Counsel
FRANCES STILL, Chief Clerk
W. PATRICK MORRIS, Chief Minority Counsel



SUBCOMMITTEE ON PANAMA CANAL
RALPH H. METCALFE, Illinois, Chairman


ROBERT L. LEGGETT, California
DAVID R. BOWEN, Mississippi
CARROLL HUBBARD, JR., Kentucky
BO GINN, Georgia
LEO C. ZEFERETTI, New York


GENE SNYDER, Kentucky
ROBERT K. DORNAN, California

PHILIP E. RUPPE, Michigan
(ex officio)


JOHN M. MURPHY, New York
(ex officio)
TERRENCE W. MODGIAN, Professional Staff
BERNARD TANNENBAUM, Consultant
NICHOLAS T. NONNENMACIIERi, ProOesional Staff, Minority


(II)










CONTENTS

Hearings held- Page
July 25, 1977_-1
July 26, 1977------ -123
July 27, 1977_-161
Statement of-
Boone, James W., Director, Office of Rail Economics Operation, Fed-
eral Railroad Administration, U.S. Department of Transportation 105
Prepared statement- 106
Casey, Howard F., Deputy Assistant Secretary for Maritime Affairs,
U.S. Department of Commerce---94
Prepared statement---95
Cox, Robert G., management consultant-148
Ferguson, Yale, professor of Latin American studies, Rutgers Univer-
sity---209
Prepared statement---209
Geyelin, Henry, president, Council of the Americas----------------- 187
Gibbs, Dr. Stephen R., Institute for Marine Studies, University of
of Washington, Seattle--17
Graham, Brig. Gen. Irwin P., USAF, Assistant Deputy Director,
Politico-Military Affairs, Plans and Policy Directorate, Joint Chiefs
of Staff----133
Prepared statement--134
Hayes, Margaret D., Policy Sciences Division, CACI, Arlington,
Va-----33
Kujawa, Leonard, Arthur Anderson & Co., Chicago, Ill 48
Prepared statement- 49
Moorer, Adm. Thomas H., USN (Ret.), Chairman of the Joint Chiefs
of Staff, 1970-74, before the Subcommittee on Separation of
Powers, Committee on the Judiciary, U.S. Senate, July 22, 1977--- 128
Parfitt, Maj. Gen. Harold R., Governor of the Canal Zone------ 6
Prepared statement--7
Prewett, Ms. Virginia, Washington columnist on Latin America, North
American Newspaper Alliance---223
Reynolds, James J., American Institute of Merchant Shipping -------111
Rogers, William D., former Assistant Secretary of State for Inter-
American Affairs--182
Prepared statement ----------------------------------------164
Sheffey, Col. John P., U.S. Army (Ret.), executive vice president,
National Association for Uniformed Services- 144
Snyder, Hon. Gene, a Representative in Congress from the State of
Kentucky----- 3
Additional material supplied-
Casey, Howard F.:
Differences in insurance rates for vessels using the Panama Canal
and Cape Horn----- -118
Forecast for traffic on U.S. maritime trade routes which include
the Panama Canal-121
Major U.S. trade routes through the Panama Canal and their all-
water alternatives--292
Panama Canal exports-------- 376
Panama Canal imports-372
Petroleum shipments over U.S.-related trade routes------------ 880
Reduction in the size of the U.S. merchant fleet due to the
Panama Canal--120
Summary reply to questions of Panama Canal Subcommittee--- 359
Cox, Robert G.:
Questions of Mr. Dornan and responses--- 318
Questions of Mr. Metcalfe and responses- 313
(III)








Additional material supplied-Continued
Dornan, Hon. Robert K.:
Article from the Congressional Record of October 30, 1975: "The Page
Cubanization of Panama" by Hon. John M. Murphy- --------246
Remarks from the Congressional Record of June 7, 1977, made by
Hon. Gene Snyder---------- 163
Ferguson, Yale H.:
Minority question by Mr. Dornan and responses--------------- 343
Questions of Mr. Metcalfe and responses- 339
Geyelin, Henry:
A Guide to the Issues-United States, Panama, and the Panama
Canal -----------------------------------------------188
Questions of Mr. Dornan and responses ----------------------338
Gibbs, Dr. Stephen R.:
Economic value of the Panama Canal ------------------------ 22
Minority questions by Mr. Dornan and responses 273
Multiobjective analysis of the Panama Canal: The Value of a
Marine Transportation System---414
Panama Canal Traffic: Prospects for the Future --------------- 37
Questions from majority members and responses ---------------265
Graham, Brig. Gen. Irwin P.:
Responses to questions of majority members------------------ 296
Responses to questions of minority by Mr. Dornan------------- 297
Hayes, Margaret Daly:
Questions of Mr. Dornan and responses- 280
Questions of Mr. Metcalfe and responses- 278
Kujawa, Leonard J.:
Questions of Mr. Dornan and responses---------------------- 284
Questions of Mr. Metcalfe and responses--282
Parfitt, Gov. H. R.:
Estimated gross payments and income flow to the Republic of
Panama from the Canal Zone--264
Minority questions submitted by R. K. Dornan and responses 280
Questions of Mr. Dornan and responses---------------------- 262
Questions of Mr. Metcalfe and responses -256
Prewett, Virginia:
Article from Sea Power of August 1976: "The Panama Canal:
Past and Present in Perspective"-228
Questions of Mr. Dornan and responses- 344
Response further to question 5 -------------------------352
Questions of Mr. Metcalfe and responses --------------------353
Rogers, William D.:
Minority questions of Mr. Dornan-326
Responses---334
Questions of Mr. Metcalfe-325
Responses----328
Sheffey, Col. John P.: Responses to Mr. Metcalfe's questions .......-303
Whitman, W. M., article entitled, "Value of the Panama Canal and
Related Property"-391
Communications submitted-
Admirals Robert B. Carney, George Anderson, Arleigh A. Burke,
and Thomas H. Moorer: Letter of June 8, 1977, to the President .... 126
Boon6, James W.: Letter of August 19, 1977, to Hon. Ralph H.
Metcalfe- 294
Briggs, Richard E.: Letter of August 17, 1977, to Hon. Ralph H.
Metcalfe- 386
Casey, Howard F.: Letter of August 29, 1977, to Subcommittee on
Panama Canal_-288
Senators Strom Thurmond, Jesse Helms, John L. McClellan, and
and Harry F. Byrd, Jr.: Letter to the President on June 15, 1977 ----- 125










U.S. VITAL INTERESTS IN THE PANAMA CANAL


MONDAY, JULY 25, 1977

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON PANAMA CANAL,
COMMITTEE ON MERCHANT MARINE AND FISHERIES,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:08 a.m., in Room
1302, Longworth House Office Building, Hon. Ralph H. Metcalfe
(chairman) presiding.
Mr. METCALFE. The subcommittee on Panama Canal will come to
order.
The hearings for the next three days are being held by the
Panama Canal Subcommittee in order to examine what vital inter-
ests the U.S. has in the Panama Canal Zone during the remaining
years of the 20th Century.
To explore what, in fact, are our interests in the Panama Canal is
of paramount importance if we arb, in fact, to pursue for the U.S.
and the world a positive and constructive course of action.
In attempting to ascertain what our vital interests may be, we
must deal with facts, not rhetoric, reality and not myths. We must
approach the subject with a certain sensitivity to the opinions of
other nations.
The subcommittee will look at three specific areas during the
next few days: specifically, the economic value of the Panama Canal
to the U.S.; the military value of the Panama Canal and the
Panama Canal Zone to the U.S.; and, thirdly, we will examine how
our presence in the Canal and the Canal Zone affects our relations
with other countries.
Although I do not think that we should conduct our foreign policy
by polling other nations, I nonetheless think that the increasing
interdependence of the various nations of the world compels us to
show a certain sensitivity towards the aspirations and concerns of
other nations. To quote Edmund Burke: "Nothing is so fatal to a
nation as an extreme of self-partiality and the total want of consid-
erations of what others naturally hope or fear."
As I stated on the floor of the House on May 19th of this year:
"The facts of the Panama Canal situation ought to be set before the
American people. We have an obligation to respect the expressed
viewpoints of our constituents. But we have an equal obligation, as
leaders and representatives, to communicate to the people certain


(1)





facts and realities. Experience has shown that the American people
will respond rationally, compassionately, and wisely, when the facts
of a particular situation are made clear."
These hearings will be conducted in a fair, impartial, objective,
and, I certainly anticipate, bipartisan manner.
I now invite the Minority Member from California, Mr. Dornan, if
he wishes to make an opening statement.
Mr. DORNAN. Mr. Chairman, I have no opening statement. I
appreciate your calling these hearings. You recall on our trip down
to the Panama Canal area in February, at the press conference, I
said that I was afraid the impression was being given in Panama
and throughout Central and South America that all was going to be
resolved with a new treaty on Contadora Island, when, in fact,
major decisions would be made here in the Senate and House of
Representatives. I hope these hearings will help to further that
impression throughout the world. The Congress is going to play, I
believe, the vital role in what happens as far as the future of our
country is concerned with the history of that area.
Mr. METCALFE. Thank you very much. We are delighted that you
are able to be here.
The first panel will consist of General Harold Parfitt, Dr. Stephen
R. Gibbs, Dr. Margaret Hayes, and Mr. Leonard Kujawa. We are
especially pleased this morning to have a very competent panel of
witnesses on the subject of U.S. Vital Economic Interests in the
Canal.
This panel includes:
-Governor Harold R. Parfitt, of the Canal Zone, whose dynamic
policy and previous cogent testimony dismiss the need for any
lengthy introduction to the subcommittee. Permit me to say that
the Governor is, of course, acutely aware of all the financial
operations of the Panama Canal Company, and that he was Lieu-
tenant Governor in the 1960's previous to his present position.
-Dr. Stephen Gibbs, now with the Institute for Marine Studies at
the University of Washington, is an accomplished scholar on the
Canal as a transportation artery. He co-authored with Norman
Padelford a volume on Maritime Commerce and the Future of the
Panama Canal. His thesis at M.I.T., for a Doctor of Philosophy
degree in Ocean Engineering, was a multi-objective analysis of the
Panama Canal as a marine transportation system.
-Dr. Margaret Daly Hayes is a senior research associate in the
Policy Sciences Division of CACI, a think-tank-type firm that pro-
vides professional services for the solution of managerial and oper-
ational problems. She received her doctorate in political science
from Indiana University, and the areas she has given special
analytic attention are Latin America, Europe and the developing
world in general. Dr. Hayes is a frequent lecturer on Latin Ameri-
can affairs and has written on the economic prospects of various
nations and has done one project on Downstream Implications of
Panama Canal Treaty Negotiating Options.
-Leonard Kujawa is a partner in the accounting firm of Arthur
Andersen & Company. He is a certified public accountant and a
member of the American Institute of Certified Public Accountants
and other professional organizations. He has spent 20 years concen-







trating on the finances of rate-regulated utilities and governmental
organizations. Mr. Kujawa has done numerous studies on the tolls
structure of the Panama Canal and the financial mechanisms by
which the Canal is governed.
I have just been informed by staff that Congressman Snyder has
sent a statement which he wishes read.
Mr. DORNAN. This statement is by Honorable Gene Snyder, of
Kentucky.
STATEMENT OF HON. GENE SNYDER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF KENTUCKY
"Mr. Chairman, I must file a protest against the haste with which
the Majority's hearings have been rushed into being, and accord-
ingly state that I will absent myself from them.
"We all know that this haste was totally due to a fear on the part
of the Majority that the proposed treaty with Panama would be
sent up here shortly, and the Majority's feelings that the hearings
should be held in advance of that event.
Some people may even have hoped the hearings would help
grease the skids for that treaty, a treaty by which the American
taxpayers would be divested of what may well be their single-most
important piece of territory-the Canal Zone, through which the
Panama Canal courses from the Atlantic to the Pacific.
"From the list of witnesses slated to appear, I do not expect much
of an argument will be heard for keeping the Canal and the Zone
which frames its route. I cannot acept the Chairman's statement in
his last letter to me dated Friday, July 22, to wit, 'I have no idea as
to whether in fact the witnesses know what the State Department's
position is.' To make such a statement is comical. The immediately
preceding sentence reads, 'the witnesses that have been chosen
were asked to participate because of their expertise in the areas
which the Subcommittee will be addressing.' If experts, they cer-
tainly know the essentials of the proposed treaty.
"As the exchange of correspondence with the Chairman shows,
the Minority was offered the opportunity to select one witness for
each of the panels to testify for ten minutes, and were such
witnesses to participate in these three days of hearings, I am sure a
more balanced record of testimony would be produced for the
benefit of the public.
"The Chairman scheduled these hearings on June 30th and they
were placed on the full Committee's calendar for July. The calendar
was mailed out with full Committee Chairman Murphy's accompa-
nying Memorandum, also dated June 30. However, that memo did
not state the purpose of the hearing. Moreover, June 30 was the last
day Congress was in session, with the July 4th recess following
immediately. Hence the memo and calendar did not even arrive in
my office until the Members of the House had all left Washington,
as is well known to the Subcommittee Chairman.
"Even on the day I returned, the 11th of July, I had not received
formal notification from the Chairman in the usual manner, desig-
nating the purpose of the hearings and other details. Nor had I on





the 12th. His formal letter was dated the 13th, and I read it upon
receipt, Thursday, the 14th of July.
"While my Subcommittee staff assistant may have been aware of
the hearings being scheduled, as the Chairman has pointed out, he
could not know until the Majority's witnesses were selected and
firmed up as definite that those Majority witnesses would exclude
those whom he had suggested and which it is anticipated would
testify contrary to the Administration's position.
"At the time I received the Chairman's formal letter of the 13th
notifying me of the hearings, the Majority's witness list was still not
firmed up. Now at that point, on July 14th, there were but six
working days before the first scheduled day of these hearings, and it
is unreasonable to try to get witnesses in six working days.
"I responded on the same day to the Chairman's letter, stating I
would not participate unless we were given at least 30 days' notice
within which to invite witnesses, ascertain their willngness to
testify, and allow them to be adequately prepared.
"The Chairman answered, also on the 14th, that he had acted
within the Committee rules in giving the notice he had. I had not
questioned the Chairman's right to set the hearings as he did, but
had indicated my conviction that they required much better prep-
aration than the time remaining allowed for the Minority.
"On Monday, July 18th, I wrote the Chairman requesting equal
time in September, after the August recess, for completing a better
committee record in the hearings with Minority witnesses. I pointed
out that even should a new treaty be sent up to the Congress, the
Minority would still present its witnesses.
"I received no answer to this request until last Friday, July 22, in
a letter from the Chairman dated the 22nd, and handed to my
counsel on the subcommittee at 4:35 p.m. I had already taken the
3:59 p.m. plane to Kentucky. In that letter from the Chairman, read
to me over the phone at 7:15 last Friday evening by my assistant,
and dated the last working day before the opening of the hearings
today, the Chairman stated- the Minority could have a day of
hearings, not equal time, in the last week of July, not in September
after the recess-or even in August.
"That gave me not even the six or seven working days' notice I
had had in the first place, but only four days if I were to set
Minority hearings this Thursday, the 28th, or five days if I were to
hold them Friday, the 29th. There is no way a reasonable person
could comply with that time requirement.
"This is a remarkably absurd situation, to say the least.
"The Chairman arbitrarily refused my request, stating it would
'stretch out the hearing into September.' He seems to have over-
looked the fact that the Congress, by way of its August recess, is
stretching out the entire business of the American people into
September. He could, had he wished, have made an accommodation,
but I realize that might prejudice his objectives which are obviously
to bolster the position of the State Department and the Administra-
tion in giving away the Panama Canal.
"I fear these hearings will prove to be slanted in their results
because of the Majority's choice of witnesses.
"In point of actual fact, the majority of the members of both
parties on the Panama Canal Subcommittee and on the full Com-





mittee on Merchant Marine and Fisheries, might be taken as
opposed to the State Department's proposed treaty if we were to
look at the individual votes on the various amendments I have
offered to recent State department authorization and appropri-
ations bills.
"Since the topic of the hearings is to ascertain 'The Vital Inter-
ests of the United States in the Panama Canal and Canal Zone,' it
is obvious that they are designed to make a record that will conform
the proposed treaty to the language that now appears in the law as
reflected in the Buchanan Amendments which have been adopted
as substitutes for my amendments to the State Department authori-
zation and appropriations bills.
"Clearly, this is in no way a Majority-Minority conflict as far as
political parties are concerned. Members of each party on our
committee and subcommittee are divided on the treaty question, as
well as in the Congress as a whole.
"It is a matter of the highest importance that witnesses should be
called who would present arguments opposed to the rationale of the
State Department-namely, that the Panama Canal and the Canal
Zone no longer retain sufficient economic and strategic military
importance to our citizens, and that for the sake of better interna-
tional relations, the U.S. should surrender that territory and
waterway to the demands of Panamanian dictator, Omar Torrijos.
"I regret that the Chairman has not considered my request
favorably, in the national best interests of the country."
Mr. METCALFE. Thank you, Mr. Dornan. Just to set the record
straight, I would like to make a few comments with regard to the
criticism that Mr. Snyder, the ranking Minority Member, has made
of these hearings.
It is regrettable that Mr. Snyder will not participate in these
important hearings which are attempting to define and clarify U.S.
interests in the Panama Canal and Canal Zone. The more members
that participate in these hearings, the more of an educative func-
tion they will serve for the Congress. But while I regret Mr.
Snyder's decision, I think that I, as Chairman, have been more than
fair with the Minority.
First, the Minority was told of the general subject of these
hearings on June 30, nearly one month ago. We on the Majority
side cannot take responsibility for the communication or
noncommunication that takes place within the Minority staff and
members. The Minority would have been told of these hearings
earlier, if a decision had been made to hold them. As events
developed, the Minority was informed of the scheduling of these
hearings only a day or two after a decision was made.
Second, the basic Minority contention is that there was insuffi-
cient time for the Minority to select their witnesses. This belies the
fact that several of the witnesses that have been selected by the
Majority were contacted and agreed to testify even after Mr. Snyder
received correspondence from me on July 14. When the Minority
was told verbally about these hearings on June 30, not one witness
of whom I am aware was chosen or even contacted. Although there
are a limited number of people who are experts on the Panama
Canal, I am sure that there are many who would have identified





with the ranking Minority Member and been happy to testify.
Unfortunately, I cannot concur with his rationale.
Third, I want to make the point that I alluded to in correspon-
dence to Mr. Snyder. In preparation for these hearings, we have
more than complied with the rules. To allow the Minority to dictate
the time, the terms, and the setting for these hearings would be an
abdication of the responsibility of the Majority and would be an
unwholesome precedent not just for this subcommittee but for the
entire Merchant Marine Committee. We have indicated on several
occasions that we are flexible about the specifics of witnesses and
panels. But we cannot consider running these hearings into Septem-
ber when almost assuredly we will have matters more directly
connected with a treaty with Panama to worry about.
The ranking Minority Member has asserted that the witnesses
have been chosen because they are pro-treaty. First of all, I would
ask any intelligent individual to look at the qualifications of the
witnesses and assert which one of them is not competent to testify.
These are the most qualified individuals in the U.S. on the subject
of the Panama Canal, whether they are pro-treaty or anti-treaty.
Second, the rank classification of individuals as being pro-treaty
and holding the State Department line, or being anti-treaty and
sharing the opinion of the ranking Minority Member, is a type of
simplistic thinking that I thought was getting behind us. The
Panama Canal issue is complex, full of shades of differences, and
can be seen from many perspectives, as the testimony will probably
show today. There are lots of "pro-treaty" people who do not agree
with the State Department, and there are lots of "anti-treaty"
people who don't agree with the ranking Minority Member, if you
want to use this classification system.
Third, and most important, the witnesses were chosen because of
their particular expertise in a field and not because of their treaty
position, because in many instances we do not know their treaty
position and because they may not have ever indicated one.
I want to thank the audience for indulging in my statement, and I
hope that we can now forget this matter and go on and have some
excellent hearings.
PANEL I ECONOMIC: MAJOR GENERAL HAROLD R. PARFIT,
GOVERNOR OF THE CANAL ZONE; DR. STEPHEN R. GIBBS, IN-
STITUTE FOR MARINE STUDIES, UNIVERSITY OF WASHINGTON,
SEATTLE; MARGARET D. HAYES, PH.D., POLICY SCIENCES DIVI-
SION, C.A.C.I., ARLINGTON, VIRGINIA; AND LEONARD KUJAWA,
ARTHUR ANDERSEN & CO., CHICAGO, ILLINOIS
Mr. METCALFE. We now recognize Governor Parfitt.

STATEMENT OF MAJOR GENERAL HAROLD R. PARFITT
General PARFITT. Mr. Chairman, with your permission, I would
like to cover highlights of my statement and submit the full text for
the record.







Mr. METCALFE. If there is no objection, it shall be ordered that the
full statement shall be entered into the record. Hearing no objec-
tion, it will be entered.
Thank you, and proceed.
[The information follows:]


PRESENTATION BY
GOVERNOR H. R. PARFITT
TO THE PANAMA CANAL SUBCOMMITTEE
OF THE HOUSE MERCHANT MARINE AND FISHERIES COMMITTEE

July 25, 1977

1. Mr. Chairman and members of the Subcommittee, I am Harold R.
Parfitt, Governor of the Canal Zone-and President of the Panama Canal
Company. The Panama Canal Company and the Canal Zone Government are the
agencies of the United States responsible for the operation of the
Panama Canal and the administration of the Canal Zone.

2. You have asked me to give you my view of the economic importance
of the Panama Canal to the United States, and to the economies of the
world, and I am happy to be able to do so.

3. The matter of trying to establish even an approximate economic
value for the services of the Panama Canal is of considerable complexity
because it cannot be measured directly. In a normal marketing situation,
value is related to the selling price, which is determined by supply and
demand and the practical maximun that traffic will bear. But, Panama
Canal tolls are not set at the maximum that traffic will bear. By law,
they are set. only to recover costs of operation.

4. The value that accrues to a manufacturer, for example, is the
excess of his sale price over his costs, in the form of surplus, or
profit. For the Panama Canal, because services are priced at cost, the
value of the service accrues not to the Canal as profit but to the user
as savings, or to put it into economic terms, as a "user's surplus."
The economic value of the Canal in a year, then, is the total user's
surplus or savings realized by Canal customers.

5. How are these savings measured? We measure them by estimating
what the Canal user would have to pay if transport was by the next lowest
cost alternative. The savings -- that is, the user's surplus -- is the
difference between what is paid to use the Canal and what would be paid
if there were no Canal.

