Panama Canal treaty ramifications

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Panama Canal treaty ramifications
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Table of Contents
    Front Cover
        Page i
        Page ii
    Table of Contents
        Page iii
        Page iv
    Economic and financial ramifications of the proposed Panama Canal treaties
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    Appendix. Questions of subcommittee chairman Metcalfe for various witnesses pursuant to hearings
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    Back Cover
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Full Text
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1 PANAMA CANAL TREATY RAMIFICATIONS

Part 1





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
THE ECONOMIC AND FINANCIAL RAMIFICATIONS OF THE
PROPOSED PANAMA CANAL TREATIES AND THE ROLE THE
SUBCOMMITTEE WOULD PLAY IN IMPLEMENTING THE
TREATIES

NOVEMBER 30, DECEMBER 1, 1977

Serial No. 95-20

Printed for the use of the Committee on Merchant Marine and Fisheries
.10010" A****'lo11,
440



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U.S. GOVERNMENT PRINTING "OFrinN .S9l% Of
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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) DM 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
JAIMES 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
JOHN M. MURPHY, New York
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GENE SNYDER, Kentucky
ROBERT K. DORNAN, California
PHILIP E. RUPPE, Michigan
(ex officio)


2r If ENCE W. MODGLIN, Professional Staff
..-* ^f vI MAN CONROY, Professional Staff
Alf aARD TANNENBAUM, Consultant
'" a RRILL WHITMAN, Consultant
NICHOLAS 1. t.N E'.NMIACHER, Professional Staff, Minority
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CONTENTS


Hearings held- Page
November 30, 1977--- -- --- ------- -- 1
December I, 1977---------------------------------------------- 131
Statement of-
Alexander, Clifford L., Jr., Secretary of the Army------------- ------ 56
Baxter, Richard R.. professor of international law, Harvard Law
School ----------------------------------------------------- 176
Prepared statement----------------------------------------- 178
Brandes, Ely M., International Research Associates, Palo Alto, Calif_ 153
Bunker, Ellsworth, Treaty Negotiator----------------__------------- 6
Casey, Howard F., Deputy Assistant Secretary for Maritime Affairs,
Maritime Administration. Department of Commerce-------------- 123
Cooper, Richard, Under Secretary for Economic Affairs. Department of
State --------------------------- 6
Dickman, James J., president, Council of North Atlantic Shipping
Associations ---------------------------------------------253
Dolvin, Lt. Gen. W. G. (U.S. Army, retired), Deputy Negotiator, De-
partment of Defense for Panama Canal Negotiations--__------------ 97
Gleason, Thomas W., president, International Longshoremen's Asso-
ciation, AFL-CIO--- ---------------------------- 251
Joint statement------------------------------------------- 253
Haar, Herbert R., Jr., Associate Port Director, Port of New Orleans- 213
Kujawa, Leonard J., partner in Arthur Andersen & Co-----__------_ 133
Linowitz, Sol M., Treaty Negotiator___ --------------------------- 6
Maechling, Charles, Jr., attorney ------------------------- --------188
Prepared statement--------_--------------------------------- 190
Nachmanoff, Arnold, Deputy Assistant Secretary of Treasury for
Developing Nations, Treasury Department__--- ---------- 106
Parfitt, Maj. Gen. H. R., Governor of the Canal Zone------- ---------56
Reynolds, James J., President, American Institute of Merchant Ship-
ping ---------------------------------- --------------------- 208
Schlee, G. Michael, director, National Security/Foreign Relations Divi-
sion, The American Legion----- -------------------------------257
Staats, Elmer B., Comptroller General of the United States----------- 49
Steers, Philip L., Jr:, former financial vice president of the Panama
Canal Co -------------------------------------------------- 145
Watson, John, Assistant Director, International Division of The Gen-
eral Accounting Office-------------------------------------- 49
Whitman, W. Merrill, constitutional lawyer; former secretary, Pan-
ama Canal Co ---.------------------------------------------- 227
Zappacosta, Frank M., Assistant Director, International Division of
the General Accounting Office----------------------------------- 49
Additional material supplied-
Army Department:
Questions for the Secretary of the Army----------------------- 59
Brandes, Ely M.:
Questions submitted by subcommittee and answers thereto--------- 154
Clausen, Hon. Don H.:
Excerpt from the Congressional Record of October 6, 1977: "Per-
spective on Panama"---------------------------------------- 30
Defense Department:
Questions posed to the Department of Defense------------------- 96
Dolvin, Gen. W. G.:
Drydock and supporting facilities--------------------- 1------ 00
Navy and Government tolls---------------------------------- 104
(III)









Additional material supplied-Cont.
GAO: page
Questions posed the General Accounting Office------------------ 47
Kujawa, Leonard: Questions submitted by Subcommittee------- 144
Maechling, Charles, Jr.:
Panama Canal Treaties------------------------------------- 196
Responses to questions--------------------------.----------- 191
Text of the Declaration of the Suez Canal-------------------- 194
Maritime Administration:
Questions and answers supplement to the statement of Howard F.
Casey -------------------------------------------- --- 126
Parfitt, Maj. Gen. H. R.:
Answers to questions from Subcommittee (includes supplementary
questions) -------------------------------------------------- 67
Reynolds, James J.: :
Canal users and associated grouips------------------------------ 208
State Department:
Loan obligations-------------------------------------------- 45
Response to paper on Panama Canal Treaty Problems---------- -248
Responses to questions from the subcommittee------------------- 12
Steers, Philip L.:
Questions submitted by subcommittee-----------------__ 144
Treasury Department:
Advantages of Panamanian banks-------------------- --------115
Attractiveness of Offshore Banking Centers------------------- 116
Panamanian banks----------------------------- ---..- 114
Questions and replies for the record by the Treasury Department- 118
Questions posed to the Treasury Department------------------- 104
Whitman, W. Merrill:
Panama Canal Treaty Payments and the Constitutional Power of
Congress to make appropriations----------------------- ---- 228
Panama Canal Treaty problems------------------------------ 241
Communications submitted-
Bennet, Douglas J., Jr.: Letters of February 3,1978, to Hon. Ralph H.
Metcalfe with a point-by-point analysis------------------------- 248
Engram, Robert C.:
Letter of September 28, 1977, to the President and Congress------ 216
Haar, James C.: Letter to Edward S. Reed----------------------- 219
Metcalfe, Hon. Ralph H.: Letter of January 9, 1978, to Ellsworth
Bunker --------------------------------------------------- 248
Reed, Edward S.: Letter of September 28, 1977, to the President,
Congress, and Secretary of Commerce ------------ 216
Appendix-Questions of Subcommittee Chairman Metcalfe for various
witnesses pursuant to hearings on the economic and financial ramifica-
tions of the proposed Panama Canal Treaties------------------------ 261













ECONOMIC AND FINANCIAL RAMIFICATIONS OF THE
PROPOSED PANAMA CANAL TREATIES


WEDNESDAY, NOVEMBER 30, 1977
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON PANAMA CANAL,
COMMITTEE ON MERCHANT MARINE AND FISHEP'ES,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:10 a.m., in room
1302, Longworth House Office Building, Hon. Ralph H. Metcalfe
(chairman), presiding.
Mr. MELCALFF. The subcommittee will come to order.
On September 7, President Carter signed the proposed Panama
Canal Treaties of 1977. Since then, the treaties and their accompany-
ing documents have been formally sent to the Senate of the United
States.
Today and tomorrow, the Panama Canal Subcommittee will examine
the economic ramifications of the treaties. The economic and financial
ramifications of the Panama Canal Treaty are of great importance
to the Subcommittee on the Panama Canal. The subcommittee is espe-
cially concerned because under the rules of the House, the Merchant
Marine and Fisheries Committee, in general, and this subcommittee
in particular, has jurisdiction over the "Panama. Canal and the main-
tenance and operation of the Panama Canal * *."
These hearings have been called because it is this subcommittee
which will have to review and, if necessary, modify the implementing
legislation, if the treaties are ratified. The subcommittee will be
especially concerned with the new entity which will replace the present
Panama Canal Company and also with the financial management of
the Panama Canal.
We had hoped to have the enabling legislation before us prior to
these hearings. The State Department legal adviser stated in his
testimony before a House committee on September 8, 1977, that "We
do hope to submit the proposed implementing legislation within a
period of weeks * *." Obviously, we cannot wait indefinitely before
we discharge our responsibilities.
The treaties and their accompanying agreements tell us a good deal
about the future finances of the Panama Canal. Hopefully, today and
tomorrow we will have the kind of substantive exchange which will
prompt the best possible legislation, if tihe treaties are ratified.
(1)








We have announced three basic hearing objectives, which are (1)
examination of the financial prerogatives and responsibilities of the
projected Panama Canal Commission under the proposed treaties;
(2) analysis of the change in the rate of tolls needed to finance the
Commission, and the relationship of that change to canal traffic; and
(3) procedural and constitutional questions that relate to implement-
ing Panama Canal Commission obligations.
It would not be appropriate for us to discuss these financial questions
today were it not for the fact that the proposed Panama Canal Com-
mission, which will operate the canal to the year 2000, is to be a U.S.
Government agency.
This agency is one of the most important, but underrated elements
of the treaty package. I commend the negotiations for their attention
to this element in the treaty talks.
All of the witnesses have been furnished with rather detailed ques-
tions. The subcommittee has asked the witnesses to direct their atten-
tion to those questions. We hope their prepared testimony and their
answers in response to questions of the subcommittee will be responsive
and detailed.
In order to make the record of these hearings as clear as possible, I
ask unanimous consent that the questions to the individual witnesses
appear at the appropriate interval in the hearing record, unless the
questions are included in the witness's statement.
Hearing no objection, it is so ordered.
I am informed that the Honorable John M. Slack of West Virginia,
who is chairman of the Subcommittee on State, Justice, Commerce and
the Judiciary of the House Appropriations Committee, has asked
permission to sit in on these hearings.
Would you please come up, Congressman Slack.
I would ask unanimous consent that the subcommittee be as generous
as is the chairman of the Subcommittee on State, Justice, Commerce.
I ask that we reciprocate his generority because in February of this
year he invited the members of the Subcommittee on the Panama Canal
to accompany him and his committee to Panama.
We would like to extend to him the same kind of courtesy so that
he will be able to sit in and ask questions and make comments because
his subcommittee has a vital interest in the treaty issue itself.
We are delighted to have you, Chairman Slack. Unless there are
any objections, we will accord you that privilege of participating.
Mr. SLACK. Thank you. I would appreciate it very much.
Mr. METCALFE. Come up and sit with us.
Incidentally, all members of the Merchant Marine Committee have
been invited to participate in these hearings.
Mr. SLACK. Thank you.
Mr. METCALFE. I have a few other remarks. Because of the nature
of the hearings, and the importance of the minatter before us, the sub-
committee hopes to issue a report with respect to the issues raised in
these hearings.
Finally, I wish to indicate that the chair intends to conduct these
hearing proceed(lings in accordance with rule III(b) of the committee
rules and comparable House rules which provide that on the first
round of questioning members will be granted 5 minutes each. There
is a t rewmendous amount of inaterial to be covered in the hearings, and








many witnesses to be questioned, so I think it is imperative we adhere
to this procedure.
Before I introduce our first witnesses, I would like to give our mem-
bers an opportunity to make any opening statements they desire.
Does anyone seek recognition?
Mr. SNYDER. Mr. Chairman?
Mir. METCALFE. The gentleman from Kentulcky, Mr. Snyder.
Mr. SNYDER. Mr. Chairman, I am looking forward to these hearings
as a primary source of information for the American people as to ex-
actly what the proposed Panama treaties will cost them.
I suspect the cost is far higher than the administration spokesmen
would have us believe. I welcome the opportunity to put questions to
them and other knowledgeable expert witnesses. It is my conviction
that the taxpayers will end up footing another very unwelcome bill
costing millions should these Panama treaties be ratified.
The last time this committee met the treaty negotiators on August
17, the treaties had not been published, and I found those gentlemen
quite unwilling to answer some very simple, elementaTry questions con-
cerning the security of the United States under the proposed agree-
ments.
Perhaps they will be more forthcoming at this time in regard to
those few questions.
My position is well known as urging the defeat of the proposed
treaties.
As far as the security of the United States is concerned, our pos-
session of the Panama Canal in peace and war is vital. I see no sense
in our global conflict, with the Soviet Union in throwing in our hand-
our top cards-and I think the American people agree with me.
Many Americans, including Members of Congress, suspect the bank-
ing interests may be behind the canal giveaway. I have no knowledge
as to whether or not they are, but there have been numerous allega-
tions in the press. For example, an article in Bankers Magazine for
spring 1977, flatly says of the banks, and I quote:
They want the taxpayers of the creditor countries to pay the bad debts with
the money passing-in theory only-through the hands of the debtor governments
on its way to repay bank loans.
An article in the London Daily Telegraph, March 3, 1977, states:
Apart from political considerations the Carter Administration is also believed
to be under pressure from American banking interests to hand the canal over
to Panama.
If there is substance to these allegations, the American people should
know of it. If there is none, the allegations should be laid to rest.
This past August, Senator Frank Church issued a staff report titled
"International Debt, the Banks, and U.S. Foreign Policy."
I'd like to ask a number of questions based on some things that have
appeared in this report and in the press.
Let me set the background in a few excerpts from the Church re-
port.
The Senator sets the problem in his introduction as follows:
But what we have been dealing with since the oil price increase of 1973 are
not temporary deficits but a structural defect in the world economy in which
enormous financial surpluses are concentrated in the hands of a very few coun-






4

tries which cannot spend them for goods and services. They are thus deposited
in the "strong" industrial countries. The "weak" oil deficit countries then borrow
from the major financial institutions in the strong countries. And there is no end
in sight to this cycle of a few permanent financial surplus oil producer countries
and burgeoning international indebtedness by weaker oil importing countries.
The central theme of the Church report, written by Ms. Karen Lis-
sakers of the subcommittee staff, is that the world's major international
banks have become more and more overextended in lending to the
debtor oil importing nations and their financial positions are becom-
ing more and more precarious.
Mention is made of the Basle, Switzerland, agreement in July 1974
of the Board of Governors of the Bank for International Settlements,
the "central bankers' central bank."
The United States, though not a member of the BIS, subscribed to
the Basle accord at the annual International Monetary Fund meeting
in Washington in October 1974.
The report states that under the agreement, "Consortium banks
which have multinational bank participation will be bailed out on a
pro-rata basis by member parent banks, again backed by their own
central banks."
Note the words, "will be bailed out."
Key to the background I am setting is this statement in the report:
It is worth noting that the central banks asked nothing from the private
banks in return for their guarantee, at least officially . Commercial banks
can continue to compete on the euromarket at margins which do not insure
profitability, to take on deposits and external credits without adequate capital
reserves and to roll over hundred million dollar loans to underdeveloped coun-
tries who have little or no hope of ever being able to pay them back, without
interference from any governmental authority. And if such practices lead to
disaster, the governments are pledged to come to the rescue.
Discussing the nature of the use underdeveloped countries make of
these loans just to maintain a given level of domestic consumption,
the report states:
Doubts are therefore raised about the ability of some countries to ever repay
their foreign loans, or, in the long run, even to continue to meet interest pay-
ments on those loans.
Toward the end of the report Lissakers cites the Citibank loan to
Zaire which had fallen behind in its repayments. Zaire agreed to pay
up back interest only if Citibank committed itself to a new $250 mil-
lion loan.
Lissakers sums up the incident with this amazing sentence:
The Zaire Governmnt is thus holding the money it owices the banks hostage
for a $250 million ransom.
She goes on:
The Zaire case raises some interesting questions about just who has the great-
est leverage at this stage of international debt buildup-the creditor banks, or the
debtor countries? Was Citibank's willingness to undertake the task of raising
another large loan to Zaire a prudent and sensible response to restore the credit-
worthiness of a borrower, or a desperate attempt to avoid as long as possible
having to write off a substantial loss on an international loan, and perhaps
thereby set a precedent for other debtor countries to follow suit?
Wrapping up the ovErall international activity, Lissakers asks
"whether this process of deficits, recycling, borrowing, and debt re-






5

scheduling can go on indefinitely," and answers it in a way that is, I
believe, quite worrisome:
The viability of the whole international financial system is premised on the
assumption that all the players stay in the game; that the banks continue lend-
ing, and the borrowers keep repaying the interest, so that although the principal
may be refinanced or "rolled over" for individual borrowers, the money con-
tinues to circulate. The biggest threat to the system lies in the possibility that
one of the passengers on this merry-go-round will decide to get off-that on%
of the large debtors finally decides to repudiate its debts, or one of the lenders
says "no more" and calls in the chits. Other lenders then follow in order to
protect their interests and a domino effect sets in. As the crisis created by the
collapse of Herstatt and Franklin National several years ago illustrates, even
the disappearance of a relatively minor player can set the multinational bank-
ing system teetering.
Finally, in conclusion, Lissakers asks the $64 question:
The question arises of how prudent the banks have been in their lending..
Has the profitability of this activity blinded them to the underlying risks? Or
has the banks willingness to lend to foreign countries for balance of payments
purposes been premised on the unstated assumption that in the event of a real
debt repayment crisis, the governments of the wealthy industrial countries will
have to come to the rescue because they cannot afford to see either the debtor
countries or their own large banking institutions go under?
Mr. Chairman, Panama is a debtor nation with almost 40 percent
of its annual budget now dedicated just to debt service.
American and foreign banks have been coming to the rescue.
I hope we can find out in these hearings if the American people are
being set up to bail out the banks, and if, perhaps, the canal giveaway
just might play a role in this bailout.
My questions all relate to my central concern here: Is the Panama
Canal vulnerable-to international bankers?
I repeat, I don't know if the many allegations that such is the case
have substance.. If they do, the people should know it. If such allega-
tions are without merit, they should be laid to rest.
I am a firm believer in the free enterprise system and have no desire
to worsen the banking climate with untoward fear, but news stories
on which my questions will be. based reflect growing concern in banking
and government circles.
The witnesses may have to obtain some answers from other agencies
and submit them in writing, and I hope this can be done expeditiously.
Of course, any proprietary information I may request should be sub-
mitted without identifying the individual bank involved.
Mr. METCALTFE. Thank you, Mr. Snyder.
Are there any other members who wish to make a statement.?
[No response.]
1Mr. METCALFE. We will proceed. Our first witnesses are our distin-
guished Ambassadors who negotiated the Panama Treaty, Ambassador
Ellsworth Bunker and Ambassador and Adviser Sol Linowitz. They
are accompanied by their colleagues on the negotiating team. These
are the first witnesses in a long series of distinguished persons who will
be testifying today and tomorrow.
Ambassadors, this is the first time that you have. appeared before. the
subcommittee since the treaties have been signed. Several other commit-
tees have been able to hear your testimony. We await the enlightened
statements that you may be able to give us.






6

STATEMENT OF HON. ELLSWORTH BUNKER AND HON. SOL M.
LINOWITZ, TREATY NEGOTIATORS, ACCOMPANIED BY RICHARD
COOPER, UNDER SECRETARY FOR ECONOMIC AFFAIRS
Ambassador BUNKER. Thank you.
Mr. Chairman, members of the Panama Canal Subcommittee of the
House Committee on Merchant Marine and Fisheries. Ambassador
Linowitz and I are here today at the subcommittee's invitation to dis-
cuss some of the economic aspects of the proposed Panama Canal
Treaties.
We are accompanied also by Mr. Richard Cooper, Under Secretary
for Economic Affairs.
The Ambassador and I will each have an opening statement.
These statements are intended to complement the lengthier written
response which the Department of State has prepared to the question-
naire received from the subcommittee in advance of the hearings.
This written response accompanies the texts of our statements.
Let me turn first to the rationale for the economic and financial ar-
rangements that will flow from the new canal agreements.
These arrangements fall into three broad categories.
First, there are the payments to Panama established by treaty.
Second, there are the changes in the anticipated expenses and rev-
enues of the canal enterprise as a result of modification of its functions
and responsibilities under the new treaties.
Third, there is an economic cooperation program-which Ambas-
sador Linowitz will discuss-comprising loans, credits, and guaran-
tees to be offered to Panama outside the framework of the treaties.
The basic premise of the canal negotiations, from their inception 13
years ago under President Johnson through three successive adminis-
trations of both parties, has been that the U.S. interest in an open, se-
cure, and efficiently operated canal can best be advanced through co-
operation rather than confrontation with Panama.
In negotiating these treaties, we have sought to establish the basis
for an effective partnership between the United States and Panama in
the canal enterprise.
An essential element for the. success of that partnership is that
Panama have a significant and direct economic stake in the efficient op-
eration of the canal.
This concept was part of the guidelines under which the negotiations
were conducted.
In the February 1974 joint statement, the United States and Panama
agreed that "The Republic of Panama shall have a just. and equitable
share of the benefits derived from the operation of the canal in its
territory."
The joint statement continued: "It is recognized that the geographic
position of its territory constitutes the principal resource of the Re-
public of Panama."
This concept was part of the guidelines under which the negotiations
receives support not only from treaty proponents but also from many
opponents.
Many of t fiese opponents acknowledge that Panama's direct benefits
fromii the rights it granted to tlhe United States under lthe 1903 treaty
and sul)sequent annindments should be increased.







T-o other principles set. forth inthe February 1974 joint statement
atire fundamental to establishing a cooperative relationship with
Panama and are'also important because of their economic and financial
implications.
One of these principles is that Panama will exercise, jurisdiction
over the area of the Canal Zone.
The other is that the United States will operate the canal for a
fixed period on the basis of a grant from Panama, of specific opera-
tional rights.
Consonant with these two principles, the Panama Canal Commis-
sion, which will operate the canal after the new treaties go into effect,
will have more limited functions and responsibilities than its prede-
cessor agencies, the Panama Canal Company and the Canal Zone
Government.
Most governmental functions will in general be eliminated, and pub-
lic service and conmmercial-type activities will be greatly reduced.
Specific guidelines for activities to be undertaken by the Commis-
sion are contained in the annex to the Panama, Canal Treaty.
They will bring important changes in the costs and revenues of the
canal enterprise.
Another important provision of the new Panama Canal Treaty is
that the Panama Canal Commission, which is to operate the canal
through December 31, 1999, will be U.S. Government agency.
This means that major elements of the financial structure of the
Commission are not specified in the treaty but are left for determina-
tion by the United States.
We expect that, many of these matters will be addressed in the legis-
lation implementing the treaties.
Having pointed out these general considerations which affect the
financial and economic impact of the new canal agreements, I now
want to address some of the specific arrangements established in the
treaties.
Under article XIII of the Panama Canal Treaty, Panama is to re-
ceive annually certain payment from canal operating revenues.
These re an amount equal to 30 cents per Panama Canal net ton, or
its equivalency, for each vessel transiting the canal. The rate for this
payment will be adjusted biennially to reflect changes in the U.S.
Wholesale Price Index for total manufactured goods; a fixed annuity
of $10 million; an amount of up to $10 million to be paid from any
surplus of canal operating revenues over Panama Canal Commission
expenditures.
In working out these provisions we had two basic considerations in
mind.
Consistent with our objective of building a solid United States-
Panamanian partnership, we thought it highly desirable that Panama
have a strong economic stake in the continued efficient operation of
the canal.
We also sought to insure that the canal would continue to be self-
sufficient, thereby avoiding recourse to the U.S. taxpayer to fund pay-
ments to Panama.
The Panamanian negotiators, for their part, originally proposed
higher payments than we projected the canal enterprise could sustain.








However, the provisions of article XIII, as finally negotiated, met
our objectives.
All payments are to come from canal revenues, and have been set at
levels which the canal enterprise should be able to generate.
The payments to Panama are linked to the operation of the canal.
The most important source of revenue to Panama will be the pay-
ment of 30 cents per canal ton; and the yield from this is directly de-
pendent on canal traffic.
This payment constitutes Panama's principal financial stake in the
success of the canal enterprise.
The provision for adjustment of Panama's 30-cent-per-Panama
Canal-ton share of the tolls according to the U.S. Wholesale Price
Index for total manufactured goods insures that Panama's financial
interest in the canal will not be vitiated by inflation.
The contingent payment of up to $10 million per year to Panama
will be possible only if the canal is able to operate efficiently enough
to produce a surplus.
The rationale behind this payment is that Panama should have an
incentive to cooperate with the Commission to keep operating costs
low and operating efficiency high.
I should also add a comment about the fixed annual payment of
$10 million.
This payment was agreed upon in response to Panama's view that
it should receive a substantial lump sum payment in exchange for our
rights under the treaty.
Panama's original proposal was for a lump sum payment of over
$1 billion, which was later reduced to $460 million.
While we were unwilling to agree to a lump sum payment, we did
agree to a fixed annual payment that would come, like the variable
annuity, from canal revenues.
This payment from canal revenues was unlinked from the number
of actual transits to ameliorate the otherwise major upheaval to the
Panamanian economy that would result if a landslide or other tem-
porary closure of the canal limited transits for a substantial period.
A further payment to Panama is established in article III, which
provides that the Panama Canal Commmission will reimburse Pana-
ma for specified public services which Panama will furnish to the
canal enterprise.
These services are currently provided by the Canal Zone Govern-
ment at an estimated yearly cost of $18 million.
The treaty establishes that the amount of reimbursement will be
$10 million annually during the first 3 years.
This lower payment to Panama takes into account Panama's lower
wage scale, together with the fact that the area serviced will be smaller
than at present, since the Panama Canal Commission's operating
areas and the housing areas for U.S. citizens will comprise only a por-
tion of the territory presently included in the Canal Zone.
Because of the difficulty of estimating in advance the cost to Panama
of providing these services, article III specifies that after the first 3
years the amount of reimbursement may be adjusted to reflect in-
flation and other relevant factors, such as changes in the actual cost
of the services provided.








We believe that the canal enterprise should be capable of generating
revenue to meet these payments to Panama under the treaty.
Our judgment is based on estimates of future traffic and possible
toll revenues.
Data available to us during the negotiations indicated that a toll
increase in the neighborhood of 30 percent would likely produce
sufficient revenues to support projected operating expenses, including
all payments to Panama except the contingent $10 million payment
from surplus.
This brings me to the final subject which I would like to discuss-
the implications of the new agreements for the financial structure of
the canal enterprise.
This is a matter on which precise comment is not possible in all
cases, since, as I noted earlier, many key elements of the Commis-
sion's procedures and organization are not specified in the treaty but
are left for determination by the Congress in the implementing legis-
lation and by the Commission itself.
However, I can make certain observations, which I hope will be
useful.
The Commnission will have certain costs that are fixed by the Panama
Canal Treaty. These include the payment per canal ton-initially 30
cents-to be paid to Panama, the $10 million fixed payment for
Panama, and the public service payment.
Both the costs and the revenues of the Commission will, of course,
be affected by the distribution under the treaty of the functions and
responsibilities currently performed by the Panama Canal Company
and the Canal Zone Government.
The canal enterprise no longer will have the responsibility to pro-
vide certain services; on the other hand, certain of its current revenue-
producing activities will be transferred to Panama.
Just as the United States retains considerable discretion to control
Panama Canal Commission expenditures, it will also have authority
to establish a toll structure that is within the general guidelines set
forth in the Neutrality Treaty, which provides that tolls must be
just, reasonable, and equitable.
We expect that the toll formula will be one of the topics addressed
in the proposals for implementing legislation that the administration
will be submitting to the Congress.
Finally, concerning financial flexibility for the canal enterprise in
case of emergency, we are considering recommending that the im-
plementing legislation continue for the Panama Canal Commission
the same authority to borrow from the Treasury and to seek appro-
priations on a reimbursable basis now held by the Panama Canal
Company.
Mr. Chairman, that concludes my statement.
Ambassador Linowitz will now address some of the other topics
which you have raised.
Mr. METCALFE. Thank you, Ambassador Bunker.
Now, we will hear from Ambassador Linowitz.
Mr. Ambassador.
Ambassador LINOWITZ. Thank you.
Mr. Chairman, members of the subcommittee, of all the questions
involved in the negotiations with Panama for a new canal agreement,








none had a higher priority than that of assuring permanent and
nondiscriminatory access to the canal for the ships of all nations. That
is the principal topic which I will address in my statement this morn-
ing. I will also comment on the United States-Panamanian. economic
cooperation program which was developed simultaneously with the
treaty negotiations.
With regard to canal access, our objective was to make certain that
the canal would be open and available to all world shipping without
discrimination during the period of U.S. management of the canal
and indefinitely thereafter. This was achieved through negotiation of
a separate neutrality treaty, which is to remain in effect permanently.
The Neutrality Treaty establishes certain principles which consti-
tute the regime of neutrality that will govern the operation of the
canal permanently. The fundamental concept for the operation of the
canal is contained in article II of the treaty. This provides that the
canal will remain secure and open to peaceful transit by vessels of all
nations without discrimination concerning the conditions, or charges
of transit, or for any reason. This basic assurance of nondiscriminatory
access to the canal is the same as that set forth in the 1901 Hay-
Pauncefote Treaty between the United States and Great Britain,
which governs access to the canal today.
Article III of the treaty sets forth that portion of the regime of
neutrality which provides the general guidelines for canal operation.
They include provisions that the canal be operated efficiently, that
tolls and rules of navigation be reasonable and equitable, that services
necessary for transit be available, and that military vessels may tran-
sit at all times without inspection and irrespective of their armament
or means of propulsion.
Another particularly important element of the regime of neutrality
appears in article V of the treaty. This article prohibits, after the year
2000, foreign operation of the canal, as well as the garrisoning of
foreign troops and the maintenance of foreign military installations
in Panama. This provision, which was strongly supported by both the
United States and Panama, provides clear notice that neither the
United States nor Panama would tolerate any attempt to establish
foreign domination in Panama after that country assumes responsi-
bility for canal operation.
Panama and the United States have also agreed in article VI that
as part of the regime of neutrality, United States and Panamanian
military vessels m-.y transit the canal expeditiously when they con-
sider it necessary.
And this is important.
Furthermore, Panama has undertaken, through article I of the
treaty, to apply this and all other eleemnts of the regime of neutrality
to any other interoceanic canal that may ever be built in Panama.
Thus. the United States is assured that any canal in Panama always
will op)ei it d in an Afl.ii,:it manner in accordance with the rules of
1iK0i 1-1-rimiinatory -.'ess provided in this treaty, will not be operated
or defended by a third country, and will 1be available for expeditious
pas-}ae> by U.S. military vessels at all times.
The United( States and Panama are individually responsible for
maintaiv'ing this regime of neutrality. Their responsibility, set forth
in article IV, provides that each country hans the right to aet against






11

any aggression or threat directed against the canal or against the peace-
ful transit of vessels through the canal. The two countries have con-
firmed this understanding of the meaning of article IV in identical
statements issued .October 14 in Washington and October 18 in
Panama.
To sum up, the principles embodied in the proposed Neutrality
Treaty provide assurance to the United States of continued nondis-
criminatory access at reasonable tolls to an efficiently operated canal
for all our vessels permanently.
Now let me turn to the economic cooperation program, which devel-
oped out of the canal negotiations but, as I said, it is separate and
independent from the Panama Canal Treaty. As Ambassador Bunker
has noted, the Panamanian negotiators originally proposed that
Panama receive a much larger annuity under the treaty than we
ultimately agreed upon. They also proposed that the United States
make a large initial lump-sum payment which far exceeded the most
optimistic estimates of what canal revenues could generate. In this
connection, the Panamanian negotiators stressed the importance to
Panama of being able to undertake rapid social and economic develop-
ment with wide distribution of benefits to its people during the first
few years of the implementation of the new treaty relationship.
As Ambassador Bunker has emphasized, our position prevailed that
Panama's share of the economic benefits from the canal should be
supportable from canal revenues alone; that is, that payments to
Panama should reflect the canal's economic value as measured by our
projections of its revenue-generating capacity.
At the same time, however, we recognized that there was merit,
from the standpoint of the future U.S. interest in the canal, to add
further stability to the Panamanian economy by heeding Panama's
development needs. This Panamanian development will help create the
conditions of stability that will enhance the prospects for an open, safe,
efficient, and accessible canal permanently.
We therefore arranged for the Panamanian representatives to meet
with representatives of the Departments of State, Treasury, the
Agency for International Development, and the Export-Import Bank
to consider Panama's development needs. In doing so, we made it clear
to the Panamanian negotiators that any arrangements to assist with
Panama's development were to be separate from the canal agreements
themselves and were in no way to be tied to the rights and obligations
of the United States and Panama under the Panama Canal Treaty
and the Neutrality Treaty.
SOut of these discussions emerged a program of projected loans,
credits, and guarantees which was set forth in a diplomatic note from
Secretary of State Vance to the Panamanian Ambassador. This note
constitutes an offer of assistance to be brought into effect through a
subsequent exchange of notes. The elements of this program are: Up
to $75 million in AID housingguarantees over a 5-year period; up to
$200 million in Export-Import Bank loans, loan guarantees, or in-
surance over a 5-year period subject to approval by the Bank; a guaran-
tee by the Overseas Private Investment Corporation of $20 million
in U.S. private capital to the Panamanian National Finance Corp.-
COFINA-for use in productive projects in the private sector; and