6. To look at this another way, if we were to imagine that instead
of letting the user have the surplus, the Canal raised its tolls to the
maximum that traffic would bear, then the economic value would accrue
to the Canal directly in the form of profits. But, what determines the
maximum tolls that the Canal can charge? The maximum is equal to the
costs of the various alternatives to the Canal for the transport of the
multitude of commodities that pass through the Canal. To charge more
than any individual commodity will bear in terms of the alternatives
open to it is to divert traffic to the competition. Therefore, the
economic value of the Canal is defined and limited by the cost of the
alternatives.

7. In the last decade or so, a number of studies have touched on
this general question of economic value. In 1966, the Arthur D. Little
Company analyzed potential Canal revenues as opposed to tolls actually




8



charged for fiscal 1963. In 1971, the Economic Commission for Latin
America (ECLA) (a United Nations organization), completed a study of
Canal revenues and estimates of savings to users, and in 1974 the
Maritime Administration completed a study of The Panama Canal in U. S.
and Foreign Trade.

8. These studies had essentially one focus in their analyses of
the economic value: The difference in distance between ports via the
Canal versus the shortestalternate all water route. For example:
The sea route distance between New York and Los Angeles is shorter by
almost 8,000 miles using the Panama Canal versus the Straits of Magellan
route. Between New York and Yokohama, the Panama route is about 3,000
miles shorter than the Suez route, its nearest competitor.

9. The effect of A. D. Little's findings imply that the economic
value of the Canal to all users in 1963 was equal to one or two times
the tolls of that year which were $57.9 million. This is the total
economic value to all users, not just the United States.

10. The ECLA study estimated the direct transportation savings to
all users of the Panama Canal at an annual average of $540 million in
the decade 1960-1970, and at a potential annual average of $805 million
between 1970 and 1980.

11. The Maritime Administartion (MARAD) study estimated that a
Canal closure would increase the delivered annual price of U. S. exports
by $932 million and the annual price of imports by $583 million, in-
cluding $78 million for intercoastal deliveries. The supporting
analysis for the MARAD study is primarily applicable to short-run effects
but also represents their view of a "worst-case" situation over the long
term.

12. Although the three studies were nct exactly comparable, they
were primarily based on the assumption that the only alternative to the
Panama Canal worth considering was the longer way around, using essen-
tially the same size ships. This was possibly the only true alternative
in the Canal's early years, but today's economic and technological
environment is considerably different, offering far more competitive
alternatives. Thus the economic value of the Canal should be estimated
by a comparison with all major alternatives which include alternate
modes of transport such as rail, truck, pipeline, and air; the use of
larger ships; and new sources of or markets for Canal related commodities.

13. The Canal is now meeting stronger competition from alternatives
taking advantage of the economies of scale such as the transportation of
commodities in large ships whose daily cost of operation per ton of
cargo is in some cases low enough to permit them to go the long way
around at lower landed cost than a smaller ship using the Canal. Another




9



competitor, the shipment of goods by sea and rail via the mini- or
landbridge, uses the rapid handling of containerized cargo to marry the
advantages of ocean and rail shipments.

14. To date, only one value study has, to our knowledge, taken into
account the very real alternatives to the Canal. This study, The Economic
Value of the Panama Canal, was prepared by Dr. James E. Howell and
Dr. Ezra Solomon of Stanford University in conjunction with a private
firm, International Research Associates, in December 1973. The study
concluded that in the years between 1975 and 1985 the annual economic
value of the Canal to all users would build from $93 million to $141
million, with an average economic value, or user's surplus, of $117
million. The study was based on the traffic forecast and sensitivity
analysis of the major commodities moving through the Canal at that time.

15. This $117 million is the "sustainable" user's surplus. By
sustainable is meant the equilibrium condition that will occur after a
transition period during which the users adjust to more economical
alternatives. For example, if tolls are doubled, revenues may double
initially, but this would be transitional. In the longer run, as long
as five to ten years depending on the commodity, some users would adapt
by using more economical alternative arrangements.

16. An addendum to the economic value study reviewed the "short-term"
value of the Canal. This study estimated the total first year costs
associated with an abrupt closing of the Panama Canal before users made
alternative arrangements at $367 million more than the tolls that would
have been collected for the year.

17. The benefit of this user's surplus accrues to the various
national users through the sellers, the buyers, or the shipping lines.1
Because-the shipping industry is highly competitive, most of the
potential savings to the shipping lines are passed along to the sellers
or buyers. How the sellers or buyers share the savings depends upon
market conditions.

18. Counting its share of savings accruing to sellers and its share
of savings accruing to purchasers, it is estimated that the United States
benefits to the extent of approximately one-third of the total annual user's
surplus, or economic value. The rest of the user nations share the remaining
two-thirds of the annual economic value. Japan, the second most important
user in terms of cargo, can probably lay claim to 19 percent and Canada
to approximately 5 percent, and so forth down the line in order of Canal
use. It is not possible for me to determine the impact of this shared
user's surplus on the various economies, but I think it is safe to say
that the relative impact on smaller economies is greater than that on






10


the larger ones. The trillion dollar plus U. S. economy, for instance,
dwarfs the almost $40 million user's surplus estimated for the United
States.

19. The $117 million user's surplus relates to the amount by which
Canal tolls could be increased under the circumstances obtaining at the
time of the study, 1973. As those circumstances change, as for instance
with changes in oil prices, the Canal's competitive position changes,
moving the user's surplus up or down accordingly.

20. Precision in estimating the user's surplus and thus the amount
by which tolls can be increased is obviously not possible but we do know
that the freedom to raise tolls is more limited than before since the
costs of alternatives are nearer to the cost of using the Canal.

21. I have talked about some of the theoretical aspects of economic
value -- theory which enables us to appreciate the relative importance
of the Panama Canal to United States and world commerce. The Canal may
be thought of, however, in other, more absolute terms.

22. There is ample evidence that an absolute advantage to world
trade exists that permits the Canal to retain its importance. There are
today, for instance, almost 25,000 vessels of 1,000 gross registered
tons and over, out of an approximate world fleet of 27,000, that can
transit the Panama Canal, and some 4,000 actually do use the Canal.

23.. Approximately 921 vessels, or 96 percent of the U. S. merchant
fleet (active and inactive), are able to pass through our locks and some
98.0 percent of our U.S. Navy vessels can do so.

24. Last year, a poor year by Canal standards, nearly 12,300 transits
through the Canal were made by vessels flying the flags of 65 nations.
U. S. flag vessels alone made 1,064 transits, or almost nine percent of
the total. The United States was, in fact, number three in transits in
fiscal year 1976.

25. Commercial cargo tonnage through the Canal is another important
index of utility.

26. In fiscal year 1976, approximately 117 million tons of commercial
cargo passed through the Canal, down sharply from the 1974 level of 147
million tons because of recession and other factors, but up by over 30
million tons from 1967, a decade ago. Of the 117 million tons in 1976,
over 78 million originated in or was destined for the United States in-
cluding intercoastal cargo (49 million originated in; 24 million destined
for; 5 million in intercoastal trade.) Accordtag to figures available to
the Company, this cargo volume represented percent of the total U.S. sea-
borne commerce of the United States compared with about 15 percent as an
average for the prior decade. 10







11



27. In U. S. foreign trade this cargo included approximately 28
percent of our total coal exports, 15 percent of coarse grain exports
and 26 percent of all phosphates sent abroad. Import tonnages were
less substantial and it is interesting to note that one item of major
importance to the United States, crude petroleum, passes through the
Canal in relatively minor quantities. In 1976, U. S. crude oil imports
through the Panama Canal totaled 3.2 million long tons compared to
1.3 million tons in 1967.

28. U. S. intercoastal traffic through the Canal has declined
substantially from its peak of 13.5 million tons in 1924, but was still
4.7 million tons last year and may indeed rise again if the Alaskan
North Slope crude oil moves through the Canal as now planned.

29. Information received on July 20, 1977, indicates that the am
of North Slope oil now scheduled to transit the Panama Canal is about
200,000 barrels, or 29,000 long tons, per day which equals to an averag
of 1.3 transits daily (including laden and ballast). Original estimate
were for about 70,000 long tons to pass through the Canal daily which
would have generated some 3 transits a day.

30. The lower volume is attributable to the recent damage to Pump
Station No. 8 on the trans-Alaksa pipeline which oil industry sources
indicate may take from 9 to 15 months to repair. Once the pump station
is repaired, or replaced, it is possible that the amounts originally
estimated will transit the Canal.


Dunt

e
s


31. Needless to say, the value of the Panama Canal under such cir-
cumstances would be extremely difficult to quantify since both the
potential volume and duration of North Slope oil through the Canal are
conjectural at this point.

32. Other countries are even more dependent on the Panama Canal for
the movement of their seagoing tonnage. For example: In 1974, some
73 percent of Ecuador's imports and exports were Canal oriented, and
in the case of Peru, almost half of their tonnage passed through the
Canal. Generally, most Central American and West Coast South American
countries rely heavily on the Canal.

33. The fact that cargo tonnage through the Panama Canal has increased
in a rather steady fashion over the years and is forecast to continue to
increase, reinforces my firm conviction that the Panama Canal serves and
will continue to serve a useful function. If the past may be thought of
as prologue, it helps to balance perspective by noting that total
commercial cargo tonnage through the Canal increased by almost 400
percent between 1948 and 1976.

34. The increase over the last twenty-eight years has been relatively
steady with only five years of cargo decline due to recessions in the







12



entire period. And, incidentally, we have measured our historic growth
to 1976, itself a recession year in which Canal cargo dropped by 30.0
million tons from the 1974 high.

35. This year (FY 1977) cargo shipments are once again on the rise
with an increase in the first nine months of the year of 5.5 million
tons, or 6.4 percent ahead of the same period last year.

36. Thus far, our discussion has been keyed generally to the past
and the present. I would now like to talk about my view of the future,
including our forecast of traffic and our financial viability and
capital funding.

37. A series of events have combined to change the possible future
level of Canal traffic and tolls revenue. Since just 1974, world trade
has slumped in the most severe recession since the 1930's, and the Suez
Canal has reopened, siphoning off substantial amounts of Panama Canal
traffic. The pattern of Canal traffic seems to be entering a phase of
indefinite duration of more moderate growth than experienced in the
last thirty years.

38. As in the past post-war period, future Canal traffic will
certainly be subject to unforeseen outside political and economic
factors and cyclical variation must be expected as a matter of course.
Likewise, certain fundamental aspects of world trade such as growth
itself and the specialization of transportation modes must be thought
of as forming the backdrop for Canal traffic over time. But given these
basic elements of trade through the Canal, it is also apparent that a
consensus is forming: continued growth but at more moderate rates.

39. Our latest in-house forecast of Canal traffic and tolls revenue
at current rates foresees oceangoing transits rising from 33.4 in fiscal
1977 to 40.6 per day in 1990 or 12,200 and 14,835, respectively. During
the period, average vessel size is expected to go from 11,420 Panama
Canal net tons to 13,000 tons. Tolls revenue is expected to increase
from $166.6 million in 1977 to $240.0 million in 1990 at present toll
rates.

40. If we simply extrapolate the estimates to the year 2000, transits
would reach 17,000 or 46.6 per day, while tolls revenue would be almost
$300.0 million by the end of the century. It is fair to note, however,
that our forecast is considerably more conservative than that prepared
by the Interoceanic Canal Study Commission in 1970 in conjunction with
the feasibility studies for the sea level canal. It is also slightly more
conservative than our last long term forecast (to 1985) prepared by
Economics Research Associates for the Panama Canal Company in 1974.







13



41. Forecasting tolls and transits that far into the future is a
hazardous undertaking and while we have presented our best estimate of
the underlying trend of Canal traffic, events such as war or new
discoveries (e.g., North Slope oil) could change the estimates.

42. The Company is required by law to set tolls to recover all costs
of operating and maintaining the Canal. If our forecast of growth in
tolls revenue is reasonably correct, and if historic inflationary cost
patterns continue, it will be necessary to adjust tolls periodically to
break even, just as we have had to adjust upward the tariffs charged
our employees. Since inflation should impact concurrently on the costs
of alternatives to the Canal' I view such adjustments to tolls as normal
price adjustments which should obviate the necessity for future subsidies.
I do not envision these periodic adjustments eroding the comparative
advantage provided by the Canal, that is, the Canal's economic value,
and therefore feel that they will not have a depressant effect on
predicted traffic growth.

43. Given the transit forecast to the end of the century, I foresee
no difficulties with numerical capacity as a limitation on growth. The
dimensions of our locks, however, are a limiting factor since they prevent
Canal traffic from taking full advantage of the economies of scale. As
a result, toward the end of the century some growth which might otherwise
accrue to the Canal could be siphoned off by competition which can take
advantage of those economies of scale.

44. Although the forecasts do not envision our reaching numerical
capacity, this does not mean that we can skimp on capital expenditures
to replace and improve Canal facilities. As facilities age and the aver-
age ship using the Canal gets bigger, it is incumbent upon Canal manage-
ment to replace plant with equal or better facilities. Our concern is
with the safe and expeditious handling of all ships, not just for their
sake but also to ensure the safety of the thin artery that is the
Panama Canal.

45. To look at it another way, expenditures on capital replacement
and improvements provided from cash flow are a means of protecting the
gross investment of the United States in the Canal. In May 1976, the
General Accounting Office (GAO), reporting on the financial status of
the Panama Canal Company and Canal Zone Government for fiscal years
1974 and 1975, included in their audit a summation of the
gross investment of the United States in the enterprise since its
inception. Updated through 1976, that gross investment, which does
not include defense investments, is about $1,886 billion. Recoveries
have amounted to about $1.134 billion, leaving an unrecovered investment
of approximately $752 million.


95-548 0 77 2





14


46. The Panama Canal enterprise is required by law to recover its
costs of operation and maintenance. It is not, nor was it intended to
be, a profit generating entity and thus does not calculate return on
investment in a commercial sense. The return to the United States on
its investment in the Canal enterprise, however, can be thought of to
include interest and dividend payments to the U. S. Treasury as well as
the U. S. share of the user's surplus which has accrued over time. I
anticipate that the Canal could continue to provide a return on invest-
ment to the United States even though heavier traffic demands than those
predicted could possibly increase our need for capital funds for
modernization beyond what the enterprise can finance internally.
47. In summary, let me emphasize that whether we look at the impor-
tance of the Canal in the narrow terms of economic value defined as the
relative range within which tolls can be raised, or whether we look at
the importance in terms of the absolute value reflected in the continued
heavy use of the Canal, we can see that the Canal is still viable and capable
of continuing to provide quality service to'at least the end of this century.
48. Mr. Chairman, this completes my opening statement. I will be
happy to answer any questions you may have and to offer for the record
any additional information that may be required.

General PARFIrr. The matter of trying to establish even an
approximate economic value for the services of the Panama Canal
is of considerable complexity because it cannot be measured di-
rectly. In a normal marketing situation, value is related to the
selling price, which is determined by supply and demand and the
practical maximum that traffic will bear. But, Panama Canal tolls
are not set at the maximum that traffic will bear. By law, they are
set only to recover costs of operation.
The value that accrues to a manufacturer, for example, is the
excess of his sale price over his costs, in the form of surplus, or
profit. For the Panama Canal, because services are priced at cost,
the value of the service accrues not to the canal as profit but to the
user as savings, or to put it into economic terms, as a "user's
surplus." The economic value of the Canal in a year, then, is the
total user's surplus or savings realized by Canal customers, that is,
that the difference between what is paid to use the Canal and what
would be paid if there were no Canal.
In the last decade or so, a number of studies have touched on this
general question of economic value. In 1966, the Arthur D. Little
Company analyzed potential Canal revenues as opposed to tolls
actually charged for fiscal 1963. In 1971, the Economic Commission
for Latin America (ECLA), a United Nations organization, com-
pleted a study of Canal revenues and estimates of savings to users,
and in 1974 the U.S. Maritime Administration completed a study of
The Panama Canal in U.S. and Foreign Trade.
These studies had essentially one focus in their analyses of the
economic value: The difference in distance between ports via the
Canal versus the shortest alternate all-water route.
Although the three studies were not exactly comparable, they
were primarily based on the assumption that the only alternative to
the Panama Canal worth considering was the longer way around,
using essentially the same size ships. This was possibly the only
true alternative in the Canal's early years, but today's economic
and technological environment is considerably different, offering far
more competitive alternatives.







The Canal is now meeting stronger competition from alternatives
taking advantage of the economies of scale such as the transporta-
tion of commodities in large ships whose daily cost of operation per
ton of cargo is in some cases low enough to permit them to go the
long way around at lower landed cost than a smaller ship using the
Canal. Another competitor, the shipment of goods by sea and rail
via the mini- or landbridge, uses the rapid handling of containerized
cargo to marry the advantages of ocean and rail shipments.
To date, only one value study has, to our knowledge, taken into
account the very real alternatives to the Canal. This study, The
Economic Value of the Panama Canal, was prepared by Dr. James
E. Howell and Dr. Ezra Solomon of Stanford University in conjunc-
tion with a private firm, International Research Associates, in
December 1973. The study concluded that in the years between 1975
and 1985 the annual economic value of the Canal to all users would
build from $93 million to $141 million, with an average economic
value, or user's surplus, of $117 million. The study was based on the
traffic forecast and sensitivity analysis of the major commodities
moving through the Canal at that time.
This $117 million is the "sustainable" user's surplus. By sustain-
able is meant the equilibrium condition that will occur after a
transition period during which the users adjust to more economical
alternatives. For example, if tolls are doubled, revenues may double
initially, but this would be transitional. In the longer run, as long as
five to ten years, depending on the commodity, some users would
adapt by using more economical alternative arrangements.
The benefit of this user's surplus accrues to the various national
users through the sellers, the buyers, or the shipping lines. Because
the shipping industry is highly competitive, most of the potential
savings to the shipping lines are passed along to the sellers or
buyers.
It is estimated that the U.S. benefits to the extent of approxi-
mately one-third of the total annual user's surplus, or economic
value. The rest of the user nations share the remaining two-thirds
of the annual economic value. It should be noted that the relative
impact on smaller economies, however, is greater than that on the
larger ones.
Precision in estimating the user's surplus and thus the amount by
which tolls can be increased is obviously not possible, but we do
know that the freedom to raise tolls is more limited than before
since the costs of alternatives are nearer to the cost of using the
Canal.
I have talked about some of the theoretical aspects of economic
value-theory which enables us to appreciate the relative impor-
tance of the Panama Canal to U.S. and world commerce. The Canal
may be thought of, however, in other, more absolute terms.
There is ample evidence that an absolute advantage to world
trade exists that permits the Canal to retain its importance. There
are today, for instance, almost 25,000 vessels of 1,000 gross regis-
tered tons and over, out of an approximate world fleet of 27,000,
that can transit the Panama Canal.
Ninety-six percent of the U.S. merchant fleet and 98 percent of
our U.S. Navy vessels are able to pass through the Canal locks.





16


Commercial cargo tonnage through the Canal is another impor-
tant index of Canal utiity.
In fiscal year 1976, approximately 117 million tons of commerical
cargo passed through the Canal, down sharply from the 1974 level
of 147 million tons because of recession and other factors.
Of the 117 million tons in 1976, over 78 million originated or was
destined for the U.S. This cargo volume represented 12 percent of
the total U.S. seaborne commerce.
U.S. intercoastal traffic through the Canal has declined substan-
tially from its peak, but was still an impressive 4.7 million tons last
year and may indeed soar again if the Alaskan North Slope crude
oil moves through the Canal as now planned.
Latest estimates are that 29,000 long tons per day (1.3 transits)
will move through the Canal. This could increase to 70,000 long tons
per day (3 transits) when damage to Pump Station No. 8 is repaired.
However, both the volume and duration of North Slope oil through
the Canal are conjectural at this point.
Other countries are even more dependent on the Panama Canal
for the movement of their seagoing tonnage. For example: In 1974,
some 73 percent of Ecuador's imports and exports were Canal
oriented, and in the case of Peru, almost half of their tonnage
passed through the Canal. Generally, most Central American and
West Coast South American countries rely heavily on the Canal.
The fact that cargo tonnage through the Panama Canal has
increased in a rather steady fashion over the years and is forecast
to continue to increase, reinforces my firm conviction that the
Panama Canal serves and will continue to serve a useful function.
It helps to balance perspective by noting that total commercial
cargo tonnage through the Canal increased by almost 400 percent
between 1948 and 1976.
And, 1976, itself, was a recession year in which Canal cargo
dropped by 30 million tons from the 1974 high.
This year (fiscal year 1977) cargo shipments are once again-on the
rise with an increase in the first nine months of the year of 5.6
million tons, or 6.4 percent ahead of the same period last year.
I would now like to talk about my view of the future, including
our forecast of traffic and our financial viability and capital
funding.
Our latest forecast is that transits will rise from 33.4 per day in
fiscal year 1977 to 46.6 per day in the year 2000, and tolls revenues
at current rates will increase from $166.6 million to $300 million in
the same period. Forecasting tolls and transits that far into the
future is a hazardous undertaking, and while I have presented our
best estimate, events such as war or new discoveries (for example,
North Slope oil) could change the estimates.
The Company is required by law to set tolls to recover all costs of
operating and maintaining the Canal. If our forecast of growth in
tolls revenue is reasonably correct, and if historic inflationary cost
patterns continue, it will be necessary to adjust tolls periodically to
break even. Since inflation should impact concurrently on the costs
of alternatives to the Canal, I do not envision these periodic
adjustments eroding the comparative advantage provided by the
Canal.







Given the transit forecast to the end of the century, I foresee no
difficulties with numerical capacity as a limitation on growth. This
does not mean that we can skimp on capital expenditures to replace
and improve Canal facilities. As facilities age and the average ship
using the Canal gets bigger, it is incumbent upon Canal manage-
ment to replace plant with equal or better facilities. Our concern is
with the safe and expeditious handling of all ships, not just for their
sake, but also to ensure the safety of the thin artery that is the
Panama Canal.
To look at it another way, expenditures on capital replacement
and improvements provided from cash flow are a means of protect-
ing the gross investment of the U.S. in the Canal.
Updated through 1976, that gross investment, which does not
include defense investments, is about $1.886 billion. Recoveries have
amounted to about $1.134 billion, leaving an unrecovered invest-
ment of approximately $752 million.
The Panama Canal enterprise is required by law to recover its
costs of operation and maintenance. It is not, nor was it intended to
be, a profit generating entity and thus does not calculate return on
investment in a commercial sense. The return to the U.S. on its
investment in the Canal enterprise, however, can be thought of to
include interest and dividend payments to the U.S. Treasury as well
as the U.S. share of the user's surplus which has accrued over time.
I anticipate that the Canal could continue to provide a return on
investment to the U.S. even though heavier traffic demands than
those predicted could possibly increase our need for capital funds
for modernization beyond what the enterprise can finance
internally.
In summary, let me emphasize that whether we look at the
importance of the Canal in the narrow terms of economic value
defined as the relative range within which tolls can be raised, or
whether we look at the importance in terms of the absolute value
reflected in the continued heavy use of the Canal, we can see that
the Canal is still viable and capable of continuing to provide quality
service to at least the end of this century.
Mr. Chairman, this completes my opening statement. I will be
happy to answer any questions you may have and to offer for the
record any additional information that may be required.
Mr. METCALFE. Thank you, Governor. I think we should hear the
testimony of the other panelists, and then we will have a question
period.
Now, I invite Dr. Stephen R. Gibbs, of the Institute for Marine
Studies, of the University of Washington, Seattle, to make the next
statement.
Dr. Gibbs?

STATEMENT OF DR. STEPHEN R. GIBBS
Dr. GIBBS. Thank you very much, Mr. Chairman.
This is the first time I have been invited to appear before a
subcommittee. It is a great honor for me. I hope that what I have to
say here today will be of use to your work.
Now I will proceed with my summary.







While a graduate student at the Massachusetts Institute of Tech-
nology, I analyzed the economic value of the present Panama Canal
to the world and to various countries and regions of the world,
including the United States. In addition, some of the arguments
which have been raised regarding the strategic significance of the
waterway were explored.
An article describing my investigations is forthcoming in the
journal "Water Resources Research."
Mr. Chairman, economic analysis is fundamentally forward look-
ing. It attempts to ascertain the effect of today's decisions on near
and far term economic welfare and then to restate the effect as
simple dollar values expressed as a lump sum. The term for this
sum is a net present value. A reasonable person or entity should, in
principle, be indifferent between being offered the near and far
term economic benefits actually at hand and the lump sum which is
the restated form for these benefits.
The basic measure of benefit for my analysis is the value of the
transit service to the Canal users.
As a reference against which to measure the Canal's value, it is
assumed that, for whatever reason, the services of the Canal are
suddenly and permanently denied to users in 1975. This might take
the form of a canal closure. In this context the Canal's net present
economic value to the world was in the range of $5.4 to $6.9 billion
as of 1975. Its value in 1977 terms is roughly 20 percent higher due
to the effects of inflation on the value of the dollar. Please see Table
1 of my statement. Also, this range bounds, in principle the price
which the owner of the Canal should set were it to be sold to a
buyer whose pricing policy was known to be monopoly profit
maximization.
The fraction of the world value which the United States would
lose if the Canal ceased to function is roughly 27 percent, or from
$1.8 to $2.4 billion net present value in 1977 dollars. Actually these
later figures are too large because some important effects, which
would follow a closure, which have not been estimated in detail,
would offset the loss of the United States and other world regions,
and increase the Republic of Panama's loss. It is sufficient for my
purpose to note that the figures given are estimates of the upper
limit of U.S. loss.
Other regions of the world which would suffer losses of economic
welfare if the Panama Canal were to close, are Japan, 17.5 percent
of the total; South America, 16.5 percent, and Central America, 5.2
percent, among others. Please see Table 2 of my statement. The
actual loss to the Republic of Panama would be much larger than
the percentage for Central America listed in Table 2 suggests due to
the same effects which tend to reduce the United States loss.
Were the Canal to deny its service to users, the loss to the world
in the first year would be on the order of $2 billion, and the U.S.
loss would probably not exceed roughly $500 million that year. As
time passed, additional losses would occur. These figures for both
first year and net present value losses are infinitesimal when
compared to the U.S. Gross National Product.
Mr. Chairman, the loss suffered by the world as calculated in the
context of a Canal closure is just one possible way to measure the







Canal's value. Another way, is to consider the consequences of'
selling it to an entity having an operation policy different than that
of the U.S. Very likely any buyer of the Canal would adopt a
monopoly profit-maximizing policy.
In principle, a monopoly profit-maximizing buyer should be will-
ing to buy the Canal for a price somewhere in the range of those
listed in Table 1, which I referred to previously. In practice, these
figures considerably overstate the Canal's marketable price because
no way exists for an owner of the Canal to assess Canal users for all
of the value of the transit to them. Other speakers here today will
likely address this point, that as a going concern the Canal is
valuable to the world, but it is very difficult to make that value
tangible by raising toll prices, and that a residual benefit or
consumer's surplus inevitably remains asociated with cargo
movements.
Much of the value of the Canal which accrues to the cargo and
therefore to users, will continue to accrue, so long as the Canal is
open and rates attractive to commerce are charged. And if they are
not, the owner will be hurting himself by turning away business,
and the loss to the world will not exceed the estimates given in
Table 1.
What level should the sale price be? There is probably no com-
pletely justifiable way to estimate a sale price, but a not unreason-
able guess-and I emphasize guess, because I don't feel I am really a
knowledgeable expert on toll matters, there are other gentlemen at
this table who are . but a not unreasonable guess would be that
a price of $2 billion to $4 billion would be fair to both buyer and
seller. This is my guess of what the owner of the Canal could
extract from users through increased tolls, which would exceed
Canal operating and maintenance costs, expressed as a net present
value.
The user's increased toll payments would cause an increase in
prices of consumer goods in the countries which trade through the
Canal. Table 2 shows the proportion of the additional burden which
might be borne by various regions. The figure for Central America
does not apply in this case, however, since the Republic of Panama,
the presumed buyer, would gain the difference between the actual
sale price and the monopoly profits it derived as owner.
Economics is only part of the multidimensional effects of a
change in control of the Canal so that actual cash payments would
also depend on what else was part of the package, such as access to
military bases, better relations, and so forth. One might think of
access to a base for 20 years as being worth $2 billion to $4 billion so
that ownership of the Canal and access to a base might be traded
even up. I use this merely as an illustration to make my point clear.
It is hazardous for me as a specialist to judge the significance of
the Canal's economic value. Nevertheless, I will venture the judg-
ment that the Canal's economic value is not great relative to the
other dimensions of U.S. interest which would be affected by a
change in control of the Canal. If the U.S. has a vital interest in the
Panama Canal, it is probably not economic.
Mr. Chairman, I would like to change course at this point, and
move away from economics to a question of national security. This





20


is something that I realize is not supposed to be treated in this
meeting, but I felt it would be worthwhile for me to bring it up
because my orientation as an economist might be helpful in ad-
dressing the question of national security.
I would like to bring to your attention some calculations I have
undertaken of the response time of naval ships to emergencies in
the oceans. The purpose of the calculations is to see if the time it
takes to move naval forces to the scene of an emergency is likely to
be affected by access to a Central American canal and to see if
explicit calculations of the response time is apt to be a useful
method for exploring the contribution of the Panama Canal to
United States national security.
My reason for calling this work to your attention is not because it
proves anything about the Panama Canal. Rather, it indicates that
the debate about the Canal's national security value can be con-
ducted on a basis of valuable information if an effort is made to
develop it. Thus far, an effort to develop useful information has not
occurred, or at least has not been made public. The calculations are
contained in Table 3.
This table shows the sailing time in days of task forces located in
the Atlantic and Pacific Oceans to areas of possible emergency. The
table shows that for emergencies in the Atlantic, such as near the
Cape of Good Hope, a task force coming from the Pacific via a canal
would take 19.6 days to arrive on the scene, whereas a task force
starting from the North Atlantic could arrive in only 12 days, or
almost 8 days sooner than one coming from the Pacific. The table
further shows that if the Pacific task force was denied use of a
Central American canal, it could still come around Cape Horn,
losing two days. Thus a canal does not appear, in this simple
scenario, to be an important factor in expediting the movement of
naval forces in an emergency.
For emergencies in the Pacific, access to a canal would be more
useful in that a forced movement from the Atlantic around Cape
Horn to Callao, Peru, would cost the difference between 17.9 and 5
days, or almost 13 days. But then a task force from the Third Fleet
in the North Pacific might arrive in 7.5 days or only 2.5 days later
than a task force coming through a canal.
This analysis is intended to be illustrative and ignores many
important factors. However, the 2-day saving, for the scenario of an
emergency in the Southeastern Pacific is a number like the Pa-
nama Canal economic value. It may be thought of as a rudimentary
indicator or metric of the contribution of a canal to the security
dimension and weighed against accomplishments in the economic
dimension, for example. Systematic comparisons of this nature for
several alternatives have come to be called a multiobjective
analysis.
I would like to summarize my statement now for you, if I may.
The lump sum economic value of the Panama Canal to the world is
in the range of $6.5 to $8.9 billion. Were the Canal service denied to
users, the U.S. loss would be about $2 billion. Were the U.S. to
contemplate selling the Canal to a profit maximizing operator, it
should initially consider a sale price in the range of $2 to $4 billion
or attempt to obtain this value in other services in exchange. The







Panama Canal does not appear to me to be of vital interest
economically to the United States.
An examination of U.S. task force locations and their relation to
areas of possible future emergencies reveals that the advantage in
sailing time a Central American canal offers is relatively limited.
This calculation says less perhaps about the strategic value of the
Panama Canal than it says about the possibilities for explicit,
cogent analysis of the contribution of the Canal to our national
security.
If possible, I would like to have inserted in the record at this
point this statement and the fourth chapter of my doctoral disserta-
tion, which contains a detailed description of my economic analysis
of the Panama Canal.
Mr. METCALFE. Unless there is objection, it will be entered in the
record, and may I also express the thought that your entire state-
ment will be entered into the record unless there is objection.
Hearing no objection, the entire statement of yours will be entered
into the record.
[The statement and attachment follow:]







22



Dr. Stephen R. Gibbs


THE ECONOMIC VALUE OF THE PANAMA CANAL

While a graduate student at the Massachusetts Institute of Technology ,I

analyzed the economic value of the present Panama Canal to the world and to

various countries and regions of the world including the United States. In

addition, the economics of several proposed improvement projects for the Canall

and what effect these would have on the economic welfare of the world and

the United States were studied. Lastly, some of the arguments which have

been raised regarding the strategic significance of the waterway were explored.

This study constituted my Ph. D. dissertation. It may be found at M.I.T. under

the title Multiobjective Analysis of the Panama Canal: The Value of a Marine

Transportation System, 1976.

The following statement is a digest of the insights of my research which

are likely to be most useful for this Committee's purposes. No attempt

will be made here to develop in detail the theoretical basis of my research.

An article describing my investigations, of the same title as this statement,

is forthcoming in the highly regarded journal Water Resources Research. It

describes the theoretical basis of my work and its appearance therein reinforces,

in my opinion, the assertion of my doctoral committee at M.I.T. and myself

that my methods are reasonable and consistent with the current state of the art.

The estimates which follow in this statement should not be interpreted

as exact determinations of the Canal's economic value. A myriad of details

enter into such a calculation, many of which can be known only imperfectly.

Of necessity, a host of assumptionsand approximations must be made, most of

which will not be described here. However, exact figures are unlikely be be

ess-ential for this Committee's purposes. All that is essential is that the

estirmaLes be sufficiently close to the true values, that were the latter knovwn,

thuy would indicate an overall judgement on the Canal issue no different than







23



that indicated by the estimated figures. I believe I have achieved this

essential level of accuracy.

How Benefits and Costs Existing in Different Time Periods are Equated to the
Present

In order to understand what follows it is necessary that an important econom--

ic principle be described relating to the treatment of time-in the analysis.

Economic analysis is fundamentally forward looking. It attempts to as-

certain the effect of today decisions on near and far term economic welfare

and then to restate the effects as simple dollar values expressed as a lump -

sum. The technical term for this sum is a net present value. A reasonable

person or entity should, in principle, be indifferent between being offered the

near and far term economic benefits actually at hand and the lump sum which

is the restated form for these benefits. Another way of putting this in the

Canal context is that, in principle, the net present value of the Canal

represents its fair market value or its selling price where the owner is

indifferent between holding the Canal, or selling it for a lump sum. Casting

an estimate in terms of a sale price is a convenient device and I will return

to this technique below.

The forward looking philosophy leaves little room for consideration of the

quantity of investments already made in the Canal or the benefits already

reaped from its ownership, except insofar as knowledge of these may assist

in post-mortems on previous decisions. For purposes of studying decisions

which will affect the present and future, these historical events should be

considered largely irrelevant from an economic viewpoint.

Previous investments do influence today's evaluations. Their influence works

indirectly by increasing or decreasing near and far term net benefits derivable

from continued control and operation of the Canal. These benefits appear as

increases, or decreases, in the size of the net present value of the

Canal. If a prior investment was worthwhile, it will bring about an increase







24



in the size of the estimated net present value of the Canal. If it was not

worthwhile, it will have no effect, or possibly a negative effect, on forecast

future benefits and thus on the size of the estimated net present value.

Ironically, economic thinking also results in a reduction of importance,

in today's terms, of benefits and costs occurring in the distant future.

For most rational people an inheritance received today provides greater

economic welfare than does the knowledge that it will be received later.

Likewise for the United States, a given change in the nature of the Panama

Canal operation has a more important effect on economic welfare if it happens in the near

term than in the long. Economists and businessmen deal with this declining interest

in future costs and benefits by applying lighter weights to the far term than

the near term effects of a decision when estimating the net present value.



Net Present Value of the Panama Canal

The basic measure of benefit for my analysis is the willing-

ness of users to pay for Canal transit services.


The net present value of the Panama Canal to the world, as I have estimated

it, lies in the range of $5.4 to $6.1 billion as of 1975. These figures in 1977

terms would be roughly 20 percent higher due to the effects of inflation on the

value of the dollar. See Table 1. This range of figures represents my

estimates of the loss in economic welfare which the world would suffer were

the Panama Canal to suddenly and permanently close. It also represents, in

principle, the price which the owner of the Canal should set were it to be

sold to a buyer whose pricing policy was known to be monoploy profit maximi-

zation.

The fraction of the world value which'the United States would lose in the

event of a Canal closure is roughly 27 percent, or from $1.8 to $2.4 billion

net present value in 1Q77 dollars. Actually these latter figures are too large

b1)cause some important effects, which would follow a closure, which I have not







25


estimated in any detailawould offset the loss of the United States and other

world regions, and increase the Republic of Panama's loss. It is sufficient

for my purpose to note that the figures given are estimates of the upper limit

of U.S. loss.


TABLE 1
Net Present Value of the Panama

Social rate of discount 8%

Panama Canal value $8.9

Billions of 1977 dollars


Canal to the World

10% 12%

7.2 6.5


Other regions of the world which would suffer losses of economic

welfare if the Panama Canal were to close are Japan (17.5 percent of the total),

South America (16.5 percent), Central America (5.2 percent) and Asia, excluding

Japan (10.6 percent) among others. See Table 2. The actual loss to Panama

would be much larger than the percentage listed suggests due to the same

effects mentioned above which tend to reduce the United States loss. Very

likely, the Republic of Panama would be the largest loser in absolute terms if

the Canal closed and the effect on its economy would probably be devastating.

TABLE 2

Percentage Share of Panama Canal Benefits by World Region

Region Percent Share
United States 27.0
Japan 17.5
Western Europe 7.1
Canada 7.0
Central America 5.2
Oceania 3.9
South America 16.5
Asia (excluding Japan) 10.6
West Indies 4.4
Middle East .1
Africa .7
Total 100.0

The figures in Table 1 are net present values and equivalent to a

time stream of costs and benefits. Were the Canal to close, the loss to the







26'


world in the first year would be on the order of 2 billion dollars and the

United States' loss would probably not exceed roughly $500 million that year.

As time passed, the additional losses would occur. Appropriately weighted,

they sum to the figures of world loss given above. These figures for both

first year and net present value losses are infinitesimal when compared to

the United States Gross National Product.

At various times it has been stated that approximately 70 percent of the

trade passing through the Canal originates in or is destined for the United

States. This figure of 70 percent does not agree with my estimates of the

percentage of Canal value accruing to the United States because the former

figure is a measure of the importance of United States trade to the Canal

enterprise while my figure is the reverse of this, the value of the Canal to

the United States. This latter measure seems to me to be the relevant one

from a national perspective.
The Effect of a New Treaty and Possible Sale Price

Thus far, the likely consequences for economic welfare if the Panama Canal
were to be suddenly and permanently closed have been described. However, this
scenario is perhaps less likely than one of a change in ownership and admini-
stration of the Canal brought about by a new treaty agreement.

In this case,)the change in economic welfare will be smaller in all respects

than if the Canal were shut although it makes some difference who the new

owner is and what pricing policy is adopted. To explain this scenario it

is useful to return to the discussion of possible sale prices.

In principle, the Republic of Panama or any other buyer, should be willing

to buy the Canal for a price somewhere in the range of those listed in Table 1.

The more concerned the buyer or seller is with benefits and costs occurring in

the present and near future, as opposed to those occurring in the far future,

the h~Ih'r the social rate of discount should he in calculating the net present
value and thi, lower the sale price.
In practice, thec f i ures considerably overstate the Canal's marketable
price hecanue no way exists for an owner to







27


assess Canal users for all of the latter's willingness to pay for transit. Other

speakers here today will likely address this point that as a going concern

the Canal is valuable to the world but it is very difficult to make that value

tangible by raising toll prices. The problem is that each unit of cargo

derives benefit from the transit up to some maximum price, but for each unit,

its a different maximum. Since there are a vast number of cargo units transiting

the Canal, Canal authorities, whomever they may be, must use simple rules of

thumb when setting tolls that have broad applicability. When reduced to simple

systems, however, it become impossible-to extract all the value of the transit

from'the cargoes passing through the Canal. A residual benefit or consumer's

surplus remains associated with the cargo movement. Another way to say this

is that as far as users are concerned it probably doesn't make much difference

who owns the Canal, so long as the owners are rational economic actors. Much

of the value of the Canal which accrues to the United States and the world in

general will continue to accrue, so long as the Canal is open and rates

attractive to commerce are charged. And if they are not, the owner will be

hurting himself by turning away business and the loss to the world will not

exceed the estimates given above for the case of a Canal closure.

What level should the sale price be? A number of difficulties arise here

involving strategy and bluffing in setting toll prices which will affect the

amount of value the owner can extract from the operation and thus the size of

the sale price. There is

probably no theoretically justifiable way to estimate a sale price but a not

unreasonable guess ould be that a price of $2. to $4 billion would be fair to

both buyer and seller. This is my guess of what the owner of the Canal could

extract from users through increased tollswhich would exceed Canal operating

and maintaince costs, expressed as a net present value. Canal users would

lose this same amount, over and above what they would pay under a continuation

of the present Canal toll policy of breaking even. The users' losses would







28



ultimately cause an increase in prices of consumer goods in the countries

which trade through the Canal. Table 2 shows the proportion of the total loss

which might be born by various regions. The figure for Central America does not

apply in this case however, since Panama, the presumed buyer, would gain. The

actual incidence of the loss would depend on the toll policy and toll system

and cannot be foretold without more information.

A perceptive reviewer of my statement has observed that while the loss to

the United States of a Canal closure is on the order of $2 billion net present

value, the fair sale price to a buyer is different than this, a range of $2 to

$4 billion having been suggested. However, in principle, the economic value

of the Canal is closer to $7 billion. Why are all these numbers different and

particularly why is the sale price different than the economic value of the Canal

to the United States?

They differ because I have assumed that the U.S. government policy of

charging tolls to recover only operating costs is immutable. Given this,

the value of the Canal appears as a consumer's surplus and is reaped by its

users. Those U.S. citizens who consume or produce goods shipped through the

Canal gain the $1.8 to $2.4 billion value. If the Canal were sold to a profit

maximizing operator, he would raise tolls and capture as much of the surplus

as possible. Therefore, to him the Canal's worth is what can be gotten through

higher tolls as opposed to the case of the U.S. where the worth appears as the

consumer surplus accruing to Canal users. The U.S. sale policy is assumed for

this discussion to be one of selling for just a shade less phan what it is

worth to the buyer. I have guessed this figure to be in the range of $2 to

$4 billion net present value. Other experts in the field of Canal toll policies

may suggest a different range.

Suppose the U.S. sold the Canal for $3.5 billion, or about one-half its

economic value as estimated here. This sale price is assumed to be a fraction

less than the excess in tolls that the new owner could extract. Then the U.S.







29


treasury would be $3.5 billion ahead and U.S. citizens who trade through

the Canal might lose, through higher tolls charged by the new owner, about one--

half of their surplus, or about $1 billion. On balance the U.S. comes out ahead

by $2.5 billion. Japan, on the other hand would probably lose something on the

order of .$63 billion. This represents one-half of the consumer surplus which

would have otherwise accrued to Japan or is one-half of 17.5 percent of the

global economic value of the Canal as shown in Table 1. If the losses from

all other wcrld regions were totaled up it would come to about $2.5 billion,

the U.S. gain in this transaction.

Economics is only part of the multidimensional effects of a change in
control and ownership of the Canal so that actual cash payments would also
depend on what else was part of the package, such as access to military bases,
better relations, etc. One might think of access to a base for 20 years as being
worth 2 to 4 billion dollars net present value so that ownership of the
Canal and access to a base might be traded even up.
The weight one accords these estimates of the economic value of the
Panama Canal operation depends not so much on the absolute value of the estimates
as on their relation to all the other consequences of the Panama Canal operation,
especially consequences in the national security and foreign relations dimensions.
For this reason it is hazardous for me as a specialist to judge the Canal's
economic value. Nevertheless I will venture the judgement that the Canal's
economic value is not great relative to the other dimensions of U.S. interest
which would be effected by a change in control of the Canal. If the U.S. has
a vital interest in the Panama Canal, it is probably not economic.

Analysis of Major New Projects
Several possible major improvements to the Panama Canal have been proposed
over the years. These are directed to permit an increase in the size of the
maximum size ship which can transit the Canal and to increase the capacity of
the waterway in terms of total annual traffic. The proposals fall in two
main categories: 1) Enlargements of the present lock canal by adding enlarged
locks; and 2) Digging a sea level canal.
Any estimates of the economic consequences of these major investments are
necessarily rough as neither the costs of the undertakings is well known nor
can one forecast with confidence the demand for the facilities. I used the
estimates for construction cost and demand levels contained in the 1970
Interoceanic Canal Study Commission report. Using their estimates and


95-548 0 77 3







30


what I believe to be reasonable assumptions about benefits, scheduling

of the construction and toll policies, it appears that building a third

set of would cost about $200 million net present value in 1975 dollars.

This assumes that the construction would not begin until 1995 or later. Startin-

work earlier results in larger net losses. It seems unlikely that such an

undertaking would produce a positive net economic benefit if undertaken in the

foreseeable future.

Analysis of a sea level canal investment presents essentially the same

type of problems as for a third locks project. Nevertheless, the uncertanties

are not so great as to preclude reaching the general conclusion that even the

least costly conventionally constructed (not employing nuclear explosions)

sea level canal, like the third locks projectwould be a net economic loser for

whomever undertook it. My analysis indicates that the loss, in 1975 dollars,

for a sea level project undertaken in 1991 would be between $240 and $450 million

net present value. These figures are mostly illustrative however and the loss

could well be twice, or half this.