12


issuance of repayment guarantees under our foreign military sales
program not to exceed $50 million over a 10-year period.
Under Secretary of State Cooper is here and will be able to answer
any questions you have on this aspect.
It is important to point out certain features of this cooperation pro-
gram. First, it is in the form of an agreement to agree. Our under-
takings would become effective upon an exchange of notes to that
effect. Once these undertakings do come into effect, they are subject
to availability of funds and to compliance with applicable legal re-
quirements established for each of the existing programs. The economic
cooperation program was designed to utilize financial assistance pro-
grams that are suitable to Panama's stage of development and directed
at meeting Panama's present economic needs for low-income housing
and a growing private sector. Such assistance would be channeled
through existing programs that are established tools for furthering
U.S. interests abroad. And all elements fit within existing statutory
authorization.
We believe this is a sound and useful program. It is separate from
the Panama Canal Treaty because the assistance to be provided does
not relate to our rights and obligations under that treaty. But we
expect this assistance to make a positive contribution to the successful
implementation of the new United States-Panamanian partnership in
the canal enterprise which will grow out of the new treaties.
That, Mr. Chairman, concludes my opening statement.
Now, Ambasador Bunker and I will be pleased to answer your
questions.
[The following questions were posed to the witnesses and their re-
sponses received prior to the hearing:]
DEPARTMENT OF STATE RESPONSES FOR THE RECORD TO QUESTIONS FROM THE
SUBCOMMITTEE
Question 1. Specify the rationale used in connection with all economic, financial
and related provisions of the accords and related agreements, including, for ex-
ample, the payment to Panama for public services provided in the area of the
present Canal Zone and the inflationary adjustment provided for the $.30 com-
pensat ion of Panama Canal tonnage.
Answer: The general criterion used in determining the basis for the economic
and financial terms of the Panama Treaty and related agreements is contained in
the so-called Kissinger-Tack Joint Statement of Principles signed on February 7,
1974.
The fifth of these principles reads as follows: "The Republic of Panama shall
have a just and equitable share of the benefits derived from the operation of the
canal in its territory. It is recognized that the geographic position of its territory
constitutes the principal resource of the Republic of Panama."
The payment to Panama for providing public services in the Canal area will be
made to compensate it for services, which we formerly provided but which will be
provided by Panama after the Treaty enters into force. Since the new Canal
Commission will not pay taxes to Panama, it was believed that Panama should
be compensated through a payment from Canal revenues for the services it will
undertake.
The justification for the inflationary adjustment for the 300 royalty paid on
Panama Canal tonnage is contained in the answer to another question.
Question la. What was the rationale for payments to Panama out of Canal
operating revenues rather than provision of an annuity without definition of
source?
Answer: Specification of annuity payments without definition of a source would
have made the annuity payment an obligation of the United States, payable out
of the general funds of the U.S. Treasury. We wanted to ensure that: Treaty pay-







13


ments would reflect a fair return to Panama for the operation of the Canal in its
territory during the period of our administration of the Canal; treaty payments
would not constitute-to the maximum extent that we could anticipate and plan-
a burden on the American taxpayer; Panama would have a financial stake in the
continued efficient operation of the Canal.
Question lb. What was the rationale for economic arrangements outside the
written texts of the agreements?
Answer: Panama's initial economic demands were not compatible with our
view that any payment to Panama under the new treaty would have to be financed
from Canal revenues. However, we perceived that because of the Canal we have
now and will continue to have a special relationship with Panama. We felt, there-
fore, that it was in our own interest to enhance Panama's economic stability and
security by promoting sound economic development there. Such assistance would
also benefit U.S. investors and businessmen by giving them an opportunity to
participate in Panama's growth.
Because the treaties are intended to deal only with matters relating directly
to the operation and defense of the Canal, the proposed economic cooperation
programs are separate from and outside the Treaties. The rights and obligations
of the United States under the Canal treaties are therefore not linked to the im-
plementation of the economic cooperation program. The program is to be carried
out within the framework of existing statutory programs. The proposed arrange-
ments consist entirely of loans, credits and guarantees. There are no grants.
Question Ic. What was the rationale used in determining the activities to be
transferred to Panama and those to be retained by the Canal Conmnission?
Answer: The basic premise used in deciding which of the activities currently
performed by the Panama Canal Company or the Canal Zone Government would
not be performed by the new Panama Canal Commission was that the new Com-
mission should not engage in purely governmental or commercial function not di-
rectly related to the operation of the Canal.
This principle is established in paragraph 2 of the Annex to the Panama Canal
Treaty, which also recognizes that the Commission may, however, undertake any
activities necessary for efficient Canal operation and maintenance. Under this
general principle, the two illustrative lists set forth in the Annex show the types
of functions which the Commission may not perform as well as the types of func-
tions it may. Concerning governmental services, the reassumption of jurisdiction
by Panama over the Canal Zone by reason of the abrogation of the 1903 Treaty
meant that the governmental functions currently performed by the Canal Zone
Government in general would no longer be performed by the United States. Thus,
for example, the civilian police force, the court system, customs services, and im-
migration services operated by the United States will cease to function either
upon entry into force of the Treaty or at the end of the 30 month
transition period.
Some of the governmental services, like educational services and medical care,
will not be provided by the Commission, but will continue to be available for U.S.
citizen employees through use of U.S. military school and hospital facilities in
Panama.
Concerning commercial activities, it was decided that in general Panama should
derive the benefit of such service performed in its territory. Thus, commercial
cargo handling and bunkering will be undertaken by Panama under conditions
designed to assure the continued efficient conduct of these activities. However,
practical consideration dictated that functions like the provisions of commer-
cial utilities services continue to be provided by the Commission, since it must
retain the facilities to provide such services for its own internal operations.
Housing for U.S. citizen employees is another example of a commercial type serv-
ice which the Commission will continue to provide because of the close correla-
tion between adequate and reasonable housing in the vicinity of the Canal and
employee morale and efficient Canal operation.
Question 2. Article III, paragraph 3, of the Panama Canal Treaty provides that
the United States shall carry out its responsibilities in reference to operation of
the Canal by means of a U.S. government agency "which shall be constituted by
and in conformity with the laws of the United States of America." To which laws
does this section make reference?
Answer: One of our major negotiating objectives was to retain Congressional
authority over the operation of the Canal during the life of the Panama Canal
Treaty. Thus, we sought and obtained treaty provisions which established that
the Canal will be operated by a United States Government agency constituted


21-738-78-pt. 1---2







14


by and in conformity with the laws of the United States. Accordingly, the Con-
gres-s will have the authority to establish the Panama Canal Commission by ap-
propriate legislation. Such legislation would address, intcr alia, the organiza-
timonal structure of the Commission, its relationship to the rest of the United
States Government, and its powers and duties. Moreover, Congress would remain
free to amend such legislation concerning the Commission throughout the
Treaty's durationn.
It should be noted that Article III of the Panama Canal Treaty also pro-
vides that "the United States of America shall, in acordance wiith the term.-i of
this Treaty and the prorisions of the United States lar:, carry out its responsi-
bilities by means of [the Panama Canal Commission]." Thus, the Congress will
retain ongoing legislative authority over all matters concerning the management,
operation and maintenance of the Canal for which the United States is respon-
sible under the Treaty.
This authority would include legislating the means for establishing toll rates,
the conduct of relations with our employees, budget and accounting practices,
etc. The Commission and all its officers and employees will be fully subject to
such legislation.
Question 3. In your view, how should the obligations now incumbent upon the
Panama Canal Company compared with those obligations that ought to be
shouldered by the Commission? Specifically, what do you recommend with re-
spect to the statutory obligations: (a) to make annual payment on the net
direct investment of the U.S. in the Panama Canal Company; (b) to reimburse
the Treasury for appropriations for the costs of the Canal Zone Government;
(c) to pay the portion of the annuity now provided by Canal toll revenues; (d)
to pay to the Treasury as dividends amounts of funds in excess of operating and
capital requirements (2 CZO 70) ; (e) to pay back to the Treasury any funds
borrowed at a determined interest rate (2 CZO 71) ; and (f) to pay back to the
Treasury all appropriations to cover losses.
Answer: The question of carrying over, modifying or terminating the vari-
ous statutory obligations applicable to the existing Panama Canal Company is,
of course, a matter to lbe ultimately decided by U.S. legislation. The Adminis-
tration's preliminary views, however, keyed to the specific statutory provisions
as mentioned in the question are as follows:
a. The Administration would recommend repeal of the provision requiring an
annual payment on the direct investment of the U.S. in the Panama Canal Corm-
p)any. This provision creates a burden on toll revenues that is essentially in the
nature of a dividend or profit to the United States Government on its operation
of the Canal. The Administration sul;ports the continuation of the principle that
the Canal operation should be self-sufficient. The United States interest in the
Canal is not in making a profit, but in the economic and military value of its
availability to the United States.
b. Ina:smnuch as the Canal Zone Government will cease to operate in the Re-
public of Panama upon entry into force of the Treaty, this statutory provision
must clearly be amended. We do, however, consider that the Canal Comimis-
sion should continue to reimburse other agencies for services rendered. For ex-
ample, the operation of U.S. schools and hospitals in Panama will be taken over
by the U.S. military, and we believe the Canal Commission should be directed
to reimburse those agencies on a pro-rata basis. Similarly, we have agreed in
the Treaty that the Canal Commission will reimburse the Government of Pan-
ama for certain other public services now l)erformed by the Canal Zone Gov-
ernment. wlich it will take over upon entry into force of the Treaty.
c. Inasmuch as the Treaty establishes that all annuity payments to Panama
are to be paid out of Canal revenues, the statutory provision requiring reimburse-
ment to the Treasury for a portion of the annuity now paid out of appropriated
funds would be rendered meaningless and hence should be repealed.
d. The Treaty would clearly permit payment to the Treasury of surplus funds.
If, after liay.,nent of all its operating and capital expenditures, including the
payments to Panama under paragraphs 4(a) and 4(b) of Article XIII of the
Panama Canal Treaty, the Commission has excess funds, we would be obligated
to pay Panamna such excess up to the amount of $10 million. To the extent the
surplus exceeded that $10 million, the funds may be disposed of in such manner
as tlhe unitedd States deemli appropriate, and the Administration would sup-
port legi-lation to return such surpluses to the Treasury.










e. and f. Consistent with the concept of a self-sustaining operation, the Admin-
istration would support continuation of the existing statutory requirements to
repay borrowed funds or funds appropriated to cover losses.
Question 4. What rate of inflation was contemplated in estimating the effect on
cost of the provision of Article XIII, paragraph 4(a), for adjustment of the
payment of $.30 per Panama Canal ton "to reflect changes in the United States
wholesale price index for total manufactured goods"?
Answer: We cannot accurately forecast long-term inflationary trends and no
particular rate was contemplated as the basis for Article XIII(4) (a) of the
Treaty.
The purpose of indexation of the 30-cent annuity is to maintain Panama's fi-
nancial stake in the Canal's operation at an equitable level in real terms. To
ignore the effects of price changes could mean that Panama's financial return
from, and hence interest in, the efficiency of the Canal operation would diminish
substantially during the Treaty period. The Wholesale Price Index for manuffac-
tured goods was used because it is a modest, yet reasonable measure of price
changes, on the basis of past performance.
Question 5. Do the negotiations provide any indication as to what was meant by
the term "or its equivalency" as used in paragraphs 4(a) of Article XIII of the
Treaty providing for the payment to Panama of $.30 per Panama Canal net ton
"or its equivalency, for each vessel transiting the Canal * for which tolls
are charged"?
Answer: Under the new treaty, the United States will operate and manage
the Canal. This includes responsibility for the setting of tolls and the control of
Canal traffic upon which tolls would be assessed.
The words "or its equivalency" are designed to maintain an equivalent return
to Panama in the event the United States exercised its prerogative to change the
unit of measurement for Panama Canal traffic.
Question 6a. How should the annual amount of up to $10 million per year for
payment to Panama under Article XIII(c) of the Treaty be treated on the
books of the agency operating the canal?
Answer: The Article XIII(c) payment will not be treated as an operating ex-
penditure of the Canal operation. It will be a charge only against any surplus
of operating revenues over expenditures as these will be defined by legislative
or administrative action.
Question 6b. How should the annual amount of up to $10 million per year for
payment to Panama under Article XIII(4) (c) of the Treaty be treated in the
determination of toll rates?
Answer: The Article XIII(4) (c) payments are a contingent obligation. There
is no requirement under the treaty that would make the Article XIII(4) (c)
payment an element for determination of toll rates. Therefore, this payment
depends on the efficient operation of the canal.
The United States will set canal toll rates in accordance with the procedures
to be established by the implementing legislation on this subject.
Question 7. Do the negotiations provide any indication or do you have any
suggestion as to how determination will be made of the extent to which reve-
liues of the Canal exceed expenditures for purposes of the $10 million payment
to Panama provided for by Article XIII, paragraph 4(c) of the treaty? Are
"expenditures" as used in that provision exclusive of obligations?
Answer: The establishment of an accounting and financial system for the new
Canal Commission will be within the discretion of the Commission under the
authority provided it by thle legislation implementing the treaty.
We anticipate that expenditures would include obligations of the Panama
Canal Commission. In addition to the costs of Canal operation, such as those
for lock operations, traffic control, housing, etc., Canal operating expenditures
would include the 30-cent per Pananma Canal ton annuity pnympent and the
fixed $10 million annual payment. However, they would not include the payment
of up ro $10 million under Article XIII (4) (c), which is a contingent obligation
under tie Treaty.
Question 8a. Under Article XIII, paragraph 4(c), what responsibility does the
U.S. h.,ve to the Republic of Panamina in any given year if "the operating revenues
in any year do not produce a surplus sufficient to cover the payment"?
Answer: According to Article XIII (4) (e), any unpaid balance in any single
year would be paid "from operating surpluses in future years in a manner to be
mutually agreed".







16

Question 8b. Is this financial responsibility cumulative?
Answer: Yes, but only to the extent that there are operating surpluses in
future years and subject to the terms of mutual agreement with Panama.
Question 8c. What will be the financial responsibilities of the U.S. to the Re-
public of Panama (under the proposed agreement) in the year 1999 if, in fact,
there has been no surplus in the preceding years?
Answer: There will be no obligation by either the Canal Commission or the
U.S. Government to pay Panama any unpaid cumulative obligation after De-
cember 31, 1999.
The payments under Article XIII (4) (c) are a contingent obligation to be
met from surplus Canal revenues of the Panama Canal Commission. After De-
cemiber 31. 1999, the Commission will no longer receive Canal operating revenues
(which will then be received by Panama). We will accordingly make no further
payments from Canal revenues.
Question 9a. How was the figure of $10 million arrived at for the payment for
public services to be provided by Panama?
Answer: The current estimated costs to the Canal Zone Government for the
services for which Panama is to be compensated are about $18 million per year.
It was finally agreed that $10 million was a reasonable initial figure to be
paid to Panama because: Panama should be able to do the same job at lower
cost since it has a lower wage scale than that used in the Canal Zone; and the
services to be compensated for under the Treaty are limited to Canal operating
and housing areas and thus cover less than half of the area of the present Canal
Zone, for which the Canal Zone Government currently provides such services.
Question 9b. What rate was used for estimating the effect of provisions of the
treaty for adjustment of the $10 million annual payment provided by Article III,
paragraph 5, in reimbursement for certain "public services" "because of inflation
and other relevant factors affecting the cost of such services"?
Answer: The provision for reimbursement for public services was considered
a reasonable compensation in the short-term, i.e., the first three years of the
Treaty period. The Treaty formula was, however, intended to compensate Pan-
ama for actual cost. Therefore, it was logical to build in a provision for flexibil-
ity to reflect future costs to Panama in the years ahead.
It is not possible to estimate rates of increase or decrease for future costs.
The Canal enterprise has not received public services from Panama in the past.
Once Panama begins to provide Canal operating and housing areas with public
services, it may be that actual costs will run below $10 million. On the other
hand, long-term inflation may eventually raise costs above that level.
Question 10. What part of the Canal ,agreement would allow for the financial
flexibility needed for Canal operations during times of emergency and great
fluctuations in traffic?
Answer: According to Article III, the United States has the right to manage.
operate and maintain the Canal. Inherent in this right is the power to legislate
regarding the financial structure of the new Canal operation. Therefore, the
financial aspects of Canal operations will be molded by implementing legislation
and by the actions of the proposed Panama Canal Commission.
To cover the possibility of emergency or unusual traffic conditions, the imple-
menting legislation would presumably grant the Commission the authority for
prudent management, for example, through continuation of the borrowing au-
thority now possessed by the Panama Canal Company.
Question 11. If for any reason the Canal Commission were unable to meet its
operating expenses and make payments to Panama, where would the Commission
obtain funds needed to meet its obligations?
Answer: In the interest of prudent management, we would recommend that
the Treaty's implementing legislation provide the Commission with sufficient
borrowing authority to meet such contingencies as is the case with the Panama
Canal Company under present law.
Question 12. What terms are contemplated for the "loans, guaranties and
credits" to be provided to Panama under the agreement supplementary to the
Treaty? Will these be related to the development of the Canal?
Answer: Any project implemented under the proposed economic cooperation
program will be subject to the normal criteria and procedures of the agency
involved.
These programs-AID housing guarantees. OPIC investment guarantees and
Eximbank loans, loan guarantees and insurance-do not offer concessional terms,
but rather, involve interest rates and fees which approximate those of the
market.







17

The development of the Canal itself will be at the discretion of the United
States during the Treaty period. However, the current Panamanian development
Investment program contemplates several projects that would enhance the utility
of the Canal, e.g., container ports, Free Zone expansion.
Even, though Panama is under no obligation to use the program for Canal-
related, projects, it is likely that Panama will use much of it for this purpose.
Question 13. Commentators and government leaders in Panama have from time
to time raised questions about disputing various accounting practices of the Pan-
ania Canal organization. In view of the fact that the proposed Panama Canal
Treaty provides for four Panamanian citizens on the commissions Board of Direc-
tors and an equal number of Panamanian and U.S. citizens on the Panama Canal
Consultative Committee, what prospects are there that the accounting principles
which have heretofore governed the Panama Canal will be radically changed? Do
accountants in Panama accede to any different accounting principles than does the
accounting profession in the United States?
Answer: The management of the Canal operation under the Treaty will remain
a right of the United States. The Panamanian directors will have only a minority
role in management.
To the best of our information the accounting profession in Panama follows
the same accounting principles as its counterpart in the United States. Many
members of the best Panamanian accounting firms have been trained in U.S.
schools.
Any changes in accounting practices will be at the discretion of the United
States in the exercise of its control of Canal operations.
Question 14. In the negotiations, the U.S. side must have proceeded with some
conception of the extent to which Canal tolls could be raised without diverting
Canal traffic or without having counterproductive financial effects. What was the
view in the negotiations as to the latitude for raising Canal tolls without divert-
ing traffic or being counterproductive financially?
Answer: Our objective was to insure that 'any payments to Panama should be
financed by Canal revenue. However, we wished to avoid any unnecessary or un-
reasonable increase in tolls and to avoid raising tolls to the point of diminishing
returns. With those purposes and the mose expert professional advice available,
we agreed upon payments to Panama that we judged to be well within the rev-
enue-producing capacity of the ("anal. The basic analysis used to estimate the
margin for toll increases was that prepared by International Research Associates
(IRA) of Palo Alto, California. In preparing its estimates IRA drew on data
from a variety of sources including the Panama Canal Company and shipping
companies.
The basic IRA study, prepared in 1975, determined that tolls could be increased
between 75 and 100 percent over 1974 toll levels before Canal revenues would
cease to increase as a result of toll increases. In order to meet increased costs due
to inflation there has been between 1974 and the present an absolute 50 percent
increase in tolls.
During the summer of 1977 the Department consulted with IRA concerning the
continued relevance of its 1975 study. On the basis of this information it was
decided that an initial toll rate increase in the neighborhood of 30 percent once
the Panama Canal Commission takes over Canal operations should be well within
the Canal's revenue generating capacity.
A more definitive update of the IRA study is in preparation and is expected to
be completed early in 1978. We expect this study to provide a more precise esti-
mate of the Canal's revenue generating capacity for the next few years.
Qucstiou 15. What effect did the resolution adopted by the OAS in June in Gre-
nada have on the negotiations, specifically, Titles III and XIII?
Answer: The Grenada resolution was an indication to both Panama and the
United States of Canal user interest in a financially sounimd Canal operation based
on reasonable toll rates. In this respect, the resolution was consistent with the
U.S. objective that tolls should cover the costs of Canal operation.
Question 16. Canal tolls are subject to the requirements of the Hay-Pauncefote
Treaty of 1901. Will that Treaty continue to apply under the proposed treaty re-
lationship with Panama. For what period will the Hay-Pauncefote Treaty apply?
Will the Thomson-Urrutia Treaty continue to apply to the Canal? (Article VI of
the Neutrality Treaty says it may continue to apply).
Answer: The 1901 Hay-Pauncefote Treaty with Great Britain provides that
charges of traffic will be nondiscriminatory and just and equitable. These prin-







18

ciples are carried over in Article II and III(c) of the Treaty Concerning the
Permanent Neutrality and Operation of the Panama Canal.
The Department of State has consulted with Her Majesty's Government con-
cerning the relationship between the Hay-Pauncefote Treaty and the proposed
Neutrality Treaty. In these consultations Her Majesty's Government confirmed
our view that the proposed treaty is consistent with the H-lay-Pauncefote Treaty,
which remains in effect.
Concerning the 1914 Thompson-Urrutia Treaty with Colombia, Article III of
the Neutrality Treaty authorizes the United States to fulfill its obligation to Co-
lombia under that Treaty to provide toll-free transit to Colombia troops, vessels
of war and materials of war. The United States will, of course, fulfill its obliga-
tion to Colombia to provide such toll-free transit. It would not have been ap-
propriate, however, for the United States to undertake a commitment to Panama
to fulfill United States Treaty commitments to Colombia. (Hence the use of
"may" rather than "shall".)
Article VI also provides authority for Panama to continue such toll-free tran-
sit privileges and extend them to Costa Rica as well when it takes over opera-
tion of the Canal. In the March 1975 Declaration of Panama, the Government
of Panama expressed its intention to do so.
Question. 17, Many statements have been made about user guarantees for the
Canal in the proposed treaties as compared to those terms in 'the present treaty
relationship. Please provide a very specific comparison of the present guarantees
and those provided in the proposed treaties, and explain the rationale of the
wording of the user guarantees in the proposed treaty relationship.
Answer: The present standard's concerning the operation of the Canal are
established in Article III of the 1901 Hay-Pauncefote Treaty between the United
States and the United Kingdom and are incorporated by reference in Article
XVIII of the 1903 U.S.-Panama Treaty. The proposed Treaty Concerning the
Permanent Neutrality and Operation of the Panama Canal carries over the
basic principle of neutralization elaborated in the Hay-Pauncefote Treaty and is
consistent with the terms of that Treaty.
Most of the textual differences between the 1901 and 1977 Treaties center
around the fact that the latter include a series of specific standards, not spelled
out in the former, concerning such matters as inspection of warships, require-
ments to demonstrate financial responsibility to pay for damages, provision for
expeditious transit of naval vessels of the Parties charged with maintaining
Canal neutrality, etc. (See Articles III and VI in particular). These specific
standards reflect concerns of the modern world. At the same time, the new Treaty
does not repeat the specific provisions of Hay-Pauncefote concerning such mat-
ters as the treatment of belligerent vessels in accordance with pre-U.N. Charter
International law and practice, which reflect concerns of the age when tlhe
Treaty was drafted.
In addition to these changes in emphasis on specific operating standards, the
basic Hay-Pauncefote requirement that the Canal be "open to the vessels of
commerce and war of all nations . on terms of entire equality, so that there
shall be no discrimination against any such nations, or its citizens or subjects,
in respect of the conditions or charges of traffic . ." has been made expressly
applicable "both in time of peace and in time of war" under the new Treaty. This
reflects the view of our highest military and political authorities that, during
wartime, our national security interests can continue to be protected, and our
interests in our own use of the Canal better served, by relying on our navy to
preclude enemy shipping from reaching the Canal, rather than by giving tihe
Canal operator authority to attempt to exclude them through regulatory action.
Article V of the new Neutrality Treaty also contains a concept not found in
the 1901 Treaty. That Article would prohibit foreign operation of the Canal, the
garrisoning of foreign troops, and maintenance of foreign military installations
in Panamanian territory after tlheo year 2000. This revisionn was strongly sup-
ported by both the U.S. and Panama as a means of putting other nations and
groups on notice that neither the U.S. nor Panamna wNould tolerate any attempt
to establish foreign domination in Panama once that country assumes responsi-
bllity for Canal operation.
As indicated in our answer to question 16 above, the textual differences be-
tween the 1901 ITIay-Pauncefote Treaty and the proposed 1977 TU.S.-Pannina
Treaty Conceirning the Permanent Neutrality and Operation of the Panama
('iianl do not reflect any change in the fundamental concept that the Canal shall







19

be open to world shipping on a nondiscriminatory basis, at reasonable tolls. The
differences in emphasis indicated above do not reflect any inconsistency between
the old treaty and the new. Indeed, the 1901 Treaty would remain in effect along
with the 1977 Treaty, and Her Majesty's Government has confirmed that the two
are entirely consistent, and that the new Treaty would fulfill U.S. Treaty obli-
gations to the United Kingdom.
Question 18. If an interoceanic canal treaty involving guarantees of nondis-
crimination and reasonable tolls is violated, what remedies are usually available
to any user state of the violation? Would possible remedies of any violation of the
proposed treaties be any different than those available under the present Canal
treaties? Have any user states made a complaint against the U.S. for unreason-
able tolls in the past? If this has occurred, what was the resolution of the
complaint?
Answer: U.S. experience under the 1901 Hay-Pauncefote Treaty with Great
Britain provides a concrete example for the hypothetical issue raised here. Under
that treaty, the U.S. has an obligation to Great Britain to maintain only noii-
discriminatory and just and equitable charges for Canal transit.
Great Britain has never questioned the fulfillment of that obligation. How-
ever, had it ever felt that the obligation had been violated, it would have had
available to it all of the remedies one nation normally has under international
law when it judges its treaty rights to have been violated. On the other hand.,
the U.S. has.never held the view that other user nations have legal rights under
the Hay-Pauncefote Treaty, although they obtain benefits from its existence.
Prior to the 1976 toll increase, certain user nations from the West Coast
of Latin America did express official concern at the contemplated toll increase.
This concern was not expressed, however, in terms of a violation of the Hay-
Pauncefote Treaty, but rather as a general appeal on the basis that the proposed
increase would be detrimental to their interests. The remedies user nations
would have available under the new treaty would be no different from those
currently available to them.
Question 19. In terms of user guarantees for the Canal, will the accession of
user states to the Protocol to the Neutrality Treaty have any effect on the rights
of those states with respect to Canal passage? Does the dedication of the
Panama Canal to "peaceful transit by the vessels of all nations on terms of
entire equality" (Article II of the Neutrality Treaty) ensure the rights of all
states?
Answer: An indicated above, Article Ii of the Neutrality Treaty does not
confer legal rights on third country users. Under international law, the creation
of a third-party right is dependent upon the condition that the Parties to the
Treaty should have had a specific intention to confer an "actual right" as
distinct from a mere benefit. The United States and Panama had no such
intention in the case of this Treaty, just as the United Kingdom and the United
States had no such intention in concluding the 1901 Hay-Pauncefote Treaty.
Similarly, adherence to the Protocol to the Neutrality Treaty would not estab-
lish in third countries any legal rights with respect to Canal passage. Rather, in
adhering to the Protocol, they would, in recognition of the substantial benefits
they derive from the treaty arrangements concluded by the U.S. and Panama.
commit themselves to observe and respect the regime of neutrality established
by the U.S. and Panama and to ensure that vessels of their registry observe the
applicable rules. Thus, the Protocol provides third-countries the opportunity to
lend both moral and practical support to upholding treaty arrangements between
the U.S. and Panama which greatly benefit their own interests. For this reason,
third countries would presumably have a strong interest in persuading as many
of their colleagues as possible to undertake similar commitments.
Question 20. The United States and the Republic of Panama are signatories of
a number of international agreements, including the OAS Charter. the Inter-
,American Treaty of Reciprocal Assistance, and the UN Charter. How do you
believe these and other international agreements relate to user guarantees in
the proposed Canal treaty package?
Answer.: The obligations of the United States and Panama under other inter-
national agreements such as the Organization of American States Charter and
the United Nations Charter do not affect the provisions for non-discriminatory
access to the Canal by all user nations under the Neutrality Treaty.
Question 21. Article III of the proposed Neutrality Treaty establishes various
rules for the security, efficiency and proper maintenance of the Panama ('anal.






20

As a guarantor of the regime of neutrality of the Canal (Article IV of the Neu-
trality Treaty), does the U.S. have the right to exercise that regime guarantor
role if there is violation of the rules stipulated in Article III? Does any U.S.
role in assuring the security, efficiency and maintenance of the Canal after the
year 2000 extend to any direct rulemaking function?
Answer: Under Article IV of the Neutrality Treaty, the United States would
have the right to take appropriate action to ensure that all aspects of the regime
of neutrality including the provisions of Article III of the treaty are maintained
permanently. This role for the United States would not extend to direct in-
v-olvement in the formulation of the rules of transit foreseen in Article III (a)
during the period of Panama's responsibility for Canal operations. However.
should Panama formulate rules that are not just, equitable and reasonable, or
that are beyond those necessary for safe navigation and efficient sanitary op-
eration of the Canal, or are otherwise inconsistent with the terms of the treaty.
the United States would be in a position to challenge such rules as a violation
of its treaty rights, and would take appropriate action to assure that the rules
be brought into conformity with the stipulations of the treaty.
Mr. METCALFE. Thank you, Ambassador Linowitz.
I will ask each of my questions of the entire negotiating team un-
less it is specifically addressed to one of the negotiators.
You indicated in your answers for the record that the Hay-Paiunce-
fote Treaty will apply while the United States runs the canal. Will
it apply thereafter, after the year 2000?
Ambassador LINOWITZ. Yes, sir.
Mr. METOALFE. If a new study of canal tolls slowed the tolls could
not be raised beyond 25 percent or so, would you recommend that this
subcommittee implement the treaty to hold tolls to that level?
Ambassador LINOWITZ. I think there ought to be sufficient flexibil-
ity so as circumstances require, appropriate action can be taken to
recognize the conditions as they exist rather than having a specific
toll speci fied by legislation or authorization.
Mr. METCALFE. Thank you, Mr. Ambassador.
Was it the assumption of the U.S. treaty negotiators that the pro-
posed Panama Canal Commission would have a financial character
similar to the present Panama Canal Company?
Ambassador LINOWITZ. The same position? Was that the word?
Mr. METCALFE. Same financial character.
Ambassador LINOWITZ. The same financial character to the extent
the revenue will take care of all expenditures. That is the regime that
exists today.
Mr. METCALIFE. Ambassador Bunker, on page 7 you partially an-
swered the following question. I would like you to expound upon it.
if you will.
If before the year 2000 the Panama Canal were closed by a natural
disaster, or otherwise, would the United States have any obligation
to pay Pananma the 30 cents per net ton referenced in article XIII of
the Panama Canal Treaty?
Ambassador BUNKER. No, it would not, Mr. Chairman.
MIr. METCALiE.. Am I to understand from the material sent to the
subcommittee that some appropriations will be required due to the
treaties? Could you specify the appropriations? I think you do so in
your statement.
Ambassador LINrowITZ. Is there specific reference in the ambassa-
dor's statement to this?
Mr. MJrcA LmFE. Yes. I wanted him to be specific.






21
Ambassador LINOWITZ. I think the import of Ambassador Bunker's
statement was to make these payments. Appropriations would not be
required to make the annual payments to the Panamanian Govern-
ment in the new treaty.
Mr. METCALFE. Would not be required ?
Ambassador LINowrrz. Would not be required.
Ambassador BUNKER. No.
Mr. METcALFE. Ambassador Bunker, you state on page 6:
All payments are to come from Canal revenues.
Yet, on page 10 you seek authority to borrow from the Treasury
and, to quote you again:
.. seek appropriations.
What happens if Canal operations are insufficient to meet such
obligations'?
Ambassador BUNKER. If they are insufficient in a given year, we
would want authority as the Panama Canal Company has now to
borrow from the Treasury which would be repaid in subsequent years,
from subsequent years' operating revenues.
Mr. METCALFE. How would you repay that?
Ambassador BUNKER. As we have done previously, from future
year revenues. We have had, as you know, deficits in several of 3 years
and tolls were raised when the Canal was not operating at a surplus.
Mr. METCALFE. Mr. Zeferetti, have you any questions?
Mr. ZEFERETTI. Thank you, Mr. Chairman.
Gentlemen, I thank you for your extended statements. I have just
a few questions. Maybe you can help me with them.
One, you say that the treaty arrangements state that the tolls must
be just, reasonable, and equitable.
What would prevent Panama from, sometime in the future, mak-
ing their own interpretation as to what constitutes just, reasonable,
and equitable rates and raising them ?
Ambassador LINOWITZ. The reference to just, reasonable, and equi-
table tolls is contained in the treaty. We are a party. As such, we have
an interest in the level of tolls. If tolls were established at a level which
we regarded as not just, not reasonable, and not equitable, we could
take whatever action necessary which would include remonstrating
with the Panama Canal-
Mr. ZEFERETTI. Who would oversee this? An American agency?
Ambassador LINOWITZ. No, that would be just during the time that
the United States is responsible for canal operations from now until
the year 2000.
Mr. ZFERETTI. What American agency? What governs them?
Would they fall under U.S. laws and statutes?
Ambassador LINOWITZ. Under legislation which would come out of
the Congress. Congress would have fixed responsibilities for setting up
this Commission and for making some important determination with
respect to the authority of the Commission.
Mr. ZEFERETTI. Also, Mr. Ambassador, you say you have secured
basic assurances of nondiscriminatory access to the canal in the treat-
ies. What about after the year 2000?






22


Mr. LINOWITZ. That continues indefinitely. It is covered in the neu-
trality treaty which is a permanent treaty.
Mr. ZEFERETTI. You believe don't you that the Canal should be capa-
ble of creating their own revenues in order to pay back all the loans?
Ambassador LINowITz. Yes, sir.
In making the agreement, we relied upon the best expert guidance
we could get and we were advised that the arrangement which had
been worked out would permit us to use canal revenues in order to
meet the requisite obligations.
Mr. ZEFEREPTT. I think, Ambassador Bunker, you say that if the
revenues which are brought in do not meet those requirements, you
have a way of raising the tolls at that particular time to generate that
kind of revenue or-
Ambassador BUNKER. Yes. We have done that previously.
Ambassador LINOWITZ. There are three things you can do. We can
raise tolls. There is a limit. You cannot do it indefinitely. The Com-
mission could achieve economies, and we could exercise borrowing au-
thority which would permit us to get over an interim period until
once again there was sufficient revenue available to take care of all
the obligations.
Mr. ZrERETTr. One more, Ambassador Linowitz.
You say the principles in the proposed neutrality treaty provide as-
surance to the United States continued nondiscriminatory access.
Should we not have a little more than nondiscriminatory access to
that canal? Shouldn't it read "priority"?
Ambassador LINOWITZ. We do in terms of our movement of our
warships?
Mr. ZE.FRErrTr. Should not that word be "priority" rather than "ex-
peditious passing" ?
Ambassador LINOWITZ. We have defined it in our understanding
with the Panamanians. "Expeditious passing" means getting through
the canal with expedited treatment and to go to the head of the line
whenever necessary.
Mr. ZEF rr.TTL Thank you.
Mr. METCALFE. For the benefit of the. Members who came in lateI
I would like to advise you that we are operating under the 5-minute
rule.
I now recognize the gentleman from Kentucky, Mr. Snyder.
Mr. SYNDER. I ask unanimous consent to present additional ques-
tions for the record in case I do not have time to get through with the
questions that I have.
Mr. METCATLFE. Without objection, it will be so ordered.
[The questions of Mr. Synder for witnesses of the Department of
State are contained in appendix B.]
Mr. METCALFE. You will proceed.
Mr. SNYDR:l. The money that has been pledged to Panama in the
treaties, how will this be transferred to Panama? I would like you.
if you would in responding, to compare it with the present method
where the $.:i million goes, not to Panama directly, but to New York
banks where it is pledged as collateral or some such for loans they
iiIfle to Pannnma.
Ambalssador LINOWI'N'z. Is your question how it will be transferred
to Panina ?






23

Mr. SNYDER. Yes; how will it be transferred to Panama and, in
that respect, compare it to the present system where they now give it
to New York banks in return for loans. I guess it is collateral.
Ambassador LINOWITZ. I do not think we addressed it.
Mr. SNxYDER. I am asking you to address it. I would be glad to let
the gentleman behind you respond if he wants to.
Ambassador LINOWITZ. I would rather stick with my answer. We
have not yet decided how to do it.
Mr. SNYDER. So it could go directly to Panama or to the banks as
collateral?
Ambassador LINoWITZ. If the Commission so determines. Maybe
Mr. Cooper, Under Secretary of State, might comment on that.
Mr. SNYDEiz. All right.
Mr. COOPER. I think the payments have to be made to Panama. How
Panamna chooses to direct them is up to Panama. The salary that the
Government pays me goes directly to the bank. It does not come to
me. Similarly by agreement with Panama and some of the creditor
banks, the two point some million dollars--
Mr. SNYDER. I may be in error. I did not know that the Government
would accept an assignment of your salary.
Mr. COOPER. It goes into deposit into my account in the bank. That
is done routinely.
The payments are to be credited to Panama and how Panama
chooses to use it, which particular operation Panama wishes to choose
to use it for is up to Panama.
Mr. SNYDER. Would any of you give us in general amounts Panama's
indebtedness to U.S. banks and terms of repayment, as you under-
stand it?
Ambassador LINOWITZ. We understand the total obligation is $355
million.
Mr. SNYDER. Do you have any understanding as to the terms of
repayment?
Ambassador LiOWlITZ. No; but I am sure we could get those. I do
not have them.
Do you ?
Mr. SNYDEn. If they are available, I would like to have them sub-
mitted for the record.
Mr. COOPER. I am not sure we can get them. This is between creditor
and debtor. This is not a matter in which the U.S. Government has a
direct interest, between the lender and borrower if you are talking
about the details on maturity.
Mr. SNYDER. It is our understanding that 40 percent of the Torrijos
regime's budget is pledged to debt service-
Ambassador LINOWITZ. About 32 percent.
Mr. SNYDER. Has that been reduced, Mr. Linowitz?
Ambassador LINOWITZ. Well, it is the figure which we have now.
Mr. SNYDER. There is no agreement, on or off the record, that any
of this money that you have referred to in your testimony is pledged
to this debt service or to any financial interest, to the best of your
knowledge?
Ambassador LINOWITZ. Absolutely right.
Ambassador BUNKER. Right. Right.






24


Mr. SNYDER. Ambassador Bunker, 0you have referred, and I think
another witness too, to the possibility of the canal closing because of
some phenomenon and not having the revenue coming in to meet the
commitments, and I believe you said you would seek borrowing au-
thority from the Treasury until the time that revenue is again
generated.
Ambassador BUNKER. It is similar to the borrowing authority we
have now.
Mr. SNYDER. It would not permit you to borrow for the purpose of
the Commission? You would have to get new authority from the
Congress todo that?
Ambassador BUNKER. Yes.
Mr. SNYDER. If the Congress would not give you the authority, what
would you do?
Ambassador BUNKER. I do not know what we would do. We would
not be able to make the payment. We would have to make it up in
the future.
Mr. SNYDER. I think my time is up.
If you do not make the payment, how would you get the services
pledged?
Thank you, Mr. Witness, and thanks you, Mr. Chairman.
Mr. METCALFE. Thank you, Mr. Snyder.
At this time I call on the distinguished chairman, Congressman
Slack.
Mr. SLACK. I have no questions.
Mr. METCALFE. The gentleman from California. Mr. Robert Dornman.
Mr. DORNAN. Mr. Chairman, I was late. Could I defer to some of
the more senior Republicans?
Mr. SNYDER. Would you yield the time to me?
Mr. DORNAN. I would use my time, but there are committee mem-
bers liere from the full Merchant Marine and Fisheries Committee,
and since they were on time, may I defer to Congressman Treen or
Congressman Bauman?
Mr. M[IETCALFE. MFr. Treen.
Mr. TREEN. Thank you, Mr. Chairman. I appreciate being able to
participate even though I am not a member of the subcommittee.
I have a few questions. First of all, what happens if the extra trea-
ties and guarantees are not agreed to by the Congress? What happens
to the basic treaty structure if that is not approved?
You have said, Mr. Linowitz, on page 6:
We made it clear to the Pannamanian negotiators that any arrangements to
assist with Panama's development were to Pe separate from the Canal agree-
ments and were in no way to be tied to the rights and obligations of the
United States and Panama under tlhe Ponama Canal Treaty and the Neutrality
Treaty.
How is this made clear? What are the consequences if Congress
does not guarantee the loan?
nAmbassador LINOWITZ. It was made unmistakably clear by us that
thle treaty stood alone, and the economic package was separate and
apart.
Mr. TREN. In what form? Was it verbal or in writing?
Amlbassador LINOWITZ. I do not know if we put it in writing. We
male it clear orally. In a number of our discussions it was clearly
elnpllhnsized.






25

Mr. TREEN. There is no protocol or anything in writing which makes
clear that the United States intends to obtain these loans, loan guar-
antees, or credits; but even if the United States is not successful with
respect to the Ex-Imbank, with respect to Congress, that the treaties
still will have the full juridical impact?
Ambassador LINowrrITz. If the treaties were dependent upon the
package, they would have said so. They did not. This said "best ef-
forts." In other words, we made it clear in every way possible and the
Panainanians so understand that the treaty stands alone. They under-
stand that if it is ratified, it becomes effective whether or not there
is approval of the economic cooperation package. We would regret
exceedingly if there is not such an approval because it is in our high-
est interests.
Mr. TREEN. I am not disagreeing with the point. I might at a later
time. I am trying to get facts. There is nothing in writing between
the two Governments that makes it explicit that the loan guarantees
and credits have no effect on the treaty?
Ambassador LINowTrrz. There is a note written by Cyrus Vance to
the Panamanian Ambassador that makes no reference at all to the
treaty in discussing the economic cooperation package. It says, "I am
authorized to inform you that my Government is prepared to agree
within limitations of applicable U.S. legislation and subject to appli-
cable legal requirements and, where necessary, to availability of the
appropriate funds to the following:". And then it goes through it.
Mr. TREEN. I understand.
The flat $10 million, that is to be paid regardless of the revenues
of the canal. If the canal were closed by some catastrophe, the $10
million must still be paid; is that correct ?
Ambassador BUNKER. No. Each of the annuity payments must be
paid from canal operating revenues according to the treaty.
Mr. TREEN. On page 8 of your statement, Ambassador Bunker, the
third to last paragraph, you refer to the difficulty of estimating in ad-
vance the cost to Panama of providing these services. Article III
specifies that after the first 3 years, the amount of reimbursement may
be adjusted to reflect inflation and other relevant factors.-
Who will make the decision after the third year? The Panama Canal
Commission, or will that be negotiated by the two Governments?
Ambassador LINOWITZ. The question, sir, I think that you are ad-
dressing is how does the determination get made with respect to what
are the factors that are relevant, and how is that determination
reached. Is that it?
Mr. TREEN. What factors are relevant and who would determine
the actual payment level on the services?
Ambassador LINOWITZ. Perhaps this would be helpful.
We have specifically demanded the insertion of the words "and
other relevant factors." The Panamanians ask for a factor which
would take into account inflation. It was our strong feeling it was only
a one-sided arrangement. It might be well that the costs would be
significantly less than the $10 million we agreed to pay. They might
be able to do the job more economically, in which case we would want
to adjust the payment down. This would be done by the Commission.
Mr. TREEN. The Commission would have full authority I.






26


Ambassador LINOWITZ. Yes.
Mr. METCALFE. The gentleman's time has expired.
I recognize the gentleman from Mississippi.
Mr. BowEN. No questions.
Mr. .METCALFE. I recognize the gentleman from Minnesota, Mr.
Oberstar.
Mr. OBERSTAR. Thank you, Mr. Chairman.
I have supported the concept of the treaty, and I complimented both
Ambassadors for the presentation in August. I think it restored the
responsible position of the United States with respect to our Ameri-
can neighbors to the south.
I think that the real issue of the Panama Canal Treaty lias to do
with the future relationship of the United States with our American
neighbors south of us.
There/are some questions that people raise about the content of the
treaties and obligations of the United States incurred by the treaties,
which I think, if carefully and fully answered, will bring about the
wider support of the American public which the administration needs
to win ratification of the treaties.
I found in my own district when I fully explained the treaties both
as to the history of the U.S. Government in the establishment of the
Government of Panama and the present relationship of the Panama
Canal to our economic and military requirements, people supported
the concept of these treaties.
They raise a question about many numbers which have been cited
in the press. The numbers are these, $345 million for economic and
military assistance over a period of 10 years outside of the treaties, I
believe; and $752 million unrecovered investment referred to in testi-
mony to be presented later today by the Comptroller General. That is
about $1 billion.
People ask why do we have to make that payment or make that
contribution to Panama in order to give up the canal.
They ask why do we have to pay $46 million a year to the Govern-
ment of Panama, and I would like you to respond to this question.'
Ambassador LITNOWITZ. I think in the first place, sir, it is important
to pull apart those, concerns so tl)nt we can deal with them ,effectually.
It is of vital significance that the economic cooperation and military
assistance program is understood to be not a grant, new loans, guaran-
tees, or insurance. In other words, this is not going to le a payment to
Panama, but it is making available to them on terms and conditions
which are established for all other countries, funds which will help
them in their economic development and help them to build up their
defenses so they can help defend the canal when the time comes.
We believe it is very importpiint for people to recognize that. from
now to the year 2000, we will continue operating and maintaining the
canal. We will continue to have the use of it as we have in the past.
Everyone recognizes thIat we have paid a small annual sum for the
use of Panama proper. We are paying $2.3 million a year. That is an
increase several times over the original $250,000 a year.
We have hlad a ,al'.raii in terms of the T.S. payments to Panama in
contr-:1st to payments we emake to other countries for use of their land.
Tie thiird point is that \ve :ire going to continue having use of the








canal. We have a righllt to access. We are not washing ouir hands of
Panama. The treaty is a fair one. It takes care of the Panamnanian re-
quirements. It fully represents our interest, and does not. represent a
bribe or a kind of effort to give the Panamanianis more thlan they were
entitled to.
They asked large sums, $1 billion down first, then $500 million, then
S300 million a vea'r based on comparisons of what we were paying other
countries for use of their land.
They finally accepted the basic proposal we put forward.
'Mr. OBERSTAR. How does the Panama economy rank with respect to
the economy of other Central and South American countries?
Ambassador LIN-OWvITZ. Mr. Cooper wanted to make a comment.
Mr. CoOPER. I want to address the first question.
What was the background of this very extensive U.S. investment in
the Panama Canal? We have had the use of the Panama Canal for 65
years. We expect under the treaty and beyond the treaty. period in-
definitely to continue to have the use of that. The U.S. investments
originally and improvements were for the provision of the service. It
was never anticipated at any time that I am aware of that thlie capital
should be paid to the U.S. Government. On the contrary. Congress at
various points along the way created the structure where the expecta-
tion was explicit that the capital would not be returned. Tlihe benefits to
the Ainerican public have not come through profit, on original invest-
ments, but through a transportation facility which has been extremely
valuable to our own country economically and for national defense
puqL)oses. Our return is to be measured in those terms rather than it?
terms of a financial return.
It is worth recalling that in the early 1950's when there was legisla-
tion changing the financial structure of the Panama Canal Company,
no provision was made at all for the return of the original investment.
Mr'. METCALFE. The gentleman from Maryland, Mr. Bauman.
Mr. BAUMAN. I would respond to the Secretary by saying that it was
indeed never anticipated that we would have a full repayment of our
capital investment; neither was it seen by Congress that any adminis-
tration would relinquish control or abandon ownership of the canal.
Many original bases of thinking have gone by the boards.
I will ask this question simply because it is being asked by a great
many Americans.
Tlhe present worth of thlie Panama Canal based on look value, is about
$502 million for the Panama Canal facilities and $60 million for U.S.
Canal Zone facilities, but the Governor lihas estimated the replacement
value is $3.5 billion.
In addition to the 30 cents net ton fee to be paid, we are agreeing to
$10 million payment annually, and there have been various estimates
given from time to time as to what the total amount will he which the
United States will pay throughout the term of the treaty.
Various Senators dealing with the figures and the other figures
which you presented came up with a total amount of $1.32 billion to be
paid. However, tlie Economic Minister of Panama estimated $2.26
billion in 1977 dollars which would eventually be paid to the Govern-
ment of Panama.


I






28

If, indeed, we are giving this away, why are we paying the Panama
Government to take our property? Is this a bribe to get them to agree
to the political part of the treaty with which you gentlemen seem so
enamored?
Ambassador LIxoWITZ. Are you addressing that to anyone?
Mr. BATJMAN. Whomever can answer. We heard you in August. We
will be glad to listen.
Ambassador LiNowrrz. We do not look on it as a giveaway. Let us be
precise about language. There is an agreed amount to be paid per year
while we continue to run the canal. When they get the canal, we pay
them nothing.
Mr. BAU MAN. We are paying them a fee for our operation and, in
addition, we are paying them a per tonnage fee. for the amount of
shipping? ;
Ambassador LiXNOWITZ. We, as such, are not paying. The canal op-
erations will pay a certain amount coming from the use of the canal.
That is where the 30 cents per ton comes from. It is very important to
keep that arrangement in line.
Mr. BAUMA'. The economic issues are not divorced from the politi-
cal issues.
We are paying them over and above the enormous cost of this canal
in lines and fortunes; we are paying them to agree to take this off our
hands until they can run it.
Ambassador LINOWITZ. I would agree until you got to the
other words. I agree that political issues and economic issues are in-
tertwined. They were both part of the same treaty. We worked out a
treaty which was fair and reasonable and in the national interest.
Mr. BAUMAN. Has any agency of the United States done an analysis
of the negotiations conducted this summer and the impact on the
economy?"
You said that 32 percent is devoted to debt service. Other figures
show 40 percent. Panama has a $1.5 billion national debt. Their infla-
tion rate has been as high as 25 percent-15 to 10 percent in the last
year. They turned to the Soviet Union to buy their sugar. The Soviet
Union has certain other negotiations going on for the building of plants
and a factory for sugar refining equipment, and they are going to
establish a bank.
Has any analysis been done of the economic dependence of Panama
on the Soviet Union as a result of these recent negotiations? If not,
why not?
Ambassador LiNowrrz. Mr. Cooper can comment.
So far as we know, no agreements were reached. It was only a pre-
liminary discussion.
Ambassador BUNKER. Preliminary discussion.
Mr. BAUMAXN. No analysis was made of what this might mean?
Ambassador BUNKER. Since the preliminary discussion did not come
to anything, I don't know what we would analyze.
Mr. BAUMrAX. You would wait until the troops are there?
Mr. A[ETCALFE. Your time has expired.
The gentleman from Waslhington.
Mr. PRITCHiARD. Thank you, Mr. Chairman. I want to thank you for
allowing us to sit in.






29


You touched on the fact, one of the reasons that made the costs go
up so radically is the fact that we have made very large payments to
people in other countries around the world where we have our bases.
I don't personally agree with this as a policy-
Ambassador LINOWITZ. May I please respond, sir ?
Mr. PRITCHARD. Yes.
Ambassador LINOWITZ. That is what led them to make their original
demand.
Mr. PRITCHARD. Yes. It created a situation for us to say that $10
million is a good payment.
Ambassador LINOWITZ. The thing that I would stress is that the fig-
ure that was finally arrived at was the figure that we had put forth.
Mr. PRITCHARD. What is it that we pay to say Turkey ? Do we have
a figure?
Ambassador LTNOWITZ. Yes; we do, sir.
Mr. PRITCHARD. And also the amount of land we rent from Turkey
for these purposes?
Ambassador BUNKER. I think over a 4- or 5-year period the total
comes to about $1 billion, of which $200 million will be for military
assistance grants.
Mr. PRITCMHARD. It seems when we are dealing with Panama and
this amount of money, the problem is the amount of money that we
pay to other nations. It is the perception of another country as to
what is the going price in the world when America goes out and rents
acreage. It is a policy which I think leads us into serious trouble. It
does raise the perception of other nations as what we will pay.
Ambassador LINOWITZ. Yes, sir. We do not accept that analogy, but
they do.
Ambassador BUNKER. They cited it to us.
Mr. PRITCHARD. I am sure they did. It is a shortsighted policy in
our country. We are starting down the road with nations who have
a great deal to gain by our staying in there and being their protector.
In many ways we are performing a far greater service for them than
a comparable situation in Panama.
When you talk about inflation, you have written this into the con-
tract, that inflation will be a factor in all computations of what we are
going to pay.
Ambassador LINOWITZ. The adjustment will be based on the Whole-
sale Price Index for all manufactured products starting the day after
the treaty goes into effect.
Mr. COOPER. Only on the royalties.
Mr. PRITCHARD. That is what I am talking about. Some of the fi-
nancial factors are based on coming to an agreement today. I think
you recognize that we are getting into a political year. I guess we are
always in a political year. It may be that the Senators will not want
to take up this sticky bone. If they do not, then we have already com-
mitted ourselves.
First of all, I guess there are two factors.
One is the money factor. If you have inflation going and it is held
up for a couple of years, what is the actual effect?.
Second, of this inflation on the total cost given some lapse of time
before the treaty is signed, what happens if we are unable to approve


21-738-78-pt. 1- 3







30


this for a couple of years? Can this drag on? I know this is not some-
thing you would like to talk about or think about.
Ambassador LIxNOWITZ. We have indicated to the Panamanians we
will in good faith do everything we can to assure ratification. This
would mean moving with all speed in order to obtain the requisite rati-
fication and, later, the implementing legislation required so we can
make the treaties effective.
I think that is what they are expecting. It would be pure specula-
tion for us if we said how they would react if it were not approved.
We would have reason to anticipate that some things would take
place that would not be good for our relationships with Panama or
the Panamnanians.
Mr. PRITCIIARD. All right, thank you.
Mr. METCALFE. Your time has expired.
We passed a resolution permitting nonmembers of the Committee
on Merchant Marine and Fisheries to ask questions. This referred to
Congressman Slack.
I would ask unanimous consent that we make the same resolution
to extend the privilege to Mr. Clausen of California if he cares to
participate.
Hearing no objection, I call on Congressman Clausen.
Mr. CLAUSEN. I would ask unammous consent that I be permitted to
submit a copy of my perspectives on the Panama Canal and the treaties
in question.
Mr. METCALFE. There being no objection, it is so ordered.
[The following was supplied for the record:]
[From the Congressional Record, Oct. 6, 1977, vol. 123, No. 160,
House of Representatives]
PERSPECTIVE ON PANAMA
The SPEAKER pro tempore. Under a previous order of the House, the gentleman
from California (Mr. Don H. Clausen) is recognized for 30 minutes.
Mr. DON H. CLAI'SEN. Mr. Speaker, I wish to present today to my colleagues,
a matter of great concern-a "Perspective on Panama" as I see it.
I do so in the hope that my sharing some of my experiences in the "negotiating
process" relating to political status questions during my service on the territories
subcommittee of the Hou.me and as a member of the Ad Hoc Advisory Group on
Puerto Rico will be helpful to the congressional process.
I will attempt to relate where I have seen the negotiating process fail in the
course of the Puerto Rican negotiations and also comment on the lessons to be
learned from the very successful negotiations with the Marianas covenant which
were carried on with the full support andl knowledge of the Members of the
House and Seniate having jurisdiction over and responsibility for the legislative
inmatters that were to be involved.
The Panama Canal and the proposed treaty are the subject of much discussion,
confusion, distortion, dissension, concern, and debate-throughout the country
and in the halls and cloakrooms of Congress.
While tlhe ratification of international treaties is the traditional and constitu-
tional responsibility of the U.S. Senate, there is a growing body of opinion in our
country, as reflected in the communications to my office, that the American
people want and, indeed, expect the full Congress-the House and the Senate-
to 1,o involved in the Panama issue. A very emotional issue. I might add. both
here and throughout Latin America. You have heard and read multitude of com-
mints sunh as: "We bought and paid for it, don't give it away" or "If the Treaty
isi't anpproved-there will be guerrilla warfare all over the Western Hemisphere."'
Thles, are but two examples representative of the extreme points of view.
Tonight, I would like to shbnre a few thoughts with you and, hopefully, give
you a little different "Perspective on Panama".








31

NEGOTIATING PROCESS
I would like to share some thoughts and concerns I have with regard to the
"negotiating process," some chronological and historical data; what some of the
people in Washington are saying; what the alternatives are if the treaty is not
approved in its present form, and; finally, why I think we need a new approach
to our relations with Panama and all of Latin America-including the resources,
security, and stability of the Western Hemisphere.
The "negotiating process" on the Panama question, really "leaves me cold" and
in my view is the major contributor to the problems we face in dealing with
this controversial issue.
This process started in the Johnson administration, in response to the riots
in Panama during the minidsixties, and was carried forward thioughi the Nixon,
Ford, and Carter administrations.
My fundamental disagreements with the "negotiating process" are, I believe,
consistent with expressions most often lbiard from the American people.
What are they saying?
"(1) As my elected representative in Congress, don't give away the canal.
"(2) What are we doing negotiating with a nouele-.ted military dictator?
"(3) What do the people of Panama really want and have to say about their
future destiny and political status?
"(4) What do the people of the United States really desire in the way of a
relationship with Panama?"
What do I read from all of this? My people want me to be involved in the
process so as to express their concern and point of view.
They find it difficult to accept a "negotiating process" that regulates the U.S.
House of Representatives to a followup role of having to vote to "pay the bills"
for a vital economic and security package which was drafted by others and
which the House had no opportunity to approve or reject.
The bitter experiences of Vietnam, starting in the early sixties and escalating
in the midsixties by unilateral Presidential action is another case in point where
the Presidents of that era took the action and then said to Congress "pay the
bill."
This costly experience has caused the American people to demand a check and
balance effort from the Congress.
They want us to be consulted and more involved in the total process.
They want us to be fully involved in the process during the negotiations and
not be put in the position where: "you've got to accept what has been negotiated
by the Executive because, to reject it, would cause embarrassment to the President
and the country."
I say it is ridiculous even to suggest that the Congress must accept a position
the executive branch has announced just because someone might be embarrassed.
I have seen successes and failures in the negotiating process.
The failures occur when Presidents try to go it alone without adequate con-
sultation, advice, and involvement in the negotiating process with the Congress.
Our most successful ventures in foreign policy are those that had maximum
involvement and cooperation between the Executive and the Congress-because
all know they would be held accountable to the people that elect them.
Panama has the potential for failure unless they revise and/or establish this
type of joint negotiating process.
I am in the process of communicating my strong concerns to the Members of
the Senate.
For one experienced in Washington politics, the current dissention on Capi-
tol Hill over the ratification of the new Panama Canal Treaty was fully predict-
able. My committee assignments in the House of Representatives-Public Works
and Interior and Insular Affairs-provide an opportunity for me to participate
actively in international negotiations and to deal with Inter-American affairs.
I know that international political negotiations are apt to succeed only when
both branches of Government act as coparticipants.

PUERTO RICAN EXAMPLE
For example, in 1972, the President appointed me to the Ad Hoc Advisory
Group on Puerto Rico. The President charged us to meet with our Puerto Ricau
counterparts to hammer out a new political status for the island. Three years
later, hard work, a draft compact of free association was developed and pre-








32


sented to the U.S. Congress for enactment. Unfortunately, from the start, the
compact was doomed to fail. Although the document was sensitive to the political
and cultural aspirations of Puerto Rico, the details-especially the intricacies
of tax, trade, and immigration matters-were hazy at best. Why? Throughout
the negotiations, the executive branch failed to supply the mainland negotiators
with the expert advice and administrative experience necessary to fashion a
compact in consonance with legal precedent and Federal practice. Accordingly
when put to the scrutiny of various congressional committees and Federal agen-
cies, discrepancies emerged of sufficient magnitude to kill the draft compact. In
other words, of the two pillars upon which successful negotiations must stand-
political sensitivity supplied by the Congress and administrative expertise afoe
forded by the administration-input from the executive branch was absent.
In addition to the inadequacy of the administrative expertise furnished by
the United States, the makeup of the Puerto Rican delegation clearly was not
representative of the major established political interests in Puerto Rico at that
time.
In spite of the good faith of all concerned and the importance of the issue,
the Puerto Rican compact could never get off the ground. Although the Ameri-
can system of government is the finest in the world, it is like any other delicate
mechanism. To be effective, all components must be operable.

MARIANAS EXAMPLE
But all negotiations undertake by Washington do not end so abysmally. Once
again, let me draw again from personal experience.
Following World War II, the United States agreed under the U.N. Charter to
administer those Pacific islands, known as Micronesia, which were wrested from
the Japanese by American amphibious forces during the war. Many of these
island names-Kwajalein, Truk, Peleliu, Saipan, Tinian-will he familiar to
many of you, especially if you served as a member of the Armed Forces in those
bloody Pacific battles. As a carrier pilot, the Navy first introduced me to the
Mariana Islands-one of the three archipelagos that comprise Micronesia. Ironi-
cally, and proudly, I might add, it was these same islands-the Marianas that
becai me the ones I assisted, in the determination and development of their own
political future, 30 years later as a Member of Congress.
Under the U.N. trusteeship agreement, the United States is obligated to "pro-
mote development toward self-government or independence in accordance with
the wishes of the people * *."
The story of the negotiations-the give and take on both sides, the integrity and
sincerity displayed by all participants-is too long to relate to this forum. Let
it suffice, that in my political experience, I have never witnessed a better example
of "working democracy." Within the Federal Government, a special White
House office was established to undertake the ramifications of negotiations. Dedi-
cated American officials from the Defense. State, Justice, Treasury, and In-
terior Departments were brought together to work out the details of this new,
innovative approach in American federalism. Within Congress, we were con-
tinuously kept abreast of progress in the negotiations. Congressional input into
the negotiating process was conspicuous. Following a plebescite in the Marianas,
wherein nearly 80 percent of the people endorsed the covenant's provisions, the
President submitted the pact to the Congress for approval. The Congress, having
been consulted and kept fully informed from its very inception, had no doubt of
the covenant's contents. Here was a negotiated document to which all parties
concerned had access-a document freely chosen by the people. Congressional
passage was assured. On July 1975, on the floor of the House, I stated:
"Mr. Speaker, although the population of the Mariana Islands is small and
the amount of Federal expenditures envisaged is relatively small, the political,
legnl. and social precedents to be established with approval of the Marianas
Covenant are salient. Foremost, a new system of local government, unique in
the nnn',ls of U.S. history, will be enacted. Secondly, new patterns of economic
and social advancement for the undeveloped world will be launched; and finally
America's leadership in the Pacific basin takes on a new and very constructive
dimension.
*
"Regarding the negotiating process, I wishli to commend highly, Ambassador
IIaydn Williainms. the President's personal representative for Mieronesian political
status n,,egotiationis, for the diligence I( (dislplayed in keeping members of the
Interior Committee informed on progress made throughout the negotiating proc-







33


ess. * In my 13 years as a Member of Congress, I have never witnessed a closer
or more cooperative relationship established between the Congress and the
Executive Branch."
On March 24, 1976, there was no one in the East Room of the White House with
more pride than I as I stood behind President Ford and watched him sign the
covenant into law.
CURRENT SHORTCOMINGS
At this point, you may be saying, all very interesting, but how does this con-
cern the new Panama Treaty? Although the political status of Puerto Rico, the
Marianas and Panama may diffier; in all three instances, vital U.S. interests were
at stake; namely, America's leadership role in the Pacific and the Caribbean.
Moreover, U.S. economic ties with the underdeveloped world hung in the bal-
ance. Also, national security interests, specifically, the preservation of air and
sea lanes, upon which this Nation is dependent, were in jeopardy. But even more
importantly, the lives of people-their freedom of choice were-cogently in-
volved. American citizens, as well as aliens, were dependent upon the good
auspices of the U.S. Government to protect their individual rights.
Therefore, with the understanding of the delicacy of international negotia-
tions, it becomes clear that the negotiations of the United States and Panama
over the past 13 years have been too narrow in scope in at least two ways.
First, the two groups deliberating as representatives of Panama and the United
States were not truly representative, in any sense of the word, of the people
of the two nations. For our part, as I have mentioned, the bargaining was done
by career diplomats without sufficient input from the legislative branch of our
Government let alone the views of the many people and groups in our country
who have an interest in the canal issue.
Similarly, the existing regime in Panama has operated its side of the nego-
tiations with a combination of bluff and threat. It needs a broad-based negotiat-
ing team that could represent the people of Panama rather than its dictator.
It is rather paradoxical that on the one hand this dictator, who holds his
position through power rather than popular support threatens that failure to
ratify the treaty will lead to insurrection, sabotage, or guerrilla warfare while
on the other hand we are being asked to entrust long-range security interests
of future American generations to the good intentions and stability of this regime.
If Panama is to have an increased role in the canal, then that role must be one
which the Panamanian people understand and are willing to accept.
The Panama Canal is an asset of the Western Hemisphere and should be con-
sidered in that context rather than the exclusive property of either the United
States or Panama. In my view, the Organization of American States was afforded
no more opportunity to influence the contents of the Panama treaties than
America's elected representatives in Washington or the people of Panama. To
exclude multinational participation in the determining the political and economic
future of the Hemisphere is inexcusable.
This short-sightedness in the negotiating process-this callous disregard for
the concerns of the people of both Americas-has raised a storm of protest over
Capitol Hill. The likelihood of attaining the two-thirds majority in the Senate
necessary to ratify the treaties becomes less likely with each day. But if the
treaties fail, what next?
Obviously, the relations between the United States and Panama are strained;
tensions can be eased only through open and forthright discussion. In the next
round of negotiations, we must be assured of a broad base.
There is a very important principle involved. The United States is the major
advocate of a free and open society, and has raised concepts of human rights
to a level unprecedented in history. We are a government of, by and for the
people. Whatever we do in the negotiating process should reflect and project
that principle.
As demonstrated in the Northern Marianas negotiations, the United States
can no longer rely exclusively on the State Department to conduct proceed-
ings which are politically sensitive at home. Rather an administrative task
force-composed of the best political, economic, and military talent available-
must be established under the President's personal direction and charged with
formulating an agreement that truly reflects the desires of the American people.
In the process, both Houses of Congress must be active participants. Similarly,
members of the OAS should also be invited to join in. As for Panama, strong
international pressure must be placed on the Torrijos' regime to insure that all
factions of the Panamanian society are represented at the negotiating table.







34

FREE ASSOCIATION
One option might be to form closer political and economic ties with Panama.
The concept of "free association" is one receiving more and more attention aS
nations, whose economies and histories are inextricably intertwined, seek to main-
tain national identity in a world of ever expanding complexity. Free association
involves the recognition of the political dependency of one national entity upon
another but simultaneously maintains a discrete legal identity recognized by
international law. Such a status becomes increasingly important for small states
which have been drawn into a power struggle between the great powers or have
an insufficient economic base to support its population. At this moment, for ex-
ample, the United States and Micronesia are involved in negotiations which,
if successful, will establish the free associated State of Micronesia, wherein
Micronesia will retain its sovereignty for internal matters while the United
States assumes responsibility for the islands' foreign affairs and national de-
fense. It is conceivable that a similar arrangement could be worked out with
Panama. In any event, this option should not be overlooked. Of course, any such
change in political relationships would require the consent of the Panamanians,
freely expressed at the polls.