Economic Thinking as an aid in Elucidating the National Security Dimension

While a Central American Canal was seen in the 19th Century as primarily

a commercial enterprise, the Spanish-American war shifted the thinking of this

country's leaders to the improvement in naval mobility potentially provided

by a canal.. Their resolve to build and control a canal was founded

primarily upon military needs. Today the effect on U.S. national security

of the Panama Canal operation is still at the forefront, ifnot foremost, in

the thinking of most citizens. Yet the contribution a canal makes in this

dimension is rarely spelled out publicly. The Interoceanic Canal Study

Commission study, for example, simply asserts that access to a sea level canal

would economize defense efforts so that our navy would be better able to meet

the continuing requirement to shift naval power between the oceans in the face

of changing threats and situations. It further states that "A transisthmian












canal, either lock or sea level, is of major and continuing importance to

the national defense of the United States. These statements provide a slim

basis on which to judge a sea level canal's contribution to the defense

needs of the United States. Thus, it is especially difficult to weigh that

judgement against achievements in other dimensions such as foreign policy or

economic welfare.

Yet the effects of the Canal operation on the U.S. national security

dimension can be explored to a certain extent. As an illustration I submit

the figures contained in Table 3. These show the sailing time of various

task forces from regions where one might expect the task forces to be found,

to regions where they might be needed on short notice. It is the improvement

in response time of naval units which naval authorities cite as an important

benefit stemming from guaranteed access to a strategic canal such as the

Suez Canal or the Panama Canal.

For emergencies in the Atlantic Ocean, the naval forces already in the

Atlantic are closer in time to the scene by about 7.5 days than are naval

forces stationed in the Eastern Pacific Ocean which would employ a Central

American canal. In this case a canal appears to provide no benefit.

For emergencies in the Pacific Ocean, only for a region





in the South Pacific near Western South America would a task-force coming from

the Second Fleet located in the Central Western Atlantic arrive sooner than

a task force from the Third Fleet sailing directly from the Eastern North

Pacific. The time advantage offered by a Central American canalcapable of

accepting for transit the forces in mov' wut is about 2 days.

This analysis is illustrative and ignores such important factors as needs

for ships elsewhere in the oceans, risk of attack on the task force while in

route, likelyhood that the canal would be open when needed, duration, magnitude,







32


and type of conflict, composition and capability of the task force and transit
characteristics of the canal. The effect of variations in all these parameters
can and should be investigated and the results made available to this committee.
An economicsts calls such an investigation a sensitivity analysis. This
committee should seek such explorations from its witnesses.





TABLE 3
Response Time of U.S. Task Forces

A. Assume that ships from either the Third Fleet or the Second Fleet are to
be moved at an average task force speed of 20 knots to an incident in
the South Atlantic. The Third Fleet ships are assumed to be in the
vicinity of San Diego when setting out and the ships from the Second
Fleet are assumed to be in the vicinity of Puerto Rico when setting cut.

Incident Location: Montevideo Rio de Janero Cape of Good Hope

Third Fleet Ships via

Canal in Panama 17.1 15.0 19.6

Cape Horn* 14.8 16.7 21.0

Second Fleet direct 9.8 7.6 12.0

B. Assume that ships from either the Second Fleet or the Third Fleet are
to be moved, at an average task force speed of 20 knots, to an incident
in western South America. The starting points of the task forces' are
assumed to be the same as for scenario A above.

Incident Location: Guayaquil Callao Valparaiso

Canal in Panama 3.9 5.0 7.6

Cape Horn* 19.2 17.9 15.3

Third Fleet direct 6.5 7.5 9.9

No allowance is made for possible delays due to foul weather.

The two day saving, for the scenario of an emergency in the Southeastern

Pacific is a number like the Panama Canal economic value. It may be though:

of as a rudimentary indicator or metric of the contribution of the canal to the

security dimension and weighed against accomplishments in the economic dimension,

for example. Systematic comparisions of this nature for several alternativ-.s

constitute what economists have come to call a multiobjective analysis.





33


While sensitivity analysis and multiobjective studies can not reduce our
fundamental ignorance of present relationships and future events, if properly
done, I believe them to be as useful or more useful than other commonly used
methods of analysis.
Conclusion
Based on willingness to pay as a measure of benefit, the lump sum economic
value of the Panama Canal to the world is in the range of $6.5 to $8.9 billion.
The U.S. share of this value is roughly 27 percent or about $2 billion. Were
the U.S. to contemplate selling the Canal to a profit maximizing operator, it
should initially consider a sale price in the range of $2 to $4 billion net
present value or attempt to obtain this value in other services in exchange for
control of the Canal.
No major improvement projects that have thus far been proposed appear to
be justiable from a purely economic perspective. An elementary examination of
present U.S. task force locations and their relation to areas of possible future
emergencies reveals that the advantage in sailing time a Central American canal
offers is relatively limited. This calculation says less perhaps about the
strategic value of the Panama Canal than it does of the need for improved infor ratic-
and analysis of the contribution of the Panama Canal to national security. The
illustration provided indicates how one might develop such an analysis.
This concludes my statement. Thank you for accepting it for inclusion in
the record and for inviting me to appear before you.

Dr. GIBBS. Thank you very much, Mr. Chairman. This concludes
my statement.
Mr. METCALFE. Thank you very much, Dr. Gibbs.
Next we will hear from Dr. Margaret Daly Hayes, of Policy
Sciences Division of CACI, of Arlington, Virginia. Dr. Hayes?

STATEMENT OF DR. MARGARET DALY HAYES
Dr. HAYES. Thank you, Mr. Chairman. Mr. Chairman, members of
the committee, I am Margaret Daly Hayes. I hold a doctorate in
political science with special interest in Latin America and pres-
ently work for a consulting firm, CACI, Inc., in Arlington, Virginia,
in the Policy Sciences Division. I would like to thank the Chairman
of the Panama Canal Subcommittee for the opportunity to address
these hearings. It is both a pleasure and an honor to do so.
For the past year and one-half I have been closely involved in
studying political, economic, and military implications of different
scenarios involving the future of the Panama Canal. This work has
been performed under contract to the Office of the Assistant Secre-
tary for International Security Affairs, Department of Defense. I
have recently completed a study to forecast future traffic flows
through the Panama Canal to the year 2000. This study was jointly
undertaken by myself and my colleague, Mr. Salam Hleihel, who is
present with me in the room today.





34


The perspective we have adopted in evaluating future prospects
for the Panama Canal is comparative, not absolute. We assume the
Canal will be open to world trade in the future, for it is a worthless
facility if it is closed. We are therefore interested in those factors
that will affect Canal use, not in assessing its current real estate
value. Estimates of future Canal traffic are based on the standard
assumption that international commerce will flow through the
Canal as long as it represents the cheapest, most rapid, and most
efficient route for trade between partners. The economic value of
the Canal is represented by the savings that accrue because the
Canal is available, that is, the difference in cost between a Canal
route and the next best alternative route.
As a result of this research, I conclude that, while the Canal is,
has been, and will be an important facility for the U.S., it in no way
is or will be economically vital to this country. In contrast, I believe
the Canal and Canal Zone are currently politically important. Our
political interests can best be served by a renegotiated treaty that
provides for U.S. cooperation in effecting a gradual transfer of
future responsibility for the Canal to Panama, thus assuring the
Canal's continued availability for efficient service to international
trade. My conclusion is based on the following points:
One, while U.S. trade is very important to the Panama Canal, the
Canal is less important to U.S. trade. Almost 70 percent of Canal
traffic is U.S. related-either imported to or exported from the U.S.
Approximately 25 percent of U.S. exports by volume and 7.5 percent
of U.S. imports by volume pass through the Canal. The value of this
trade has been about one percent of U.S. GNP.
Two, Panama Canal traffic volume is strongly determined by a
few high-volume bulk commodities. Growth of traffic in several of
these is likely to decline sharply in the future. General cargo traffic
will grow substantially, paralleling world economic growth, but will
not replace the tonnage volume lost in bulk commodities over the
next two decades and beyond.
Three, the major bulk commodities transiting the Canal at
present are petroleum and petroleum products, grains, and coal.
These have accounted for over 50 percent of total Canal tonnage
over the past two decades. There has already been a noticeable drop
in coal traffic through the Canal as the coal trade shifts to carriers
too large to pass through the Canal. Alaskan oil production will
soon supply West Coast U.S. needs, eliminating the need for ship-
ments from the East. Latin American intercoastal petroleum traffic
will decline as domestic refinery capacity and domestic consump-
tion increase in Ecuador and Peru. U.S. petroleum imports from
Latin America have been declining steadily as a percentage of total
petroleum imports. Latest figures indicate that over 60 percent of
U.S. petroleum imports come from outside the hemisphere. Cur-
rently, most U.S. imports from Latin America do not pass through
the Canal. In the future, Mexico is likely to become a major
supplier to the U.S. in petroleum. Of the major commodities cur-
rently transiting the Canal, only grains shipped from U.S. Gulf
ports to Pacific Ocean destinations are expected to continue to
increase in volume.
Four, future Canal traffic will likely grow at substantially slower
rates than in the past. CACI estimates for future traffic volume,







based on analysis of 21 major commodities traded on 40 major trade
routes and 25 high-volume general cargo routes, indicate a modest
(less than two percent per year) average annual growth rate for
total Canal traffic to the end of the century. The major factors
influencing this slower growth rate are changes in patterns of
international commerce that are dictated by availability of new
sources of supply, rising costs of shipping, and rapid development of
trade with the developing world and with the developed world.
Five, with the exception of petroleum, no raw materials imports
critical to the U.S. now transit the Canal in significant volume.
However, the pattern of petroleum distribution will change radi-
cally in the near future when Alaskan oil becomes available. Best
estimates by a variety of experts indicate that surplus Alaskan
crude should be transshipped through the Canal only in the short
run. In the long run, pipelines should be more economical and more
secure thna Canal transshipment.
Six, by contrast, Japan presently relies upon the U.S. for 30-40
percent of its coal imports and 60 percent of grain imports. Most of
these have been shipped through the Canal in the past. While
alternative sources of coal are available and substantial coal ton-
nage now bypasses the Canal enroute to Japan, the U.S. is expected
to remain the main supplier of grains for the foreseeable future.
The bulk of U.S. exports to the Pacific will continue to prefer the
Canal route. In addition, a high volume of Japanese manufactured
exports to the U.S. pass through the Canal. Because the Japanese
economy is heavily dependent on these imports and exports, the
Canal is potentially more important to Japan than to the U.S. Even
so, Japan could be supplied over alternate routes at modest differ-
ence in cost.
Seven, next to the U.S., the Latin American countries are the
main users of the Canal. In 1976, 24 percent of Canal traffic
originated in Latin America. Several of the countries in Central
America, including Nicaragua, El Salvador, Panama, and Colombia,
depend heavily on the Canal for shipping major export commodities
such as bananas and coffee. The Canal is much more important to
these countries than it is to the United States because of their less
diversified economic structures. It is in their interest that the Canal
remain an open and efficient facility.
Eight, alternative routes and sources of supply are available for
nearly all commodities presently transiting the Panama Canal.
Many are currently only marginally more costly than the Canal
route. Some are becoming more competitive as they attract greater
volumes of trade and employ larger, faster vessels, or as the cost of
Canal use (tolls) increases. The rapid development of Third World
international trade is opening new sources of raw materials sup-
plies and new markets for manufactures exports. Most of this new
trade will not pass through the Panama Canal.
Nine, the Panama Canal currently transits about four percent of
world seaborne trade. It is an important facility on some trade
routes because it provides savings in shipping time and costs. In the
unlikely event that the Canal were not available, approximately 40
percent of current traffic would be diverted to alternative sources of
supply. The increased costs of rerouting the remaining 60 percent of





36


trade are estimated at $1 billion in the year 2000. This is less than
one-tenth of one percent of the total value of world trade in 1975,
and therefore insignificant. The value to the U.S. is estimated to
range between $200 million and $500 million (1975 constant prices)
in the period to the end of the century. World trade is expected to
double by the year 2000 at conservative estimates. This is a negligi-
ble portion of our $1.5 trillion GNP.
Ten, the Panama Canal will continue to be an important facility
in international trade through this century and beyond. Total
traffic volume as currently forecast will not tax Canal capacity. The
economic viability of the Panama Canal will depend on its availabil-
ity to international commerce. Revenues from the Canal and Canal
Zone currently account for 13 percent of Panama's GNP. This
represents a much smaller share of Panama's GNP than in the past
as Panama's economy has developed and diversified. Panamanian
plans for future development are based on expanded provision of
service to international commerce drawn by the Panama Canal.
Panama rightfully considers the Canal, even under U.S. ownership,
its most important economic resource. It is therefore highly un-
likely that Panama would purposely engage in actions to threaten
traffic flow through the waterway.
Eleven, the Panama Canal can hardly be considered vital to the
United States. It is neither essential nor indispensable to the
movement of U.S. commerce. Were it not available, adjustments
would occur as they did when the Suez Canal was closed. However,
insofar as the Panama Canal provides economic benefits to world
commerce, our interests and those of our allies lie in maintaining it
as an open and efficient path between the Atlantic and Pacific
Oceans. How best to do this depends on political, not economic,
considerations.
The United States cannot operate the Canal without the
cooperation of Panama. Nearly three-quarters of the Canal and
Canal Zone Government labor force are Panamanian citizens. The
costs and benefits to be incurred by the United States under a
proposed new treaty should be weighed against the costs and
benefits that might occur should the United States have to support
the Canal and Zone operations without Panamanian participation
aid. As Ely Brandes, an economist associated with the Panama
Canal Company's own studies of future Canal traffic, has stated,
"The Canal is simply not worth a king's ransom any more." Our
analyses concur with this conclusion.
In light of these economic facts, forecasts, and analyses, we
conclude that it is in the political, military, and economic interest
of the United States to maintain a friendly and cooperative rela-
tionship with Panama. Only in this way can we assure the effi-
ciency and effectiveness of Canal operations. It is also in the
political interests of the United States to demonstrate its willing-
ness to respond positively to the interests of developing countries in
Latin America and the third world in general. It is in this political
arena that we have much to gain and most to lose over the next 20
to 25 years.
Mr. Chairman, that completes my statement. I have submitted
additional supporting material for the record and I will be glad to






37


answer any questions or provide additional information as
requested.
Mr. METCALFE. Thank you, Dr. Hayes.
Unless there are objections, the entire statement will be entered
into the record. Hearing no objection, the entire statement with all
the statistical information will be entered into the record.
Thank you very much.
[Document referred to follows:]


PANAMA CANAL TRAFFIC: -PROSPECTS FOR THE FUTURE




Forecasting future Canal traffic for an extended period of time is a
risky endeavor. Most startling developments in the world economy during
recent years were not foreseen in even the best and most rigorous pro-
jections. Discussion of U.S. interests in the Panama Canal to the year
2000 and beyond must be based on analysis of the best information cur-
rently available and on careful examination of important future trends
in global economic behavior.


Panama Canal traffic presently represents approximately 3.5-4.0 percent
of world seaborne trade (Panama Canal Company and UNCTAD, 1975). The
most recent available estimates by CACI and others indicate that future
Canal traffic will grow at substantially slower rates than in the past.
The developing world trades primarily with the developed world, Europe,
Japan, and the United States, on trade routes that do not involve the
Canal. A number of major trades have recently begun employing vessels
too large to pass through the Canal. Higher prices for raw materials
have stimulated development of new supply sources in areas that will not
require the Canal to reach markets. The reopening of the Suez Canal has
already caused a drop in Panama traffic on the Europe-Japan route.


Assuming that these trends continue to develop, CACI has forecast that
Panama traffic volume will likely grow at rates averaging between 1 and
2 percent/year between 1976 and 2000. This compares to an average
annual growth of 7.8 percent between 1965 and 1974. Figure 1 presents
forecasts of Canal traffic as developed by CACI and other researchers.1
The long-term forecasts are, of course, risky and therefore subject to
revision over time as new information becomes available.

1 The purpose, methodology, and assumptions of these forecast efforts
differed. They represent each research team's best estimate of future
traffic, but are comparable only in a gross sense.









* . .


0**O*@
xxx


750 -


700.

650.

600.

550-


..A. ... --"% Relaxed Assumptions
-- -t..... ,
..- . . --'-'' "--Best Estimate


0 0 0
Actual Traffic


1970


1975


1980


1985


1990


1995


2000


Year


Figure 1. Comparison of Forecasts of Panama Canal Traffico 1970-2000


IOCSC, 1970
Padelford and Gibbs. 1975
CACI, 1977
Actual Traffic
ERA, 1972


Hig IOCSC
High

Potential





Padelford and Gibbs


Maximum

Minimum

CACI


500t

4504-


400-

350-

300-

250.

200-

150-

100-
75-
50-


1965










The CACI forecasts were based on evaluations of future supply and demand
for major commodities, the impact of changes in shipping (particularly
vessel size and new technology), the impact of rising shipping costs
(particularly fuel costs), the availability of alternative modes of
transport, the impact of reopening the Suez Canal, and the increasingly
important role of Third World countries as suppliers of raw and semi-
processed goods and consumers of finished products. Twenty-one specific
commodities traded on 40 major trade routes and 25 high-volume general
cargo routes were analyzed in detail to generate the forecasts. Several
factors contribute to the low rate of growth forecasted for Panama Canal
traffic:


Major declines in crude petroleum and petroleum products
traffic (Alaskan crude is not included in the projections).

Declines in coal and several other bulk commodity traffic.

Diversion of some general cargo traffic to alternative
routes.


PROSPECTS FOR MAJOR COMMODITIES TRANSITING THE PANAMA CANAL


Panama Canal traffic volume is strongly determined by a small number of
high-volume commodities. A small change in the trade pattern in any one
of these commodities can have a large impact on Canal traffic volume and
revenue. CACI's projections for diminished Canal traffic growth over the
next two decades are based on the assessment that substantial change will
occur in the trade patterns of several of the most important commodities
currently transiting the Canal. The major commodities transiting the
Canal in recent years have been petroleum, grain, coal and coke, iron and
steel manufactures, ores and phosphates, and fertilizer. Table 1 gives
the percentage of total traffic for 1965, 1970, and 1976.


In the past 5 to 6 years petroleum and products, grains, and coal and
coke have accounted for nearly 50 percent of total Canal traffic.






40


TABLE 1
Major Commodities Transiting the Panama Canal
(percent of total tonnage)

1965 1970 1976

Petroleum and Products 19.8 15.5 18.7
Grains 8.8 10.9 16.3
Coal and Coke 8.7 18.7 14.3
Manufactures of Iron and Steel 5.0 7.1 7.6
Ores and Metals 13.4 12.9 7.3
Fertilizer Raw Materials 5.5 6.8 5.3


Source: Panama Canal Company Annual Report.


Looking to the future, however, one sees a potential sharp decline in the
volume of Canal traffic in coal and petroleum as well as a decline in ore
and metals traffic.


Petroleum and Products


Petroleum and petroleum products traffic moves primarily between East
Coast Latin America and West Coast Latin America (Venezuela and West
Indies to West Coast Latin America and Ecuador and West Indies), East
Coast Latin America and West Coast U.S., and West Coast Latin America
and East Coast U.S. This historical traffic pattern should change sub-
stantially in the near future. Several factors will influence this
change:


1. The availability of refinery capacity in Ecuador to
process light Oriente crude petroleum will substan-
tially reduce Ecuadorean crude exports to West Indies
refineries.

2. The availability of Alaskan crude in the West Coast
U.S. will nearly eliminate the need for Venezuelan
and West Indies crude and refined exports to the West
Coast U.S.










A projected decline of petroleum and products traffic from 18 percent
in 1976 to 4 percent in 2000 is based on these two observations.


Surplus Alaskan crude will likely transit the Canal in the short run
(next 5-8 years) under current plans to transship the surplus at Panama
to U.S. Gulf ports. At peak Alaskan production, transshipping Alaskan
crude could result in an additional 50 million tons of traffic through
the Canal. Over the long term, however, transshipment is more costly
than alternative means of disposal such as exchange with Japan or pipe-
line construction. Table 2 presents data on proposed alternatives and
costs for distributing the Alaskan crude surplus. It is likely that one
or more of these alternatives will be adopted in the future, thus elim-
inating a good portion of prospective Canal traffic. Moreover, Panama
and several other Latin American countries have proposals for pipeline
construction to transfer Alaskan crude imports. Once these are developed,
the Canal would be a least preferred route.


Coal and Coke


Almost all coal shipped through the Canal moves from East Coast U.S.
ports to Japan for use by the Japanese steel industry. Due to a decline
in Japanese steel production as well as increased use of bulk carriers
too large to transit the Canal, 1976 represented a year of unusually low
Japanese coal imports through the Canal. The employment of large vessels
bypassing the Canal is increasing. The superships carried 17 percent of
U.S. coal exports to Japan in 1975, up from 8 percent the year before.
This diversion of coal traffic from the Canal can be expected to continue,
and the enlargement of Hampton Roads, Virginia, port in the 1980's to
handle ships of 200,000 deadweight tons will further undercut shipments
through the Canal. In addition, Japan is presently seeking to diversify
sources of raw materials imports and will purchase increasing amounts of
coal from Canada and Australia, none of which will move through the Canal.






42


Prop
Pr


Pipeline/ 1

Route Crt

Pipelines

Canada

Northern Tier U.S.

Guatemala

North Central U.S.
(Seattle-Wyoming)

Central U.S.
(California-Wyoming)

Canadian Trans-Mountain

Sohio (Southwest U.S.)
Phase I Conversion 500

Phase I (new line or
partial conversion)

Phase II

Ocean Shipments

Panama Direct

Panama Transshipment

Cape Horn

Rail (U.S.)

Exchange

Valdez to Japan

(1/1977 Costs)


TABLE 2
)sed Transportation and Marketing
)jects for Alaskan Crude Surplus

1985 Transport
Costs and $/bbl.
985 Alaskan (Valdez to final
ide Capacity destination specified)


384

484

1200

500


500


165

500


500


1000


2.39

2.85

2.76

4.04


(Chicago)

(Chicago)

(Houston)

(Chicago)


3.91 (Chicago)


2.56

2.24


(Chicago)

(Houston)


2.51 to 3.02
(Houston)


4.54

3.03

4.29

4.59



0.64

0.45


Earliest
Start Date
(month/year)



7/1980

1/1981

1/1981

1/1981


1/1981


1/1979

1/1979


1/1980


1/1984


(Houston)

(Houston)

(Houston)

(Houston)


(U.S. Flag)

(Foreign Flag)


Sources: A.D. Little, Inc. (1977), FEA (1977), Temple, Barker and Sloane,
Inc. (1977).