AN INTER-AMERICAN PROBLEM
Beyond the procedures of the talks on the future of the canal, however, lies the
fact that the canal is not simply an issue affecting Panama and the United
States-its strategic and economic importance affects every nation in the
Hemisphere.
This is not just a Panama-United States problem but rather an inter-American
problem and requires an inter-American solution.
My suggestion is that we begin new and expanded negotiations on the future
of the canal and all related economic, political and security matters. These nego-
tiations should be bilateral between the United States and Panama on economic,
political status, and operational matters. The security matters should be inter-
Amierican in scope and solution, and every interested nation of the Western
Hemisphere should be offered the opportunity to participate. The canal is very
important to some Latin nations, like Mexico, Chile, and Peru, and is relatively
less important to others. The special concerns of each nation should be represent-
ing an inter-American solution.
Until such time as a solution satisfying the security interests of the immedi-
ately concerned nations, as well as the special interests of Panama and the United
States is concluded, the United States can continue to operate on a free access
basis just as it has for over 70 years.
This concept recognizes the legitimate economic and security interests of the
North, Central. and South American countries, and it is the only course that
can offer a final, permanent, and acceptable solution.
It would Permit decisions to be made in a constructive atmosphere of give and
ta;:e rather than under the threat of another so-called "revolution" in Panama,
be'.ise its rights are supposedly ignored.
My principal objection at this time is the manner in which the treaty was
drawn. In this e.ase, it hns lead us to thef- position where our only choice is cou-
frontation. What we really must strive for is coordination, communication, and
cooperation between all the countries of the Americnas. hut in pa rticular we need
to comiimunicate to the people of Pnnnma the advantages that will accrue to them
through a more mature, fair, and strengthened partnership with the United
States.
REQUTISITES FOR SUCCESSFUL NEGOTIATIONS
As I mentionedl in relation to lbe Puerto Ric.nn compTnet. successful negotii-
ti(ow1 li nge upon two propositions: First, administrative expertise, and second,
poll ical awareness. In the cnase of the Panama Treaty, we had an over-abundance
of tfchnicnl advice with little sensitivity demonstratedd for political questions.
And what of the people-Americans. a d(1 PInn:nnians alike? Do the provi-
sions of the treaty meet with their desires? Or. like the Congress, are they merely
Ieivin handed n fa it acecompli with all options closed.
(Congress has a vital role to play in such proceedings. The President can and
should expect the American Congress or the Animerincan people to revamp this mut-
md(led style of international negotiations-to endorse procedures similar to







35

those evoked by the previous administration in formulating the Marianas' Cove-
nant-to open the international negotiating process to the will of the people
through their elected congressional representatives.
I am not sure if we know specifically how the people of Panama feel about the
treaty or what they really would like to see evolve in the way of an economic and
political relationship with the United States.
When you are dealing with a military dictatorship that got its power by force,
you cannot be certain what the feelings of the people would be if they were free
to express them.
I believe we can move ahead to an improved relationship with the people of
Panama through a modernization of the canal which could allow the investment
of large economic resources into our future ties with Panama.
This is the message we can and should take to the people of Panama. If we
adopt the "negotiating process" I have outlined, we can assure thorn that our
diplomacy will have the necessary institutional stability to insure equitable,
fair, and just results.
While this would be an investment in our own interest, it would allow partic-
ipation from Panamanians that would benefit them in every social, economic,
and cultural way.
The gospel I preach-and one many of you have heard me on before-is that
the nations of North, Central, and South America have the potential to be totally
self-sufficient as a group.
Hemisphere self-sufficiency would be in our best interest and, in my judgment,
ought to be one of our primary goals.
In a nuclear age in which security needs and economic values are so closely
intertwined and so absolutely vital to our future, and when the requirements for
a coordinated, integrated, and balanced international transportation system has
never been greater, the United States must plunge ahead, not pull back.

A NEWV APPROACH
We have a responsibility to demonstrate bold, innovative leadership in our
relationship with our hemispheric partners.
The Santa Rosa Press Democrat editorialized that-
"We need a new approach to our relations with Latin America, we need more
trade agreements and exchanges of technical assistance."
I could not agree more with this statement.
In discussing U.S. policy toward Latin America, I have often said: "We do
not wish to be looked upon as your fathers; we prefer to be your brothers."
Behind this phrase, there is a long history of continuing debate as to what
the proper relationship should be between us and our neighbors to the South.
That debate spans long periods of our history from the Monroe Doctrine, through
the good neighbor policy, and the alliance for progress, up to the present. Each
phase of our evolving policy toward Latin American responded both to an as-
sessment of U.S. interests and of the realities of our relationships in the
Hemisphere.
The change in our desired role from being "fathers" to "brothers" goes to the
very core of our concept of the "mature partnership" we wish to have with our
Latin American friends. As I have observed our working relationship during the
sessions of the Pan American Highway Congresses I have attended, I have come
to the firm conclusion that we are all proud of our national heritage, yet we are
also willing to share ideas that will be helpful to all.
Why must we move to this new policy and new diplomatic style?
We have realized that our Latin American neighbors have made great strides
in recent years in the complicated tasks of nation building and economic and
social change. These nations are increasingly flexing their "muscles of maturity"
as they develop their self-confidence, as they thrust ahead in their efforts to mod-
ernize. and to bring the benefits of economic growth and social progress to more
of their people.
We, too, have assessed our national interests and the realities of contempo-
rary Latin America.
We have come to the conclusion that the special relationship we seek with our
Latin American friends must be such, as to assist the processes of change in an
atmosphere of mutual respect, confidence, and cooperation.







36

As this partnership develops and mellows with time, we not only help each
other, but strengthen the quality of our political, social, and economic institu-
tions that bind us together in the inter-American system.
In presenting my personal assessment of our relations of the past, I am of the
firm opinion that we must all accept a proportionate share of the blame for the
problems that have not been resolved in an orderly manner.
Why has this occurred?
In my view, we have all wavered from one extreme to another-all the way
from "benign neglect" on the one hand to the "bear hug" on the other.
When we needed each other desperately, we would join together to meet a
common threat to our respective interests.
After the threat had passed, we would fail to communicate adequately, to
"keep in touch," thereby neglecting to recognize or deal with promptly the in-
creasing problems associated with the challenges of change in this jet-space-
technological age.
The result has been smothering paternalism wrapped in a blanket of immatu-
rity, misunderstanding, unfulfilled promises, and mounting uncertainty.
The sweeping changes in world economic conditions imply a sharp increase
in U.S. economic interests in Latin America.
In facing these U.S. interests, what is the position of Latin America? What are
its geals?
A chief Latin goal remains the modernization and diversification of their
economies, via industrialization, including increased processing of raw materials.
Latin America's needs for capital and especially technology suggest that it will
certainly continue to want foreign investment. But the terms must be right: The
investment must be perceived to promote their own goals of industrialization,
better balance-of-payments positions, reduced unemployment, technological ad-
vance, and the like.
The new economic strength of Latin America has led to a dramatic improve-
ment in its bargaining position vis-a-vis the United States. But it has also laid
out the continued needs of the Latins for external markets, especially for their
manufactured products, and for infusions of cap i t al and technology.
There is a wide array of options available to the United States and to Latin
America.
The special relationship between the United States and Latin America now
needs to be a new kind of special relationship, in which each works together to
promote global programs of joint benefit to both. A vision of such expanded and
diversified progress together should animate United States-Latin American eco-
nomic relations in the new world economy and policy of the late 1970's and be-
yond. And since economic issues will almost certainly lie at the heart of the
overall United States-Latin relations for the foreseeable future, the realization of
such progress could provide the basis for stability and progress throughout the
Western Hemisphere for some time to come.
The time has come for all Americans, North. Central. and South. to stand up
and be counted on a man-to-man basis-treating each other with mutual respect
in a true spirit of brotherly love, as intended originally by our Creator.
We are all constructive, creative, dedicated, and determined individuals and
nations.
We must all realize, however, that by maximizing our economic organizational
and institutional interdependence, we can greatly enhance our individual and
cherished goals of independence. This is, in truth, what has happened in our
United States of America. The lessons we have learned in the course of our exper-
iment in functioning democracy have relevance, purpose, and potential applica-
tion to all the Americas. I sincerely believe the nuclear age and the long term
security interests of the United States nnd our inter-American friends make an
improved relationship necessary-the potential for resource self-sufficiency make
it desirable, and the projection of economic and political solidarity, coupled with
security, organizational cooperation among the Americas will have a very sober-
ing and stabilizing influence on the entire world community.
A new, expanded, and updated "negotiating process" can make this a reality.
The concerned, confused, uncertain, and fearful people of the world are "hun-
gry" for this type of bold and imaginative leadership from the recognized
championn of freedom and justice."
I hope and pray the UTnited States will rise to meet this challenge. The potential
for nation is unlimited. The consequences of inaction can be devastating to the
hopes and aspirations of free men and women in every corner of the globe.






37

Mr. M'ETCALFE. The gentleman from Mississippi, Mr. Bowen.
Mr. BOWEN.. No questions.
Mr. METCALFE. Mr. Dornan, you passed on the first round. We
plan to go around again because of the importance of the witnesses
who are here. Are you ready now?
Mr. DORNAN. Yes; thank you, Mr. Chairman.
Mr. Linowitz and Ambassador Bunker, I would like to discuss the
word "indexing," which appears on page 5 of your remarks, Ambas-
sador Bunker.
"An amount equal to 30 cents per Panama Canal net ton, or its
equivalency for each vessel transiting the Canal."
Then you say: "The rate for this payment will be adjusted bi-
annually to reflect changes in the U.S. Wholesale Price Index for total
manufactured goods."
Who was the fiscal conservative on the negotiating team that gave
the Panamanians the break that the American taxpayer cannot get
from the Internal Revenue Service with respect to indexing? This is
a terrific boon to a foreign country that our own citizens do not get.
Would you comment on that?
Ambassador BUNKER. The reason for indexing is, the 30 cents
would change in value over the years. It might be very little.
Mr. DORNAN. The American taxpayers know that. Why should we
give a break to a foreign country that our own people do not have on
indexing?
Mr. COOPER. You are putting the question somewhat tendentiously,
and where the U.S. Government makes a long-term contract with its
own people, we have that-social s-ecurity pensions have a cost-of-
living escalator. It is not an open-and-shut case.
What we have learned in today's world is that where one makes an
agreement with respect to money covering a period as long as two
decades, one has to make some allowance. I would suggest where we
have those internally between the United States, either between indi-
viduals, between two private, parties or in the case of pensions between
the U.S. Government or former employees, we make provision for the
fact that the value of the money may be different.
Mr. DORNAN. I am sure you appreciate that is an awfully hard
answer to give to a taxpayer who feels overburdened. The people also
want to know why the Panamanian dictators get a plebiscite on the
canal issue and our people do not get a plebiscite.
Could I ask a question about the garrison of foreign troops and the
maintenance of foreign military installations in Panama?
Suppose there is one of these frequent revolutions or insurrections in
Panama and, the first day after the year 2000, a new government comes
in and there is a garrisoning of Cubnn-Soviet troops. What would you
think would be necessary for us to do to protect the canal?
Ambassador LTN-OwITZ. Whn atever is necessary.
Mr. DOR-,XAN. Would that include going in with force?
Ambassador LTNOWITZ. Whatever is necessary.
Mr. DORNAN. You say, "whatever is necessary." The President has
not said that. He would not tolerate troops going in now.
How would that take place in the year 2000 when the ownership and
sovereignty succeeded to Panama?






38


Ambassador LiNowrrz. That is why the reading of this is important.
If you read the neutrality treaty, it is a treaty which will be endorsed
by a protocol, which means all the countries of the world will be asked
to support that United States and Panama are together to be respon-
sible to keep neutrality.
If we were to make a move-charged as we are-we would be doing it
so world opinion would have to be behind us.
Mr. METCALFE. The gentleman's time has expired.
We will go around again in the event some of your questions
we re not asked in the first round.
I would like an answer to this from the Ambassadors.
The Panama Canal Company has deferred some payments to the
Treasury in recent years. Should these deferments be carried over to
the Panama Canal Commission and recovered by them?
Ambassador LINOWITZ. Deferred payment of interest?
Mr. METCALFE. Yes.
[Discussion off the record.]
Ambassador LINOWITZ. I am advised there was a deficit in fiscal year
1976. This year there was a surplus which paid back a good portion of
that deficit. That reduces the deficit to less than $4 million which will be
paid for out of the earnings next year.
Mr. METCALFE. If, when the Panama Canal Commission would go
out of existence in the year 2000, Panama, owes money to the Commis-
sion as they do now to the Company, what would happen at that time,
after the year 2000?
Ambassador LINOWITZ. If Panama owes money to the Commission?
Mr. M.ETCALFE. The Panama Canal Company-Commission.
Ambassador LINOWITZ. If I understand it, when the Commission
goes out of existence in the year 2000, and if there. is money owed by
Panama to the Commission, does that obligation continue? I think it
does.
[Discussion off the record.]
Amribassador LINoWITz. Sorry for the delay, but, the liability would
continue.
Mr. METCALFE. Article XIII of the treaty provides that the canal
"shall be turned over in operating condition and free of liens and
debts" at the treaty termination.
If the canal is closed before the year 2000, and if the Canal Corn-
mission is borrowed to the hilt, is not the United States obligated to
pay off or wipe out these debts and to extend funds to put the. canal
ack in operation?
Do we not have the obligation?
Ambassador LINOWITZ. At the end, there are the words "except as the
two parties may otherwise agree." The, canal would be turned over free
of debts, but if moneys had to be borrowed to keep the canal in good op-
erating order and efficient so Panama could accept it and take it over
and run it the way it should be run, then the two parties would agree to
that, and that would be a continuing obligation.
Mr. METCALFE. -Thank you.
My time has expired. I recognize the gentleman from New Jersey,
Mr. Zeferetti.
Mr. ZiF.EKiETTT. The gentleman from New York.
Mr. METCALFE. The gentleman from New York.






39

Mr. ZEFERErrTTI. Thank you.
What are the financial arrangements for the employees of the canal,
the American employees, as a result of the complete turnover of the
canal ? What have we structured ? Is there anything in writing that we
have guaranteeing pensions, et cetera?
Ambassador LINOWITZ. Article X of the treaty deals with employ-
ment for the Panama Canal Commission, and it covers such things as
early retirement, and tells about the rights of the employees as they
continue under the Panama Canal Treaty.
Mr. ZEFERETTI. You say early retirement. Are you talking about a
mandatory retirement system?
Ambassador LINOWITZ. No. Early/optional retirement.
Mr. ZEFERETTI. Do you have any idea what the cost factor will be for
the employees that are affected ?
Ambassador LINOWITZ. No, sir, I do not. It would depend on how
many choose to take early retirement, when, and so forth.
Mr. ZEFERETTrI. You have got a consensus of the amount of em-
ployees we have, approximately the length of service and age. Would
you have an idea as to what we are talking about in numbers in regard
to that ? We are talking about the year 2000.
Ambassador LINOWITZ. We can get that, sir.
Mr. ZEFERETTI. I would like that to be made a part of the record.
We have been advised we are talking somewhere in the neighborhood
of $30 million. Excuse me, $8.4 million a year for 30 years. Those are
the retirement figures that come to mind.
Has anybody heard those figures?
Mr. SNYDER. I have.
Ambassador LINOWITZ. What are they for?
Mr. DORNAN. $8.4 million for 30 years for retirement coming out
of the appropriated funds.
[Discussion off the record.]
Ambassador LINOWITZ. We would like to get back to you with the
figures.
Mr. DORNAN. Because I think this is a direct cost to the taxpayer
and we would like to have those numbers.
Ambassador LINowITz. We will get that for the record.
Mr. DORNAN. Thank you.
[The following was received for the record.]
The cost of the early optional retirement program is estimated at $134 million
over the life of the Panama Canal Treaty.
Mr. METCALFE. The Chair recognizes the gentleman from Kentucky,
Mr. Snyder.
Mr. SNYDER. It is my understanding that the World Bank figures
show that Panama owes $1.7 billion to the private banks. Is that con-
sonant with the $355 million figure you gave me a moment ago?
Ambassador LINOWITZ. The figure we have is $355 million as owed
to private banks.
Mr. COOPER. United States?
Ambassador LINOWITZ. Yes.
Mr. SNYDER. $355 million owed to U.S. banks, 1.7 billion total to all
private banks. Is that correct, all private banks?






40


Mr. COOPER. Mr. Congressman, I cannot explain the World Bank
figure right off, but I suspect in order to reconcile that figure with
ours, you would have to include borrowings by entities in Panama
other than the Panamanian Government.
Mr. SNYDER. Please clarify that in a written response.
[The following was received for the record.]
The correct World Bank figure for the Government of Panama's total external
debt is $1.1 billion.
Ambassador LTNOWITZ. Panama's total disbursed external debt
stood at $1.1 billion at the end of 1976. And $648 million was owed to
commercial banks. Of that amount, $355 was owed to U.S. banks.
Mr. SNYDER. Maybe the World Bank figures are in error. Now, on
another point, I am sure you are familiar with the Library of Con-
gress analysis made at my request on October 27, 1977, which indi-
cates that the Carter-Torrijos statement does not clarify what rights
of intervention the United States has if any threat to the canal comes
from Panamanians.
After the year 2000, just what can we do if the Panamanian Govern-
ment decides to close the canal.
Ambassador LINOWITZ. What rights do have if, after the year
2000
Mr. SNYDER. I will read it to you directly.
However, the Carter-Torrijos statement, while guaranteeing each party the
right to act against threats directed at the Canal, also specifies that the United
States may not intervene in the internal affairs of Panama. It is not altogether
clear that the statement would permit the United States to intervene in the
event that the aggression or threat should result in some Panamanian action.
What can we do if some Panamanians decide to close the canal,
whether it is done by an insurrection or by the Government?
Ambassador LINOWITZ. Let me read you what the statement says
regardless-
Mr. SNYDER. No. I want "-ou to answer this.
Ambassador LINOWTTZ. That is not my statement.
Mr. SNYDER. It is Kenneth Mierin's statement, who is a legislative at-
torney with the Library of Congress.
Ambassador LINOWITZ. I respect him, but I have no reason to be-
lieve his statement is more accurate than what the parties agreed to.
Mr. SNYDER. All right.
Ambassador LINOWITZ. "* * shall, in accordance with their re-
spective constitutional processes, defend the canal against any threat
to the regime of neutrality and consequently shall have the right to
act against any agr'ession or threat directed against the canal * *"
MI'. SNYDER. It also says tfliat we cannot intervene in the internal
affairs of Panama.
Ambassador LTNOWITZ. The next sentence says, "Any U.S. action
will be directed at insuring that tlhe canal will remain open, secure,
and accesible."
Mr. SNYDER. That statement will take precedence, over the state-
ment that says we cannot intervene in the internal affairs of Panama?
Ambassador LTNOWVITZ. Tliere is no inconsistency between the two
st ateSients.
Mr. SNYIE.i There could be.






41


Mr. METCALFE. The gentleman's time has expired.
I recognize the gentleman from Minnesota.
Mr. OBERSTAR. I would like to resume questioning which I began
earlier.
It relates to the economic condition of Panama, and I repeat the
question that I asked earlier.
How does it rank with respect to the other countries of Central
and South America? Near the top, near the middle, one of the least
viable?
Mr. COOPER. There. is a serious problem of measurement in address-
ing the per capital income. It would be ranked at the top in Central
America and among the top as far as per capital income is concerned
among South American countries. It is roughly $1,000 a year. Vene-
zuela is substantially higher. A few of the countries are in that league.
Most are well below that.
Mr. OBERSTAR. What is its balance of trade with the United States?
Deficit or surplus, Mr. Cooper ?
Mr. COOPER. Overall, it is a deficit. That requires two further state-
ments of elaboration.
Even in normal times, year in and year out, Panama's overall bal-
ance is deficit, and paid for in part in services, notably through the
operation of the canal.
In addition, Panama has been running a deficit over and above
what can be covered by its service areas.
Mr. OBERSTAR. That is part of what authority ?
Mr. COOPER. The bank loans we have just discussed. Panama is like
dozens of other countries around the world since the increase in oil
prices and the world recession.
MAr. OBERSTAR. What has been the extent of U.S. economic develop-
ment assistance through our various foreign aid programs, going back
to the Marshall plan days, nonmilitary assistance?
Mr. COOPER. I have the figure of $20 to $25 million per year.
Mr. OBERSTAR. $20 to $25 million total?
Mr. COOPER. I have a figure here-do you have the table here?
Mr. OBFrSTAR. What I am trying to measure is the amount of effort
made by the United States in the past to develop the economy in
Panama, and the relationship of that effort to these treaties, and the
incentive provided to future development to Panama to have a stable
government so it will not fall prey to some outside influence?
Mr. COOPER. Let us provide that figure for the record. That is
cumulative over the years, and not counting military assistance.
[The following was received for the record.]
U.S. economic assistance to the Republic of Panama from the post-World War
II period to 1976 totalled $314.5 million.
Mr. OBERSTAR. What are the resources for economic development
assistance to Panama? What development resources does it have?
Mr. COOPER. Total economic and military assistance, loans and
grants, $321 million from 1949 to present.
Regarding the possibilities for development, other than the canal,
there are some possibilities that are in a sense related to the canal.
Panama is making an effort, and so far, a moderately successful one,
to become an entrepreneur area in that part of the world, an entre-






42


preneur not only for goods, relatively low tariffs, relatively free ex-
change service, but also in services. They made a conscious effort in
the last 5 or 6 years to establish a banking community with some
success.
There are now 71 foreign banks operating in Panama. Beyond that,
there are their traditional products, such as bananas, although the
prospect of long-term development here is limited. There are major
comparable resources in Panama which are in the early stages of de-
velopment at the present time. Then, of course, there is tourism. It
is an attractive place partly, again, because of the traffic through the
canal, so they have the possibility of becoming a regional service
center.
Mr. OBERSTAR. I think that statement is significant for the future
of these treaties, and the relationship of the United States and
Panama.
The testimony to be presented by the GAO suggests that possible
increases in tolls may result in a financial burden on the Government
of Panama.
What is your statement as to the effects of relinquishment of U.S.
control over the canal to the Government of Panama? What effect
do you think that will have on the economy of the Government of
Panama? Will it be a net beneficial effect, or is it likely to be a con-
tinuing burden?
Mr. COOPER. Answering that question involves forecasting consider-
able distance into the future, since we will not relinquish operation of
the canal for a 20-year period of time. It would continue to be under
U.S. management, with increasing Panamanian involvement in the
actual running of the canal.
The expectation, I think, is that by the time the canal passes to
Panama, the Panamanians will be fully capable of running it on an
efficient basis.
Assuming that the Panama Canal continues to be an important
traffic link, I would want to know more about the GAO judgments
about why this would be wont to be a burden, assuming the transition
is done constructively, and the Panamanians run the canal efficiently.
Mr. METCALFE. The time of the gentleman has expired.
I recognize the gentleman from California.
Mr. DORNAN. Were you aware that William Colby admitted in Los
Angeles that the Marianas Conference was bugged with electronic
listening devices?
Were you aware that Colby admitted that the CIA did bug the
Marianas Conference?
Ambassador LINOWITZ. No.
Mr. DORNAN. The Panama Canal has been described as a free-fire
zone. Never mind how we deal with the case of Richard Helms. Would
you answer concerning the rumors, suspicions, inferences or hints of
bugging in Panama, particularly since you were new to the negotiat-
ing process, Mr. Linowitz, and you were not familiar with intelli-
gence gathering of a heavy nature.
From your Vietnam experience, Mr. Bunker, were you aware of the
rumors or inferences or suspicions about the bugging of the other
side?





43


The Panama Canal Treaty being ten times more important than
the Marianas Conference, were you aware of any bugging during the
treaty making?
Ambassador LTNOWrrTZ. I wonder if we ought to go into that. We
have testified before the Senate Intelligence Committee in closed ses-
sion. I do not think we ought to get. into these questions here.
Mr. DORNAN. I want to know why the American people should not
know if we have intelligence information from the other side as a
result of bugging.
Let me ask you, then, Ambassador Biunker, have you publicly denied,
and I ask this sincerely, I do not know, have you publicly denied the
charges made on the Mike Wallace show, that you offered $3 million to
General "Big" Minh to enter the Presidential race in the-
Ambassador BUNKER. I deny that.
Mr. DORNAN. Why should not Torrijos resign and give freedom
of the press now, rather than hold it out to the U.S. Senate that he
will give his people what they deserve and should have any way only
after ratification? Why should we do this before we negotiate with
him, rather than after?
Ambassador LINOWITZ. Do you not think it is irrelevant for this
Government to suggest that another head of State leave his position?
Mr. DORNAN. Not when he offers it as a carrot, and when you talk
about giving him defense money which will go into armed carriers
and machine guns which will continue to suppress freedom, with only
the Communist Party allowed in the country. I do not think it is in-
appropriate for me to suggest that he give his people what they should
have and deserve now, instead of holding it out as carrot, even if we
give the dictator the canal.
Ambassador LINowITz. Even if his people do not want it? His
people. have not suggested it. You have.
Mr. DORNAN. They do not want freedom of information and free-
dom of press?
Ambassador LINOWITZ. We are talking about the resignation of
Torrijos.
Mr. DORNAN. I have on my staff someone from the Panama Canal
who tells me that there is a tremendous desire for freedom of the ex-
pression and freedom of the press, but how would they ever ask for
Torrijos' resignation, without being suppressed and damaged in a
dictatorship?
Ambassador LTNOWITZ. No international community supports what
you say. The only place you have any support is in the Freedom House.
Freedom House, despite that, has strongly urged ratification.
Mr. DORNAN. Well, the Organization of American States is sending
a team down.
Ambassador LINowTrrz. They are there now.
Mr. DORNAN. A CBS correspondent was physically injured because
he wanted to investigate the jail situation. It is ranked with Cuba as
a nation with the least amount of freedom.
Mr. METCALFE. Your time has expired. Mr. Bauman?
Mr. BAUMAN. I want to get back to increased tolls and the economic
impact.






44


As I understand it, Mr. Linowitz has been quoted as saying that
there is a probability or possibility that the tolls could rise as much as
25 to 30 percent to cover the new expenditures, and avoid a further def-
icit, if the treaties are enacted. That would be the largest single in-
crease in tolls since 1914.
I am sure that all of you are also aware of the fact that a number of
Latin American countries must depend upon the Panama Canal for a
large amount of shipping which they conduct in international trade:
Chile, 35 percent. Ecuador, 51 percent. Guatemala, 30 percent. Nica-
ragua, 76 percent. Peru, 21 percent. I will supply these figures for the
record.
Mr. BAUIMAN. Have any of the agencies of our Government--the
State Department or the Treasury-conducted an analysis of the im-
pact which the projected increases you have mentioned would have on
the cost of international trade, and also the impact on their economies?
That is part one of the question. The second part concerns Mr.
Vance's or Mr. Linowitz's statement made during our hearing last
August that there will be no increased taxes on the American people,
or other added burdens on the American taxpayer, according to a
phrase used by Mr. Vance.
Have you done any analysis of what the U.S. costs will be for the
average American, such as the 45 percent in Alaskan oil, if these tolls
have to go up under the new arrangements?
Do you have any statistical analysis, both as to the Latin American
countries' impact; and if not, would you do it?
Mr. CooPER. The short answer is yes. Studies have been made for
the canal company on the impact of toll increases on the United States
and other parts of the world.
As far as the general trade is concerned, a detailed study was done
on the Commission by the Panama Canal Company, I believe, several
years ago. They went into considerable detail, commodity by com-
modity. as to the impact on trade of an increase in tolls.
I am not aware that that has been translated into impact for the in-
dividual countries, like Ecuador, for example, but work was done on
the trade effects of toll increases and canal closures in various regions
of the world.
As far as the U.S. taxpayers are concerned, rough estimates have
been made of the implications given existing trade patterns of a toll
increase on the cost of living, and they are negligible, measuring below
tenths of 1 percent.
Mr. BAU-MAN. Yes, of course.
Mr. METCALFE. In regard to the question of tolls, Governor Parfitt
will address himself to it as well, as will other witnesses tomorrow.
Mr. BAUMAN. I would appreciate that.
Mr. Linowitz is already on record for that period.
Mr. MET'CAiI.FE. Thank you for yielding.
Mr. BAUMAN. This may be peripheral to you but central to American
investors.
The Republic of Panama has issued some millions of dollars of
bouds which, under the 1904 treaty are guaranteed by the United
States to the extniit that they would be paid in tlhe event of default of
the i(rlvi1ls which the United States achieves from the canal. It is also
mii iindersli (iding lniat despite the assiirances given to some of these
bondholders, the treaty is silent on this question, and that, as a result,






45

Standard & Poor dropped the rating from AA, which is pretty high,
to zilch-there is no rating. They have withdrawn it completely.
A number of American investors stand to lose a great deal of money
as a result of the absence of any mention of this in the treaty. Are you
familiar with it? What is being done about it?
Mr. COOPER. In general, yes. Your implication is misleading. Stand-
ard & Poor did not drop the rating; they suspended the rating. It goes
back to the question Congressman Snyder asked earlier.
The payments which the United States Panama Canal Company
makes to Panama, $2.3 million, is pledged against certain outstanding
Panamanian bonds. The question will arise what happens, assuming
the treaty is ratified and the Panama Canal Commission is set up to
replace the Panama Canal Company? What happens to those out-
standing pledges?
That is a matter for the Panamanian Government. I think they
would be well advised to continue to pledge the required portion of
the revenues to which it is entitled under the proposed treaty to back
those bonds. The issue can be settled to the satisfaction of Panama
and the bondholders.
Standard and Poor suspended its rating just because of the uncer-
tainty surrounding this issue until all the arrangements are made.
Mr. BATUMAN. But I want to complete the question.
Mr. METCALFE. We have the unanimous consent request of Congress-
man Snyder that all members will be permitted to submit written
questions in the future.
Mr. BAUMAN. Thank you.
Just following on the tail-end, you say that this is up to the
Panamanian Government to decide, but the United States Government,
by the original treaty, accepted this obligation, and much of this in-
vestment was made by American citizens. And we have been told this
treaty will not hurt American citizens.
It is at least incumbent upon the administration to, in some way, in-
demnify these bondholders if your treaty wipes out the value of their
investment. They now face the possibility of losing millions of dollars.
I do not know what position you might wish to take eventually on
that, but it should be considered.
Mr. COOPER. I am not aware that that is in the original treaty.
Ambassador LINOWITZ. It is not in the original treaty.
Mr. BAUMAN. I said it was associated with the original treaty.
Mr. COOPER. We will supply the details of this for the record. I was
not aware it was part of the original treaty.
[The following was received for the record.]
LOAN OBLIGATIONS
With respect to the portion of the present annuity payment pledged against
loan obligations of the Republic of Panama, the $500.000 payment formerly made
to the National Treasury of the Republic of Panama is currently paid, under
irreversable instructions given by the Republic of Panama to the United States.
to the Chase Manhattan Bank, fiscal agent for the Republic of Panama. in con-
nection with a 1962 bond issue which was privately placed with the Prudential
Insurance Company.
These assignments of annuity payments result from contractual arrangements
between the Republic of Panama, the fiscal agents, and the bondholders and are
not obligations of Panama under the existing treaty between Panama and the U.S.
Nevertheless, because the fiscal agency agreements and the instructions issued by
Panama to the United States refer to payments due under the 1955 Treaty, it
21-738-78-pt. 1---4








will be necessary to make certain technical changes in these documents to provide
for continuation of these payments if and when the 1977 Treaty becomes effective.
As I am sure you are aware, Panama's treaty income would increase sub-
stantially under the proposed Treaty and thus payments under that Treaty will
be more than ample to provide continued security for these bond issues. We have
been assured by the Embassy of Panama that its government has every intention
of guaranteeing the continued annual payment of funds necessary to secure the
bond issues.
Mr. COOPER. Panama, partly because of what I said in my response
to Congressman Oberstar, is very much interested in becoming a finan-
cial center. I find it would quash that whole plan, which is a long-
term plan, if Panama were to default on its bonds. It is not in Panama's
interest in the period where its revenues are expected to rise, not fall.
Panama-I am told informally that Panama-and this does not sur-
prise me-will honor the bonds.
Mr. BAUJMAN. Perhaps we can get the Soviet Bank to guarantee
the American investors' bonds in Panama.
Thank you, Mr. Chairman.
Mr. METCALFE. Thank you.
We have a quorum call.
Mr. CLAUSEN. Yes, I see that.
You have been very accommodating to me, Mr. Chairman. I would
like to ask one brief question. I have a great and long standing interest
in all of Panama, having been a cosponsor, along with Mr. Wright, on
the Darien Gap proposal.
I would like to know from the vantage of your insight with regard
to the statement made by General Torrijos that if it becomes necessary,
for treaty ratification he would resign. What, in your opinion, would
happen if he were to resign ? This is hypothetical.
I ask this question on the basis that I have some serious question
based on negotiations with a strong personality as opposed to institu-
tional negotiations.
Ambassador LINowrrTTz. I will give you an estimate. If he resigned
and stood for election, I think he would be elected in the country
right now.
But if he resigned and did not, and did it in a manner that was
graceful and indicated this was something he was doing for the
good of the country, I do not know that there would be any strong
reaction.
I think he made the suggestion when Senator Byrd and his group
was there indicating that he thought the approval of these treaties
was so important that he was willing to do whatever he personally
could to insure that he not impose any problems as far as ratification
is concerned.
Mr. CLAUSEN. I have been involved in the negotiation process con-
cerning the Marianas as well as Puerto Rico. I have had successes and
failures.
To what extent were you involved, to what extent did you involve
the legislative branch of the U.S. Government and in what precise
terms? I know you will be dealing with the chairman and all kinds
of ranking and minority members, but who was involved?
Aminbassador LINOWITZ. I would venture to say that we were in
touch with and consulted with 60 or 70 Members of the Senate, meeting







47


in small groulps with ihlemi in order to in form ti Ihem dui1ring thl-e (roulrse
of neg'ot i4t ions what anId howv we were doing.

A FTL'RNOOX SESSION

MAr. M.E'CALE. The afteIrnoon se.-:sion will c(Ol' ( to ord'lr.
We are especiall.v honored (toI have with i us 1taI the i [oiioI':Mhle
Elmer Staats, Comp(i1)troller (Gener al ot tie lnited1 i S1t ates. -eWe( re-
member that tle (ienerail Accountin ()Mlice, wli.,li IMr. Saats hecads.
has worked clo-vly within tlie sulhcoiiiiiitee in Ite 1w1pastt. In 197-5'. ('A()
did a landmark report on personnel policies in tihe (Caal Zone. Ti at
report paved tihe way for soiie need(Ied eimanges.
It is my understanding tibat iMr. t4lats ias mIade a per-onal recon-
naissance of the situation in Panama, and so lie (cones to ]s today
prepared to give us some pointers on how tihe proposed Panama ii canal
Commission can work most efficiently and how tihe interests of the
taxpayers of the United States can best be protected.
Mr. Staats.
[The following were the questions posed by the subcommittee prior
to the hearing. Responses to the questions are contained in the testi-
mony of the witness:]

QUESTIONS POSED THE GENERAL ACCOUNTING OFFICE
1. TYPE OF AGENCY
Article II, Paragraph 3, of the Panama Canal Treaty provides that the United
States shall carry out its responsibilities in reference to operation of the (Canal
"by means of a United States Government agency called thlie Panama Canal
Commission, which shall be constituted by and in conformity with the laws of the
United States of America." In order to accomplish the objectives for thle Conm-
miisiion set forth in the Panama Canal Treaty and to provide for the most ef-
ficient Canal operation, with what laws could the Commission be conformed and
what Government form or forms could the 'agency' take? In terms of require-
mnents and accountability for funds and decisions, what would be the ramilfica-
tions of the alternative forms?
2. PROPERTY TRANSFER
The P:iia jaia Canal Treaty and its accolmpanying documents set out some prop-
erty which will be transferred to the Republic of Panama upon the entry into
force of the treaty, and the transfer of other real and personal property is to
take place not later than the termination date of the Treaty. What implications
do these transfers have for the accounting" procedure in connection with U.S.
investment in the Canal enterprise, assets and liabilities, toll charges, and budg-
eting. What guidelines or methodology might be suggested in order to accoim-
plish the transfer of assets of real property, and personal property, in an ef-
ficient and orderly manner?
3. 17.S. GOVERNM1I:NT INVI-. 1 M iNT AND FUTURE CAPITAL OUTLAYS
Article XIII of the Panama Canal Treaty stipulates that the Canal "shall be
turned over in operating condition and free of liens and debts, except as the two
Parties may otherwise agree." In lighlit of the unrecovered U.S. investment in the
('anal (cited as about $736 million in the GAO 1975 audit of the lPanima (Canal
(Compipany/'Canal Zone Government) and the net direct invest-nent of thlie Unit
States iln the Panama 'ana:l ('omlpanly, which was about ,366 million in Fiscal
Year .1,97. what inpli,;' tions does tlhe provision have for tlhe accounting alnd
budgeting" decisions with r'lopect to recovery of Government investment and fu-
tuire capital ou tlaiys and liae incurrenee of debt by tlie proposed (Co mission?
What alto ernlatives are available to insure equity to thlie .S.. tIaxpayer as well as
efficient operation of thle (C:i ; ii connection within thee issues? For each of the
altern tiives, whiat assumpnltions underlie one or all of them?







48


4. DEPRECIATION POLICIES
The Panama Canal Treaty has many provisions which may impact upon the
depreciation policies of the Panama Canal Commission. For example, the United
States will have "use rights" in lieu of ownership of some assets associated with
the Canal-housing, for instance, is transferred to Panama but the U.S. continues
to have the right to use that housing for its employees for a period of time. Also,
since all assets of the U.S. agency called the Commission will be turned over to
Panama in the Year 2000, all assets could be viewed to have a definite economic
life. Given these and other treaty provisions, what are the alternatives for a
depreciation policy for the Commission and bow might such policies relate to the
basis for toll charges at the Canal?

5. PAYMENT FOR PROVISION OF PUBLIC SERVICES
Section 5 of Article III of the Panama Canal Treaty provides that "The Pan-
ama Canal Commission shall pay the Republic of Panama the sum of ten million
dollars ($10,000,000) per annum" for police, fire protection, street maintenance,
street lighting, street cleaning, traffic management and garbage collection serv-
ices. The Treaty also provides that the costs involved in these services would be
reexamined every three years after the Treaty goes into effect. What might be
suggested as some of the major alternatives for an agreement for provision of
services and insurance for the quality of services provided? What guarantee is
there that the Commission will pay an equitable fee to Panama for these services?

6. CONTINUITY OF POLICY AND ACCOUNTABILITY
The Panama Canal Treaty seems to make no stipulation as to the accounting
of Panama Canal finances except as insofar as it references certain obligations
of the Commission. What would be the implications of total assumption by the
Commission of the accounting policies now followed by the Pina ma Ca nal Com-
pany? If some of the major accounting and finance policies of the present Pan-
ama Canal organization are not followed by the Commission, what are some of
the possible ramifications of discontinuity?

7. RELATIONSHIP BETWEEN DEFENSE COSTS OF THE CANAL AND THE CANAL COMMISSION
Defense costs in connection with the Panama Canal have been -ecluded from
the present tolls base for a variety of reasons. Given the rationalT that has mo-
tivated the exclusion of these costs over the years, which resui< for excluding
defense costs would still apply under the new agreements, and w1'!.'h would not
apply?
8. COMPTROLLER GENERAL
What responsibilities does the Comptroller General of Pain'' :i. or bis equiva-
lent, have under the proposed Treaty? What are the responsibilities of the Comp-
troller General of the U.S. under the proposed Treaty?

9. ACCOUNTING AND AUDITING
Are there differences in the accounting and auditing procedures used by the
signatories which could pose difficulties?

10. REVENUE
Assuming the treaties are ratified, would revenue from tols l t ,resent rates
cover the cost of the operation of the Canal, together with f eifties an'd appur-
tenances related thereto, as required by the tolls formula enn'eil Iv b- ngress?

11. TOLLS
.i'he it ains been estimated thliat the provisions of the new f,qt;,,- would re-
quire increases in the rates of tolls of somewhere between 25 Plid -16 percent, or
po'.sihly more, and assuming increases in the rates of tolls of that r:lnge, what
effect would( increases of this magnitude have on the volume of traffic transiting
tlhe (',anal?






49

STATEMENT OF ELMER B. STAATS, COMPTROLLER GENERAL OF
THE UNITED STATES, ACCOMPANIED BY JOHN WATSON AND
FRANK M. ZAPPACOSTA, ASSISTANT DIRECTORS, INTERNATIONAL
DIVISION OF THE GENERAL ACCOUNTING OFFICE
Mr. STAATS. Thank you.
Mr. Chairman and members of the subcommittee: We welcome
this opportunity to discuss our observations on the proposed Panama
Canal Treaty and its financial and operational implications for the
canal.
The General Accounting Office, as you know, is responsible for au-
diting the financial operations of the Panama Canal Company and the
Canal Zone Government.. We are currently auditing their accounts
and financial statements for fiscal year 1976, the transition quarter,
and fiscal year 1977.
We have had a long involvement with these entities, dating back
to the establishment of the Panama Canal Company in 1951 as a cor-
poration subject to the requirements of the Government Corporation
Control Act. Because of our statutory auditing responsibility and long
relationship with the Canal Company and government we have fol-
lowed the treaty negotiations with great interest. Now that the treaties
have been signed and specific future functions and activities of the pro-
posed Panama Canal Commission have been outlined, we plan, as part
of our current audit, to analyze the problems involved in the imple-
mentation of the treaties.
Governor Parfitt has established a treaty planning committee to
guide and coordinate planning for treaty implementation and under
the direction of the group, a number of studies are now underway to
determine the specific organizational, personnel, and financial impact
of the treaty provisions. We have asked for and Governor Parfitt has
agreed to provide these studies as they are completed. Until we receive
and have an opportunity to analyze the studies we are unable to make
any definitive statements on the financial viability of the proposed
Panama Canal Commission. Nevertheless, based on our auditing ex-
perience and understanding of the treaty, we can highlight some of
the issues to be resolved in implementing the Panama Canal Treaty.
In our testimony today we will not attempt to address the impact
of the treaty on the U.S. military forces in Panama or the $345 million
economic and military assistance package over the next 10 years which
has been arranged outside of the treaty.
The unresolved implementation issues include:
The form of U.S. Government organization that the proposed Pan-
ama Canal Commission would take; provision for external audits;
transfer of property to Panama, recovery of U.S. investment in the
canal, depreciation policy and future capital outlays; treatment of
interest currently paid to the Treasury on the interest bearing invest-
ment of the United States; treaty payments to the Republic of Pan-
ama; resolution of Panama's debt for past services; increased benefit
payments to employees for repatriations, early retirements, and reloca-
tions; and the impact of the treaty on toll rates.






50


Form of U.S. Government organization: The treaty is silent as
to what form of organization the proposed Commission would take-
Government corporation or independent agency.
The Panama Canal Company is a wholly owned U.S. Government
corporation managed by a Board of Directors appointed by the Sec-
retary of the Army. The Canal Zone Government is an independent
U.S. Government agency. The budgeting and accounting functions of
the Company are subject to the Government Corporation Control Act
(31 U.S.C. 841 et seq.) and the government is subject to the Budget
and Accounting Act of 1921, as amended.
Under the provisions of the Panama Canal Treaty, the Canal Com-
pany and the government would cease to exist. Article III, paragraph
3 of the treaty provides for the establishment of a "... United States
Government agency called the Panama Canal Commission, which
shall be constituted by and in conformity with the laws of the United
States of America."
The Commission would be supervised by a Board composed of five
U.S. citizens and four Panamanian nationals. Through December 31,
1989, the Administrator of the Board would be a U.S. citizen and
the Deputy Administrator a Panamanian citizen. These roles would
reverse on January 1, 1990, and continue until the termination of the
treaty at noon, Panamanian time, December 31,1999.
The implementing legislation has not yet been presented to the Con-
gress but we understand that the administration prefers to stick as
closely as possible to the current corporate form. In September, the
Secretary of the Army recommended to the Senate Foreign Relations
Committee that the future canal organization continue to be operated
under the provisions of the Government Corporation Control Act.
We believe that this would be appropriate since it would preserve the
businesslike accounting and budgeting principles which have success-
fully served the canal organization for over 25 years.
The distinguishing budgeting, accounting, and auditing features of
a Government corporation are: Business-type budgets and mainte-
nance of accounting records in accordance with commercial corporate
accounting principles and standards and audit by the General Ac-
counting Office with a mandatory report to Congress.
Information required for the business-type budget includes a state-
mfnt of financial condition, statement of income and expense, analysis
of surplus or deficit and statement of source and application of funds.
Our audit of Government corporations is on a reimbursable basis
and is performed in accordance with the principles and procedures
applicable to commercial corporate financial transactions. Unless spe-
cifically authorized by law, Government corporations cannot engage
private accounting firms for audits.
Provision for external audits: A related issue to the type of U.S.
Government entitY the proposed Commission would take concerns the
subject of external audits. The treaty documents do not discuss this
issue. Nevertheless, we presume that, unless specifically precluded
by law, the General Accounting Office will continue to be responsible
for auditing the, accounts and operations of the canal organization. It
is not clear what role, if any, my counterpart, the Comptroller Gen-
er:il of the Republic of Panama. would have under the proposed
tireAty. IHowever, we believe, that it would be appropriate to explore






51

ways of cooperating with the Comptroller General of Panama con-
cerning the audit.
Transfer of property, U.S. investment and depreciation: I would
like now to discuss some of the financial implications of the treaty
provisions which would cause major changes in the valuation of
U.S. assets, capital-generating depreciation costs, other costs and
revenues.
A fundamental economic aspect of the treaty that needs to be ad-
dressed by the Congress is the policy question of whether the invest-
ment of the United States should be recovered over the life of the
treaty. This decision will have a profound effect on the financial opera-
tions of the new organization, the toll rates and the taxpayer.
At the time of our last audit for the fiscal year ended June 30, 1975,
the United States had an unrecovered investment in the Panama Canal
enterprise of $736 million. According to unaudited figures, this amount
increased to $752 million by the end of fiscal 1977. I should note that
these amounts do not include investment in military facilities in the
Canal Zone. Under the provisions of the Panama Canal Treaty, the
United States will turn over to Panama all its real property, including
nonremovable improvements thereon in accordance with a specified
timetable, with the final transfer upon expiration of the proposed
treaty.
There is currently no systematic method for repaying the invested
capital of the Canal Company. The Company repays the invested
capital through dividends only when the Board of Directors deter-
mines that funds exceeding working capital and capital improvements
requirements are available. Since its incorporation, the Company has
repaid $40 million in dividends; the last such payment was in 1969.
The invested capital of the Canal Zone Government, however, is being
systematically repaid. The cost of operations and capital programs
are initially financed by appropriations. The government charges in-
dividuals and other government agencies for services and these reve-
nues are paid into the Treasury. In addition, the difference between
these revenues and expenses including depreciation, or the net cost of
operations, are paid into the Treasury by the Company. Therefore,
the entire costs, including the capital investments, are being recovered.
We have been concerned for some years about the repayment of the
U.S. investment in the Canal Company. This concern led us to rec-
omminend for many years that certain previously undepreciated assets
such as titles, treaty rights and excavations be depreciated and that
consideration be given to using the amounts recovered through inclu-
sion of the depreciation of these assets in the toll rate structure for
minimal repayments of the U.S. investment. Depreciation on these
assets began on July 1, 1973, but the Company's capital requirements
have precluded paying any dividends to the Treasury since that time.
The United States could recover its investment by increasing de-
preciation charges sufficiently above the amounts needed for capital
expenditures and raise toll rates to recover this additional deprecia-
tion. This would permit repayment of dividends to the Treasury
during the lifetime of the treaty. This could be accomplished by ad-
justing annual depreciation charges to coincide with the provisions of
the treaty relating to the transfer of assets.






52


To recover the existing U.S. investment over the next 22 years would
require additional depreciation charges of over $25 million each year
in excess of the new capital investment requirements. While theoreti-
cally possible, these actions may not be economically sound because
of the impact on toll rates and possible adverse effect on traffic and
revenues.
For the proposed Commission to be financially self-sufficient, toll
rates would have to be raised to cover these increased depreciation
costs. The potential for increasing toll rates and the sensitivity of
canal traffic to toll increases is now under study by a private consult-
ing firm, International Research Associates, engaged by the Canal
Company. The results of this study are not expected until January
1978. However, based on previous toll studies, it is doubtful that toll
rates could be successfully raised to recover both the new payments to
Panama and increased depreciation charges designed to recover the
past U.S. investment in the canal.
In addition to recovering past U.S. investment in the canal, we
are also concerned about the impact of the treaty on future capital
outlays. Article XIII of the treaty requires that upon treaty termina-
tion the United States turn over the canal "in operating condition
and free of liens and debts." This transfer would involve "all real
property and nonremovable improvements" used by the United States
during the treaty and the "equipment related to the management,
opera t ion, and maintenance of the canal."
It is obvious that the United States would have to continue to make
some new capital investments during the lifetime of the treaty to meet
its treaty obligations and to continue operating the canal in an effi-
cient manner. It is equally obvious that. if the treaty is ratified, new
capital budgets should receive close scrutiny by the administration
and Congress to assure that only essential capital investments are
made.
INTEREST PAYMENTS TO THE U.S. TREASURY
Although the Panama Canal Company is not required to systemati-
rally repay the U.S. investment in the Company, it is required to pay
interest to the Treasury on the interest-bearing U.S. investment which
was about $319 million as of June 30,1976.
According to Company figures, interest payments due in fiscal year
1976 and the trans-ition quarter were calculated at $16.7 million and
$1.4 million, totaling $21.1 million. Interest payments amounted to
only $11.8 million; the difference represents the net operating loss of
flhe Company which must be paid from future revenues. Total interest
payments to the Troeasury since the establishment of the Company
through September 30,1976, have been about $272 million.
Although the legislative package for treaty implementation has not
'vet. )(en presented, we understand that the administration proposes
to relieve the Commission of the statutory obligation to pay interest
to the. Treasury. This proposal would improve the cash position of
the new Commission and relieve some of the upward pressure of costs
on toll rateN. but it would also reduce Tresnrv receipts and impact on
the overall UT.S. budget. It will be necessary for the Congress to eval-
uate. this tradeoff when considering implementing legislation.






53


TREATY PAYMENTS TO THE REPUBLIC OF PANAMA
Article XIII of the treaty requires the United States to pay $40 to
$60 million annually to the Republic of Panama for the use of the
canal as follows:
Thirty cents per Panama Canal net ton for each tollpaying vessel
transiting the canal each year. This rate is indexed to the U.S. Whole-
sale Price Index for total manufactured goods and would be adjusted
biennially, beginning 5 years from the entry into force of the treaty.
The current estimated value of this payment is $40 million annually,
a fixed annuity of $10 million each year; and an annual amount of up
to $10 million per year if canal operating revenues exceed expendi-
tures. If revenues do not produce this surplus in any year, the unpaid
balance would be paid from future operating surpluses in a manner to
be mutually agreed.
These payments would replace the $2.3 million annuity currently
paid to Panama under the 1955 treaty. The Panama Canal Company
pays about $500,000 of this annuity, and the remaining $1.8 million is
paid through appropriations to the Department of State.
The 30 cents per ton and fixed annuity payments under the proposed
treaty appear clear cut. However, a question has been raised whether
the additional annual payment to be paid if operating revenues ex-
ceed expenditures constitutes a fixed liability of the proposed Commis-
sion. If it does, then at termination of the treaty it could require a
lump-sum payment of Panama of up to $220 million if no payments
were made during the lifetime of the treaty. On the other hand, if it
is a fixed liability, then the Commission could include it as an annual
expense in its budget and set toll rates designed to recover this addi-
tional expense. We await the implementing legislative package before
forming an opinion on this issue.
Mr. METCALFE. May I interLrupt you and say there is a rollcall vote
on the floor? We would like to recess and pick up your testimony on
page 12 when we come back.
We will recess for 15 minutes.
[A brief recess was taken.]
Mr. METCALFE. The recessed mineeting of the Subcommittee on the
Panama Canal will come to order.
Mr. Staats, if you can, start where you left off.
Mr. STAATS. Yes, Mr. Chairman.
We were discussing the various payments that would be made under
the treaty provisions to the Republic of Panama, and I was at the top
of page 12 referring to the last of these payments.
Article III, section 5, of the treaty stipulates another payment to
Panama which has raised questions. According to this provision, the
Commission would pay the Republic of Panama $10 million a year
for the costs involved in providing the following public services in the
canal operating and housing areas: police, fire protection, street main-
tenance, lighting and cleaning, traffic management, and garbage col-
lection. The treaty is not clear as to whether payments for the first 3
years are a flat $10 million a year or require a determination of the
actual costs incurred by the Republic of Panama. After 3 years, the
treaty appears to relate payments to costs. It states: "The costs in-






54

evolved in furnishing said services shall be reexamined to determine
whether adjustment of the annual payment should be made because
of inflation and other relevant factors affecting the cost of such
services."
The treaty documents are silent about how these costs are to be
calculated. The treaty also does not contain specific provisions con-
cerning the quality of services to be provided. The implementing
agreement for article III of the treaty, however, does provide for the
establishment of a United States-Panamanian Coordinating Commit-
tee for consultation and coordination on matters concerning the
housing areas. On this problem, this committee could possibly serve as
a forum for resolution of any problems concerning the quality of
public services to b6 provided by Panama.
It makes a great deal of difference if you are talking about current
U.S. costs or if you are talking about different costs which would be
future costs for the same services., and you have a third possibility
which would be the kind of services which the Panamanian Govern-
ment should provide for the arrangements. You could get three figures
depending upon the concepts adopt ed.
We believe this is a matter which should be resolved in the imple-
menting legislation been use it is a large amount of money.

PANA:%MA7S DEBT FOR PAST SERVICES
As of September 30, 1977, the. Republic of Panama owed the canal
organization over $8.4 million for past services:. Approximately $4.8
million of this total wais for the operation of Palo Seco hospital, a fa-
cility for the treatment of Hansen's disease. The treaty documents pro-
vide that the United States continue to provide certain utility services
such as power, water, and services in the canal area and that the Com-
mission would be reimbursed for its cost in providing such services.
There is no mention in the treaty of Panama's debt for past services.
This is an issue which should be resolved either through a lump sum
payment to the United States or as a credit against U.S. treaty pay-
mients to Panama.

BENEFIT PAYMrENTS TO CANAL E-3DPLOYEES
TlI, proposed treaty would have far-reaching effects on the em-
plot :'s of the c;nail or.,4,naization. and would require significant, addi-
tional costs for repatriations, relocations, and early retirements. In
September, Governor Par'fitt testified before the Senate Foreign irela-
tions Committee that on the effective date of the treaty the work force
would be reduced by between 5,000 and 6,000 employees, of which be-
tween 2,100 and 2,400 would be transferred to thel Department. of De-
fense. An additional red(luction of 500 employees would occur by about
,0 i months later with the phlaseout of rcenainilic governmental activi-
ties and further reductions would miad(e tlhroug'hout the remaining
life of tlhe treaty as more Panamanian citizens are employed.
F"ilier thisi month when I was in Panama. Governor Pa.rfit.t ex-
p-(,(l liis conicein to me about the moraile and fair treatment. of the
e;1,1l labor force. Tie is concerned both with maintaining an adequate
level of -crvics iand benefits for all employees, and providing equitable






55

benefits for those employees who lose their jobs through a reduction in
force.. One of the proposed benefits is an early optional retirement pro-
gram for present employees. Another proposal is priority job place-
ment program with other U.S. Government agencies. In addition to
new programs, the canal organization has existing obligations to its
employees for repatriations and accrued leave.
The details and costs of a reduction in force have not vet been pre-
sented. When they are available we can better judge whether the pro-
posed Commission will be able to bear the added expenses or whether
appropriations will be necessary.

IMPACT OF TREATY ON TOLL RATES
Under existing legislation (2. C.Z.C. sections 62 and 412) the Com-
pany is expected to (1) recover all costs of operating and maintaining
its facilities, including depreciation ; (2) pay interest, to the U.S.
Treasury on the U.S. Government's net direct investment in the Com-
pany; and (3) reimburse the U.S. Treasury for (a) annuity payments
to the Republic of Panama. under the convention of 1903, as later modi-
fied and (b) the net costs of operating the Canal Zone Government, in-
cluding depreciation on fixed assets. Tolls are set to recover these costs,
not to maximize revenue by charging what the traffic will bear. The
l)roposed treaty is silent on the subject of toll-setting policy, but we
p)resumne that the present principle of recovering only costs will
continue.
We have not seen the financial picture of a canal organization re-
structured to the treaty provisions but indications are that an increase
in toll rates will be required. It has been estimated that current. toll
rates would have to be raised between 25 percent and 40 percent to
generate sufficient revenues for the estimated $50 to $GO million in an-
mnual payments to the Republic of Panama as required by the treaty.
More precise estimates will require analysis of the financial data wvlich
the Canal Company is developing.
As I have indicated, there are a number of financial issues which
must be resolved before we know what costs the proposed Commission
must cover through tolls. Before toll rates are set, itis also necessary to
know the revenue-generating potential. As I mentioned before, Inter-
national RPesearch Associates is now preparing traffic projections, sen-
sitivity analyses of the impact of various rate increases and estimates of
maximum obtainable revenues. We plan to take a close look at this toll
study and the Company's financial data. At this time, however, we can-
not make an informed statement on the level of future toll rates.
This completes our presentation. We will be happy to respond to
any questions you may have.
Mr. METCALFE. Thank you, Mr. Staats.
I take it, it is your feeling that the financing of the Panama Canal
operations has worked well over the years and you would like the
Canal Commission to follow in the footsteps of this; is that correct?
Mr. STAATS. That is correct.
We think the same pattern and the same concept of corporate ac-
counting should be continued.
Mr. METCALFE. Thank you.






56

Very succinctly, do you have a position as to whether the assets or
liabilities of the Panama Canal Company or Canal Zone Government
should be assumed by the Commission?
Mr. STAATS. Do you want to respond to that, Mr. Zappacosta ?
Mr. ZAPPACOSTA. Basically, what should be done is a complete inven-
tory taken of the assets that are to be transferred under the treaty
provisions. Once the Congress makes a policy determination whether
or not the United States is going to recover its investment, then you
would either transfer them over at historical costs which are the
present costs on the Canal Company's records, or it can be advocated
that you transfer them at current value.
However, I believe that we must consider what you are going
to gain through a reappraisal of assets. It is almost an accounting
nightmare to reappraise the assets to bring them up to current value.
This was done in 1951 and took an untold amount of accountants and
engineers and what have you to reappraise it.
As far as we can see. a starting point would be to take an inventory
of the assets now on the books to make sure that they do, in fact, exist
and in what condition they exist.
Mr. METCALFE. Thank you very much.
I would like to thank you, Mr. Staats, Mr. Zappacosta and Mr.
Watson for your testimony. Thank you very kindly.
Mr. STAATS. Thank you.
Mr. ZAPPACOSTA. Thank you, Mr. Chairman.
[The following questions and answers were supplied for the record
and may be found in appendix A.]
Mr. METCALFE. We will now hear from the Secretary of the Army,
the Honorable Clifford Alexander, Jr.
Before proceeding, I would like to ask unanimous consent that any
member or any staff member will have the privilege of submitting
any questions in the future.
Hearing no objection, that will be the order.
It is now my pleasure to introduce to the subcommittee resourceful
leaders of the executive branch, Secretary of the Army, the Honorable
Clifford Alexander, Jr., and the Governor of the Canal Zone, General
Parfitt.
This is the first opportunity we have had to receive testimony from
the Secretary who, as you know, is the distinguished sole stockholder
of the Panama Canal Company and supervisor of the Canal Zone
Government's affairs.
Mr. Secretary, you have become interested in Panama Canal affairs
at a time when we are all at the crossroads. You were not a part of the
previous administration, so only recently have we had the benefit of
your thinking.
Please proceed as you wish, Mr. Secretary, and Governor Parfitt as
well.

STATEMENT OF HON. CLIFFORD L. ALEXANDER, JR., SECRETARY
OF THE ARMY, AND MAJ. GEN. H. R. PARFITT, GOVERNOR OF THE
CANAL ZONE
Secre(tary ALEXANDER. Mr. Chairman, members of the Panama
Canal Subconillmittee of the House Committee on Merchant Marine






57


and Fisheries, I appreciate having this opportunity to appear before
you to discuss my views on the economic and financial aspects of the
proopsed new Panama Canal Treaties and their effects on future canal
operations.
Although I serve as head of the Department of the Army, as you
have indicated, I have a special responsibility-exclusive of that posi-
tion-for overseeing the effective and efficient operation of the Panama
Canal. As the direct representative of the President on Panama Canal
Company and Canal Zone government affairs, I supervise the adminis-
tration of the Canal Zone government and act as the stockholder of
the Panama Canal Company.
While I strongly identify with those who believe that the canal is
and will continue to remain a valuable asset in the foreseeable future,
I am equally firm in my support for revamping our treaty relationship
with Panama.
Through the establishment of a new treaty relationship with
Panama, I believe our country has shown that it can establish a sensible
and reasonable relationship with a nation that is smaller than ours:
through the proposed treaties, we have shown that we can build a
cooperative relationship that meets the needs of our fellow human
beings, while looking out for our own interests. The proposed treaties
would accomplish this end.
They provide our country with an excellent opportunity to do justice
to our real accomplishments in Panama, protect the legitimate needs
of the United States and international shipping, and rightly take into
account the aspirations of the people of Panama. All this can be
achieved in a spirit of cooperation and accommodation that has pre-
viously been known on few occasions in the history of United States-
Latin American relations.
What four administrations-Democrat and Republican alike-have
hoped to accomplish is a cooperative partnership with Panama that
will foster and enhance the successful canal operation that interna-
tional shipping has come to expect.
I would like to present a short statement outlining my views of the
future operation of the canal. Governor Parfitt will provide additional
and more detailed data. After the Governor's presentation, we will be
glad to respond to any questions you might have on either the current
or proposed operations of the canal.
Over the past 63 years, the Panama Canal organization has provided
a valuable service to world shipping: this exceptional service has been
recognized by both Members of Congress and by the users of the canal.
Under the new treaty, we should continue to operate the canal, utilizing
to the greatest extent possible those proven procedures which have been
accepted by the Congress and the canal users. Any deviations from
proven practices and established managerial procedures should be held
to the minimum necessary to conform to the letter and spirit of the
treaty. This is highly desirable and certainly achievable under this
new treaty.
I would like to briefly address several general aspects of canal
operations under the proposed treaties.
Six months after the exchange of ratifications, the Panama Canal
Company will be replaced by a successor agency to be known as the
.Panama Canal Commission.






58


There are ongoing studies within the administration to determine
the most effective relationship of the new Panama Canal Commission
to the executive branchli of the U.S. Government. While I do not want
to prejudge the outcome of those studies, I can present to you some
of the organizational considerations that I feel have proven valuable,
and will remain important, to the continued success of the canal's
operations in the future. They are as follows:
(1) Insure that the organizational arrangement remains compati-
ble with the philosophy that revenue must cover all costs of canal
operation and maintenance.
(2) Preserve unity of effort as long as the United States has pri-
mary responsibility for operation of the canal. Both authority and
responsibility should follow clear direct lines from the Administrator
to the President of the United States who retains ultimate
responsibility.
(3) Facilitate maximum cooperation between the agency respon-
sible for operating the canal and the military elements which will
provide certain support services to that agency, as well as defend the
canal and the agency itself, if necessary.
(4) Establish an organizational arrangement that remains com-
patible with the international utility concept of operation-that the
agency exists to serve the shipping interests of all nations.
(5) Insure that the Congress has a continuing role in overseeing
the operation of the canal.
(6) I would also like to recommend that the future canal organi-
zation continue to operate under the provisions of the Government
Corporation Act, thus enabling the canal's operators to utilize busi-
ness and management practices which will best provide efficient opera-
tions at minimum costs to the user.
As in the past, the new Canal Commission will not be dependent
on U.S. tax dollars and will continue the longstanding system of self-
sufficiency. The Panama Canal Commission will also maintain the
s:naiie broad mission as the current Panama ('anal Company: the
movement of ships between the oceans in an effective, efficient, and
nondiscrimninatory manner.
The Commission will also control the lands and waters necessary
to transit ships, and will not be precluded from conducting activities
which are directly related to that function; however, the Commission
will not perform certain supporting activities now conducted by the
Canal Company such as commercial port operations, commercial
b)unlkering, commercial ship repair, and retail sale of goods and
services.
Although the existing Panama Canal Company retail stores will be
discontinued, U.S. citizen employees of the Commission will be au-
thorized use of military exchanges and commissaries for the first 5
years of the treaty. I have proposed that after that period, additional
compensation be provided to these employees to offset associated in-
creases in their cost of living.
How the canal's finances are structured is critically important to
the objective of the new treaty-insuring successful canal operations.
"lioro will undoubtedly be an increase in toll rates at the beginning
of the, treaty to meet necessary increased payments to Panama, and
to provid(le sufficient funds to maintain an effectively operating canal.