- f






43


Grains


As in the case of coal, most U.S. grain (corn, barley, soybeans, and
wheat) shipments through the Canal are destined for Japan, though exports
to the People's Republic of China have increased sharply in recent years.
U.S. exports to the Asian subcontinent, sometimes high, will be shipped
via the shorter Suez Canal route in the future. Shipments to the Soviet
Union go primarily to European and Baltic Sea ports. West Coast Latin
America, particularly Chile, is the other large-volume trade passing
through the Canal. Thus, Asian and-Latin American demand for U.S. grain
exports will be the major determinants of Canal traffic in these commod-
ities.


The United States is expected to continue to be a major grain exporter,
and exports will increase particularly in feed grains. Canal traffic is
expected to remain fairly stable however, due to increasing competition
from other suppliers -- Canada and Australia for wheat, Brazil for soy-
beans. In addition, many wheat exports move through West Coast ports.
Feed grains, shipped out of Gulf ports, are therefore likely to consti-
tute the bulk of Canal grain traffic in the future. Unlike the commod-
ities discussed above, grains tend to move in smaller ships that will be
able to pass through the Canal in the foreseeable future.


Ores and Metals


The volume of ore and metals shipments through the Canal has been declin-
ing in recent years, and this trend is expected to continue. The bulk of
trade has traditionally been in iron ore shipped from West Coast South
America to East Coast U.S. and Europe. U.S. imports of West Coast South
American iron ore have declined as a result of nationalization of prop-
erty there and a shift to nearer sources in Canada and Venezuela. West
Coast South American exports to Europe constitute a very small percen-
tage (from 4 percent in 1965 to 1.5 percent in 1974) of total European






44


imports, though they have been important in Canal traffic in the past.
Volume on the South America-to-Europe route has declined in recent years,
however, as a result of increased South American shipments to Japan and
a dramatic shift to use of large (greater than 100,000 DWT) carriers in
the ore trades.


Copper and zinc exports by West Coast South America constitute another
high-volume Canal trade. These are destined primarily for Europe and are
expected to continue to pass through the Canal. They will nevertheless
comprise a very modest percent of total Canal traffic.


Manufactures of Iron and Steel


Traffic in iron and steel manufactures has traditionally moved through
the Canal from Japan to East Coast U.S. and Europe. The European trade
emerged after the closing of the Suez Canal and can be expected to
slacken with the opening of that waterway. U.S. imports of Japanese
manufactures of iron and steel are expected to increase but less rapidly
than in the past, as devaluation of the dollar has placed domestic pro-
duction in a better competitive position. The Canal will continue to
be important in this trade and other growing trade with Japan. Alter-
native routings, via West Coast ports and landbridge, would be viable
however.


Fertilizer Raw Materials


Phosphate rock, fishmeal, and sulphur are primarily processed as fertil-
izers, and increasing trade is expected as world food demand increases.
Rock phosphate exports now comprise 3-4 percent of Canal traffic and
are shipped from East Coast U.S. to Canada and Asia. U.S. exports are
expected to decline in the late 1980's as major supply areas near deple-
tion (U.S. Bureau of Mines, 1976; H.P. Drewry, 1974). In addition,
Australia and North Africa will be major export suppliers in the next






45


decade and beyond and will make inroads in former U.S. markets. Exports
between the United States, Asia, and Canada will continue to use the
Canal. Fishmeal exports from West Coast South America to Europe are
expected to increase in the future and will continue to use the Canal.
It will remain a modest (about 1 percent) component of Canal traffic
however.


VALUE OF THE PANAMA CANAL TO THE U.S. ECONOMY


The value of U.S. foreign trade (exports plus imports) as a percent of
GNP has been steadily increasing over the recent past. In 1975 foreign
trade accounted for 16 percent of GNP, up from 10 percent in 1969 and
12 percent in 1972 (International Monetary Fund, 1976). In 1975 the U.S.
foreign trade volume carried by ocean vessels was 632.8 million long tons
(Bureau of the Census, 1976). At the same time approximately 90 million
long tons of U.S. trade were shipped through the Panama Canal (Panama
Canal Company, 1976). Thus, U.S. trade through the Canal represented
approximately 25 percent of U.S. exports and 7 percent of U.S. imports
by volume in 1974-1975 (Table 3).


Overall 65 to 70 percent of total Canal traffic volume either originates
or terminates in the United States. Table 4 gives CACI forecasts of past
and projected U.S. shares of Canal traffic. These forecasts estimate
that U.S. trade volume through the Canal will remain stable at present
levels (90-100 million long tons/year) because changes in trade patterns
or means of transportation will divert trade away from the Canal. Thus,
as U.S. international trade grows, U.S. trade through the Canal will
decline as a portion of total U.S. trade. The Canal will therefore be
less important to the United States in the future than it is at present.
U.S. trade with Japan is by far the most important route using the Canal,
accounting for 25 to 30 percent of traffic in recent years. U.S. interi--
coastal trade, in contrast, accounts for only 3-4 percent of total Canal
traffic.


95-548 0 77 4






46


TABLE 3
U.S. Trade Through the Panama Canal
as a Percentage of Total U.S. Seaborne Trade
(million long tons)

1968 1975

U.S. Exports Through Canal 36.1 58.8
(less intercoastal)

Total U.S. Seaborne Exports 170.5 237.9
(average over 1974, 1975)

Percent U.S. Exports 21.1% 24.7%
Through Canal

U.S. Imports Through Canal 21.7 27.9
(less intercoastal)

Total U.S. Seaborne Imports 240.8 390.6
(average over 1974, 1975)

Percent U.S. Imports 9.0% 7.1%
Through Canal


Sources: Panama Canal Company, Annual Report; Bureau of the
Census (various years).


TABLE 4
Panama Canal Traffic and U.S. Canal Traffic,
Past and Projected
(million long tons)

1968 1974 1985 2000

Total Panama Traffic 96.6 147.9 131.2 155.4

U.S. Trade Through Panama 62.5 96.9 93.2 100.3
(including intercoastal)

Percent U.S. Traffic 64.7% 65.5% 71.0% 64.5%

Sources: Panama Canal Company, Annual Reports; CACI estimates.






47


Were the Panama Canal not available to world trade, it is estimated that
approximately 40 percent of current traffic would be shifted to alterna-
tive markets and sources of supply. Remaining trade would incur addi-
tional transportation costs on longer ocean voyages or alternative mixed
mode routes. Using CACI's forecasts of future Canal traffic it is esti-
mated that total additional costs to international commerce would range
from 1.1 billion dollars in 1985 to 1.5 billion dollars in 2000 (1975
constant dollars and shipping costs). This represents less than one-
tenth of 1 percent of the value of world trade in 1975.


The U.S. economy (with a 1975 GNP of 1.5 trillion dollars) could easily
absorb the additional cost of goods that would result from the unlikely
event of closing the Panama Canal. These costs would have been about
200-400 million dollars if the Canal had been closed in 1974, a miniscule
percent of the U.S. GNP. These costs (which represent the economic value
of the Canal to the United States) are projected to grow to only 300-600
million dollars by 2000.






48


BIBLIOGRAPHY




Bureau of the Census (1969, 1976a) U.S. General Imports: Geographic
Area, Country, Commodity Groupings and Method of Transportation.

(1979, 1976b) U.S. Exports-World Area by Commodity Grouping.

H.P. Drewry, Ltd. (1974) Prospects for Phosphate Shipping and Trade.
London.

Federal Energy Administration (FEA) (1977) Equitable Sharing of North
Slope Crude Oil. Report to Congress. Washington, D.C. (April).

International Monetary Fund (IMF) (1976) Direction of Trade: Annual
1969--1975. Washington,. D.C.

A.D. Little, Inc. (1977) Soh'io, West Coast to Mid-Continent Pipeline
Project (Final Environmental Impact Report prepared for the Port
of Long Beach and California Public Utilities Commission) Vol. 4,
Part 5.

Panama Canal Company, Canal Zone Government (no date) Annual Report
covering fiscal 1965-1976.

Temple, Barker and Sloan, Inc. (1977) Panama Transshipment Facility
Feasibility Study, Part II: Economic and Logistic Analyses.
Wellesley Hills, Massachusetts.

U.S. Bureau of Mines (1976) Mineral Facts and Problems (1975 edition).

United Nations Conference on Trade and Development (UNCTAD) (1975)
Review of Maritime Transport-1974. New York.


Mr. METCALFE. Now we are going to hear from Leonard Kujawa
of the firm of Arthur Andersen & Co.

STATEMENT OF LEONARD KUJAWA, PARTNER IN ARTHUR
ANDERSEN & CO., CHICAGO, ILL.
Mr. KUJAWA. Mr. Chairman and members of the committee, my
name is Leonard J. Kujawa, partner in the firm of Arthur Ander-
sen & Co., and a certified public accountant. I have been a financial
and accounting adviser to the Panama Canal Company since 1962.
At your instigation, I appeared before this committee on several
occasions. I appreciate this opportunity to again appear.
For the record I prepared a complete statement which I would
request be inserted in the record, Mr. Chairman.
Mr. METCALFE. That will be the order unless there is objection.
Hearing none, the statement will be entered into the record.
[Prepared statement of Mr. Kujawa follows:]







49


PREPARED STATEMENT OF
LEONARD J. KUJAWA
OF
ARTHUR ANDERSEN & CO.



My name is Leonard J. Kujawa. I am a partner in

Arthur Andersen & Co., a certified public accountant, and a

member of the American Institute of Certified Public Accountants

and other professional societies and organizationS. My entire 20

years of professional accounting experience has been concentrated

on work for rate-regulated utilities and governmental organizations.

Among the private companies for which I have responsibility for my

firm's work are United Air Lines, Chicago and North western

Transportation Company and several other major rate-regulated

utilities. In the governmental sector i had responsibility for

my firm's substantial engagement as financial and accounting

advisors during the organization ohase of Amtrak and I am

responsible for my firms work for the Chicago Board of Education

and several other government clients. Regarding the Panama Canal

Company, I have been a consultant on various financial and

accounting matters since 1962.


My work for similar organizaticns has included consult-

ing work for the Suez Canal Authority, for the Atiantic-Pacific

Interoceanic Canal Study Commission, '.hich studied the feasibil" -v

of a reolacement for the existing Panara Canal, and for the

St. Lawrence Seaway Develooment Coruoration, which is the U. S.

entity resnonsible for operation of the Lawrence Seaway.







50



I have previously testified before this Subcommittee

on several occasions as an expert witness regarding financial

matters. In addition, I have testified before various Federal

and state regulatory bodies, Federal courts and the National

Arbitration Board.


Arthur Andersen & Co. is an international firm of

independent Dublic accountants with 49 offices in the United

States and 57 offices in 34 other countries. Our personnel

number in excess of 14,000. We serve aoroximately 50,000 clients

and are among the largest public accounting firms in the world.

Our relationship with the Panama Canal Company began in 1951 when

we assisted in establishing the initial accountabi-ity for the

property which *:as to be assumed by the newly formed Federally

chartered Panama Canal Company. Of more immediate significance

is the work we have done through continuous engagements for the

Company from 1962 to the present time. Following is a brief

description of some of our work:


1. We have consulted with the Company and prepared

extensive studies to determine the most appropriate

method to assess tolls on individual ships for the use

of the Panama Canal; included in these studies were

evaluations of the universal tonnage measurement system

developed b: the Inter-Governmental Maritime Consultative

Organization, an agency of thc United Nations.


2. We assisted in the preparation of the Company's

orooozals chang-in the level of td!ls to recover increased

costs of operation.







51



3. We assisted the Company in the computerization

of many of its data processing activities.


4. We assisted in developing its management

reporting system for the purpose of controlling and

reporting costs at all levels of management.


5. We have reviewed certain of the Company's

accounting policies with respect to cost recognition.

Such reviews principally focused upon the adherence of

such policies to generally accepted accounting.

principles, recognizing that, from a legal viewpoint,

the Company is similar to a rate-regulated public

utility.


6. Reports we have issued over the last few years

to the Panama Canal Company include: Report on

Development of Tolls Anal:tical Data (May, 1969),

Renort on Inoact of Universal 'Teasurement Sy!stem (March.

1970), Reoort on Development and L-aluation of Tolls

Policies an.d Alternative sers (Ncvember. 1970),

Accounting for the Cost of Excavations (April 1972)

Evaluation of Acccinti- Cha-s Durin, Fiscal Year 107-

(August, 1973), Reevaluation of Universal Teasuremeni
Sstem (October, 1974).



In my testimony today, I aill be using amounts fron ;_e

records of the Panama Canal Company, but the analyses and con-

clusions are my own.







52



Mr. Chairman, your invitation included a series of

questions designed to focus the discussion on the importance of

the Canal during the last quarter of this century. If we look at

what has occurred in the quarter century just past, we see a

remarkable financial success, due in large part to the observance

of sound financial control. I believe that the key to the next

quarter century is continued application of the wisdom contained

in these sound financial controls.


The Panama Canal Company and Canal Zone Government

agencies were established by Congressional action in 1951 as

accountable entities whose costs were to be self-financed from

revenues. There has never been a policy that the United States

would recoup its investment by a return of cash to the

U. S. Treasury.


That investment covers far more than the common image

of the Panama Canal as a ditch and some locks would indicate. The

combined Panama Canal Company/Canal Zone Government enterDrise

runs an oneratioo which is unique in the annals of business

organ athns. In the business world an organization that

carriesout on its own the full range of business operations from

mining throu-h manufacturing and marketin- is said to be

vertically integrated. The 'anal organization, which has the

in-house ca ilit y to provide a wide variety of services in

support of the "ditch and the locl'csc reurents tne ula in

vertical i.t erati on. For example, it operates the follo-ain:

An ELECTRICAL Y,TM'' with a caoaci-y of
163 mec awat.

A T T'i 1r1 Tj NI' C T Y T 7Y" i t 12I002.






53


A WATER PROCESSING AND DISTRIBUTION SYSTEM
furnishing potable water to some 500,000
people in the Canal Zone and the Cities of
Colon and Panama City.

A RAILROAD interconnecting the length of the
Canal Zone.

HOUSING for a population of 13,349 employees
and dependents.

RETAIL OPERATIONS, including SUP=RI'IARKETS, DRY
GOODS STORES and CAFETERIAS with an annual
sales of $36.4 million.

A SCHOOL SYSTEM.1 Droviding education from
kindergarten through three years of college
with a student population of 12,522.

". HEALTH FACILITIES, including a !eprosarium, a
mental health center and two general
hospitals with a caDacity of 360 beds and
outpatient services consisting of 371,000
outpatient visits annually.

CIVIL GOVERNMET, including 252 policemen, 148
firemen, courts, jails and prisons.


For those of us who have to travel away from home a lot,

there is a recognition of the rarity and importance of relia-le

service. We have all had experiences--not always in foreign

parts--of water that cannot be consumed, teleohor-es that rec-"re

repeated dialing before a satisfactory connection is made, trains

that run late, and sometimes, even, electrical systems that break

down. What the Panama Canal Company has been able to do thrc'ugh

its totally integrated system of facilities is to provide hiy

reliable service to world shipping. This reliability, as I ."17l

point out in a moment, has considerable economic value.







54


In a financial sense, this integrated operation repre-

sents a very complex financial management problem because less

than 501 of gross revenues are obtained directly from tolls

charged ships for use of the Canal. Gross revenues of the com-

bined Canal enterprise in 1976 were $299.9 million, of which

$135.0 million were from tolls. The remainder was revenue from

sales of services to employees, to shipping, to the military

services in the Canal Zone and other users. Thus, the Panama

Canal not only has a minieconomy producing a variety of essential

services, but also has a variety of different users to serve.






55


A QUARTER CENTURY OF FINANCIAL SUCCESS



As an accountant, I have a natural propensity for

financial facts. This attracted me to look at what has occurred

in the past in Canal finances. The first year under the new

financial structure established by Congress was fiscal year 1952

and the last available results are for fiscal year 1976.

Coincidentally, this elapsed period covers a quarter of a century.

It was a very important quarter century with tolls amounting to

$1,812 million and 2,048 million tons of cargo transiting the

Panama Canal. Compare this to the first 37 years of Panama Canal

operations, from 1914 to 1951 during which tolls amounted to

$727 million with 772 million tons of cargo transiting the Panama

Canal. Although it is the early years of Panama Canal history

that arouse visions of great accomplishments, the past quarter

century has seen the Panama Canal develop economic significance:

70% of all cargo that transited the Panama Canal in its history

did so in the past quarter century.


An informative story of the financial affairs of the

Panama Canal develops from a comparison of the results for fiscal

1952 with fiscal 1976, which is shown as Exhibits 1 and 2 to my

testimony. An analysis of this comparison reveals the following:


1. Tolls grew from $30.4 million to $135.0 million,

or an increase of 350%. Of this increase, $80.5 million

is due to increases in traffic level and $24.1 million

to toll increases made in the period 1974 through 1976.





56



2. Other transit revenues increased primarily

because of increased transits and ship sizes as well

as increases in the rates charged for these services.


3. Revenues from supporting services grew

principally due to price increases required to offset

cost increases.


4. Revenues from Canal Zone Government increased

to an extraordinary degree due to both an increase in

the level of services and changes in pricing policy.

In 1952, medical services provided to both employees

and military personnel were largely at no cost to the

recipient, whereas, in fiscal 1976, Canal employees and

employees of other government organizations were

required to make a contribution toward the ccst and

all U. S. Government organizations in the Canal Zone,

including the military, were required to bear their full

share of the cost.


Although total employment actually declined during the

periodd from 18,239 to 13,861, total Panama Canal Company and

2nal Zone Government expenses were up from $80.9 million to

c "07.3 million. The most significant factor was increases in

41'e and salary levels from $43.3 million to $158.1 million. Thus,

n traffic growth that occurred was used principally to finance

-!ncreases in wage and salary levels. The average salary of a

Z. citizen in 1952 was $5,897 per annum compared with the 1976

r annum average of $19,927, or a 2380 increase. In contrast,





57


non-U. S. citizen employees had an average wage level in 1952 of

$1,269 per annum and in 1976 of $8,143 per annum, or a 542%

increase.


During that quarter of a century, not only were all

costs recovered from revenues but a net margin of $90 million was

achieved. This is a net amount in that fiscal years 1973 through

1976 recorded losses and all prior years had met margins in vary-

ing amounts. These net margins, in combination with the recovery

of costs not requiring the current outlay of funds, principally

depreciation, provided all the cash necessary to finance the

Company's capital Drogram of $284.1 million, while $78.1 millIon

was received by appropriations for Canal Zone Government capital

programs. It is interesting to note that the total amount of tha:

capital program of $362.2 million aproxiates the total orzirinaL

construction costs of the Panama Canal from 1903 to 1914.


The 1951 legislation establishing the Company requires

the Panama Canal to pay interest on the investment of the U. S.

in the Panama Canal, whereas no such interest was payable on 'he

investment in the Canal Zone Government. Over the 25 years, ...

total interest payments made by the Company tc the Treasury were

$269.1 million, constituting an average of 2.C< on the combined

U. S. investment in the Panama Canal Company and Canal Zone

Government.







58


The original 1951 legislation did not require a

systematic repayment of the U. S. investment in the Panama Canal

Company but did provide for repayment of the investment in Canal

Zone Government plant over the service lives of the facilities.

Over the 25 years, the Canal Zone Government has returned $48.1

million to the U. S. Treasury while receiving $78.1 million for

new capital facilities, or a net additional investment of $30

million. In the case of the Panama Canal Company, it is only

required to return cash in excess of its needs; over the 25-year

period it has returned $40 million to the U. S. Treasury.







59



CONCEPT OF SELF-FINANCED ACCOUNTABLE ENTITY SHOULD CONTINUE



Experience has thus confirmed the financial soundness

of the structure established for the Canal by Congress. What

are the principal characteristics of that structure?


In brief, it provides for a fully accountable entity

within a policy that the costs of providing services should be

financed by user charges. This concept has two strong

advantages for Canal users:


1. Disclosure of results.

2. Reliability 6f user charges.


Long before the value of an open administration was

generally recognized, the Panama Canal Company and Canal Zone

Governmnent were required to maintain their financial books open

to the world. The costs for which they were held accountable

were accounted for in accordance ..ith generally accepted

accounting principles and their financial reports were audited

by the General Accounting Office. From :he point of view of the

self-interest of the user, cost incurrence is under his scrutiny,

thus placing pressure on management to incur costs more prudently.

From the standpoint of the Panama Canal, this places the users on

notice that additional demands for service would have attendant

costs for which they would be charged, thus keeping demands for

additional services within reasonable bou.nds.







60



The assurance that prices will be set based on cost

gives the user confidence in the reliability of the price-setting

process. He is assured that prices will be rationally set and,

..us. he can predict his future course of action with mdre

reasonable certainty. This permits h-i to make the required

long-range plans for investment in facilities such as ships, with

reasonable assurance that his investment can be recovered. Thus,

through its reliabiity, the Canal is able to permit users to

limit their risks and have a basis for long-range planning. :his

is a positive economic contribution and is essential for a service

such as the Canal to be able to attract users.


The financial soundness of the structure not only

provides advantae=es to users, but also to the U. S. taxpayer

because it assures that all costs are taken ino account and

tolls set to recover them. T tolls are not able to recover

costt, that is, if users are unwilling to Dav the rice necessary

to cover costs, then the Company should not be wi!!ing to incur
costs. Otherwise a subsidy would be necessary and, if that tine


comes, the appropriate conclusion would be that the .Panama COanal

represen-s an uneconomical ooeration. At that Doint, subsidies

are better sent on alternatives to the Canal.


The only -ay possible to measure precisely the financial

viability of the Canal is throu-h exactly the sa-0 kind of

account IIe entity hat now e:Uists, with the sano resrpons*'zIoy

for its costs. The continuance of the ccnceo- cf a combined

accoun table en-L.-y sel -financed! fzcm it: o%-;n revenues is in the

best interests of the United States as the owner of the Canal as

well as to the United States and other countries of the world as

users of the Canal.






61



WORLD TRADE--TH7F B..Fr.CIARY OF TJiTITD STATES POLICIES



It should be remembered that the United States decision

to construct the Panama Canal grew out of national pride consider-

ations and was not looked upon as a commercial undertaking. The

question as to the amount of the unrecovered investment of the

United States in the present enterprise is a very difficult one

to answer. There are good records indicating that the construction

costs during the period 1903-1914 amounted to $386.9 million.

After that period, up until 1951, the records are less clear;

there are many known items which do not appear in the Panama

Canal records, such as the $25 million indemnity payment to

COombia and retirement benefits to construction workers paid

by the Civil Service Commission.


The most substantial undertaking to determine the level

of the unrecovered investment in the enter-orise occurred in 1951

as part of the establishment of the Panama Canal Company/Canal

Zone Government. This was a substantial undertaking requiring

hundreds of man-years of work by both accountants and engineers.

The cost of military bases, the payment to Colombia, the aborted

third locks project, facilities not currently being used and

interest costs during the construction period .e~e excluded from

the investment- of the United States. The resultant amounts, then,

can be considered completely sanitized of any controversy. The

following two tables show, for 1952 and 1976, the cost of property,

plant and equipment and the net d"'ect investment of the United

States.


95-548 0 77 5






62



Irv st mnt .in ?rcpsrtv, ,ant ......and

Fiscal Year 1952 and Fiscal Year 1976


Property, plant and equipment--at cost-
Panama Canal Company
Canal Zone Government

Total

Less- Valuation allowances-
Panama Canal Company
Canal Zone Government


Total


Net book value


Millions of Dollars

1952 1976 increase


$586.6 $864.6 $278.0
33.7 108.3 74.6

$620.3 $972.9 $352.6

$176.0 $362.8 $136.8

10.6 48.9 38.3

$186.6 $411.7 $225.1

$433.7 $561.2 $127.5


Unrecovered lnvest.ent of the U. S. kcerent

Fiscal Year 1952 and Plscal vecr 1976


Millions of Dollars


Ecuity, of the United States Government-
Panama Canal Cc-7any-
nterest beari
Noninterest bearing
Earned capital reinvested


Total


Canal Zone Covernmn'L

Tot-a! unrecovered investment


Increase
1952 1976 (Decrease)


$373.3 2319.0 S(54.3)
18.1 18.1
71.1 175.4 104.3

$444.4 $512.5 $ 63.1


29.4 69.2


39.8


$473.S $581.7 $107.9


A prunt i-nvestor ccntemp!atin- an expenditure of' this


level would have :wo reasonable expectations.


:,he first would be


-that hc "ould recoup his investment in cash over some rericd of







63



time. The second would be that during the period in which the base

investment remained unrecovered there would be a reasonable level of

compensation for the capital employed, either in the form of

interest or profits. The United States, as an investor in the

Panama Canal, has basically received neither.


Although the Panama Canal Company/Canal Zone Government

is accountable for the investment of the United States, in the

case of the Panama Canal Company, there is no requirement for a

systematic repayment to the U. S. Treasury. For the Canal Zcne

Government, the requirement is that the investment be repaid over

the remaining life of the facility in use. At the end of fiscal

year 1976, the books of the Panama Canal- Company/Canal Zone

Government reflect an unrecovered investment of the United States

of $581.7 million.


Only in the case of the Panama Canal Company was any

compensation required to the U. S. Treasury for the cost of the

capital employed. As prescribed by law, the amount varies and in

1952 was 1.95 and in 1976, 5.199f.


Another dimension relating to the unrecovered investment

of the United States in the Panama Canal enterprise is to adjust

it to reflect the current value of the dollar. The construction

of the Panama Canal represented the largest civil engineerin;-

project undertaken by the United States Government at that time

and is grossly understated in terms of today's price levels when

stated as $386 million in terms of price levels prevailing during

the construction period. Applying the Department of Commerce GNP







64


Price Deflator to the cost of the assets transferred to the Company

in 1951, the unrecovered investment of the United States in the

Panama Canal Company was $2.8 billion at June 30, 1976. Since

this amount excludes facilities of the Canal Zone Government,

the orand total would exceed $3 billion.


The U. S. Government's generous policy regarding recovery

of capital from the Panama Canal enterprise in combination with

very modest charges for interest on i's investment has the effect

of understating the economic cost of Canal service. Although the

assessment of tolls to cover costs has proven successful in the

encouracernent of world trade, the understatement of capital costs

results in a lower level of tolls than should economically prevail.

Thus, if it is maintained that the user is obtaining a bargain

from the P anama Canal it, in Dart, reflects a generosity on the

part of the United States as owner of the Panama Canal. Since

over two thirds of the use of the Panama Canal is from foreign

users, it is this foreign commerce that enjoys the bulk of this

economic generosity.







65



THE ECO1OM IC STGNIFICA'iCE OF TM? PNA'"I_ CA,AL



Although from an investment standpoint the Panama Canal

has been a financial burden to the United States, the United

States has benefited economically from the Panama Canal as a

user. The United States represents approximately one third of

the total use of the Panama Canal and thus shares in the economic

benefits from the existence of the Canal along with many other

countries.


There has been, and continues to be, much, argument

regardna the extent of these economic benefits to users. Some

studies have concluded that enormous benefits accrue and that

past and present Panama Canal toll levels represent such a saving

to users that tolls could be increased in magnitudes several times

over because of the bargain-basement level of tolls now in effect.

I do not share these views.


In the early years of its existence, the Pana ma Canal

no .doubt constituted something arproachin- a mcnczly in nrcvidinf

services to the transporttcon industry. This is best demonstrated

by intercoastal United States traffic that, in the early days of

the Canal, constituted the most important source of use. But,

this early use must be placed in context: the total usage in

revenues for the years 1914 1926 is approximately equal to the

1976 usage! Thus, it took approximately 12 years of usage in the

early years to equal one year of current usage. :n these ear-y

years revenue fell far short of costs.







66


The Panama Canal today is not in a monopoly position

but is in competition with many alternatives. Its economic

value results from its ability to provide a transportation

alternative to shippers. In an economic sense, this is signifi-

cant in Lhqt economic diversity in the long run produces the

lowest cost to consumers through the force of competition in the

market place. To be more specific, the absence of the Panama

Canal would severely limit the economic ability cf ships 70,000

deadweight tons and smaller from competing with larger ships.

Since the great majority of the ships in existence in the world

today are 70,000 deadweight tons or smaller, this limitation

would be a significant one.


To those that argue that Panama Canal tolls can be

increased significantly with no effect on traffic, I would say

"prove it in the market place." The most informed wisdom and

knowledge available regarding the value of the Panama Canal is

produced by the individual users of ships and shippers who are

making transportation decisions on a daily basis. if their know-

ledge could be assembled and maintained, it would exceed the

knowledge of a building full of bureaucrats studying the question

in Washington or elsewhere.


Tolls must be adjusted moderately and prudently or there

can be severe dislocations that would set into motion irrevocable

economic consequences. In a short term, tolls cculd be increased

very substantially creating economic hardship for the users who,

in the short term, would have available fe.%, alternatives. However,







67



such action would have serious long-term consequences in that

it would cause users to scurry for alternatives which would

require long-term investments. Once the commitment is made in an

alternative, the traffic would be very difficult to reattract to

the Panama Canal. This is best illustrated by the closure of the

Suez Canal in 1967. The resultant investment in giant ships to

utilize the Cape of Good Hope route (ships too large to transit

the Suez Canal) was such a bonanza to ship builders that one

German builder was quoted as saying that he was "willing to erect

a monument to President Nasser." Upon reopening, the Suez Canal

was, for the most part, unable to reattract this traffic.


Panama Canal traffic levels grew dramatically in the

past 25 years leading to the conclusion that it would soon run

out of capacity. Present projections indicate a moderate growth

for the remainder of this century--the Panama Canal has reached

economic maturity. This maturity presents the problem of.ho.v to

finance cost increases that are likely to occur. Economic studies

indicate that there is sufficient capacity to increase toll levels

in the future to recover the expected cost increases. Accordingly,

the prospect is that the Panama Canal will remain financially

viable for the remainder of this century.







68


THE ECONOMIC FANTASY OF A NEW CAIAL



The physical limitations of the existing Panama Canal

have raised questions regarding its economic viability and the

desirability of itc expansion or- replacement. The most substantial

analysis regarding alternatives was conducted by the Atlantic-

Pacific Interoceanic Canal Study Commission, which completed its

work in 1970. I understand that the recent estimates for a sea

level canal at Route 10 in Panama, on the basis of present price

levels, indicate a cost of some $5-$6 billion. Estimates for

expansion of the existing Canal by the addition of a third set

of locks are $2.6 billion.


The interest cost at 7% for $5-$6 billion would be

$350-$420 million. The interest cost on $2.6 billion would be

$182 million annually. To place these costs in perspective,

fiscal year 1976 tolls revenues were $134 million.


The reason given for expansion or replacement of the

existing Canal is to accommodate those ships too large to use the

present facility. But these are the ships that enjoy strong

economies of scale due to increased ship size and because of these

strong economies of scale these ships find alternatives to the use

of the Canal more economically attractive.


In contrast to the positive economic scale of ship size,

a canal has the disadvantage of negative economies of scale. By

this i mean that each additional foot of draft to accommodate

larger ships recuires progressively hiher amounts of investment .






69



The facts are devastating and lead me to the conclusion

that a new canal represents economic fantasy. To make huge invest-

ments to attract ships which have tolls potential per ton of cargo

capacity that is not greater but less than smaller ships represents

economic thinking that I do not comprehend.


The existing Canal provides service to a great majortiy

of the ships that exist in the world. It does so at cost levels

which it has and can continue to recover through revenues from

its users. Based on present traffic projections, its capacity

limitations in terms of movement of ships is sufficient for at

least the remainder of this century. I conclude that the present

Canal facility should be maintained, operated and improved as

necessary within the design envisioned by the original

construction.






70



IN SUMMARY



The economic value of the Panama Canal to the United

States and to the world is a combination of effects, including

its relialbilit for planning purposes, its ability to pay its ow

way, the economic divers-ity it provides, and the savings realized

by its users. Only this last item has any relation to what you

can charge for the service.


The history of the finances of the Canal operation

indicates that the growth in costs over the past 25 years was met

principally by traffic growth supplemented by two toll increases.

These toll increases were necessary and financially prudent in

that they allowed the Panama Canal to continue on its financial

break-even course while not exceeding the maximum toll levels

where users ""ould start to divert to alternatives that could offer

greae r sv 17, nut, future toll Increases must be approached

with increasfn- caution. Short-term responses to toll increases

are not reliable indicators. Since we live in the present, the

human thin- is to ae more concerned with the short term, bu in

the iox' term. an imrrudent toll increase could sour traffic

growth and set in motion irreversible decisions. Loss of

traffi' cou wth -rov.wth of costs could result in higher

unit coet" d the need for further t l increase producin-

a va 1 o.... at wouId resu I n e v n -ual f inanc ia




In ccoelu in, c e- h m a Canal as a SouMe ll-..

ru ... t.- ci -C:' rc t 2-d ert ion, T is a > _" thin %Aie : Y

it is and, in my opinion, its future value can be maximized to

the UnIted States, to Panama, and to the "'ord by keeping it

runi -th its present reliabili-y and st-lb'lt-.










EX:_;ii I


PANAMA CfAAL Cl PAMY/,ANA


COMPARAT 117',RESULTS

FTS.AL 1042








REVENUES:
Panama Canal Company-
Transit-
Tolls--commercial
Other (harbor pilotage,
tugs, etc.)
Total transit revenues

Supporting services-
Sale of commodities
Sale of services

Total supporting services

Total revenues Panama
Canal Company

Canal Zone Government


Total revenues


EXPENSES:
Panama Canal Company-
Direct expenses
Cost of commodities sold
Administrative
Depreciation and amortization
Interest on U. S. investment
Total expenses Panama
Canal Company

Canal Zone Government

Total expenses


1, ZONE GOVTR:'IThT


(OF OPERATION


107E


Millions of dollars

Increase
1952 1976 (recreasge)


$30.4 $135.0

2.4 281.O

$32.8 $163.0


$27.8 $ 36.7
19.2 50.4

$47.0 S 87.1


$79.8 $250.1

3.7 49.8

$83.5 $299.9



$27.6 S120.8
23.7 26.1
3.4 43.0
5.5 19.4
7.3 16.6


$67.5 $234.9

13.4 72.4

$80.9 S3C7.3

$ 2.6 z (7.4)


$104.6

25.6

$130.2


8.9
31.2

3 40.l


$170.3

46.1

$216.4



$102.2
2.4
39 6
13.9
9.3


$!67. 4


Operating income or (loss)


1U. 0)





72


PANAM. CANAL CCU PA:;YCA :...... ~ >M:

COMPARATVE SECT7-'' DATA
F7IC AL "EAR S A'


Increase
1952 197 (Decrease)
PERSO 723L--
Employees 18,239 13,861 (4,378)
Compensation $43.3n $158.i3m $114.8m
TRANSTS (all vessels):
Vessels 9,169 13,201 4,032
Tons of cargo 36.9m 117.4n 80.5rn
CAPITAL 'EXPEND!TURES $9.6m $25. 0m $15.4m

Mr. KUJAWA. Mr. Chairman, your invitation included a series of
questions designed to focus discussion on the importance of the
Canal during the last quarter of this century. If we look at what has
occurred in the last quarter century, we see remarkable financial
success due in large part to the observance of sound financial
control. I believe the key to the next quarter century is continued
application of the wisdom contained in these financial controls.
The United States investment in the Panama Canal enterprises
covers far more than its common image as a "ditch and some locks"
would indicate. The combined Panama Canal Company/Canal Zone
Government enterprise runs an operation unique in the annals of
business organizations.
The Canal organization, which has the in-house capability to pro-
vide wide variety of services in support of the "ditch and locks,"
includes the following:
An electrical system with a capacity of 163 megawatts;
A telephone system with over 12,000 instruments;
A water processing and distribution system furn'.3hing potable
water to over 500,000 people;
A railroad interconnecting the length of the Canal Zone;
Housing for a population of over 13,000 people;
Retail operations of annual sales exceeding $36 million;
A school system providing education from kindergarten through
three years of college, with a student population of over 12,000;
Health facilities, including hospitals with a capacity of 360 beds,
and out-patient services consisting of over 371,000 out-patient visits
annually;
Civil government, including policemen, firemen, courts, jails and
prisons.
What the Panama Canal Company has been able to do through
its totally integrated system of facilities is to provide highly reliable
service to world shipping.
In a financial sense, this integrated operation represents a very
complex financial management problem because less than 50





73


percent of gross revenues are obtained directly from tolls. The
remainder consist of revenue from sales of services to employees, to
shipping, to the military services in the Canal Zone, to the Republic
of Panama and to other users.
These activities are so interrelated that a synergism is produced
that can be disproportionately affected if any one part is disturbed.
,Mr. Chairman, although it is the early years of the Panama
Canal history that arouse visions of great accomplishments, the
past quarter century has seen the Panama Canal develop economic
significance. Seventy percent of all cargo that has transited the
Panama Canal in its history has done so in the past quarter
century. An informative story of the financial affairs of the Panama
Canal develops from a comparison of its operating results for 1952
with those for 1976.
Tolls grew from $30 million to $135 million, an increase of 350
percent. Of this increase, $81 million is due to increases in traffic
levels and $24 million to toll rate increases.
Although total employment actually declined during the period
from 18,200 to 13,900, expenses were up from $81 million to $307
million.
The most significant factor was increases in wage and salary
levels from $43 million to over $158 million with the average salary
of U.S. citizen employees increasing over the 25-year period by 238
percent and salaries of non-U.S. citizen employees increasing by 542
percent. Thus the traffic growth that occurred was used principally
to finance increases in wage and salary levels.
During that quarter of a century, not only were all the costs
recovered from revenues, but a net margin of $90 milion was also
realized. These net margins, in combination with the recovery of
depreciation, provided all the cash needed to finance the company's
capital program of $284 million, while $78 million in appropriations
was received by the Canal Zone Government for its capital pro-
gram. It is interesting to note that the $362 million total amount of
these capital programs over the 25 years approximates the total
original construction cost of the Panama Canal from 1903 to 1914.
Over the 25 years, total interest payments to the U.S. Treasury
were $269 million, constituting an average of approximately two
percent on the combined United States investment in the Panama
Canal Zone and Canal Zone Government.
The original 1951 legislation did not require a systematic repay-
ment of the United States investment in the Panama Canal Com-
pany. Over the 25 years the Canal Zone Government has returned
$48 million to the U.S. Treasury while receiving $78 million, a net
additional U.S. investment of some $30 million.
In the case of the Panama Canal Company, the legislation re-
quires it only to return cash in excess of its needs. Over the 25 years
some $40 million was thus returned to the United States Treasury.
Based on that financial success, experience has confirmed the
wisdom of the structure established for the Canal by the Congress.
What are the principal characteristics of that structure? In brief,
it provides for a fully accountable entity within the framework of a
policy that the cost of providing services should be financed by user
charges.






74


This concept has two strong advantages: disclosure of results and
reliability of user charges. Long before the value of an open admin-
istration was generally recognized, the Panama Canal Company
was required to maintain its financial books open to the world and
its operating results have been published each year in its Annual
Report.
The assurance that prices will be set based on costs gives users
confidence in the reliability of the price-setting process. This per-
mits them to make required long-range plans for investment in
facilities such as ships with reasonable assurance that their invest-
ments can be recovered.
The financial soundness of the structure not only provides advan-
tages to users, but also to the United States taxpayers because it
assures that all costs are taken into account and tolls set to recover
these costs. If tolls are not able to recover costs, that is, if users are
unwilling to pay the price necessary to cover costs, then the com-
pany should not be willing to incur those cost.
The only way to measure the financial viability of the Canal is
through the same kind of accountable entity that now exists with
the same responsibility for its costs. The continuance of the concept
of a combined accountable entity, self-financed from its own rev-
enues, is in the best interests of the United States as the owner of
the Canal, as well as to the United States and other countries of the
world as users of the Canal.
It should be remembered that the United States decision to
construct the Panama Canal grew out of national pride consider-
ations and was not looked upon as a commercial undertaking. The
question as to the amount of the unrecovered investment of the
United States in the present enterprise is a very difficult one to
answer.
The most substantial undertaking to determine the level of the
unrecovered investment in the enterprise occurred in 1951 as part
of the establishment of the Panama Canal Company. The costs of
military bases, the payment to Columbia, the aborted third locks
project, facilities not currently being used, and interest costs during
the construction period were excluded from the investment of the
United States. The resultant amounts then can be considered sani-
tized of controversy.
As of June 30, 1976, the "sanitized" original cost of the facilities
of the Panama Canal enterprise less accumulated depreciation is
$561 million. The unrecovered investment of the United States
reflected on the books of the Panama Canal-Canal Zone Govern-
ment as of that same date is approximately $582 million.
A prudent investor contemplating an expenditure of this level
would have two reasonable expectations. The first would be that he
would recoup his investment in cash over some period of time. The
second would be that during the period in which the investment
remained unrecovered there would be a reasonable level of compen-
sation for the capital employed, either in the form of interest or
profits. The United States as an investor in the Panama Canal has
basically received neither.
Although the Panama Canal Company is accountable for the
investment of the United States in it, there is no requirement for a





75


systematic repayment of such investment to the United States
Treasury. For the Canal Zone Government, the requirement there
is that the investment be repaid over the remaining life of the
facilities and use.
Another dimension relating to the unrecovered investment of the
United States in the Panama Canal is to adjust the investment to
reflect the current value of the dollar. The construction of the
Panama Canal represented the largest civil engineering project
undertaken by the United States Government at that time and the
investment is grossly understated in terms of today's price levels.
Utilizing the Department of Commerce GNP price deflator, the
unrecovered investment of the United States would exceed $3
billion
The United States Government's generous policy regarding recov-
ery of capital from the Panama Canal enterprise, in combination
with very modest charges for interest, has the effect of understating
the economic cost of Canal service. Thus, if it is maintained that the
user is obtaining a bargain from the Panama Canal, it in part
reflects a generosity on the part of the United States as owner of
the Panama Canal. Since over two-thirds of the use of the Panama
Canal is from foreign sources, it is this foreign commerce that
enjoys the bulk of this economic generosity.
Although from an investment standpoint the Panama Canal has
been a financial burden to her, the United States does share in the
economic benefits from the existence of the Canal, along with many
other countries. There has been and continues to be much argu-
ment regarding the extent to which these economic benefits exist to
users. Some studies have concluded that enormous benefits accrue
and that the past and present Panama Canal toll levels represent
such a saving to users that tolls could be increased in magnitudes
several times over because of the bargain basement level of tolls
now in effect. I do not share these views.
The Panama Canal today is in competition with many alterna-
tives and its economic value to world commerce is a function of its
ability to provide a transportation alternative to shippers. In an
economic sense, this is significant in that economic diversity in the
long run produces the lowest cost to consumers through the force of
competition in the marketplace.
To be more specific, the absence of the Panama Canal would
severely limit the economic ability of ships, 70,000 deadweight tons
and smaller, from competing with larger ships. Since the great
majority of ships in existence in the world today are 70,000
deadweight tons or smaller, this limitation would be a significant
one.
Tolls must be adjusted moderately and prudently or there could
be severe disclocations that would set in motion irrevocable eco-
nomic consequences. In the short term tolls could be increased very
substantially, creating economic hardship for the users who in the
short term would have available few alternatives.
Panama Canal traffic levels grew dramatically in the past 25
years, leading to what I consider to be the erroneous conclusion that
it would soon run out of capacity. Present projections indicate only
moderate growth for the remainder of this century and the Panama





76


Canal has thus reached economic maturity. This maturity presents
the problem of how to finance cost increases that are likely to
occur.
Economic studies indicate that there is sufficient flexibility to
increase toll levels in the future to cover the expected cost in-
creases. Accordingly, the prospect is that the Panama Canal can
remain financially viable for the remainder of this century.
The physical limitations of existing Panama Canal have raised
questions regarding its economic viability and the desirability of its
expansion or replacement. I understand recent estimates for a sea
level canal indicate a cost of some 5 to $6 billion. Estimates for the
expansion of the existing Canal by the addition of a third set of
locks are $2.6 billion. The interest cost at 7 percent for $6 billion
would be $420 million annually. The interest costs on $2.6 billion
would be $182 million annually. To place these costs in perspective,
total 1976 toll revenues were $134 million.
The reason given for the expansion or replacement of the existing
Canal is to accommodate those ships too large to use the present
facility. But these are the ships that enjoy strong economies of
scale, due to their increased size and, because of these strong
economies of scale, these ships find alternatives to the use of the
Canal more economically attractive.
In contrast to the positive economies of scale of ship size, a canal
has disadvantages of negative economies in scale. By this I mean
that each additional foot of draft to accommodate larger ships
requires progressively higher amounts of investment. These facts
are devastating and lead me to conclude in a financial sense, that a
new canal represents economic fantasy. To make huge investments
to attract ships which have tolls potential per cargo ton of capacity
that is not greater but less than smaller ships represents economic
thinking that I do not comprehend.
The existing Canal provides service to a great majority of the
ships that exist in the world today. It does so at cost levels which it
has and can continue to recover through revenues from its users.
Based on present traffic projections, its capacity limitations in
terms of movement of ships is sufficient for at least the remainder
of this century. I therefore must conclude that the present Canal
facility should be maintained, operated, and improved as necessary
within the design envisioned by the original construction.
That completes my statement, Mr. Chairman.
Mr. METCALFE. Thank you Mr. Kujawa.
I would like to make the announcement that there will be
another panel following this panel, and it is the intention of the
Chair to continue on, after we have completed questioning and
discussion with this panel, with the second panel. I have proposed
we ask the panel some general questions and then go to specific
questions of each member of the panel.
I wish to point out that the discussion of the Canal's closure is a
means of evaluating the value of the Canal and is not meant to
imply the Canal will be closed by the United States or Panama, but
rather, this is just a way of assessing the value, which is the
purpose of these two economic panels.