The toll increases will also insure that there are adequate revenues
available to cover additional costs at the outset of the new United
States-Panama relationship.
While Governor Parfitt will discuss in more detail the exact mecha-
nism by which tolls can be increased to meet necessary expendi-
tures, I want to reaffirm that in subsequent years, should the treaty be
approved, I would expect the new Panama Canal Commission to hold
tolls to the minimum necessary to meet costs. Such a policy will help
to insure that the economies of the canal-user nations will not be
harmed.
As the President's special designate on canal affairs, I will strive
to carry out those practices and principles I have outlined in my
statement. I am also prepared to continue serving as the stockholder
and Board Chairman of the new Panama Canal Commission should
its organization be structured in such a fashion.
While I have made general reference in my statement to particular
issues of interest to this committee, I have provided written and
more detailed responses to the specific questions your committee has
asked me to address. These responses are attached to my formal
statement.
I would now like to have Governor Parfitt provide you with some
details of the technical aspects I've raised.
[The following was supplied for the record:]
QUESTIONS FOR THE SECRETARY OF THE ARMY
1. Question: As the Secretary of the Army, designated by the President as
the sole stockholder of the Panama Canal Company and supervisor of the Canal
Zone Government, what responsibilities do you exercise that relate to the financial
affairs of the Panama Canal, and what do you recommend that relationship to
the Canal be under the proposed Panama Canal Commission? (Please include
the role as Chairman of the Board of Directors in this discussion.)
Answer: As stockholder of the Panama Canal Company I appoint the members
of the board of directors, making certain that several members have financial and
economic expertise. The Boards' primary activity is, of course, to manage the
principal affairs of the enterprise. In order to assist the Board in accomplishing
its financial oversight responsibilities, a budget and finance committee is ap-
pointed. Since I have elected to serve as Chairman of the Board, I possess a
single vote on all financial matters brought before the Board, as do other
members.
I have designated the Acting Assistant Secretary of the Army (Civil Works)
to assist me in carrying out my functions with respect to the Canal Zone Gov-
ernment. He, among his other responsibilities, reviews the finances of the Canal
Zone Government, requests studies of various financial issues and, along with
the Governor, keeps me informed of budget matters concerning this agency.
Finally, I am responsible for the coordination of personnel policies and activi-
ties of the various agencies in the Canal Zone. This includes the authority to
establish and change compensation schedules, and to issue regulations controlling
the payment of the tropical differential. To assist in this function the Canal
Zone Civilian Personnel Policy Coordinating Board has been formed. This Board,
chaired by the Acting Assistant Secretary of the Army (Civil Works), consists
of the Governor of the Canal Zone and the Commander-in-Chief United States
Southern Command.
With respect to the future relationship of the Panama Canal to the United
States Government, I would make three basic points. First, the individual or
agency that supervises the Canal must retain complete authority along with
responsibility for operations of the Canal enterprise. We should not fragment
either the authority or responsibility. Second. any plan which is developed must
recognize and be compatible with the responsibilities which the Department of
Defense will exercise in Panama during the life of the treaty i.e., Defense of the







60

Canal, operation of schools, hospitals, etc.). Finally, as Secretary of the Army
I remain available to continue the Panama Canal functions which I currently
perform. I do not seek that responsibility and if a determination is made that
other relationships are more suitable, I would support such a plan if Department
of the Army military interests are properly protected.
Question: Should the U.S. Government have a stockholder or sole stockholder
in the Panama Canal Commission?
Answer: I would propose that the current United States Government Corpo-
ration concept be continued for the Panama Canal Commission and that the
President or his representative be designated the stockholder of the Panama
Canal Commission.
2. Question.: What will be the cost of the additional compensation (that you
have recommended) for Canal employees in order to make up for the discontinu-
ance of authorization to use military exchange facilities?
Answer: The additional cost would be computed based upon the difference be-
tween prices which employees are charged at military retail sales facilities in
Panama and those that would be charged in Republic of Panama sales outlets
for comparable items. It will be necessary to make a comparative analysis shortly
before implementation of the cost of living allowance (five years after the ef-
fective date of the treaty) in order to establish its exact amount.
Question: Will there be any reductions in cost to the Government or Commis-
sion that will offset the additional compensation?
Answer: Current Panama Canal Company retail operations incur annual losses.
The elimination of this deficit would substantially offset the additional finds
required to provide a cost of living allowance.
Question: Would such compensation be paid by tolls or out of appropriations?
Answer: Tolls.
Question: Who would be authorized to receive the compensation?
Answer: This additional compensation would be authorized to United States
citizen employees of the Panama Canal Commission and non-United States citi-
zen employees recruited from outside the Republic of Panama who are in the
employment of the Commission at the time Post Exchange, Post Office and
commissary privileges are lost.
3. Question: Under paragraph 9(a) of Article X of the proposed Treaty "the
right of employees to negotiate collective contracts with the Panama Canal Com-
mission is recognized" in accordance with the U.S. forms of collective bargain-
ing. Recognizing the Commission will be a U.S. Government agency, what effect
do you believe such a right will have on Canal Commission expenses?
Answer: Although negotiated labor agreements are normally expected to be
more costly, we would not expect to see a significant increase in expenses if the
right to negotiate "collective contracts" under EO 11491 were extended to em-
ployees of the Panama Canal Commission. It should be noted, however, that
if it were determined that wages were to be negotiable, the cost to the Commis-
sion as a result of collective bargaining could be substantially increased.
4. Question: How will the proposed Canal treaties and understandings affect
the principles for award of damages in connection with accidents in the Canal?
Is it anticipated that there will be any change in costs to the Canal enterprise
for any changes made?
Answer: In the case of vessel accidents occurring anywhere in Canal Zone
waters outside the Canal locks, the Commission would be required to pay damages
on all non-contractual claims for injuries caused by the negligence of Commis-
sion employees in the performance of official duties. This is the same standard
to which the Panama Canal Company is presently held in such cases. As for ves-
sel accidents occurring in the Canal locks, under current law, the Company is
a virtual insurer and such condition would generally continue under the new
treaty.
The loss of jurisdiction of the U.S. District Court in the Canal Zone over
civil esf, would mean that vessel accident claims against the Commission would
have to be tried in the United States. While that situation might result in in-
creascd costs (for transporting witnesses back and forth, etc.), such expendi-
tures could he limited by legislation vesting jurisdiction over such cases in a
dlistrict in the southern United States, and adopting a statute of limitations
governing vessel acr-cident suits against the Commission patterned after that
contained in the Federal Tort Claims Act. The latter measure would serve to
increase significantly the number of claims which could be settled without suit
being filed.






61

5. Question: What changes in special forms of employee compensation do you
recommend under the proposed treaty package, and what financial impact would
these recommendations have on the financing of the Commission and the obliga-
tions of the United States Government?
Answer: Special compensation paid to Commission employees in the future
should be sufficient to provide an adequate retention and recruitment incentive.
This incentive could be made available in a number of ways, including the pay-
ment of a tropical differential, a foreign area cost of living allowance, etc. The
Commission should be authorized to develop incentives in the forms and amounts
necessary to insure the recruitment and retention of those critical skills not
available in Panama.
It is virtually impossible to determine the exact amount of special compensa-
tion which would be required as an employment incentive. It should, however,
be held to the minimum necessary to accomplish the desired recruitment and
retention objectives. I would hope that we could retain the current working and
living conditions and that additional special compensation would only be re-
quired to offset the loss of certain service facilities.
Governor PARFIrTT. Mr. Chairman and members of the committee,
you have asked that I address the financial and economic ramifica-
tions of the proposed Panama Canal Treaties, and I am pleased to do
so. I am sure that you can appreciate-given the complexity of the
canal organization-that it is an enormous task to quantify the impact
of the treaty on operations. To this end, we are conducting a major
study throughout all levels of management to determine the form the
new organization should take and the costs associated with it. At the
same time, in conjunction with the State Department, we are having
an economic study performed to forecast potential canal traffic and to
determine the impact on canal traffic of various toll rate increases that
may be necessary under the new treaties. Since the two studies will
not be available until early next year, the figures on which we base our
analysis and conclusions today are tentative and subject to later modi-
fication.
I have appended to my statement for the record answers to the spe-
cific questions contained in your letter of invitation. My oral testi-
mony will respond more generally to the broad issues involved.
First, however, I would like to outline key elements of the current
financial and economic situation which may be helpful in assessing
treaty impacts.
CURRENT SITUATION
The present financial structure of the Panama Canal Company and
Canal Zone Government dates back to the Panama Canal Reorganiza-
tion Act of 1950, which became effective at the start of fiscal year 1952.
The Company has a corporate structure and maintains business-type
accounts. Budgets are submitted for review and approval by the Office
of Management and Budget, and the Congress, and our accounts are
audited by the General Accounting Office.
In contrast, the Canal Zone Government operates under what you
might call "normal" Government accounting procedures. Appropria-
tions are requested and obtained annually to cover both operations and
capital programs. Operating appropriations are repaid to the U.S.
Treasury during the course of the year, through revenues and by the
Company as the net cost of operation of the Canal Zone Government.
Capital appropriations are paid back to the Treasury over the life
of the assets.


21-738-78-pt. 1- 5






62

The underlying principle of the Company's statutory financial plan
is that the canal enterprise will operate on a self-sufficient basis. To
this end, Company costs are prescribed to include normal costs of op-
eration and maintenance, interest on the net direct investment of the
United States, a portion of the annuity to Panama, and the net cost
of operation of the Canal Zone Government.
Undergirding this plan are several important and farsighted meas-
ures that were included in the Reorganization Act of 1950, as
amended, to provide for cash in time of extraordinary need. These
measures provide authority for the Company to:
(a) Borrow up to $40,000,000 from the U.S. Treasury (interest
would be paid).
(b) Obtain appropriations to cover losses (no interest would be
paid).
(c) Obtain appropriations for capital needs (no interest would be
paid). .
(d) Defer payment to the Treasury for interest on the net direct in-
vestment, for the net operating cost of the Canal Zone Government,
and for the Company's share of the annuity to Panama to the extent
that earnings are inadequate to make such payments. (No interest
would be paid, but repayments are required to be made from subse-
quent earnings.)
The system has worked well. The Canal Company has been self-sus-
taining and operated at no cost to the U.S. taxpayer. Since 1952, it
has repaid $40 million of the U.S. investment and has financed $315
million of capital replacements and improvements from internally
generated funds and, in addition, has paid $269 million in interest to
the U.S. Treastiury on the net direct investment.
This has not been accomplished without problems, however. As an-
ticipated, there have been some years when the canal operation has
not been able to produce revenues sufficient to cover all of its costs.
Such was the case in the period fiscal year 1973 through the fiscal year
1976 transition quarter, when we experienced high inflationary costs
along with a sharp reduction in traffic resulting from termination of
the Vietnam war, a worldwide recession, and the reopening of the Suez
Canal. During this period, the Company's losses totaled $30.6 million.
Unfortunately, there are factors which limit our ability to cut costs
in response to such a decline in workload. Of the Company's total
costs, approximately two-thirds are fixed; only one-third are variable,
that is, costs that can be associated with the transit of individual
ships. For this reason, we cannot necessarily cut our costs 10 percent
to respond to a 10-percent drop in the workload. Thus, the response to
a reduction in transits from a high of over 38 oceangoing commercial
ships a day to less than 33 a day had to be more than a corollary re-
duction in directly related costs. It required an extensive austerity
program in all areas of the Company and government, an increase
in rates for all services rendered, and two toll increases. As a result of
all thlse measutires, we were able to turn the financial results around,
and for fiscal year 1977 we realized an unaudited net margin of $5.4
miillion. The losses in fiscal year 1973 through fiscal year 1975 were
absorbedl by the Company, and its cash resources were diminished to
tllat extent.






63


However, in fiscal year 1976 and the transition quarter, it was neces-
sary to take advantage of the authority to defer payment of unearned
costs, in order not to draw down cash resources further. The total un-
earned costs for the period amounted to $9.3 million. In keeping with
the requirement to repay this amount to the Treasury in subsequent
years, the last tolls increase included provision for repayment of this
amount over a 3-year period. The earnings of $5.4 million in fiscal year
1977 will be applied to this debt, and it now seems likely that the bal-
ance, $3.9 million, can be paid in fiscal year 1978. This procedure-
part of the organization's underlying financial structure-permitted
the Company to protect its cash flow-and thereby its important capi-
tal program.
Transits are still down from prior years but commercial cargo has
begun to pick up again. Traffic is expected to grow, but at a moderate
rate. Thus, even without taking into account the impact of the new
treaties, periodic increases in tolls may be necessary to absorb the in-
crease in costs resulting from inflation. In the short run, North Slope
oil movements through the canal could temporarily alter our growth
pattern and need for tolls increases.
This is the situation against which treaty changes must be scruti-
nized. Before doing so, however, I will briefly outline the broad finan-
cial aspects of the treaty.

FINANCIAL ASPECTS OF THE TREATY
Almost every aspect of the treaty and its implementing agreement
has its financial impact. Some provisions will result in cost savings,
while others will add costs. I will cover here only those provisions
which appear to have major significance. They generally fall into the
following categories: Reduction in areas; facilities and functions; em-
ployee provisions; and direct payments to Panama.

REDUCTION IN AREAS
The land and water areas designated by the treaty for use of the
Panama Canal Commission represent about 42 percent of areas now
available to the Company/Government. They fall into four categories:
The canal operating areas, consisting of a continuous area generally
following the Panama Canal and generally contiguous to it plus cer-
tain additional noncontiguous areas; certain accessory installations and
facilities outside the areas made available for the use of the United
States, anchorages; and housing areas for U.S. citizens.
The housing areas are to be administered in accordance with rules
set out in the implementing agreement. Title to the housing will pass
to Panama with the Commission having rights, without cost, to use,
manage, maintain, improve and rent such housing. Houses not required
for U.S. citizen employees will pass exclusively to Panama in accord-
ance with a prescribed schedule.

REDUCTION IN FACILITIES
As of June 1977, the net book value of property, plant and equip-
ment of the Company/Government was $567.3 million. On the effective






64


date of the treaty, an estimated $92 million of these assets will be trans-
ferred to Panama and $30 million to DOD agencies. An additional
$3.8 million in assets will be transferred to Panama during early phases
of the treaty with the residual assets becoming the property of Pan-
ama upon termination of the treaty. Property acquired by the Com-
mission during the life of the treaty would also go to Panama at the
conclusion of the treaty. Very rough estimates would indicate that
these could amount in current dollars to an average of $25 million to
$30 million per year over the life of the treaty.

REDUCTION IN FUNCTIONS
Regarding functions, the proposed Commission would have no au-
thority to perform most governmental and commercial functions. The
majority of these functions would be performed after the effective
date of the treaty by the Panamanian Government or by private in-
terests in Panama. These include: The operation of the ports of Balboa
and Cristobal, including stevedoring and bunkering; the operation of
the railroad, retail operations; licensing of vehicles, vessels and air-
craft; partial provision of police and fire protection; operation of cer-
tain recreational and amusement facilities; and provision of customs
and immigration services. The provision of postal, food and retail
store services (available initially to U.S. citizen employees from the
U.S. military), the total police function, and the operation of the
prison and court system will likewise be provided by Panamanian
sources after prescribed phaseout periods. Other functions-the op-
eration of schools and hospitals-will be transferred immediately to
another U.S. Government agency, probably the Department of
Defense.
EMPLOYEE PROVISIONS
The treaties make specific reference to several matters relating di-
rectly to present personnel. Pertinent provisions include commitments:
(1) To provide employment conditions, for Company/Government
employees who remain with the Commission, generally no less favor-
able than those prevailing prior to the treaty.
(2) To recognize the right of Commission employees to negotiate
collective contracts.
(3) To establish a policy for periodic rotation, at a maximum of
every five years, of any new non-Panamanian employees.
(4) To expand training programs for Panamanian employees.
Under the treaty, the Commission will also have the authority, and
presumably the need, to pay additional remuneration of benefits to
employees recruited from outside of the Republic of Panama.
The foregoing discussion does not take into account treaty-related
costs to )e borne by other U.S. agencies, the most significant of which
is the effect on the civil service retirement fund of the treaty commit-
iment to provide an appropriate early optional retirement program
for canal workers.
PAYMENTS TO PANAMA
With respect to direct payments. Panama is to receive the following
out of canal operating revenues:








(1) Thirty cents per Panama Canal net ton of sliplpilIg transitilng
the canal, adjusted biennially to reflect changes in the 1,.S. Whole-
sale Price Index for total manufactured( goods, with tlie first adjuat-
ment taking place after 5 years.
(2) A fixed annuity of $10 million.
(3) An additional 810 million per year to the extent that rev1enies
exceed expenditures. In the event reveluIes in anyV year no not pmodluce
a surplus siiflicient to cover tli s payment, the O1np)aid balance is to be
paid from operating surpliuses in future years.
(4) $10 million per year for certain specified public services to be
provided in canal operating areas and housing are:is.
These treaty provisions will impose a significant additional finan-
cial burden on lthe Coniission wilic the pre-cnt (Com0npany does not
have. They will also have an effect on the ability of tlie (Colmii ...s-ioii
to weather adverse conditions without outside help. In this regard,
our tentative asse>ssmneit reflects the following.

INCREASED FINANCIAL BURDEN
The net financial impact of the treaty provisions on tile Col-miis-
sion's operations can be roughly determined by calculating the effect
the provisions would have had on the actual financial results for
fizeal year 1977 and those projected in the fiscal year 1978 budget.
Such calculations have been made with the conclusion that, without
considering North Slope oil movements, there would lbe a net deli-
ciency in toll revenues of approximately $50 to $60 million. This ex-
cludes the existing requirement to pay interest on the net direct in-
vestment of the United States in the canal ($18.1 million in fiscal
year 1977) and tlhe $10 million to be paid to Panama if revenues
exceed expenditures.
Using tolls sensitivity curves developed in 1974. a tolls increase of
approximately 40 percent would be required to offset this deficiencyV
However. North Slope oil is now moving through the canal in qtuan-
tities which would generate S10 million on an annualized basis. An
increase of such revenues to S25 million annummally, which is possible
within the next few years, would reduce the requirement to rIaise tolls
from 40 percent to about 25 percent. at least temporarily.
We consider tliV to be only a general indicator. Results were o)b-
tained fronI a preliminary nalvsis. and relitbilitv is d(lependent on
the accuracy of the assumptions. For example, although it was rela-
tively simple to identify costs reduced and revenues lost as a result
of a reduction in areas and facilities, andl the elimination of many
funcmetions, it was imich more difficult to estimate tlhe cost of services
to be provided by others. Furthermore, secondary effects need to be
more carefully anal-yze(d-transition costs of severance( !1Pav. rep)a-
triation. and plant reloc:itions need to be reverified : anl1 up)dated traf-
fie projections and seiisitivitv of traftlic to varving tolls increases imiust
lbe obtained. These are tlo se j cmts of o ,r very detaailed review of tlie
financial i implications (of the u tleatv wi lichl will lbe comipletedA in
Jan narv.
At this point. I Should note 'that the problle m is more complex than
lerelvy determining' io-1 ,vow uch t>ol1s ms11i bke increa-,sed initially. It is
also imporltan:t Ito view the 1 1-1lemI o te t oe I ftal 1i;+ of t I le'oav..






66

After the initial years, transition costs should drop out; however,
other costs will continue to rise with inflation, including most of the
required direct payments to Panama. Here, too, our ongoing studies
will attempt to identify and quantify potential problem areas and their
long-term effect.
OTHER FINANCIAL IMPACTS
Other potential financial problems may stem from the requirement
for the contingent $10 million payment to Panama, difficulties in pro-
viding adequate capital funds, and the inability of the Commission to
defer payments to the U.S. Treasury as a result of the elimination of
the payments for the net cost of the Canal Zone Government, the com-
pany's portion of the present, annuity to Panama, and the interest on
the net direct investment.
I understand that the administration intends to propose that the con-
tingent $10 million to be paid to Panama will be paid only after the
operating revenues of a given fiscal period are first reduced by all ex-
penditures of that period including amounts paid or payable for op-
eration and maintenance, inventory, plant, goods, services, and that
portion of the unfunded liabilities paid or currently payable, including
the payments to Panama under paragraphs 4(a) and 4(b) of article
XIII, and under paragraph 5 of article III of the treaty, as well as the
cumulative sum from prior years of any excess of expenditures over
operating revenues, as defined above, and the carryover of funds ac-
quired under a tolls formula for plant but not expended within the
period.
'It is entirely possible that we may be able to overcome these other
financial problems through legislation to implement the treaty. We are
seeking ways to accomplish this end. As previously indicated, one pos-
sibility is to obtain authorization for inclusion in the tolls base of capi-
tal requirements in excess of depreciation, with the requirement that
funds so generated be reserved for such purpose.
Further, there is the possibility of going to some form of current
value accounting, revaluing the assets to give them a depreciable value
more closely related to their replacement cost. We are still fleshing out
these ideas and exploring others which hopefully will add to the finan-
cial stability and viability of the Commission under the new treaty.

SUMMARY
In summary, I have attempted to outline briefly the current financial
situation of the canal enterprise, and to identify and measure the treaty
provisions most likely to have a significant financial impact on the suc-
cessor agency. The financial record of tlhe current organization over a
prolonged period and under diverse circumstances is impressive. Thus,
wo face the future with optimism, not withstanding the inherent chal-
lenie- in a siftation where we foresee a very modest growth rate in
c'in:il traffic and tolls revenues.
The e tf13y, if ratified, will open up a new era in the. financial opera-
tion, of fthie (:.n1l or,1'nization. The structure of the organization will
,,e cbhanaed, tlje, nature of co.4s will be cleaned, and many of the
ground ruhle under which we operate may be changed. The net. finan-







67

cial burden of treaty provisions will be significant and will impact im-
mediately, with cumulative and increased effects over time. Quantifica-
tion of these effects to date are imprecise and incomplete.
The studies underway should provide us with more complete and re-
liable findings and recommendations in these areas. I am hopeful that,
using the strengths of the present financial structure as a guide, we
can provide a solution to the problems identified. The canal has been a
model of operating efficiency and financial stability since it was built,
and we will bend every effort to the end that it continues to be both.
In conclusion, I hope that the information I have submitted, in spite
of its limitations, will serve to advance your understanding. We plan
to have far more complete answers for you in the near future. In the
meantime, should you desire additional data concerning my testimony,
I will be pleased to furnish them. .'
[The following are questions posed to the witness by the subcom-
mittee, with the responses received prior to the hearing:]

ANSWERS TO QUESTIONS FROM SUBCOMMITTEE (INCLUDES SUPPLEMENTARY
QUESTIONS)

TRANSFER OF ASSETS
Question 1. Estimate at least the approximate value of real and personal
property and assets to be transferred to Panama (a) upon the entry into force of
the treaty; (b) the value of all property 'and assets to be transferred subsequent
to the entry into force of the treaty and before the termination of the treaty; and
(c) the value of all property and assets that must be transferred by the termina-
tion of the treaty. Explain this by charts and graphs, if possible.
Answer. The following table summarizes, by the requested time periods, the
estimated plant values of the properties which will be transferred to the Republic
of Panama in accordance with the provisions of the treaties. These estimates are
based on the original cost and net book values recorded in Panama Canal books at
.Tune 30, 1977. Not included in these totals are minor items of equipment costing
less than $1,000.
[In millions

Transferred
Original cost net book value

Early treaty:
Upon the entry into force of the treaties 1-------------------------------------- $185 2$92
Subsequentto entry intoforce of thetreaties and beforethe termination of the treaties- 9 2 4
Subtotal ------------------------------------------------------- 194 96
Upon termination of the treaties:
Existing assets3......----------------------------------------------------- 788 498
Estimated value of capital improvements to be made during life of treaty------- 616 4 454


Subtotal -----.-- --------- ---- --- ----


1,404 552


Total5................---------------------------.......--.-------------------------................... 1,598 648

1 This includes U.S. community housing (original cost and net book value of $44,600,000 and $26,400,000, respectively),
the use of which will be granted by Panama to the Commission to house U.S. citizen employees. These houses will be
relinquished to Panama over the life of the treaty in accordance with a prescribed schedule.
2 This is the net book value at June 30, 1977.
3 Included in these totals are the estimated values of properties (original cost and net book value of $47,000,000 and
$30,000,000, respectively) that will be transferred to other U.S. Government agencies during the life of the treaties and in
turn will be transferred by them to the Republic of Panama upon termination of the treaties. These are principally school
and health facilities.
4 For purposes of estimating book value of facilities to be transferred upon treaty termination, an estimated composite
depreciation rate has been calculated and applied on a straight line basis to the original cost values to approximate current
Panama Canal accounting practices.
5 Included in these totals are certain items of removable property and equipment, with an estimated net book value of
$2,000,000, which the Commission has the option, under the treaty, of disposing of by other than transfer to Panama.








68

Question 2. If the Panama Canal Treaty is ratified, the present Canal orga-
nization will have to dispose of the assets and property associated with activities
that are not to be continued by the Commission. Paragraph 4 of the Annex to the
Panama Canal Treaty lists these activities.
What is the approximate value of the assets to be disposed of in reference
to those activities; how would such disposal take place; and how would the
proceeds of the disposal be applied toward the balance sheet of the present
Canal organization or the proposed Commission?
Answer. I infer from this question that you are interested in the total estimated
value of the properties the Panama Canal enterprise will be required to dispose
of as a result of Treaty provisions that prohibit the enterprise from continuing
certain activities, including those activities which are not enumerated in para-
graph 4 of the Annex to the Panama Canal Treaty, such as the railroad and
marine bunkering activities. On this basis the total estimated original cost and
net book value of the properties the Panama Canal enterprise will be required to
dispose of during the life of the treaties is estimated to be $240 and $126 million,
respectively. These estimates are based on the original cost and net book values
recorded in the Panama Canal Company books at June 30, 1977. Included in
these amounts are the estimated value of properties that will be transferred to
other U.S. Government agencies totaling $47 and $30 million for the original cost
and net book value, respectively.
These properties would be disposed of following the present accounting and
operating procedures for disposing of excess properties. The net book value of
these assets will be written off against the United States' investment in the
Panama Canal Company and against the United States' equity in the Canal Zone
Government. based on the Agency which holds title to the disposed of property.
The majority of these assets will be transferred to the Republic of Panama
and to other United States Government agencies without the exchange of funds.
However, removable property and equipment with a net book value of approxi-
mately $2 million may be disposed of with proceeds accumulating to the benefit
of the Commission. Materials and supplies on hand and no longer required will
be handled in a similar manner.
Question 3(a). In what manner will the treaties affect the cost of operation
of the Panama Canal?
Answer. The overall effect of the changes to be imposed by the treaties will be
to increase the net cost of operation of the Panama Canal.
At this point in time, only very rough order-of-magnitude estimates are
available on the net financial impact of the treaties on Canal operating costs.
These estimates indicate probable higher net costs, ranging from $50 to $60
million during the first year. A study is under way to determine more definitely
the effect of the treaties on the cost structure of the Canal. The Subcommittee
will be furnished the results of this study upon its completion, which is expected
to be in late January.

EFFECT ON MARGIN OF 19.5 PERCENT TOLL INCREASE, 1979-81

1979 1980 1981

Total costs recoverable from tolls-.----.-------------------------............ $231,657 $235,015 $238,374
Tolls revenues at existing rates- ------------------------------- 194,943 198,385 200,127
Net deficiency---------------------------------------... ......... 36,714 36,630 38,247
Impact of 19.5 percent toll increase:
Additional revenues...-------------------------------------...... 36,918 36,915 36,975
Reduced annuityto Panama basedon PC nettons----.--------------... 215 343 397
Net income or deficiency... ----------------------------------............. 419 628 (875)








69

STATEMENT OF OPERATIONS UNDER THE 1977 TREATY, FISCAL YEAR 1979-84
[In thousands of dollars]


Presi-
dent's Estimates with treaty-imposed changes
budget
1979 1979 1980 1981 1982 1983 1984


Operating expenses:
Maintenance of channels and harbors.......
Navigation service and control-----------
Locks operation....--...--.------------
General repair, storehouse, engineering and
maintenance service- ------
Marine terminals--.- --------------
Transportation and utilities --------
Retail and housing.----- ----
General and administrative-..-----------
Interest.- ----------------------
Governmental activities
Other ---------------


25,578
45,643
27,187
8,107
22,868
22,986
53,549
55,448
20,058
90,976
18,596


25,528
42,932
27,187


25, 563
42,887
27,187


25,568
42,797
27,187


25,568
42,641
27,187


25,568
42,641
27,187


25,568
42,641
27,187


6,357 5,992 5,739 5,536 5,536 5,536
76 ---------------------------------- ---------- --
27, 262 27, 629 27,358 27, 659 27, 684 27,426
5,184 5,184 5,184 5,184 5,184 5,184
47,763 47,564 45,146 43,615 43,502 47,689
-22,271 21,310 16,790 13,377 13,366 13,331
15,230 15,255 15,255 15,255 15,255 15,255


Total operating expense---- ------- 390,996 219,800 218,571 211,024 206,022 205,923 209,817


Operating revenues:
Navigation service and control-----------
General repair, storehouse, engineering, and
maintenance service..--------------
Marine terminals.---------- --------
Transportation and utilities. ----------
Retail and housing...--- --. -------
Governmental activities. -----------
Other ------ -- -----


Total revenues and recoveries other than
tolls------------------ -----205,343 63,249


Net operating expenses exclusive of pay-
ments to Panama and transition costs.- 185,653 156, 551


Payments to Panama:
Fixed annuity to Panama-..--. ---- ---
Public services payment to Panama..--- -
Annuity to Panama based on PCC net tons -------


10,000
10,000
46,786


Total payments to Panama ----------


30,975 27,209 27,209 27,209 27,209 27,209 27,209
5,500 1,127 1,065 784 484 484 484
28,213-----------------
24,884 26,737 -26,656 26,687 26,659 26,651 25,891
47,284 4,850 4,850 4,850 4,850 4,850 4,850
66,122 2,648 2,648 2,595 2,595 2,595 2,595
2,365 678 2,165 665 665 2,165 665


64,593 62,790 62,462 63,954


153,978 148,234 143,560 141,969


10,000
10,000
47,612


10,000
10,000
48,031


10,000
10,000
48,673


10,000
10,000
49,315


66,786 67,612 68,031 68,673 69,315


61,694


148,123


10,000
10,000
49,958


69,958


Net operating expenses including pay-
ments to Panama--. --- --- 185,653


Net operating expenses including payments to
Panama .......
Transition costs:
Severance pay------------------------
Repatriation......................._.
Plant relocations ---------- -------
Inventory moves and storage---------------..-


Total operating expenses to be recovered
from tolls--- ---------------..........................
Capital program requirements in excess of
depreciation. ----------------------


223,337 221,590 216,265 212,233 211,284


223,337 221,590 216,265 212,233 211,284


4,271
1,909
931
665


174
287
2,999


733
1,099
3,053


218,081


218,081


192
2,313


231,113 225,050 221,150 214,738 211,284 218,081
544 1,993 1,377 1,099 2,237 2,336


Total costs recoverable from tolls before
inflation---....---------------------------- 231,657 227,043 222,527 215,837 213,521 220,417
Provision for inflation at 5 percent:
Annuity to Panama based on PC net tons--------------------------------------------- 5,121
All other costs--- ------------------------------ 7,972 15,836 23,197 31,077 41, 569


Total costs recoverable from tolls---------------231,657 235, 015 238,363 239, 034 244, 598
Tolls income at existing rates---------.-----------194,943 198,385 200,127 202,803 205,480
Net deficiency. ------------36,714 36,630 38,236 36,231 39,118


267,107
208,157
58,950


Note: The impact in 1978 of treaty-related requirements are as follows: Capital expenditures for relocations, $1,900,000;
cost increases, including relocations classified as expense, $2,300,000; revenue losses, $900,000; a total of $5,000,000.
There is an estimated potential loss of $2,000,000 on retail inventories. In addition, there is $1,200,000 cf operating supplies
and materials inventories related to those facilities to be transferred to Panama and other U.S. Government agencies,
the value of which may not be fully recoverable.


I---







70

DETAILED STATEMENT OF OPERATING COSTS AND REVENUES
[In thousands of dollars]

Presi-
dent's Estimates with treaty-imposed changes
budget
1979 1979 1980 1981 1982 1983 1984

OPERATING EXPENSES


Maintenance of channels and harbors:
Funded costs---------------------
Nonfund expense-----------------
Cost transfer..--..------ -----


23,961
9,479
(7, 862)


23,933
9,457
(7,862)


22,288
9,537
(6.262)


22,263
9,567
(6,262)


22,263
9,567
(6,262)


22,263
9,567
(6,262)


22,263
9,567
(6,262)


Net expense--------------------


Navigation service and control:
Funded costs--------------- -------.
Nonfund expense.-----------------.
Cost transfer.--- ----------


Net expense -----.----.-------


25,578 25,528 25,563 25,568 25,568 25,568


44,777
1,032
(166)


42,117
991
(166)


42,043
1,010
(166)


41,993
970
(166)


41,993
814
(166)


41,993
814
(166)


45,643 42,942 42,887 42,797 42,641 42,641


Locks operations:
Funded costs---- ----------
Nonfund expense.-----------------
Cost transfer----- ---------------
Net expense ----------....------


24,643
4,133
(1,589)


24,643
4,133
(1,589)


24,643
4,133
(1,589)


24,643
4, 133
(1,589)


24,643
4, 133
(1,589)


24,643
4, 133
(1,589)


42,641


24,643
4,133
(1,589)


27,187 27,187 27,187 27,187 27,187 27,187 27, 187


General repair, storehouse, engineering and
maintenance services:
Storehouse direct expense ----- ---
Cost of goods sold ---- ------------
Cost of goods issued----------------
Nonfund expense.- ---------
Cost transfer----------------------


4,402 3,884 4,004 3,941 3,941 3,941 3,941
2,431 ----------------------------------------
15,706 11,266 10,266 9,326 9,326 9,326 9,326
91 90 91 91 91 91 91
(16,353) (11,206) (10,578) (9,638) (9,638) (9,638) (9,638)


Net expense---------------.-------- 6,277


4,034 3,783


3,720 3,720


3,720 3,720


General services direct expense-----
Nonfund expense.-----.------------.
Cost transfer..------------- ------


Net expense -------- ----------


60 60 60 60 60 60


Vessel repair direct expense --- -------
Nonfund expense -----------------
Cost transfer.. --------.----.-...--.


13,160
230
(12,604)


Net expense ------------------


786 1,109 1,015 1,015 1,015 1,015 1,015


Electrical service direct expense...------
Nonfund expense...................--------------
Cost transfer..-------------------
Net expense-- ---------------


Engineering service direct expense. .
Nonfund expense--- --------
Cost transfer..-------------------


5,214
14
(5,248)


4,593
14
(4,201)


4,593
14
(4,201)


4,489
14
(4,251)


(20) 406 406 252 104 104 104


3,614
123
(3,456)


3,449
123
(3,180)


3,399 3,207
123 123
(3,150) (2,994)


Net expense------- --.-------------- 281 392 372 336 281 281 281


Contract and inspection direct expense .--
Nonfund expense-..------------------
Cost transfer.-.......----- ....-------
Net expense----... . .------ ----


8


i97 902 902 885 868
6 6 6 6 6
390) (898) (898) (881) (864)
13 10 10 10 10


868
6
(864)
10


868
6
(864)
T10


General laboratory direct expense----..------ 340 340 340 34
Nonfund expense..----------------------- 6 6 6
Cost transfer..------------.---.-----.------------------.----------


Net expense-----------------------........................... 346
Total, general repair, storehouse, en-
gineering and maintenance service
expense-----.....--------....----------........... 8,107


346 346 346 346 346 346


6,357 5,992 5,739 5,536 5,536 5,536


25,568


41,993
814
(166)


17,135
168
(16,879)


9,348
168
(9,456)


9,348
168
(9,456)


9,348
168
(9,456)


9,348
168
(9,456)


9,348
168
(9,456)


9,348
168
(9,456)


12,447
215
(11,553)


12,050
215
(11,250)


12,050
215
(11,250)


12,050
215
(11, 250)


12,050
215
(11,250)


12,050
215
(11, 250)


4,320
14
(4,230)


4,320
14
(4, 230)


4, 320
14
(4,230)


3,047
123
(2,889)


3,047
123
(2, 889)


3,047
123
(2,889)


------------------------------











DETAILED STATEMENT OF OPERATING COSTS AND REVENUES-Continued
[In thousands of dollars]

Presi-
dent's Estimates with treaty-imposed changes
budget
1979 1979 1980 1981 1982 1983 1984

OPERATING EXPENSES-Continued


Marine terminals:
Harbor terminals direct expense..---------
Nonfund expense.--------------------
Cost transfer..-------------------------


18,927 76 .................--........-.......-....-
590 ...--.-.........- ....-....- ..........- ......---
(1,622).--..--.-..................- ...--- ....-...........