My questions are as follows: first to the general panel, is the
Panama Canal of less or more importance to the United States than
it was 25 years ago?
If the value of the Canal has changed, why has it changed, and
how would the value change in the next quarter century?
Does any member of the panel wish to answer that question?
General PARFirr. Mr. Chairman, I think there seems to be gen-
eral consensus or general agreement that in relative terms the
value has decreased, but nevertheless, there is still a significant
positive value both now and for the foreseeable future.
Mr. METCALFE. Thank you.
The next question to the panel is what kind of improvements do
you foresee as being necessary for the Canal in the next 25 years, if
it is to be economically viable? What would be the cost of these
improvements and who would or could handle these costs?
General PARFITT. Mr. Chairman, we have lengthy studies which
attempt to determine the projects that are required to accommodate
increasing traffic. We call them capacity studies.
We have incorporated appropriate portions of those capacity
studies in a five-year capital program. At the moment we would
anticipate the total cost for capital replacements to be in the order
of magn itude of somewhere between $25 million and $30 million per
year. In the near term it is envisioned that the company can
finance them internally, through the depreciation process: In the
long term it is entirely possible, with growing inflation, that we
might be called upon to seek outside financing for those capital
requirements.
It is required to continually reappraise the total requirements
because we are continually adjusting our view of what the future
holds in terms of traffic.
For example, it was not too long ago that we were estimating that
there would be a requirement to accommodate approximately
27,000 ships near the end of the century, which was deemed then to
be the capacity of the Canal. Most recent studies, reflecting a
change in mix and size of ships, indicate that the capacity of the
Canal is more nearly 20,000, about 55 ships per day. However, the
estimates of the traffic have likewise been reduced.
I indicated in my statement somewhere in the magnitude of 46
ships per day. We are constantly readjusting and reappraising the
capital requirements, depending upon our best view of the future
traffic. At the moment we estimate less growth than we once
envisioned. Therefore, we are more and more confident that the
kind of capital programs we are envisioning will take care of the
traffic predicted.
To give you an idea of what we are talking about in terms of
physical things: we need to have additional locomotives, we need to
have locomotive turntables to expedite the handling of ships; we
need to have additional tugs; and we need to widen some of the
bends in the Canal because of the bigger size of ships and the safety
problems that they incur. We also need to deepen the Canal
slightly. As the ships increase in size and number we need more
water, and so on.
So we have a pretty good definitive idea of what is needed and we
are watching closely the trends of traffic so we can apply our
capital funds realiastically and in a timely fashion.


95-548 0 77 6





78


Mr. METCALFE. Thank you.
Does any other member of the panel wish to comment on those
two questions that I have asked? If so, simply so indicate; if not, we
will proceed.
How do you see the value of the Panama Canal to the nations of
Latin America changing? Will the Canal be more or less important
to them in the future?
Dr. HAYES. I think that the Latin American countries will trade
more in the future than they have in the past. Much of this trade,
however, will occur with the developed countries; much of West
Coast Latin American trade is now taking place with Japan as
Japan buys the raw materials from West Coast Latin America and
begins to invest in those countries. The same is true on the East
Coast where much of the trade occurs with Europe. Therefore, in
spite of the rate of growth which one might project for Latin
American economies as a whole, one is not likely to see that same
rate of growth in traffic through the Canal.
Selected countries, of course, would use the Canal heavily. Colom-
bia, which has major ports on either side of the Canal, Panama
itself, the Central American countries will use the Canal somewhat
more. Major products which have gone through the Canal in the
past, such as petroleum, will probably not pass through the Canal
in as great volume in the future as they have.
Ecuador has used the Canal heavily in the past because Ecuador
could not refine petroleum from her new oil fields in the country
and had to ship that petroleum to the West Indies for refining, and
then reimport it, effectively. With new refinery capacity in Ecua-
dor, this will no longer occur.
Alaskan petroleum coming on the West Coast of the United
States will have similar effects. Mexico will bcome a major supplier
of petroleum to the United States in the future. This is at least a
possibility. So some of the major commodities which have been
shipped through the Canal in the past will not go through the Canal
in the future, in spite of growth in the Latin American economies.
Several of the countries, in the southern cone particularly, do not
use the Canal heavily at all, have begun using large ships around
the Cape in their trade with Europe and Japan.
Mr. BOWEN. Will you yield?
Mr. METCALFE. Yes.
Mr. BOWEN. I note Dr. Hayes has done some political scientific
study in this area along with studies of economic impacts.
I have talked to a number of Latin Americans who indicate to me
that their reliance upon the Canal is so great that they are far more
interested in the effective management of the Canal than they are
in seeing a change in the status of the Canal. Whereas their
governments do feel obligated to make certain statements on behalf
of change in Canal control, privately there is widespread sentiment
throughout Latin America for continuation of the status quo with
respect to the Canal.
What would you say as to the private political sentiment in Latin
America on this subject since that is an area of your expertise?
Dr. HAYES. I am aware that these concerns have been expressed
and that, while the Latin American countries in many ways need,





79


political reasons, to support Panama's claim for authority over
Canal, they are concerned about management of the Canal in
future and its availability to their national commerce.
think that in a cooperative spirit the United States participating
h Panama in any kind of changeover of authority under a
posed treaty should be able to guarantee the maintenance and
cient operation of the Canal over the period of time of the
posed treaty. Therefore, in the foreseeable future, the efficiency
-he Canal ought not to be in jeopardy.
fr. METCALFE. Any other members of the panel?
Ir. GIBBS. If I may respond to this question, it is my notion that
less developed countries may in fact misperceive how significant
Panama Canal operation is in terms of their own economies.
'he economic studies that I have referenced in my own work
'e indicated that the relation of supply and demand for the kind
-ommodities that these countries tend to trade in is such that
nges in the transportation costs for these goods would in effect
I to impact more on the developed countries than it would on
developing countries, so that if in fact toll levels were raised, or
Canal service were to decline or for some reason transportation
.s in general were to rise, a significant portion of that transpor-
on cost increase would not impact on these countries.
low as I say, I am not sure that these countries' view, in
regate, is quite the same as the view, for example, of the people
) are carrying on the trade. But it is my suspicion, my notion,
t in fact if the service were to decline, if prices were to rise, that
developing countries would tend to lose less than it may appear
t' they would.
Fr. BOWEN. If the gentleman will yield further, then, I would ask
Gibbs, in talking about Latin American nations, which ones do
classify as developed and which ones underdeveloped? Are you
iping them all together?
1r. GIBBS. I am lumping them all together in aggregate. My work
not go into that fine a detail of examining each country
ividually.
Ir. BOWEN. All the testimony presented indicates that the
viest impact would be upon Latin American nations. I think one
.re mentioned was that 24 percent of the nations' commerce
is through the Canal. I think probably there has been an
ression given in the press that that is sort of a uniform opposi-
ito the United States, or uniform support for transfer of
hority in the Canal Zone on the part of Latin Americans,
!reas my conversations with businessmen and shippers involved
Reign trade, and also with those who do economic analysis from
atin American viewpoint, indicate possibly some grave appre-
sions about transfer based upon the Panamanian ability to
.dle things in the future.
1r. HAYES. Mr. Chairman, I would like to make an additional
Lment on that point.
think one of the fears of the Latin American countries is the
ably ungrounded fear that Panama would raise tolls to intoler-
levels and that this would price some of their raw material,
ir primary commodity exports, out of the world market.





80


As the several statements have indicated, tolls have been in-
creased recently in the past and there is a strong possibility that
tolls will be increased in the future to cover operating costs,
whether either Panama or the United States remains the owner of
the Canal, in control of the Canal, that is. It is also the case that
with much of the traffic, whichever owner increased tolls beyond
the tolerable level would cause more harm to itself as owner of the
Canal than it would to international trade, which can find alterna-
tives. Individual countries might be jeopardized in the short run,
but would surely find alternative markets in the long run.
It is not impossible for West Coast Latin American countries to
export their primary commodities to West Coast United States and
then ship by land across this country, and the same would hold for
East Coast to West Coast.
Mr. DORNAN. Will the gentleman yield?
Dr. Hayes, when were you last down to the Canal Zone?
Dr. HAYES. I regret that I have not been in the Canal Zone.
Mr. DORNAN. In February I talked to a former Panamanian
foreign minister and he said that the Panamanian government was
interested in raising the tolls at least tenfold. I wonder if you would
comment whether a tenfold total increase would be an economic
hardship on many South American countries.
Dr. HAYES. As I stated, individual countries would in the short
run be jeopardized by even marginal toll increases as their products
become more expensive. They would find alternative means of
shipping.
Mr. DORNAN. Mr. Bowen's question is significant because this was
also my understanding in traveling in South America. There is an
official Latin position that is taken publicly that is not in "sync"
with the private position about the instability in Panama. I recall
discussing this at least with Governor Parfitt.
I wonder if you could comment upon your talks both formal and
informal with Latin heads of state, foreign ministers, and business
leaders, who pass through the Canal Zone area, particularly since
Panama has grown into a banking center similar to Switzerland in
Europe.
What are your impressions, Mr. Parfitt, on the private positions
stated by Latin American leaders?
General PARFITT. As I stated during your visit, the strong political
position of the countries is in support of Panama. Behind that is a
concern, a stated concern from the point of view of economics. It is
of considerable concern to Latin American countries that tolls
might be raised inordinately.
This comes about because of many pronouncements made to that
effect by Panamanian spokesmen. They are equally concerned
about the degree of skill with which the Canal would be maintained
and operated.
The United States has a tremendous reputation, earned over the
years, for operating efficiently, and on a no-profit basis. They fear
that they might suffer in both those areas if the Canal were
transferred to Panama.
Mr. METCALFE. Thank you.
I have only one other question for the general panel.







What steps would be necessary if the United States decided it
must recover all of its investments in the Canal and the Zone by the
year 2000.
Mr. KUJAWA. The tolls would have to be increased substantially
for that to be accomplished. The present policy of the United States,
as I enunciated in my testimony, does not provide for recovery of
that investment; it is basically to leave the investment there and
allow it to serve shipping. Now, in terms of original cost dollars,
that unrecovered investment at the end of 1976 was some 582
millions of dollars.
We have less than 25 years left in this century. So the mathemat-
ics, while I do not have a calculator handy, indicate some $25
million to $30 million per year additional required tolls. Now, based
on economic studies and testimony here this morning, the prospects
that you could raise tolls that much and still retain traffic appears
questionable.
Also, you are going to have to increase tolls anyway to take care
of operating cost increases in the future. So the prospects of invest-
ment recovery, even absent any increased compensation to Panama,
and that of course is another question, is remote.
Mr. METCALFE. Governor Parfitt.
General PARFITT. There are several ways of looking at the
unrecovered investment.
Mr. Kujawa mentioned the figure of $582 million being
unrecovered on the books of the Panama Canal Company. GAO
made a study some time ago in connection with auditing our books.
They attempted to arrive at the figure of unrecovered investment of
the United States, not just that on the Company books. Updated
through 1976, they came up with a figure of $752 million. This
includes many of the things Mr. Kujawa referred to in his opening
statement, such as interest during construction and some annuity
payments to Panama which are not included in the $582 million.
So you have to pick which of those figures you are going to try to
recover. Figuring everything in, the United States is said to have an
unrecovered investment of $752 million, exclusive of defense.
I share Mr. Kujawa's point of view that you would have to
perhaps optimize tolls in order to recover that investment by the
end of the century. It possibly could be accomplished. It depends
upon projections of traffic and so forth. You would be in effect
optimizing your toll rates and increasing them fairly substantially.
Mr. METCALFE. Thank you.
I recognize the gentleman from California, the former chairman
of the Subcommittee on Panama, Mr. Leggett.
Mr. LEGGE-r. Thank you very much, Mr. Chairman.
Governor Parfitt, welcome back to the committee, you and the
other witnesses.
I guess these hearings today were scheduled on the issue of
whether or not the Panama Canal was vital to the interests of the
United States.
Miss Hayes, is the Panama Canal vital to the interests of the
United States, yes or no?
Dr. HAYES. As I stated in my testimony, I do not think the
Panama Canal is.





82


Mr. LEGGETT. Governor Parfitt?
General PARFITT. I think you have to put that question in the
context of the overall interest of the United States Government. We
are talking economics here.
Mr. LEGGETT. All right. In speaking of overall interests of the
United States, is the Canal vital?
General PARFITT. I would have to bow to the defense experts on
this issue.
Mr. LEGGETT. All right, you bow to the Department of Defense.
Mr. Gibbs, can you answer?
Dr. GIBBS. I agree with Governor Parfitt that I feel a qualification
is necessary.
Mr. LEGGETT. You are not tongue-tied by the Department of
Defense. Can you tell us whether or not the Canal is vital in your
view?
Dr. GIBBS. In an economic sense?
Mr. LEGGETT. In any kind of a sense.
Dr. GIBBS. In any kind of a sense, my suspicion is that it is not.
Mr. LEGGETT. Okay.
How about you, Mr. Kujawa?
Mr. KUJAWA. My point of reference again is economic or finan-
cial. I think there are two ways to look at it, one is traffic growth in
the future and the conclusion of everybody here this morning
appears to be that there will not be much additional growth. The
other, and this is a thorny one, is the economic value measured by
how much of an increase in toll rates is possible. If you could
increase tolls substantially, then it is worth a great deal; if you
cannot increase them very much, then it is worth far less.
Panama maintains you could increase it many times over, and, if
you follow that line of reasoning, it must be worth a great deal. The
economic studies of the Panama Canal do not support this
conslucion however.
I think I would conclude, just to answer your question in the yes
or no kind of thing, Congressman, that the Panama Canal is not
vital from an economic viewpoint; the Panama Canal is important.
Mr. LEGGETT. Considering the fact that say 80 percent of the
Navy ships of the United States and perhaps merchant ships are
constructed in the East and used in both oceans, and considering
the fact that say 85, 90 percent of the ships of the world, both Navy
and otherwise, can traverse it now, and considering the fact that
sometimes you need to get from one point to another rather quickly
witness the fact we are spending $6 billion on what we call a craft
conversion program for the Navy and for the Air Force and witness
the fact that 80 percent of all of the goods that got to Israel got
there by ship in the first 30 days, contrary to some impressions, is
speed of transit by sea of vital interest to the United States?
Mr. Kujawa?
Mr. KUJAWA. Again from an economic sense, generally not vital.
You can pick out certain kinds of horror stories and conclude that it
is vital but, looking at the long term, it is important but not vital.
Mr. LEGGETT. Well, the Suez Canal was closed for ten years. Do
you consider that was a matter of vital importance to say Eastern
Mediterranean countries or not, yes or no?





.83


Mr. KUJAWA. No.
Mr. LEGGETT. Miss Hayes?
Dr. HAYES. The economies that suffered most from the closure of
the Suez Canal were the Eastern African countries which lost trade
with the European markets.
Mr. LEGGETT. Was that vital to them?
Dr. HAYES. Because they are smaller economies and less diversi-
fied economies, this was important to them. They continued to exist
as economies and, therefore, to call that loss vital is perhaps
stretching the point.
Mr. LEGGETT. All right. Let me ask you this: Is peace in this
hemisphere vital to the United States?
Mr. Kujawa?
Mr. KUJAWA. I think we are getting a bit away from the eco-
nomic-financial side of things.
Mr. LEGGETT. Yes. The thing is, we cannot make a decision here
in a vacuum. We have to make a decision of course looking at the
economics, and if economics affect peace, then you have to go ahead
and broaden your horizons, do you not?
Now, consider the fact that you have said that, or rather I guess
Mr. Gibbs has said, that the-Canal is worth 4 or $5 billion, and also
you have indicated a replacement value of a sea level canal of 5 to
$6 billion, and you have indicated if you used a 7 percent amortiza-
tion rate for a sea-level canal, which is higher than the rate we use
for domestic investments of 6 3/8 plus, which is escalating all the
time, you have to get back 350 to $450 million a year for interest.
Now on a 50-year amortization that would be an extra $100 million
for payoff on principal. All this is $500 million a year cost for a sea-
level canal.
Normally the recipient of a gift values it at fair market value. I
think Arthur D. Little or Arthur Andersen and Company does the
same thing, that is, values something at market value at the time
you get it.
Certainly anybody getting that Panama Canal might get the idea
that it is worth 5 or $6 billion and that it is worth $500 million a
year to reasonably amortize it, could they not, especially in view of
the fact that indications have been made by the country of Panama,
as leaked to the press, that they would like $200 million a year as a
payment program? Let us also consider the fact that Panama would
escalate tolls 2, 3, 400 percent, do you not think? Now given the
values I mentioned, and considering the fact that we acquired the
Isthmus at a time when we had seeds of war, would we be again
sowing the seeds of war if we just looked at this matter in a short
23-year time frame?
Let the record show nobody said anything.
That is all the questions I have.
Mr.- METCALFE. I recognize the gentleman from California, Mr.
Dornan.
Mr. DORNAN. Dr. Hayes, what does CACI mean?
Dr. HAYES. Legally CACI stands for nothing. It formerly stood for
Consolidated Analysis Centers, Incorporated, and prior to that for
California Analysis Centers, Incorporated.





84


Mr. DORNAN. It started out as what is known as a California
think tank?
Dr. HAYES. Right.
Mr. DORNAN. Funded by DOD or State Department?
Dr. HAYES. You mean when it was back in California?
Mr. DORNAN. Yes.
Dr. HAYES. Much of the work is done for commercial entities.
Some of the contract work is done for the Department of Defense,
other work for other agencies of the United States Government.
Mr. DORNAN. Do you get State Department funds?
Dr. HAYES. Yes. We are not right now receiving State Department
funds.
Mr. DORNAN. What funds paid for your survey?
Dr. HAYES. Department of Defense funds.
Mr. DORNAN. DOD funds?
Dr. HAYES. Yes.
Mr. DORNAN. There is a little general information I would like to
give for the panel and everyone in attendance. An admiral who has
pretty incredible credentials as a patriot to this country told me he
submitted a report recently in the spring on the critical nature of
the Canal in transfering Pacific ships to the Atlantic Fleet in an
emergency. He determined that it was vital-since that is a key
word here, it comes from the Latin word "vita" or life-that life
depended upon the immediate transfer of ships, and that it was
rejected by higher people at the Pentagon because they said it was
not in line with administration policy.
I get a feeling here today that there is an administrtive policy
that has come down the line, and that everything has to be in
synchronization with that policy.
I might add to our marine expert, Dr. Gibbs, that two days is
critically important. If the Japanese carriers lagged two days be-
hind the main force hitting Pearl Harbor, the Japanese might have
given up their effort a lot earlier in the war. If General Patton's
rescuing forces of those surrounded at Bastogne had been two days
late, the German offensive at Ardennes would have succeeded and
we would have had a whole new war on our hands in 1944. If our
carriers had been two days late in Midway, we would have lost the
war in the Pacific. Now I think that the Arab-Israeli situation is
only one situation which shows that this Canal is vital in every
sense of the word as a strategic waterway.
I would like to ask when, Dr. Hayes, you prepared your statement
for this hearing this morning?
Dr. HAYES. Last week.
Mr. DORNAN. Last week.
When were you told, Governor Parfitt, that you would be coming
up here?
General PARFITT. The first indication was by phone on July 1,
1977. Written notice with specific questions was received on July 12,
1977.
Mr. DORNAN. Mr. Gibbs?
Dr. GIBBS. I believe I knew that I would be coming about ten days
ago.
Mr. DORNAN. Mr. Kujawa?





85


Mr. KUJAWA. Over two weeks ago.
Mr. DORNAN. I would like an opinion from each of you on the
President's discussion of the building a new canal in an unnamed
country. If I could prologue your answers by reminding you of the
Canal Zone press conference, and the statement by Congressman
Neal Smith of Iowa. He said he did not believe the negotiations
were moving forward in good faith on the Panamanian side, and he
aid he thought we should consider a third country sea level canal.
At that, the press and the embassy-to use the vernacular-went
bananas.
Could you each comment on your reaction, while you were
preparing your statements, to the President's suggestion of a sea-
level canal and how viable you think that suggestion is? He has
really opened up a whole new area by discussing that publicly as
the head of State of this nation which owns the Canal?
Dr. Hayes, would you go first.?
Dr. HAYES. My analyses of the future trade that is likely to use a
Central American canal does not indicate that a sea level canal
would be an economical undertaking at this time.
Mr. DORNAN. Why do you think the President brought it up then?
Dr. HAYES. I am afraid I do not claim to understand all of the
President's motives in bringing up the subject of a sea level canal.
Mr. DORNAN. Did it surprise you in that you were preparing a
statement to discuss before a congressional committee?
Mr. METCALFE. Dr. Hayes, would you use the mike, please?
Dr. HAYES. I am sorry.
I was aware that there was discussion of a sea level canal just as
there was discussion of a sea level canal during the 1960s when we
were in earlier treaty negotiations.
Mr. DORNAN. Governor Parfitt, in going over the press briefings
after our departure in February in the Canal, were you aware it
was Congressman Neal Smith who made a statement about a sea
level canal in another country that really caused the controversy?
General PARFITT. I was aware of that incident.
Mr. DORNAN. Were you surprised at the President-
General PARFir. I was surprised to hear the President discuss a
sea level canal, although the President of the United States has had
the recommendations of the Interoceanic Canal Commission since
1970, recommending a sea level canal be built.
Mr. DORNAN. When did you come up for this appearance?
General PARFITT. I came up on Wednesday and I heard the
President's meeting at Yazoo on television here.
Mr. DORNAN. Have you had a chance to be briefed by your people
in the Canal Zone or get a State Department briefing here about
the press impact in Central and South America?
General PARFITT. I have not, sir.
Mr. DORNAN. Were you surprised, Mr. Kujawa?
Mr. KUJAWA. Yes, I was. I participated in the studies of the
Interoceanic Canal Commission study that concluded their work in
1970, and that work concluded that a new canal was an uneconomic
undertaking. Construction cost increases since that time have made
it even more uneconomic.