Net expense------ ---.------------ 17,895


Marine bunkering direct expense. -------
Nonfund expense---------------------
Cost transfer..--------------------------


76 ....................------- ..........---..


4,905 .-..........--- ...--- --.......-- ...-..- .....
311 .--...-. ......-- .......- ...-..----- ...--.- ....-
(243)-----------------------


Net expense----------------------- 4,973 ------------------------------------------ -


Total, marine terminals expense


Transportation and utilities:
Railroad direct expense---.----------
Nonfund expense--- -------
Cost transfer --------- ---


22,868


3,722 ------..--------......----------------
158 ---------.-------.......------------
(1,277)---------------------------------------


Net expense--------. -------------2,603 -------- ---- --------------------.. -----
Motor transportation direct expense-------- 8,421 7,150 7,150 7,150 7,107 7.107 7,107
Nonfund expense- --------- 767 641 641 641 636 636 636
Costtransfer.---------- ------------(8,814) (7,791) (7,791) (7,791) (7,743) (7,743) (7,743)


Net expense ...


374 ------------------------------


Water transportation direct expense------
Nonfund expense.. .......
Cost transfer
Net expense... ----- ------
Power system direct expense-------..........
Nonfund expense------
Cost transfer
Net expense.. ---- ---


10,261
56
(6,777)
3,540
18,100
1,402
(7,816)


12,472
56
(4,507)
8,021
18,010
1,402
(5,650)


12,193
56
(3,816)
8,433
18,010
1,402
(5,650)


11,686 13,762 13,762


11,565
56
(3,461)
8,160
18,010
1,402
(5,599)


11,771
56
(3,360)
8,467
18,010
1,402
(5,599)


13,813 13,813


11,717 11,450
56 56
(3,281) (3,272)
8,492 8,234
18,010 18,010
1,402 1,402
(5,599) (5,599)
13,813 13,813


Communications system direct expense.-.
Nonfund expense
Cost transfer--- -----------
Net expense--. .---- ---
Water system direct expense.
Nonfund expense------------
Cost transfer -.-..----- -- --


Net expense -------- ---


3,800
487
(3,377)


4,028
374
(590)


3,509
487
(3, 127)


4,043
371
(448)


3,242
515
(2,933)


4,043
371
(448)


3,120
544
(2,889)


4,043
371
(448)


3,034
576
(2,845)


4,043
371
(444)


3,034 3,034
576 576
(2,845) (2,845)


4,043
371
(444)


3,812 3,966 3,966 3,966 3,970 3,970 3,970


Central air-conditioning direct expense..
Nonfund expense --------- ----
Cost transfer ---------------------
Net expense.. ---- --- -------.----


809
89
(837)


809
89
(254)


61 644


Total, transportation and utilities ex-
pense--............-- - --


22,986 27,262 27,629


27,358 27,659


27,684 27,426


Retail and housing:
Retail units direct expense----------
Nonfund expense--...--.. --
Cost of goods sold and issued-------------
Cost transfer -..


Net expense---- --------------


Food units direct expense. -.-----..- -
Nonfund expense ---- .....
Cost of goods sold and issued-
Cost transfer. --.----.----. -----.........


17,821 -----------------.-----------------..---
273 -----------------------------------------.
27,965 ------------------------------------------
(4,257) ------------------------------.---------


41,802 -------.... .. --..............-.... ..... ... .....-


2,891 ..-----------------------------------------
87 ----------------------------------......-
2,110 ----------------------------........................................
(576).......................................----------------------------


4,512 -----------------------........................................


765
4,043
371
(444)


809
89
(254)


809
89
(254)


809
89
(254)


809
89
(254)


809
89
(254)


Net expense.------..---- -----








72

DETAILED STATEMENT OF OPERATING COSTS AND REVENUES-Continued
(In thousands of dollars]


Presi-
dent's Estimates with treaty-imposed changes
budget
1979 1979 1980 1981 1982 1983 1984

OPERATING EXPENSES-Continued


Theaters and bowling alleys direct expense..
Nonfund expense -..---------__-------
-Cost transfer--------------------...


Aet expense.......--. ------


Employee housing:
ABC housing direct expense-.-------...
DEF housing direct expense.---------
Nonfund, ABC
Nonfund, DEF
Cost transfer--.. ---- -----


668 -.---------------------------------------
34 .........----------------------------------------
(14)-- .......... ....... ........... ......... .........


688 ......... ............


4,367
1,357
822
127
(126)


4,505
800

- (121)


4,505 4,505 4,505
800 800 -800
(121) (121) (121)


4, 505

8(i2i)
) (121)


4,505
800O

(121)


Net expense. ----------------
Total, retail and housing expense-.
General and administrative expense:
Under statutory limitation:
Executive direction-- ---------
Operation direction-- ---------..............
Financial management ------.
Personnel administration -------
General services---------------.-..
Employment costs:
Recruit and repatriation----------
Employee States travel ---------.-
Transport of employee's vehicles--
Apprentice program-------.
Employer's cost for FEGLI-----......
Employer's cost for FICA .------
Incentive awards--- ---------


Subtotal-..--------------


6,547


53,549


3,777
2,418
9,161
3,208
3,516
1,253
1,482
273
1,345
750
155
242


5,184


5,184


4,060
2,005
9,103
3,222
4,121
550
1,300
239
1,484
520
83
162


5, 184


5,184


4,064
2,018
8,923
3,065
4,015
550
1,290
238
1,862
520
82
162


5, 184


5,184


4,007
1,928
8,656
3,065
3,947
550
1,233
227
2,046
510
99
162


5, 184


5,184


3,922
1,941
8,519
3,065
3,936
550
1,225
226
2,046
510
120
162


5,184


5,184


3,922
1,941
8,519
3,065
3,936
550
1,225
226
2,046
510
120
162


5184


5,184


3,922
1,941
8,519
3,065
3,936
550
1,225
226
2,046
510
120
162


27,580 26.,849 26,789 26.,430 26,222 26,222 26,222


Other general corporate expense:
Cost of living allowance--.----...-- .---..-----------.. ----------------------------------------- 4,500
Sponsorship for education -------... ------- 7,213 7,144 7,159 6,424 6,218 6,105 5,992
Sponsorship for health services----------- 4,132 2,943 2,914 1,751 689 689 689
Sponsorship for fire protection--- -------- 2,571 .---------------.-- ------------------...-----
Employer's cost for health benefits--------- 6,551 4, 527 4,522 4,462 4,459 4,459 4,459
Alien cash relief payments--------------. 1, 470 1,470 1,470 1,470 1,470 1,470 1,470
Death and disability payments------------ 1,450 1,261 1,260 1,253 1,253 1,253 1,253
Provision for uncollectable accounts-------- 781-- .-----------------------.... ----...---------
Miscellaneous funded expense------------ 3,106 3,486 3,363 3,269 3,217 3,217 3,017
Non fund expense --------------------- 884 373 377 377 377 377 377
Cost transfer.....------------------------ (290) (290) (290) (290) (290) (290) (290)
Subtotal-------.........----------------- 27,868 20,914 20,775 18,716 17,393 17,280 2,1467
Total, general and administrative expense 55,448 47,763 47,564 45,146 43,615 43,502 47,689
Interest --------------------------------20,058 .-----------------------------.------.-


Other:
Grounds, refuse, and other direct expense-.
Nonfund expense----..................--------
Cost transfer-..------------------


5,075 3,577
106 106
(3,902) (3,438)


3,577 3,527 3,477
106 106 106
(3,438) (3,388) (3,338)


3,477 3,477
106 106
(3,338) (3,338)


Net expense..---------.. ------------- 1,279 245 215 245 245 245 245


Community, custodial and other direct
expense----------- ------------- 2,986
Nonfund expense-------------.---------- 2
Cost transfer----------... ---.. ---------. (2.874)
Net expense.-------....--------.........-------- 114
Agency press and duplicating center direct
expense ...--------.. -----------------. 1,391
ronfund expense---------------.......------- 29
Cost transfer----------..--.. ---------- (1,379)


2,309 2,309 2,225 2,141 2,141 2,141
2 2 2 2 2 2
(2,248) (2.248) (2,164) (2,080) (2,080) (2,080)
63 63 63 63 63 63


1,162 1,162
29 29
(1,196) (1,196)


1,102 1,084 1,084 1,084
29 29 29 29
(1,136) (1,118) (1,118) (1,118)


NPet expense --..........----.. ------ 41 (5) (5)









73

DETAILED STATEMENT OF OPERATING COSTS AND REVENUES-Continued
tIn thousands of dollars

Presi-
dent's Estimates with treaty-imposed changes
budget---1719 91989318
1979 1979 1980 1981 1982 1983 1984


OPERATING EXPENSES-Continued
Miscellaneous canal expense:
Annuity to Panama--------.--------
National policy school sponsorship of
tuition students --..- --------------
National policy health sponsorship of
former employees --............------------
Canal protection services -----....-----
Thatcher Ferry bridge operation and
maintenance-...---.--...----.------
Salvage depot and Balboa drydock... -
Other funded costs-------------------
Accrual for marine accidents and
casualty losses-------------------
Other nontund expense.- ----
Cost transfer --..----.---- -------
Net expense---- ------------
Total, other expense ---- ----
Government activities:
Customs-immigration:
Funded costs----------.. ---------
Nonfund expense...........-------------
Net expense-..---------------
Postal service:
Funded costs------------------------
Nonfund expense.------- -------
Net expense.--------------------
Police protection:
Funded costs ------. ------------
Nonfund expense ..----------
Net expense-------.--.-------
Fire protection
Funded costs..-------------------
Nonfund expense.--------. ------
Net expense-...-------------..---


519 .----------........... ..-----------------------------
847 ------------------------- ---- ---------------
6,473 5,761 5,761 5,761 5,761 5,761 5,761
3,441 3,202 3,202 3,202 3,202 3,202 3,202
758 ...------.....----.---------....---.-----------------........
470 369 369 369 369 369 369
747 1,004 1,029 1,029 1,029 1,029 1,029
4,200 4,200 4,200 4,200 4,200 4,200 4,200
939 398 398 398 398 398 398
(1,232) (7) (7) (7) (7) (7) (7)
17,162 14,927 14,952 14,952 14,952 14,952 14,952
18,596 15,230 15,255 15,255 15,255 15,255 15,255


1,584 166 166 166 166 166 166
1 1 1 1 1 1 1
1,585 167 167 167 167 167 167

3,119 166 125 83 46 35 .........
16 ----.-----..........----. -----..-.....
3,135 166 125 83 46 35 -...---


9,892
101
9,993


4,246
86
4,332


8,923
101
9,024


3,784
76
3,860


8,170
101
8,271


3,784
76
3,860


4,361 1,220 1,220 1,220
50---...............--------.....
4,411 1,220 1,220 1,220


3,784
76
3,860


3,784
76
3,860


3,784
76
3,860


3,784
76
3,860


Judicial system:
Funded costs------.---------------- 334 191 189 99 ------------
Nonlund expense ------------------------------------------------------------------------
Net expense------------------- -334 191 189 99 -------------------.
Public areas and facilities:
Funded costs---.----------------- 4,446 2,398 2,398 2,398 2,398 2,398 2,398
Nonfund expense------------------ 930 376 376 376 376 376 376
Net expense-..-..----------.------- 5,376 2,774 2,774 2, 774 2,774 2,774 2,774
Education/libraries:
Funded costs------------------- 24,398 628 583 583 583 583 583
Nonfund expense--------.---------- 664 --- ---------------------
Net expense--_ --------------- 25,062 628 583 583 385 583 583
Internal security:
Funded costs.---------------------- 367 301 301 301 301 301 301
Nonfund expense.----------------.------------....-----------------.---------..--....--...
Net expense..-------------------- 367 301 301 301 301 301 301
Other civil affairs:
Funded costs-------------------- 937 519 482 231 281 281 281
Nonfund expense-.-------------- --- 10 8 8 8 8 8 8
Netexpense-..-------...------------ 947 527 490 289 289 289 289








74


DETAILED STATEMENT OF OPERATING COSTS AND REVENUES-Continued

[In thousands of dollars]


Presi-
dent's Estimates with treaty-imposed changes
budget
1979 1979 1980 1981 1982 1983 1984

OPERATING EXPENSES-Continued


Hospitals and clinics:
Funded costs----------------------
Nonfund expense-...-..-------.-----
Netexpense---------.. -------


28,160
712


28,872 -----... -------........--....... .............


Other public health services:
Funded costs------------------------
Nonfund expense---..-------------


Netexpense-................-----------------
Office of the Governor: Funded costs ------


Other general government expense:
Employment costs:
Government cost for health benefits-
Recruitment and repatriation -----
Employee's states travel-------.-
Transport of employee's vehicles ---
Government costfor FEGLI-.......
Government cost for FICA---......
Death and disability payments--..-----
Alien cash relief payments.-------------
Government buildings, 3lands and sites.-.
Other funded costs------------------
Nonfund expense --------------
Net expense--------------------
Net expense governmental activities -


4,884
19


4,903
407


1,488
892
876
192
298
183
327
122
1,041
28
216


5,663


2,188 2,182 2,163 2,163 2,163 2,163
3 3 3 3 3 3


2,191 2,185 2,166 2,166 2,166 2,166
373 373 373 373 373 373


312 288 186 185 185 185
168 1-i43 62 62 '62 62
37 31 14 14 14 14
62 58 37 37 37 37
8 8 9 9 9 9
301 301 298 298 298 298
122 122 122 122 122 122
910 892 811 730 730 730
28 28 28 28 28 28
121 121 117 113 113 113


2,069 1,992 1,684 1,598 1,598 1.598


90,976 22,271


Total, operating expenses--------- 390,996


219,800


21,310
218,571


16,790
211,024


13,377
206,022


13,366
205,923


13,331
209,817


REVENUES AND RECOVERIES, OTHER THAN
TOLLS
Navigation service and control -----------
General repair, storehouse, engineering and
maintenance services................----------------------
Marine terminals:
Harbor terminals------------..................
M a r i n e b u n k e r i n g - ---- - - - -- - -
Total, marine terminals.------------


Transportation and utilities:
Railroad. ----.--------------------
Motor transportation...............---------
Water transportation--- ---------...............
Power system-------------------------
Communications system-----------
Water system.----------------------
Central air-conditioning.--- --------


30,975 27,209 27,209 27,209 27,209 27,209 27,209


5,500


1,127 1,065


21,95 .. . . . .. .. . . . .. . .
6,248
28,24813 .....................................................
98,213 .---- -- -- -- -- -- ------------------------ - .---- --


2,621
424
3,690
12,958
1,052
4,073
66


5,408 5,319 5,253 5,181 5,173 4,413
15,708 15,780 15,919 15,986 15,986 15,986
905 841 799 775 775 775
3,933 3,933 3,933 3,934 3,934 3,934
783 783 783 783 783 783


Total, transportation and utilities------......


Retail and housing:
Retail units-----------------------
Food units....-----------------------------
Theaters and bowling alleys...........--------------
Employee housing, ABC---- -------.............
.Employee housing, DEF ------.............--
Total, retail and housing----...........---

Other:
Maintenance of channels and harbors-----
Grounds, refuse and other service--------
Community, custodial and other services ...
Agency press and duplicating service.......
Miscellaneous...--------......--- ..--...--


24,884 26,737 26,656 26,687 26,659 26,651 25,891


36,790
4,053
431
4,990
1.015


4,850 4,850 4,850 4,850 4,850 4,850
................... ........---- ...--- ---------..-----------


47.284 4,850


223
1,596
117
51
378


128
309
66
5
170


4,850 4,850


1,628
309
66
5
157


4,850 4,850 4,850


128
309
66
5
157


1, F28
309
66
5
157


Total, other------.......---------------- 2,365 678 2


,165


665 2,165


Total, canal operating revenues other than
tolls---------..........--------------- 139,221 60,601 61,S45 60,195 59,867 61,359 59,099


------------------------------------------------------
------------------------------------------------------








75


DETAILED STATEMENT OF OPERATING COSTS AND REVENUES-Continued
[In thousands of dollars

Presi-
dent's Estimates with treaty-imposed changes
budget
1979 1979 1980 1981 1982 1983 1984

'REVENUES AND RECOVERIES, OTHER THAN
TOLLS-Continued
Government activities:
Customs-immigration..------------- -- --- --- ----
Postal service.......----------------------1. 979 ..............................................
Police protection----------------------- 51 51 51 ----------------
Fire protection -- -....--- ------ 5,422 2,578 2,578 2,578 2,578 2,578 2,578
Judicial system ------------------------ 200 ......................................................
Education/libraries----------------------1 24,407 - - - - - - - - - - - - -
Other civil affairs----.----------------- 846 4 4 2 2 2 2
Hospitals and clinics---------------------1 32,341 .....---- ...-..............- ....-..-.......- ....
Other public health services----. --------. 813 15 15 15 15 15 15
Other general government expense--------...-. 163 --------------------------- ---.------------------
Total, governmental activities---------- 66,122 2. 648 2,648 2,595 2,595 2,595 2,595
Total, revenues and recoveries, other than
tolls--------------------------- 205,343 63,249 64,593 62,790 62,462 63,954 61,694

I Amounts are net of Canal Zone Government sponsorship.
Question 3(b). What specific provisions of the proposed Canal treaties and
related documents would probably increase costs of the Canal? What provisions
would tend to decrease costs?
Answer. There are presented below only those provisions of the treaty that
would have a major impact on the cost of operation of the Canal.

PROVISIONS THAT INCREASE COSTS
Fixed Annuity to Panama of $10 minlion; Payment to Panama of $0.30 per
Panama Canal Net Ton, with adjustment provisions
These provisions will increase substantially the annuity costs being borne by
the Canal. The Canal presently pays $519 thousand of a total annuity to Panama
of $2,328 thousand. Under the treaty provisions, the cost burden will at the
outset increase to an amount in excess of $50 million annually. Moreover, the
$0.30 per Panama Canal net ton rate will increase in line with inflation starting
with the sixth year after the treaty comes into force.
Discontinuance or transfer of certain Canal Zone Government activities. Pay-
ment to Panama of $10 million, annually for specified public services, includ-
ing police and fire protection
The net effect of the treaty provisions that pertain to Canal Zone Government
activities will be to increase the cost by about $5 to $8 million annually for the
duration of the 30-month transition period. This comes about essentially because
the Commission will be required to maintain residual though decreasing govern-
ment functions, in addition to assuming a $10 million payment to Panama for
public services.
Discontinuance of commercial activities, such as marine terminals and bunkering
services
This requirement will tend to increase the cost of operation of the Canal by
foregoing the net revenue contributed by these activities as a whole to the overall
profit and loss picture of the Canal.
Establish training programs for Panamanian employees and apprentices
It is anticipated that this requirement will result in additional costs to the
-Canal over present training expenses, particularly in the area of apprentices.
Reorganization
The requirements of the treaty to discontinue various functions will impose
a cost burden on the Commission for several years for such items as severance
pay, repatriation and relocations of offices and other physical plant.
Annual contingency payment of $10 million to Panama
To the extent revenue permits and actual payment is made to Panama, these
payments will represent an additional cost to the Canal.





IL

76

PROVISIONS THAT DECREASE COSTS
Discontinuance of retail stores, food units, and recreational facilities
In accordance with established policy, these services have been provided his-
torically at comparable U.S. prices in order not to burden the employee unfairly
as compared to his counterpart in the United States. The resultant underrecov-
eries will be eliminated under the treaties.
General and administrative expenses
It is expected that overhead expenses following completion of reorganization
will be reduced as a result of the treaty requirement to shed activities and func-
tions. For example, the Commission will continue to incur costs for such items as
health care and education for its employees and their dependents, but at a re-
duced level due to the decline in workforce. General expenses should also decline
because of a reduced requirement for administrative and staff personnel.
Interest on the U.S. investment
In fiscal year 1977, the Canal paid $18.1 million into the Treasury as interest
accrued for that year. Although not specifically provided in the treaty, it is
understood that proposed enabling legislation will relieve the Commission from
such interest payments after the treaty becomes effective.
Question 3(c). What are the estimated costs of operation (by operational
activity) of the Panama Canal for fiscal year 1978 as shown in the budget pro-
gram for that year, approved by the Congress in the Department of Transporta-
tion and Related Agencies Appropriations Act, 1978? How would each of those
figures and the total be changed by the treaties?
Answer. Rough estimates based on preliminary review and analyses reflect the
following:
THE PANAMA CANAL ENTERPRISE
The financial effects of superimposing the proposed Panama Canal treaties on
the latest budget estimates of financial results for fiscal year 1978 are reflected
on the attached pages.
Several points must be considered when analyzing this data, namely:
1. These figures represent the first year under the new treaty. They are con-
servative in nature and do not reflect the impact which North Slope oil may have
upon Canal revenues.
2. Transition costs, which are shonm as $9.679 million in the attached sched-
ule will be eliminated several years after the treaty's effective date.
3. The expenses associated with governmental activities, approximately $22
million, will be reduced as the three-year jurisdictional transition period passes.
For example, some $9 million, allocated for police activities, will be eliminated
after three years.
4. It should be noted that in 1980, we expect to increase capital requirements
by $7 to $10 million annually.
5. Setting aside inflation, Canal operating costs might be somewhat reduced
after the initial transition years of the treaty; however, price index increases
made to annuity payments will serve to consume any excess revenues which we
may forecast.
THE PANAMA CANAL-OPERATING STATEMENT SHOWING EFFECT OF TREATY CHANGES SUPERIMPOSED ON
FISCAL YEAR 1978 BUDGET ESTIMATE-PRELIMINARY ESTIMATE SUBJECT TO FURTHER REFINEMENTS
lIn thousands of dollars]

1978 with
1978 treaty
budget changes

Operating expenses:
Maintenance of channels and harbors....- -------------------.....---.--...------ 22, 563 1 22,603
Navigation service and control- ------.-------------------.-------------- 40,732 38,316
Locks....-----------------.. -----. -------------.......................--------...-- 24,759 24,759
General repair, storehouse, engineering, and maintenance sarvices...---------------- 8,966 9,108
Marine term inals...---.- ------------------------------------------...... 19,801 1,659
Transportation and utilities-....----------------------------------------- 22,137 25,353
Ratail and housing.......................................--..........---------------------------.-... 51,504 6,303
Other--------------------------------------------------------.................................................................... 44,886 41,383
General and administrative .-----------------------------...---.........---------- 26, 231 25. 662
Governmental activities ....--..--------------------------------------------............... 85,968 222,097
Public service payments to Panama-...-..........------....---....--...-----.-.. 10,000
Repayment of piior year's interest costs-......... .. ...... ........... ...... 5,273 5,273
Subtotal----................................................................. 352,820 232,516
See footnotes at end of table.








77

THE PANAMA CANAL-OPERATING STATEMENT SHOWING EFFECT OF TREATY CHANGES SUPERIMPOSED ON
FISCAL YEAR 1978 BUDGET ESTIMATE-PRELIMINARY ESTIMATE SUBJECT TO FURTHER REFINE-
MENTS-Continued
[In thousands of dollars]

1978 with
1978 treaty
budget changes

Operating expenses-Continued
Interest--....------------- ------------------------------------- 19,706 ------
Fixed annuity to Panama. ------------------------------ ---------------10,000
Annuity based on Panama Canal net tonnage--------- ---------------------------------42,471
Total operating expenses... ------------------------------- 372,526 284,987
Revenues other than tolls:
Navigation service and control------------------------------------------ 29,962 26,247
General repair, storehouse, engineering, and maintenance services----------------- 6,062 3,155
Marine terminals..---------------------------------------------- 24,151 1,645
Transportation and utilities. -.--------------------------------------- 23,950 126,521
Retail and housing ...--------- ------------------------- 47,163 5,866
Governmental activities-------------------------------------------- 63,132 115
Other --------------------------------------------------------- 2,351 3,068
Total revenues other than tolls-.--------------------------------------- 196,777 66,617
Net costs without tolls ------------ ----------------------- --- -- 175,749 218, 370
Capital outlay expenditures in excess of depreciation..------......- ....- ...- -7,133 (4)
Transition costs:
Severance pay -----------------------6,093
Repatriation ----------------------------------------------------- 1,350
Plant relocations--- ---- ------------ ---------------------------------- 2,236
Total transition costs-------------------------------------------------------- 9,676
Total recoverable from tolls in 1978 dollars-- -- -------------------_------ --- 228,049
Toll revenues at existing rates-- --------------------------------------- 177,637
Net deficiency in toll revenue -------------------------...--. 50,412

1 Both costs and revenues in "Transportation and Utilities" and "Maintenance of Channels and Harbors" increase due to
reclassification of internal credits for intra-agency services, an offset to costs, to a revenue transaction representing services
provided activities transferred to other government agencies and the Republic of Panama.
2 The restated figures for governmental activities include principally cost for fire, sanitation and industrial health serv-
ices, sewers and public areas maintenance, and on transitional basis, police and courts.
3 The 1977 budget estimates repayment to the Treasury of $5,400,000 in unearned costs withheld in prior years. The
actual repayment in 1978 will be made to the extent earned, and the balance, if any, repaid from earnings projected for
fiscal year 1979.
4 It is expected that capital outlay expenditures will be constrained so as to approximate the level of depreciation charge
through the transition period. However, over the long run, capital outlay expenditures will range between $7,000,000 and
$10,000,000 in excess of depreciation.

Question 3(d). What is the estimated cost of capital replacements and improve-
ments shown in the 1978 budget for 1978 and the years immediately following?
How would the capital program be affected by the changes indicated in the pro-
posed treaties?
Answer. The following are the estimated costs of capital replacements and
improvements for the Company and Government for fiscal years 1978 and 1979.
Fiscal year 1980 costs are currently being developed.

[Obligational dollars in thousands]
Fiscal year 1978:
Panama Canal Company --------------------------------------$22, 000
Canal Zone Government------------------------------------- 2, 851
Fiscal year 1979:
Panama Canal Company------------------------------------- 22,000
Canal Zone Government--------------------------------------2, 335
If the Treaty were ratified in the second half of fiscal year 1978 there would
be negligible impact on the fiscal year 1978 capital programs. However, the im-
pact on fiscal year 1979 programs would be anticipated to result in the following
levels:
[Obligational dollars in thousands]
Fiscal Year 1979:
Panama Canal Company-------......----- ------------------------$18,870
Canal Zone Government ..--- ----- -------1,122
21-738-78--pt. 1- 6








78

Question 4. What elements of the proposed treaties and accompanying docu-
inents have implications for the accounting, and especially the depreciation poli- I
vies of the agency that operates the Canal?
Answer. The provisions of the treaties that would most heavily impact on the
accounting and depreciation policies of the Commission would be those address-
ing: the properties that would be transferred to the Republic of Panama; the
activities the Commission would be prohibited from operating; the use-rights
the Republic of Panama grants the United States for housing units to be used
to house U.S. citizen employees of the Commission; and the payment of the $10
million annuity to the Republic of Panama to the extent revenues exceed ex-
penditures after the other annuity payments to the Republic of Panama have
been made.
Question 5. Many studies have confirmed that a majority of Canal expenses
are fixed expenses which cannot be reduced if Canal traffic declines or other op-
erational difficulties arise. For example, Arthur Andersen & Co. prepared a study
which indicates that 65% of Canal expenses are fixed. Under the proposed Pan-
a ma Canal Treaty, when certain activities now performed by the Company are
transferred to Panama or the U.S. military, what will be the proportion of
fixed costs to all costs of the Panama Canal Commission ?
Answer. The Arthur Andersen & Co. report referred to was completed in
November 1970 and was based on a comprehensive, detailed, and extensive study
of costs of the Canal organization. A similar cost analysis must be made before
the new ratio between fixed and variable costs under the new Treaty can be
determined. We have not been able to proceed with this analysis because our
study of treaty-related costs is not yet complete.
Our preliminary assessment is that such study would show that the relation-
ship between fixed and variable costs will remain about the same, even after
shedding various activities and functions and assuming the higher annuity
1'- payments.
Question 6. Taken from the viewpoint of operating the Canal, what would be
the best construction of the term "or its equivalency" as used in paragraphs
4(a) of Article XIII of the treaty providing for the payment to Panama of $.30
per Panama Canal net ton "or its equivalency, for each vessel transiting the
canal . for which tolls are charged?
Answer. "Equivalency" means that any measurement system other than the
current one should yield an amount proportional to the 30 cents per Panama
Canal net ton now accorded to Panama by the Treaty. One such new system, the
"Universal Measurement System", could conceivably apply in the future to Pan-
ama Canal traffic. If it does, the relationship between Panama Canal net tons
and the new tonnage would have to be established, which would in turn determine
the equivalent ton payment to Panama.
In another more specific case, "equivalency" will have to be established for
the current tolls base. Tolls are now $1.29 per Panama Canal net laden ton and
72 cents per displacement ton. Since the Treaty specifies payment only on the
basis of Panama Canal net tons, we will adjust the amount payable for displace-
ment tonnage passing through the Canal after the treaty enters into force. At
current rates, a payment of 17 cents per displacement ton would be made to
Pan ama.
Question 7. Given a need to estimate the effect on Canal Commission costs
of the provision of Article XIII, paragraph 4(a) for adjustment of the payment
of $.30 per Panama Canal ton "to reflect changes in the United States wholesale
price index for total manufactured goods", what portion of Canal expenses
would this part of the payment to Panama represent?
Answer. We are unable to predict the changes in the United States wholesale
price index for total manufactured goods; however, if we were to assume an av-
erage 6 percent annual inflation factor (see attached schedule listing from 1967
throunhli 1977 the average wholesale price index for manufactured goods), this
would result in thie following (assuming effective date of treaty is the begin-
ning of FY 1979) :










Dollars in thousands]


Fiscal year Fiscal year
1979 1934

Rate of payment to Panama, per Panama Canal net tonnage (cetns)--------------- --. 30 33.7
Total payment to Panama based on tonnage projections assuming 40-percent toll increase
with January 1975 sensitivity curves.-------------------- ------------- $40,830 1 $50, 620
Total projected expenses--...------------------------------------------- $236,963 $297,264
Percent payment to expenses--.-----------------------------------_---- --- 17 17
Total payment to Panama with no to!l increase.-------------------------------- $43,230 2 T55, 550
Total projected expenses..---------------------------------------- ----- $239,363 $302,194
Percent payment to expenses------ --------------------------------- 18 18
]Of this amount, $4,506,000 is accounted for by application of the inflation factor.
'Of this amount, $4,945,000 is accounted for by application of the inflation factor.

WHOLESALE PRICE INDEX FOR TOTAL MANUFACTURED GOODS

Percent of
year-to-year
Year Average Increase

1967.....------------------------------------------------------------ 100.0.
1968---------.. ----------------- ---------------------- 102.6 2.6
1969 ------------------------------------------------------------ 106.2 3.5
1970__ .....--------------------------------------------- 110.2 3.8
1971... ------------------------------------------------------------ 113.8 3.3
1972...--- --------------------------------------------------117.9 3.6
1973..----------------------------------------------------- 129.2 9.6
1974 --...-------------------------------------------------- 154.1 19.3
1975.------------------------------------------------------ 171.1 11.0
1976--- --- ---------------------------------------------- 178.9 4.6
1977 2------------------------------------- 187.6 26.1


' Averages for 1967 to 1976 are for calendar years.
2 Average for 1977 is based on 6 months through June 1977; the percent increase is over


the same 6 months of 1976:


1977


1976


January- --- ---------------------------------------------- 184.1 175.3
February.--------------------------------- 185.3 175. 6
March.------.----------------------------------------------- 186.9 176.0
April-- ------ ----------------------- 188.8 177.1
May -------------------------------------------------------- 190.2 177.7
June---------------------------------.-------------------------190.4 178.9
Total.--- ------------------------------------------ 1,125.7 1,060.6
Months---- ----------------------------------------- ---- 6.0 6.0
Average..--- ------------------------------------------ 187.6 176.8

Source: Survey of Current Business and 1971 Business Statistics. The indexes for 1976 were confirmed by referring to
table 3 of the "#holesala Prices and Price Indexes," published by the Dapartmant of Labor.
Question 8(a). From the viewpoint of Canal accounting, how do you recom-
mend the determination be made of the extent to which revenues of the Canal
exceed expenditures for purposes of the $10 million payment to Panama provided
for by Article XIII, paragraph 4(c) of the treaty?
Answer. We are recommending that in determining the adequacy of operating
revenues for the purpose of payments to Panama under paragraph 4(c) of Arti-
cle XIII, the operating revenues of a given fiscal period will first be reduced by
all expenditures of that period including amounts paid or payable for operations
and maintenance, inventory, plant, goods, services and that portion of unfunded
liabilities paid or currently payable, including the payments to Panama under
paragraphs 4(a) and 4(b) of Article XIII and under paragraph 5 of Article III
of the treaty, as well as the cumulative sum from prior years of any excess of
expenditures over operating revenues, as defined above.
Question 8(b). Should "expenditures" as used in that provision be exclusive
of obligations?
Answer. Expenditures would not normally include obligations for outstanding
but unperformed contracts and purchase orders. However, obligations for major
items such as improvements would constitute an expenditure within the mean-
ing of the provision.
Question 8(c). Should "expenditures" as used in that provision include re-
serves for future operating requirements and capital replacement and better-
ments?