86


In my testimony here this morning I summarized it by saying
that a new canal or an improvement of the existing canal to a
substantial degree based on present traffic forecasts is an economic
fantasy. This is my conclusion.
Mr. DORNAN. Do you think the President thinks of it as an
economic fantasy? He must have had in-depth briefings in this
whole area. He knows that it is a potential political bombshell that
is facing him. He is probably the most astute politician in the White
House since Franklin Roosevelt. He knows Governor Ronald
Reagan carried Texas, to the last delegate, on this one issue in the
1976 presidential campaign.
Do you think he had some specific reason for bringing up some-
thing that you consider an economic fantasy?
Mr. KUJAWA. Of course his motives are unknown to me. I read
his statement in this morning's papers. He indicated that his
thoughts were, I recall the exact word, conjectural. My impression
was that he had not given it a thorough review and was just
indicating some off-the-cuff kind of comments.
Mr. DORNAN. Dr. Gibbs, did this surprise you?
Dr. GIBBS. Yes, sir, it did surprise me.
Obviously the President-well, I should not say obviously, but I
presume it would be possible to build a sea level canal, it would be
very costly. I believe all of us on the panel here concur in that.
Trying to fathom the motives for this, of course, is really impossible,
but presumably economics was being traded off in his mind against
other accomplishments, presumably another dimension, national
security, foreign relations.
Now his judgment of course was-there is no way to know
precisely what kind of trade-offs he foresaw. But I presume that it
must be the accomplishments in these other dimensions which he
had strongly in mind, it could not have been economics.
Mr. DORNAN. As a marine expert, since the President has entered
this subject into the world arena of discussions, I would like to ask
you two questions.
The word "ecology" is about as household a word as any word has
become in the last ten years. I can remember the first time I heard
that word used in mass media; it came out of the mouth of Walter
Cronkite. It made an impression on me because I remember it. He
was using it in reference to the Panama Canal over a decade ago.
He sad that the opening up of the Panama Canal had allowed some
marine life forms to transit the Canal, I cannot remember in which
direction, but that it has caused a disruption of the eco-balance, the
ecology in the area was endangered somehow.
Did something like that happen when the Canal was first opened
at the beginning of this century, and do you foresee a marine eco-
imbalance with the sea level canal similar to that?
Dr. GIBBS. Well, I am not especially knowledgeable about marine
biology but, as I recall, some people have commented upon the
severe disruption that the very large constructions had on the land
ecology in Central America, but that those disruptions now are
largely overgrown.
In regard to the impact on the marine eco-system, I have not the
faintest idea and I doubt if any marine biologist who is a real





87


scholar and professional would stick his neck out and say that a
significant change had occurred because we simply do not have the
historical information.
Mr. DORNAN. You don't know what Walter Cronkite was refer-
ring to about some life form-
Dr. GIBBS. No.
Mr. DORNAN. Something about no more eels went through and
that aided shrimp-
Dr. GIBBS. There is concern about a sea level canal now for that
reason. My suspicion is that-I have to qualify this because I am
not a marine biologist, but my suspicion is that little impact on the
marine environment occurred from opening up the Panama Canal,
because it is a fresh-water canal and marine organisms with their
preference for salt water would have a very difficult time getting
through.
Mr. DORNAN. Right, which would not pertain to a sea level canal?
Dr. GIBBS. Right.
Mr. DORNAN. The other one is a tidal problem. I understand there
is a great tidal imbalance from the Atlantic-Pacific side, and there
is controversy between marine engineers as to how this could be
neutralized, particularly using Nicaragua, which has this large
natural lake. Is there some tidal problem that could just not be
overcome, in your estimation?
Dr. GIBBS. Well, if you throw enough money at a problem, you can
usually solve it. In terms of specific engineering designs that we
have available now, I am not sure that we do have that available to
us, but all of this is based on a 1970 interoceanic study that is
getting a little out of date now, but as of that time I believe the
engineers were a little wary about dealing with the tidal problem
for a sea-level canal across the Republic of Panama.
Mr. DORNAN. Governor Parfitt, the President, as you recall, did
not just shoot from the hip, as the expression goes. It seems like he
had given this thought. He mentioned the exact billion-dollar cost
figure for the Alaska pipeline, the billion-dollar figure for what it
would cost to build a new gas Line across the U.S., and then put a
multi-billion-dollar figure for a sea level canal up against those two
other multi-billion-dollar projects and seemed to feel, at least in my
mind, that it was a credible proposition.
Has anyone from the State Department had any discussions with
you, or through our embassy people to you, about softening up the
Panamanian position or getting them to pay a little attention to
how difficult this is by discussing with them a sea level canal in
another country?
General PARFIT. No, sir, I have had no discussion of that type.
I would like to correct a previous statement I made with regard to
the character of the Inter Oceanic Canal Commission recommenda-
tion. I stated they recommended the construction, and that was not
my intent. They said that if you are going to accommodate increas-
ing traffic by the end of the century, that the preferred solution to a
third lock was a sea level canal built ten miles west of the existing
canal, and that this proposition should be reviewed when the rights
and obligations of the U.S. under new treaties with Panama are
determined. They did not recommend specifically that a sea level
canal be built.





88


Mr. DORNAN. You said there had been ten survey areas in the
Panamanian area after looking at Nicaragua and others.
General PARFITT. Yes, I forget the exact number, but Route 10 is
the number of the preferred route. It was estimated to cost about
$2.9 billion at that time. We have escalated this cost using regular
escalation factors, and estimates now, if they are correct, would
require an expenditure of about $5.3 billion.
Mr. BOWEN. Would the gentleman from California yield?
Mr. DORNAN. Yes.
Mr. BOWEN. I apologize, but I have a bill on the floor, and if I
could ask one or two questions, I would appreciate it.
I just want to say to General Parfitt, without any disrespect for
his distinguished predecessors that I cannot imagine anybody better
suited than he is for the responsibilities entrusted to him, and I
have made that statement on two occasions. The gentleman has
done an outstanding job.
There is a question of a military character that perhaps should be
addressed later but keeps coming up again and again. The point is
made that the Canal is not defensible, that all it takes is a hand
grenade in the right place, or something to that effect, to disrupt
the Canal and, therefore, it is pointless for us to try to continue to
operate it if there is any hostile attitude on the part of Panama-
nians or anybody else.
How would you comment on this military argument that it is not
really defensible and that it is futile to talk about defending it?
General PARFITT. I think this arises from the fact that a facility
as long and open as the Panama Canal is vulnerable to sabotage.
But I would say that vulnerability existed from the time of its
construction, and it is no worse today than it was when constructed.
We had that same potential problem during World War II, and we
were adequately able to cope with it.
Mr. BOWEN. Of course the last thing in the world the Panama-
nians want is the closing of the Canal.
General PARFITT. It is true that Panama would probably suffer
worse from a closing of the Canal; therefore, one finds it very hard
to envision their doing something which would adversely impact on
its efficient operation. Nevertheless, one can't rule out the potential
of an unstable act by party or parties unknown, and we have to be
apprehensive about that.
Mr. BOWEN. Do you believe the American military forces are
capable of defending the Canal in the sense that I mentioned?
General PARFIrr. Well, certainly there is no 100 percent guaran-
tee of defending the Canal. It is vulnerable in many places, and
sabotage of an extensive nature could result in its putting it out of
action for some period of time. That is always a possibility. We have
had to face it in the past and will have to face it in the future.
Mr. BOWEN. I would like to ask one further question of either Mr.
Gibbs or any other panel member. In terms of measuring the
economic impact of the Canal, if we reduce that to maybe one
question, I would ask what would be the inflationary impact on the
American economy if the Canal were closed and all the shipping
had to go around the Cape, or via some other method of transporta-
tion. How could you measure the inflationary impact on the Ameri-
can economy?





89


Dr. GIBBS. In terms of the aggregate economy, I doubt it would
even appear. $500 million in the first year relative to the figure that
Dr. Hayes quoted, was it $1.4 trillion now for the Gross National
Product, I don't think you could detect that.
Mr. BOWEN. Would anybody else on the panel like to comment on
the inflationary impact of the longer route, higher charges and
higher cost of delivery in the area of any particular commodity?
Would it impact severely?
Dr. HAYES. I think I agree with Dr. Gibbs.
Mr. KUJAWA. I think one has to distinguish between the short-
term effect and long-term effects. In the short term, the effects
could be disruptive. Again, I can't say vital, but if there was a
sudden closure, the short-term effects could be significant.
In the longer term, I have confidence in our ingenuity to accom-
modate it and go from there. So the main problem or the most vital
interest of the U.S. in the Panama Canal tends to be more short-
term than long-term.
Mr. BoWEN. I thank the gentleman.
Mr. DORNAN. Before he goes, I want him to hear the answer to a
follow-up question I will ask.
Any current danger to the Canal would still exist under new
landlordship; isn't that correct? Whatever government takes over,
the Canal has this same problem, given the instability of some
South American governments. One sure way to bring down a
government in Panama, if it had total control of the Canal, would
be to bomb a lock on the Canal and turn to the head of the state
and say, "Look what you wrought. You have had the Canal one
week and it is closed down."
Do you believe a government could sustain itself in Panama if it
lost the ability of the Canal to operate, Governor Parfitt?
GeneralPARFITF. No, I don't think so. But in a broader answer to
that question, I believe the construction of the administration is
that the danger of a mass attack or an organized attack is less than
the danger of a sabotage situation. And the sabotage situation is
more likely to be experienced with an unfriendly Panamanian
Government than with a friendly Panamanian Government. There-
fore, this is the highest risk-that either a Panamanian Govern-
ment would stand aside, or, in the extreme, because of some feeling
of dissatisfaction with the U.S., became involved in some type of
sabotage or disruptive activity.
Mr. DORNAN. What about a Panamanian Government with forces
in the country that did not agree with the government in control,
and they had the responsibility of security? In other words, can not
the United States of America defend the canal against an un-
friendly Panamanian Government far more easily than a small
Panamanian force can defend itself against some counter force that
wanted to bring the government down?
General PARFiTF. In answer to that specific question, yes.
Mr. DORNAN. Then all this talk about sabotaging the Canal to me
is meaningless, using common sense, because the same thing would
pertain with whatever government is running that Canal, and the
security would be greatly inferior, given the excellent security I saw
provided down there by our government.





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Are any of you aware of the Alaskan oil situation, where Sohio
has purchased Texas gas line rights up to the California border? It
appears now, and is debatable, that California may not allow
transit of this sour crude oil from its ports to that Texas line and
hence to refiners in the Gulf Coast area. Moreover, California
refineries cannot handle this sour crude oil, and that means the
Alaskan crude would have to use the Canal Zone quite extensively
during the next two decades.
Are you aware of this problem of transiting crude oil from Alaska
to the Canal?
General PARFITT. Yes, the original estimates were that with the
pipeline capacity of 1.2 million barrels per day, that the refining
capacity in the West Coast was about 600,000 barrels per day
Mr. DORNAN. Less than half?
General PARFITT. Roughly half, and that some alternate means of
moving that oil had to be found. That is roughly 500,000 or 600,000
barrels per day. There were some schemes considered which had to
do with a tradeoff with Japan. I understand the President turned
those down the other day, which leaves the alternatives of going
through the Panama Canal, going around the Horn, or using one of
the alternative pipeline schemes, and there are several.
My information is that the pipeline schemes are hung up on
environmental grounds, as you suggested, and that even if cleared
on environmental grounds, they would require somewhere in the
order of a minimum of 18 months to modify and get them ready for
operation. So in the interim period it seems quite likely that the oil
will flow through the Panama Canal. Recent estimates have re-
duced the quantities I mentioned substantially, because of the
disruption to Pumping Station No. 8, and our current projections
are rather than the 500,000 barrels roughly a day going through the
Panama Canal in the short term, it would be more like 200,000
barrels a day. That is in the short term.
In the longer term, when Pumping Station No. 8 is repaired, we
think we will be back up again to a potential 500,000 barrels a day.
Somewhere between one and three ships a day will be the addi-
tional traffic you will attain in the Panama Canal, which will be a
profitable business for us. However, we still feel, since the pipeline
solution seems to be preferred on economical grounds, that there
will be some resolution of their problems, and at the moment for
our planning purposes are not considering that the flow of oil
through the Panama Canal will continue for a long duration. We
are thinking it is a short term situation.
Mr. DORNAN. And as for defense considerations, it might be
better, but when we see the one explosion that took place in Alaska,
it is indefensible as the Canal, itself, if not more so?
General PARFITT. Exactly.
Mr. DORNAN. May I remind the panel that President Johnson,
President Nixon, and President Ford all used this Latin root word,
vita, vital, in their discussions of how important it was to get
Prudhoe oil down here and stop the dependence on the instability of
Middleastern oil?
I would like to close by asking each of you a question. Because I
get the impression sometimes, hearing how nonvital the Canal is,







and the Suez, that it was ridiculous to build the canals in the first
place, what do we need them for if they are so unimportant?
Please give me your best and most honest answer. Let me start
with you, Governor Parfitt, and the other three have the advantage
of following your answer, do you think the U.S., if it were offered in
the year 1977, in perpetuity rights of the real estate surrounding
the isthmus area, to build a canal, would proceed to take on this
undertaking today if it had never been done before in history?
General PARFIrr. I am not sure I understand the scenario. It is
that we have rights in perpetuity to build it but have not done so?
Mr. DORNAN. Do you think that economically we would move to
build a canal today if we were offered that opportunity by this
small country and offered, in perpetuity, rights to do it?
General PARFIrr. On pure economic grounds, no.
Mr. DORNAN. Mrs. Hayes.
Dr. HAYES. I must concur with that. I think our transportation
infrastructure would be so determined by the fact we had not relied
on the Canal previously, and that it had not been available, that we
would have no need for such a canal.
Mr. DORNAN. Do you think Panama, itself, would attempt to
borrow money from World Bank or other world banking sources to
build the canal, itself?
Dr. HAYES. Again, I suspect the international trade would be such
that that canal would not appear to offer immediate economic
benefits. The distribution of trade would be different than now.
Mr. DORNAN. Would you concur in that, that they would not be
able to afford it?
General PARFITT. It certainly would not be a viable economic
project, so, therefore, anyone would probably have a difficult time
getting funding to finance that kind of project.
Mr. DORNAN. Why is the Suez Canal in such a different position,
General Parfitt, given the anxiousness of the world to get that canal
reopened after it had sat there idle for a decade?
General PARFITT. I really don't know too much about the Suez
situation. I suspect it is quite important from the standpoint of the
economy of Egypt and the investment required to reopen was not in
the magnitude we are talking about for building a canal across the
Isthmus of Panama.
Mr. DORNAN. If it had not been dredged to begin with, do you
think world trade routes would have adjusted by this time and it
would be economically unfeasible to open up a Suez Canal?
General PARFITT. I am not sure about the Suez Canal.
Mr. DORNAN. Would you agree, Mr. Kujawa?
Mr. KUJAWA. The Suez Canal is in a different geographical
environment; is different financially in terms of construction costs;
and is different in terms of what service it gives to world shipping.
The service that a canal renders is a short-cut for a ship in going
from point A to point B. The short-cut provided by the Suez Canal is
economically more valuable than that provided by the Panama
Canal as an accident of geography. But the construction cost of the
Panama far exceeded the construction cost of the Suez, and it is
more complex. So the Suez is a more economic proposition.





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Mr. DORNAN. Suppose the Canal were offered to us at 1903 costs,
that we would be able to open it up at the cost that it was opened
up in 1903? Do you think, given both the military and economic
situations, we would built it now?
Dr. GIBBS. If we had reasonable relationships with our neighbor-
ing countries, and if it were possible to build it with the inexpensive
labor which was available at that time, which is not available now,
it might remotely be economically feasible to do it, but I have to
hedge on this. I think Dr. Hayes pointed that in 1977 if we had
progressed from 1903 to now, and not had a canal, that we would
see a considerably different arrangement of our transportation
system, that new arrangements would be in place, would be func-
tioning, and would be charging rates attractive to business. A new
facility at Panama would have to compete with this different
infrastructure, and it would be a nip-and-tuck thing whether it
could make money or not.
Mr. DORNAN. Well, the point of my asking the question was
simply this: I believe if we were offered the Canal at 1903 dollars to
build it for military reasons alone, we would proceed, but for also
economic reasons, granted that we would have a different rail
structure, different types of ships, that we would have learned to
live without it, that we would rush to build the Canal at that cost.
There are many things we have in the world that we could not
afford to build again. Los Angeles is competing for the Olympic
Games and would not be able to without the facilities and hotels
that were built for the 1932 games. I think because we do have the
Canal now, it is incredible to force our reasoning into such a
position that we are going to write it off as though it does not have
any impact on world trade. There are all sorts of ways we would
work around the Canal, if destroyed. But the fact we have it and
can protect it and would give it up to an unstable government, I
think requires a lot of mental gymnastics, some of which I think I
have seen here today. Thank you very much.
Mr. METCALFE. I would like to raise one question which is a
follow-on to the question that the gentleman from California just
raised. Recognizing that in 1903 the Canal was built for ships of a
particular size, and that subsequent, of course, to that time, the
ships have increased their size, and our war vessels have increased
their size, and, therefore, many of them cannot transit the Canal, is
it not like comparing Ford building present automobiles with the
four cylinder autos they once built. I think the question logically
would be, would we build a 4-cylinder Ford today with the same
knowledge we have and with all the other technical knowledge? I
think if the question is going to be effectively answered, we have to
answer it in terms of what are the needs of the Canal right now.
Certainly it would seem to me that it would be proper, if anyone
considered building a canal today, that they would build it suffi-
ciently wide enough and large enough to transport the larger
vessels so they wouldn't have to go around the Cape in order to be
able to transport the goods that they have.
I think we have to talk in terms of what the conditions are today.
And I raise the same question for the record that Congressman
Dornan was raising. To paraphrase it and change it somewhat, if





93


this was 1903, and now we are talking about 1977, would they build
a canal purposefully they knew could not handle all of the vessels?
General PARFrrr. I think you have to put that in proper context. I
believe the designers in 1903 did a fabulous job, and the situation
today isn't quite that which is presented by many people. Ninety-
two percent of all the ships in the world fleet, ninety-six percent of
the U.S. commercial fleet, and 98 percent of the U.S. Naval ships
can go through. So we are talking about a very small percentage of
ships that cannot use the current Canal, which I think speaks very
highly of the designers.
Certainly if we were building it today, we might build it some-
what bigger, but not necessarily big enough, if you are going to build
a lock canal, to accommodate all the ships that could possibly be
foreseen to be built.
Mr. KUJAWA. I concur in that, Mr. Chairman. The economies of a
canal are such that they generally are negative to the large ship
sizes, so each additional foot of draft for a canal comes at a larger
investment. In hindsight, the Panama Canal was a marvelous
economic achievement, as well as engineering feat. Those who
planned it back in 1903 did a terrific job, and I think, in response to
Congressman Dornan's comments, the question of whether the
Canal would be built today, is somewhat of an unfair test of the
importance of the Canal. I think it was properly built when it was
built, and in hindsight it has served Commerce over a long period of
time and has done a marvelous job of doing it, and the horizon is
that it can continue to reader an important service through the
remainder of this century.
Mr. DORNAN. Could I ask one final question?
Mr. METCALFE. If you will take only one minute, because we are
behind schedule.
Mr. DORNAN. One thing I have been confused about, particularly
when you hear the severe criticizm of how we have abused people in
the Canal Zone area: Have we really operated the Canal as a world
trade resource, and have we really been munificent here, and if we
were to charge tolls to run it as a free enterprise profit-making
concern, what could we raise the tolls to? What kind of profit could
be extracted out of that by the United States of America, and I
anticipate whatever your answer is that it will be exactly what
Panama will do the day after it takes over that canal, if it does.
Could you go first, Mr. Kujawa?
Mr. KUJAWA. The last detailed study of the revenue potential of
the Panama Canal, which was issued early in 1975, was based on
facts existing before the Canal raised tolls for the first time in its
history. At that point in time, based on the information then
available, it indicated that tolls could be raised approximately 75
percent without negative impacts over the long term.
The Canal, in order to cover cost increases in the last three years,
has raised tolls 50 percent. So some portion of that ability to raise
tolls has been eaten up by the need to increase tolls to cover costs.
Of course, you have had, since that time, changes of facts in terms
of traffic, changes in price levels, due to inflation, so the answer is
not exactly clear, but the ability to raise tolls over and above
current levels based on that study are not very bright.


95-548 0 77 7





94


Mr. DORNAN. Thank you, Mr. Chairman.
Mr. METCALFE. Thank you very much.
In the interest of time I ask unanimous consent that any member
of this subcommittee be permitted to submit questions to each
member of the panel in writing and ask that you reply to those
questions. Hearing no objection, it is so ordered.
[The questions and answers may be found at the end of these
hearings.]
Mr. METCALFE. I would like to thank the panel for its testimony
and for the presentations which you have given us. We thank all of
you for coming and sharing this time and your knowledge with us.
Thank you very much.
On Panel II on the economic subject area we have Mr. Howard F.
Casey, Deputy Assistant Secretary for Maritime Affairs, U. S.
Department of Commerce; Mr. James J. Reynolds, American Insti-
tute of Merchant Shipping; and Mr. James W. Boone, Director of
the Office of Rail Economics Operation, Federal Railroad Adminis-
tration, U. S. Department of Transportation.
Would those members please come forward and identify
themselves?
PANEL II ECONOMIC: STATEMENTS OF HOWARD F. CASEY, DEP-
UTY ASSISTANT SECRETARY FOR MARITIME AFFAIRS, U.S. DE-
PARTMENT OF COMMERCE; JAMES J. REYNOLDS, AMERICAN
INSTITUTE OF MERCHANT SHIPPING; AND JAMES W. BOONE,
DIRECTOR OF THE OFFICE OF RAIL ECONOMICS OPERATION,
FEDERAL RAILROAD ADMINISTRATION, U. S. DEPARTMENT OF
TRANSPORTATION
Mr. METCALFE. Mr. Casey, would you start off?

STATEMENT OF HOWARD F. CASEY
Mr. CASEY. Thank you, Mr. Chairman.
Mr. Chairman, I am Howard F. Casey, Deputy Assistant Secre-
tary of Commerce for Maritime Affairs.
Should I proceed with my statement?
Mr. METCALFE. If you would summarize it and then I will ask
unanimous consent that the entire statement will be entered into
the record. That would apply also to the other two panelists.
Hearing no objection to my request at this point,the entire state-
ment will be entered into the record.
Mr. CASEY. Mr. Chairman, my statement is rather brief.
Mr. METCALFE. Proceed.
[Mr. Casey read the following statement:]