80o

Answer. Expenditures as used in this provision would not normally include
any reserves for future operating requirements such as the provision for marine
accidents, overhauls, etc. With respect to reserves for capital replacement and
betterments, we are recommending that the tolls formula be revised to permit
generation of funds for these capital items and that any such funds generated be
segregated and held for future capital use.
Question 9. How would you recommend the annual amount of up to $10 mil-
lion for payment to Panama under Article XIII 4(e) of the treaty be treated-
(a) on the books of the agency operating the Canal?
(b) in the determination of tolls rates?
if no further policy guidance were forthcoming as to the structure and account-
ing of the Commission?
Answer. (a) I recommend that only that portion of the $10 million annuity
that the Commission can pay in accordance with the provisions of this Article
and subparagraph, Article XIII 4(c), be booked as a liability of the Commissiou
and that that portion of the $10 million annuity which the Commission cannot
pay be treated as a contingent liability of the Commission and be reflected in its
Statement of Financial Condition by means of a footnote.
(b) I understand that the $10 million per year is only a contingent payment,
and thus is not an element that must be recovered through tolls. Therefore, any
payments made under the provisions of this Article and subparagraph would
not be an expense of the Commission but rather a reduction of the Commission's
equity.
Question 10 (a). Article III, paragraph 5 of the proposed Panama Canal Treaty
provides for an annual payment of $10 million, examined every three years, for
the provision of certain public services by Panama. What is the present cost to
the Canal enterprise of those services; how are they funded; and what is the
projected annual cost to Panama for each one of the services?
Answer. Predicated upon fiscal year 1979 cost estimates for the involved sovwn
(7) public services under our current mode of operation, and recognizing that
the scope and mission of these public services will be limited to only Commis-
sion operating and housing areas, our comparison of costs (whether provided by
the Commission or Panama) reveals the following:

Public services related only to
Commission operating and
housing areas I
Entire present
Canal Zone Estimated cost to
Company/Gov- Commission if Estimated cost to
ernment cur- services pro- R.P. if services
rent cost esti- vided by Corn- provided by
Public services mates mission Panama
(1) (2) (3) (4)

Police------------------------------------------- $10,204,000 $6,457,000 $1,045,418
Fire protection---------------------------------- 4,362,000 1,776,000 1,722,000
Street maintenance---------------------------------- 2,592,000 553,000 553,000
Street liehting.------------------------------------- 489,000 234,000 234,000
Streetcleaning....------------------- ----------------- 116.000 96,000 96,000
Traffic mana2ement- --- ------------- 92,000 36,800 36,800
Garbageetrash collection----------------------------- 1,788,000 740,000 740,000
Total cost-------------------------------- 2 19,643,000 9,892,800 4,427,218
Less: Recoveries:
Police..-----.-----...------------- ------------------ 51,000 -------- -------------.. .-...
Fire------------------------------------- 2,889,000 ------ ---- -----.
Garbage collection.------------------------------ 1, 556, 000 ----------------
Total recoveries--..-------. -----..--------------- 4,496,000 9,892,800 4,427,218
Net operating cost--....----------------------------- 4 15, 147, 000 9,892,800 4,427,218

1 This comparison of costs assumes that the quality and level of public services provided Commission operating and
housing areas will be equal to those currently available- whether such public services are rendered by either Panama or
Commission employees. In view of the unique nature of their work, it does not appear practical to assume that police per-
sonnel would relocate along with a transfer of function to Panama. Thus, with the exception of police, costs remain essen-
tially the same under both alternatives due to transfer of personnel and continuation of current earnings in accord with
the spirit and intent of the treaty. Costs and recoveries for public services outside Comm;ssion operating and housing
areas are not inclured.
2 Actual fiscal year 1977 was $15,842,000.
3 Actual fiscal year 1977 was $3,417,000.
4 Actual fiscal year 1977 was $12,425,000.







81

The net cost of these public services is basically a cost to the Panama Canal
Company. However, because of statutory requirements to account for Canal Zone
Government data on a separate basis the major portion of the public services are
funded initially by Canal Zone Government appropriations. These appropriations
are then repaid to the U.S. Treasury by the deposit of revenues collected for fire
and certain police services and deposits by the Panama Canal Company for the
net cost of Canal Zone Government. The exception to this is the garbage and
trash collection which is a Company activity, a large portion of which is recovered
from military agencies and others. A small portion of the garbage collection costs
are charged against the Canal Zone Government appropriations and then repaid
by the Panama Canal Company as a portion of the net cost of the Canal Zone
Government.
Question 10(b). Article III, paragraph 5 states that adjustment of the annual
payment "should be made because of inflation and other relevant factors affecting
the cost of such services (provided)". Given the experience of the Panama Canal
organization in the administration of public services in the Canal Zone, what spe-
cifically should be used as the inflationary indicator for adjustment, and what are
the "other relevant factors" cited in the Treaty?
Answer. At the present time, I am not aware of any indicator applicable to the
Republic of Panama which could be used to measure the effect of inflation on
the cost of providing the services listed in Article III, )aragraph 5 of the Treaty.
However, with the cooperation of the Government of Panama, it is possible that
an inflationary indicator could be developed for use in determining whether ad-
justment to the annual payment would be necessary when costs are reexamied.
The commitment is to pay for the costs incurred by Panama. The review every
three years will reassess the actual cost to Panama. In determining these costs,
the United States and Panama will look at the effects of inflation as well as
other relevant factors such as the cost of labor, materials, etc.
Question 11. What amount of liabilities (by fiscal year and in total) to present
employees of the Canal organization are expected to be incurred by the U.S. Gov-
ernment as a result of the proposed treaty arrangement? What are expected to
be the sum of liabilities to employees of the Commission for each of the first
several years of the Commission's existence?
How will the per capital and total amount and proportion of personnel costs
of the Panama Canal Company and Canal enterprise compare with personnel
costs under the proposed Commission? Upon what assumptions are the estimates
of personnel costs based? (For example, do you assume that the minimum wage
and tax factor will continue to be in force? Because of the treaty provision
that protects terms and conditions of employment?)
Answer. As previously mentioned, the Company has in progress a compre-
hensive study of the cost impact of the treaty. Information pertaining to the lia-
bilities to employees of both the Canal organization and the Commission, as well
as changes in personnel costs, will be determined from this study. The data re-
quested will be furnished the Subcommittee upon completion of the study.
Relative to severance pay and repatriation costs, we have preliminary esti-
mates that indicate first year costs of approximately $6.1 million for severance
pay and $1.4 million for repatriation.
With respect to the liability identified with a proposed liberal retirement plan,
the final plan has not been decided upon. However, the Administration released
on November 21 an early retirement proposal for union consultation and con-
sideration. The Civil Service Commission has estimated the cost of this proposal
at $135 million to be financed by Congressional appropriations at the rate of
$.4 million per year for a period of 30 years.
For calculating personnel costs under the Commission, it is assumed that cur-
rent wage practices will be continued. It is also assumed that the minimum wage
will apply to Commission employees after the treaties come into force. However,
the U.S. minimum wage will not apply to the private sector, including contractors
of the Commission. These assumptions depend on the provisions of the final
implementing legislation.
QuOestion 12. How will the cost of living for U.S. and Panamanian employees
of the Canal be affected by the terms of the treaties? Will any change in the
cost of living of employees affect the personnel costs of the Canal Commission
and the prospective liabilities of the U.S. government to employees?
Answer. U.S. and non-U.S. citizen employees of the Panama Canal Company/
Canal Zone Government will be affected in their cost of living in different ways.








82

U.S. citizen employees and those recruited from outside of Panama will have
the use of DOD-operated hospitals and schools for the life of the Treaty and mili-
tary sales purchase privileges for the first five years. It is anticipated that legis-
lation will be sought to compensate these employees with a cost of living allowance
after the first five years.
Non-U.S. citizens will lose commissary privileges (immediately), health and
education privileges (after specific periods or conditions) ; further, they will
not be allowed military sales purchase privileges.
Personnel costs of the Commission should increase to cover any cost of living
increase authorized. The cost of living increase would be calculated prior to its
enactment five years after Treaty implementation. The exact amount would
depend on the number of eligible employees and the difference in costs to then
from purchasing in the Republic of Panama rather than in United States
Government facilities.
Question 13. What are the projected costs by fiscal year for the training pro-
grams which might be initiated under Article X, paragraph 3(b) of the Panama
Canal Treaty?
Answer. Attached is a schedule showing the estimated costs for one possible
program which might be initiated under Article X, paragraph 3(b) of the
Panama Canal Treaty. This assumes a treaty effective date of October 1, 1978.

PROJECTED ADDED COST OF NEW AND EXPANDED TRAINING PROGRAMS FOR PANAMANIAN EMPLOYEES AND
APPRENTICES UNDER THE PROPOSED NEW TREATY

Estimated costs (in thousands)
Items Fiscal year Fiscal year Fiscal year Fiscal year
1978 1979 1980 1981

Expanded apprentice program:
15 additional apprentices each year (90 versus 75) ------------ 39 210 294
2 additional instructors for the apprentice
school..----------------------------..------------------- 28 37 37
1 additional clerk for the apprentice school----------------------- 6 8 8
Installation of security fencing to protect apprentice
school tools and equipment------------------- -----------------57................
Capital equipment (machine tools, trainers, etc.)
for apprentice school15 10 -----------------.-------1.
Noncapital equipment supplies and materials for
apprentice school----------------------------- 20 15 15 15
Specialized and expanded on-going training (skill,
supervisory, and managerial):
2 additional instructors for training and management
development--------------------------------------------- 28 37 37
2 additional language instructors (English and
Spanish language training)- ------------------------- 11 33 33
1 additional clerk for training center- ----------------------------6 8 8
Audiovisual aids training equipment and supplies----------------- 10 10 10
Specialized training (off-isthmus and contract)--------------------- 50 50 50
Salaries and benefits of 10 additional towboat
master/pilot traininees--------- --------------------------- 100 250 400
Total------------------ 35 360 658 892

Note: Existing classroom space is adequate to meet the additional training requirements of the new treaty. Suitable
facilities will be sought in buildings available to the Panama Canal Commission. For this reason no costs are projected
above for this purpose. However if such facilities were to be constructed, an estimated $250 000 capital expenditure
would be required in fiscal year 1979.

Quc.tion, 1/. The present. Panama Canal enterprise has been described by you
and m;iny otlher- as a highly interdependent organization in which changes in
one part of the organization greatly affect other offices, hureaus. etc. The Annex
to the Panama Canal Treaty lists 20 types of activities now carried out by thle
Panama Canal Company and Canal Zone Government. which are not to be under-
taken iinder the Pnnama Canal Treaty.
(0) THow will the cess:ition of tl'hs,( a .tivities by the Cannl enterli'rise affect tho
tol;il 'l:1n.incing of the Canal?
Ans.\r. In re()pondin,. to this qu-4tion, the police protection function should IIe
ndilr ,.ssd sep:iratly. For t he transition period, this function will be continued by
tit. (',mmI)].issioll and, accordingly, tlere will be no substantial reduction in these
<.ost '. I't otha (lrini and after llie transition period, the Commission will he obli-
gat(ed to pay $10 million annually to Panama for this and other services.







83


We have not separately identified the net effect of elimination of the other spe-
cified activities. It is noted, however, that many of them contribute positively to
the current profit picture of the Company. We do have tentative estimates that
show that the net effect of all functional changes, excluding transitional costs,
will be a net saving of $19 million. This will contribute toward the payments to
Panama of $10 million for public services, $10 million fixed annuity, and 300 per
Panama Canal ton.
Question 14-(b). What is the annual profit or loss to the Company/Government
of each of these activities?
Answer. There is shown below the cost or margin realized in FY 1977 for each
of the subject activities. In furnishing this data, it should be emphasized that in
most cases, neither the cost nor margin shown is representative of the cost impact
under the treaty. There are several reasons for this. First of all, the police, prison
and court functions are to be continued by the Commission during the transition
period. Second, the margin results shown do not reflect overhead costs; these costs
will undoubtedly be 'affected by cessation of the activities. Finally, many of the
services will still be required by the Commission and have to be provided by out-
siders. To the extent that the rates accessed the Commission for such services dif-
fer from the prior cost, the results will alter the profit and loss picture.
Fiscal year 1977
Activity margin (cost)
Retail units (includes laundry and production plants)------------- $(2,755)
Food units----------------------------------------------- ------ (232>
Theaters and bowling alleys----------------- ---------------------- (229)
Motor transportation (commercial)-------------------------------- 99
Railroad (including Panama freight house)------------------------- (470)
Marine bunkering operations--------------------------------------- 216
Terminals operations-------------------------------------------- 3, 646
Printing services-------------------------------------------------- 4
Health --------------------------------------------------- ----- (175>
Education ----------------------------------------------------- 3, 653
Postal services-------------------------------------------------- (794)
Customs and immigration---- -----------------------------------(1, 368)
License section----------------------- ---------------------------_ 294
Magistrates courts----------------------------------------------- (50)
Maintenance division (centralized maintenance services)------------- 318
Industrial division (vessel repair)--------------------------- ------1, 079)
Electrical division--------------------------------------- ------- 181
Launches ------------------------------------- ------------------ 257
Tugs (harbor)-------------------------------------------------- 402

Subtotal ------------------------------------------------- 4, 076
Less: Police protection (includes prison system) ---------------------(8,604)

Total ---------------------------------------------------(4, 528)
Question lf(c) In what manner and in what amounts will the activities that
continue be carried on by the Commission be affected by the cessation of possibly
interdependent activities?
Answer. At this time we can provide no definitive answer as to how the cessa-
tion or partial cessation of certain activities will specifically affect the activities
that continue to be carried on by the Commission. This matter is being considered
as part of the comprehensive cost analysis which is scheduled for completion in
January of 1978.
Question 15. Maps drawn in accordance with the proposed Panama Canal
Treaty show a plethora of military areas adjacent to operating areas of the
Panama Canal Commission. Further, the treaty and its implementing agreements
prescribe subjects for coordination between the Commission and the military.
What are the costs of coordination of administration likely to be (under the
proposed treaty) and how will the financial responsibilities for administration
be divided?
Answer. The treaty recognizes the need for coordination between the Commis-
sion and the U.S. military agencies and for a continuation of relationships be-
tween agencies on a basis similar to that which exists today between the Panama
Canal Company/Canal Zone Government and the military. It is not possible







84

at this time to identify the costs that might be associated with the coordination
between agencies. However, in those cases where one agency can be expected to
utilize the facilities or services of another agency it is anticipated that it will
be done on a cost reimbursable basis under interservice support agreements as is
presently the normal practice; e.g., the provision of power, water, educational
and medical services, etc.
Question 16(a). The Panama Canal Treaty does not appear to contain any
language restricting the ability of the Commission to provide wholly-owned
modes of transport to the U.S. If this absence of language imposes no restrictions.
is it understood that the asset of vessel SS Cristobal would become the property
of the Commission?
Answer. Yes; it is contemplated that the SS Cristobal will become the property
of the Commission.
Question 16(b). How would the costs of transportation and resupply associated
with the present functions of the SS Cristobal be affected by the treaties?
Answer. Upon entry into force of the Treaty, the Panama Canal shall cease
to operate such retail activities as commissaries, department stores and food
outlets. During FY 1977, these units accounted for 27 percent of the 183,801
measured tons carried on the SS Cristobal. However, since the U.S. employees
of the Commission and their dependents will be eligible to purchase in military
commissaries and post exchanges for five years, it is possible that tihe military
tonnages on the SS Cristobal will increase correspondingly to accommodate the
added workload. In such cases, the impact on the SS Cristobal operation due to
treaty implementation will be minor.
Quest ion. 16 (c). If the U.S. did not retain the services of the Cristobal under the
auspices of the Commission, how would the cost of services associated with
the functions of the Cristobal be affected?
Answer. This would probably result in increased costs. Numerous studies have
been made of the SS Cristobal to determine the need for its continuation. All of
the studies, the latest of which was completed in July 1976, have concluded
that this Company-controlled operation has produced significant cash savings
to the Canal agency.
Question 17. What provisions for emergency infusions of resources must be
made to keep the Canal operating in event of cessation of operations under the
proposed treaties?
Answer. The Panama Canal Company has under existing law the authority
to borrow up to $40 million from the U.S. Treasury and the authority to seek
appropriations to cover funding requirements beyond those that can be met out
of its operating revenues. The retention of these two funding provisions would
provide the Commission with the mechanism for obtaining the necessary resources
to keep the Panama Canal Commission operating under adverse or emergency
circumstances.
The amount of the borrowing authority should be reviewed periodically for
adequacy, especially in light of the loss of authority to defer payments to the
U.S. Treasury which now amounts to in excess of $40 million.
Question 18. In addition to meeting its operating expenses. the Panama Canal
Company now has a number of statutory financial obligations such as payment on
the net direct investment of the United States in the Canal enterprise, repayment
of any appropriations made to cover Canal losses, and several other obligations.
In view of the obligations to the Republic of Panama incurred under tile proposed
treaties, should the present financial obligations of the Canal to the U.S. be
reconsidered? Which requirements would be least needed or relevant under the
proposed Commi.s.ion?
A.nswer. The Panama Canal Company is required under existing law to
reimburse the U.S. Treasury for the net cost of the Canal Zone Government and
to pay into the U.S. Treasury interest on the United States' net direct investment
in the Panama Canal Company. The Panama Canal Company also has under
existing law the authority to borrow up to $40 million from the U.S. Treasury
- nd the authority to seek appropriations to cover funding requirements beyond
those that can he met out of its operating. revenues.
Upon entry into force of the Panama Can.il treaties, the Canal Zone Govern-
ment and Panama Canal Company are prohibited from continuing to operate in
the Republic of Panama. Instead a new Government agency named the Panama
Canal Commission will be constituited by and in conformity with the laws of the
Ignited Siales to carry out tlhe United States' responsibility under the treaties.







85

As a result of these treaty provisions, the reimbursement of the U.S. Treasury
for the net cost of the Canal Zone Government becomes, per se, irrelevant since
the agency would no longer exist. However, it should be recognized that the Com-
mission would still bear the cost of those services formerly provided by the
Canal Zone Government to the extent such services are still provided for the
benefit of the Commission, except that the Commission would incur the cost of
these services directly instead of through the net cost of the Canal Zone Gov-
ernment as the Panama Canal Company now does. The Commission would as a
result of this financing arrangement lose the backstop financial flexibility the
Panama Canal Company now has through the withholding of payments to the
U.S. Treasury for the unearned net cost of the Canal Zone Government.
With reference to the Company's present obligation to pay interest to the
U.S. Treasury on the United States' net direct investment in the Panama Canal
Company I understand that the Administration will seek repeal of this require-
ment. Although the elimination of this obligation has the effect of offsetting the
Commission's increased obligations to the Republic of Panama, by the amount of
the annual interest payments, the Commission's backstop financial flexibility
would also be affected because under the present law the interest obligation to
the U.S. Treasury only has to be paid when it is earned.
The two statutory funding provisions that now authorize the Panama Canal
Company to borrow funds from the U.S. Treasury and to seek appropriations to
cover funding requirements beyond those that can be met out of its operating
revenues should be carried forward to the Commission. These funding provisions
would provide the Commission with the mechanism for obtaining the necessary
resources to keep the Panama Canal Commission operating under adverse or
emergency circumstances.
Question 19. Article III, paragraph 3 of the Panama Canal Treaty provides
that the United States shall carry out its responsibilities in reference to opera-
tion of the Canal by means of a U.S. Government agency "which shall be consti-
tuted by and in conformity with the laws of the United States of America." Given
the projected financial obligations which the Panama Canal Commission must
meet within its overall mission of running the Canal efficiently, what form do
you believe the U.S. Government agency should take?
Answer. In terms of management and operations, an organization along the
lines of the present Panama Canal Company would probably be the most efficient
and flexible. That agency has demonstrated, during the 26 years since its crea-
tion, that it can operate the Canal efficiently and, accordingly, it would seem
advisable to have the new Panama Canal Commission organized, as closely as
possible, along those same lines.
Question 20. Assuming the treaties are ratified, would revenue from tolls at
present rates cover the cost of operation of the Panama Canal, together with
facilities and appurtenances related thereto, as required by the tolls formula
enacted by Congress?
Since it has been estimated that the provisions of the new treaties would re-
quire increases in rates of tolls of from 25 to 46 percent, or possibly more, and
assuming increases in rates of tolls of that range:
(a) What effect would such increases have on traffic through the Panama
Canal, especially for U.S. shippers and on U.S. consumers?
Answer. Studies completed prior to the toll rate increases of 1974 and 1976,
indicated that toll rate increases of 25 and 46 percent would reduce cargo tonnage
from that forecast through the Canal by 2.7 and 3.1 percent, respectively, by
1985. With the implementation of the two toll rate increases and of the measure-
ment rule changes, tolls have been effectively increased by approximately 50 per-
cent. It is not precisely known what the effect would be of additional toll rate
increases beyond stating that if all prior toll rate increases are considered
cumulative an additional 25 percent increase would take Canal tolls above the
maximum calculated in the pre-toll increase studies. If they are not, the latitude
to increase tolls would be greater.
In order to more precisely answer the question of toll rate impact, the Depart-
ment of State and the Panama Canal Company have commissioned Interna-
tional Research Associates to forecast Canal traffic and to analyze the potential.
long term effects of toll rate increases. The results of the study will be available
in late January, 1978.
Based on prior analyses, such as the study "The Economic Value of the Panama
Canal," dated December 1973. the added burden to the U.S. economy of any
increase in tolls would be about one-third of the total increase.







86

Question 20(b). What alternatives to the use of the Canal would be available
to present U.S. users?
Answer. Different alternatives are available to different users depending on
the commodity and trade route, and alternatives to the Canal would change over
time, but basically, the following types of alternatives would be available:
1. Bypass of Canal by vessels too large to transit the Canal, such as is now
occurring to a significant degree in the U.S.-Far East coal trade;
2. Changes to different modes of transport such as the combination ocean/
laud biridge-mini bridge concepts currently operational in the U.S., pipeline, and
air;
3. Changes in sources of supply, as for example with a commodity like alumina/
bauxite. (Alumina/bauxite moves both ways in Canal traffic and swapping ar-
rangements are apparently feasible.) ; and
4. Changes in markets such as happened with iron ore from the west coast
of South America. In 1960, for example, iron ore shipments through the Canal
peaked at 8.7 million long tons with current levels of approximately 2.8 million
tons reflecting the change in demand patterns as much of the iron ore from the
west coast of South America shifted to new markets in Asia.
Quc..iion 20(c). How do such alternatives compare to the cost of use of the
Canal at present rates and at rates reflecting increases to 25 percent to 46
percent?
Answer. Except in isolated instances, we have no direct knowledge of how
current rates (Canal vs alternatives) compare. The most recent study now
available to us indicated the sensitivity of various commodities to toll increases.
These sensitivity estimates serve as general indicators of estimated cost dif-
ference over time. For example, what was estimated to be sensitive to any
toll increase over 25 percent with maximum revenues being achieved at about
1.50 p.rcent. Bananas were found to be sensitive to toll rate increases of less
than 25 percent with the maximum revenue being achieved at 25 percent. Each
c,~..nodity/trade route is different but the general approximations of sensitivity
indicate the difference between Canal costs and the costs of alternatives.
The Department of State and the Panama Canal Company have commissioned
a stuAOy to be completed in January 1978, which will review the alternatives
op,-ii to shippers and will establish sensitivity estimates based on current toll
l'il l S.
Qtwftion 20(d). What would be the comparative effect of tolls increases in
the first year of the increases and in succeeding years?
Aiiswer. Pre-toll rate increase studies indicated that a toll increase of. say
251 percent, would yield a net return in the first year of 24.4 percent, a return
of 22.6 percent in the fifth yea r, and 22.2 percent in the tenth year, at which time
the effect of the toll increase would have stabilized. We will have an updated
and more definitive answer on the effect of toll rate increases when the newly
coiiinmi.ss.ioned study is completed in January 1978.
Qiic.stion 20(e). How would changes in the magnitude indicated affect the
ec,. i'omies of the U.S., Europe, Central America, South America, Japan, Asia,
.Australia and New Zealand?
Answer. There are no current studies which delineate the potential effect of
additional toll increases of between 25 and 46 percent on the economies shown
above. All studies completed prior to the various toll rate increases since 1974.
have indicated that. no nation's economy would be severely affected by toll rate
i c(eases of these magnitudes. In general, the effect would probably be minimal
wn the larger, less dependent economies and more heavily felt by the smaller
(o o'(imies more dependent on the Canal.
Altli,,,-h the question will not he addressed specifically by the study currently
,,rierwavy, it will be possible to draw references from it as to the general impact
of iw toll rate in.reases on Canal users by nation.
(;i'r ,fion 21. To wlint degree would non-toll fees associated with the use of the
Can l (,piln.ta,. bunklering. etc.) l)e affected by the terms of the treaties?
.l\swer. There is no requirenwnt to (clmnge the system of fees for services
s-.h as. ilotnap, lineliandlers, etc., which will continue to be performed by the
Ci' hiMiss..ion. Those services. such as bunkering, which are to be provided by
Pla; ina will I)1 s, ie.r to charges determined by Panama. Both Panama and
theP I'.11:nin r:1nal C(fisision n.-o obligated by the Treaty to establish charges
l,;i.(f are- "J.i. r,4,.:mlle, equitable, and consistent with the principles of
inr,.:'n.'lional l.'.w."







87

Question 22. Would user charges for services now provided by the Canal or-
ganization and transferred by the Treaties to the U.S. military or the Govern-
ment of Panama or Panamanian private enterprise be affected?
Answer. At this time, we do not know what the specific charges for services
will be from the military or the Republic of Panama. There are general and
varying constraints on charges to be levied on U.S. agencies and U.S. citizen
employees and dependents by Panama. However, except for transit and ancillary
services which are required to be just, reasonable and equitable, I am informed
that there are no treaty constraints on charges to other users.
Question 23. From the viewpoint of the operator of the Canal, what procedures
are now instituted to insure compliance with international user guarantees and
how would such measures be modified, if at all, under the proposed treaties?
Answer. The procedures now instituted lare set forth in Title 35 of the Code of
Federal Regulations, principally in Part 131.
There are two operating practices which will be affected by the proposed
treaties. First, under present rules, the United States is entitled to obtain, as
a condition of transit, information concerning the origin, cargo, and destination
of all vessels; under the proposed neutrality treaty vessels of war and auxiliary
vessels would be entitled to refuse to disclose to Canal officials such information.
Second, under present regulations use of the Canal by enemies of the United
States is restricted during wartime; under the proposed neutrality treaty, the
United States cannot exclude on this basis.
Question 24. What is the effect of the provisions of the Hay-Pauncefote treaty
and of the 1903 treaty with Panama in regard to the practice and method of
levying tolls for the use of the Panama Canal? To what extent are the same
provisions reflected in the proposed new treaties?
Answer. Under the old and new treaties, the United States has the authority
to set tolls. The only treaty constraints are that they be non-discriminatory, just,
reasonable and equitable. We would envision that the implementing legislation
would make no substantial changes in the internal United States procedures and
standards for setting tolls. However, it should be noted that the Panama Canal
Consultative Committee established under paragraph 7 of Article III of the
Panama Canal Treaty shall advise both Governments concerning general tolls
policy. Moreover, Panama will have an increased input into the tolls process
by virtue of its participation on the Board and in the management of the new
Commission.
ADDITIONAL QUESTIONS
I. Introductory
Article VI, Paragraph 6 of the Agreement in Implementation of the Panama
Canal Treaty provides that the Panama Canal Commission "shall on behalf of
the utilities agencies of the Republic of Panama continue to provide utilities
such as power, water, and sewers to industrial and commercial enterprises and
other enterprises and other persons in the area, other than United States citizen
employees and dependents." The paragraph further states that Panama will set
the rates and bill customers for the utilities, and reimburse the Commission for
providing services.
Question A. What is the projected cost of continuing to provide utilities such
as water, power, and sewers to Panama?
Answer. The Treaty states that Panama shall reimburse the Commission for
its cost in providing such services. We do not believe that these costs will vary
substantially from those that would obtain without a Treaty.
Question B. What rates have been used or will likely be used by Panama in
billing customers?
Answer. We do not know what rates Panama will use, but we presume they
will assess the same rates as they charge other customers in the Republic of
Panama.
The Panama Canal Company's rates for furnishing potable water presently
range from an average of 27 to 47 cents per 1,000 gallons, depending on the
category 'of customer. Panama's current rates for the same general category of
customers range from 77 cents to $1.11 per 1,000 gallons.
The Panama Canal Company's electric power rates range from an average of
23 to 46 mills per kilowatt hour, again depending on the category of customer,
while the rates in Panama range from 66 to 77 mills per kilowatt hour.
The Panama Canal Company presently charges $7.000 per month for telephone
services provided to residents in the Canal Zone and $6.50 per month for corn-







88

mercial service. The system allows unlimited telephone calls without operator
assistance to any number within the Canal Zone and toll free calls to Panama's
terminal cities. Panama charges $10 per month for residential users and $20
per month for service to commercial users. Under the Panama system, calls to
Canal Zone numbers are subjected to toll charges.
Question C. How much differential has there been or will there likely be be-
tween the amounts charged by Panama on the one hand and the cost to the Com-
mission on the other?
Answer. At this time, we do not know what the differential will be between the
costs incurred by the Commission for providing these services and the rates
charged by Panama to the users.
Question D. If Panama is to reimburse the Commission for the cost in pro-
viding such services, can this reimbursement be an accounting offset against the
amount to be paid by the U.S. in Articles III and XIII?
Answer. The Panama Canal treaties do not provide for the offsetting of any
amounts the Republic of Panama owes the Commission against the amounts the
Commission owes the Republic of Panama. There appear to be advantages in
the arrangement suggested and we see no bar to making such an arrangement
with Panama.
Question 01. What is the projected cost of the obligations incurred by the U.S.
under para. 3(c) of Art. VIII of the Agreement in Implementation of Article III
of the Panama Canal Treaty provision which requires a matching sum for the
purchaser of an equity in the Panamanian Social Security System by former
Canal employees hired by the Government of Panama?
Answer. There should be no additional obligation incurred by the United
States in matching the amount of contributions transferred by employees elect-
ing to purchase an equity in the Social Security System of Panama if such
matching funds are withdrawn from the Civil Service Retirement Fund. The
United States Government earlier incurred this cost when the Agency's contri-
butions were made to the Civil Service Commission Retirement Fund for these
employees.
Question 02. What will be the effect of Article IX of the Agreement in Imple-
mentation of Article III of the PC treaty on the carriage of goods by the SS
Cristobal? This Article requires acquisition of Panamanian goods where com-
parable in quality and price to alternative sources.
Answer. The management of the Panama Canal enterprise has increasingly
over the years followed a policy of procuring supplies and services from the Re-
public of Panama whenever the Canal's criteria on quality, reliability and costs
have been met. Consequently, I would not expect the amount and nature of cargo
carried on the SS Cristobal, after the treaties enter into force, to be materially
affected by the provisions of this Article in itself. This will have to be reevalu-
ated periodically during the life of the Treaty.
Question 03. What will be the costs to the Commission of the Requirement im-
posed by Para. 5 of Art. X of the PC Treaty that the U.S. establish "a policy of
periodic rotation, at a maximum of every five years, of U.S. citizen employees
and other non-Panamanian employees, hired after the entry into force of this
treaty"?
Answer. The present average cost of recruiting an employee with a family
from the United States is $5,300 and the repatriation liability is $6,000. Last
fiscal year we recruited 30 employees in occupations that the Panama Canal Com-
mission will utilize and which would be subject to the periodic rotation require-
mnient of the treaty. Assuming some increase in this number as a result of in-
creaed turnover after ratification, it is estimated that 45 such employees will
need to be recruited from the United States during each of the first three years
of the treaty. Thereafter, the number should begin to decrease by an estimated
10%'c a year. Further assuming that the recruited employees serve for a full
five years, the cost of the rotation policy is estimated at a minimum of $5 mil-
lion for the life of the treaty.
Question 04. Must the land liepones issued in connection with Article IV of
the Agreoment Implenentation of Article III of the Panama Canal Treaty be
issnrd without charge?
Answer. Under the provisions of paragraph 2 of Article IX of the Panama
Canal Treaty, Panama has made a conmmitminent to allow private business and
non-profit organizations located in the present Canal Zone to continue to operate
"at those locations under the same terms and conditions" prevailing prior to







89


the entry into force of the Treaty for a thirty-month transition period thereafter.
At a minimum, therefore, the phrase "the same terms and conditions" would in-
clude the express terms of any land licenses currently issued by the Canal Zone
Government. As a matter of policy the Canal Zone Government does not now
impose any administrative fees or charges for the preparation and issuance of
land use licenses.
As far as the charges for the use of the land itself are concerned, Article IX
of the Panama Canal Treaty provides that owners of buildings and other improve-
ments to real property located in areas subject to the licensing procedure estab-
lished in Article IV of the Implementing Agreement will be authorized to con-
tinue using such land as outlined in that Article. Since these are areas made
available for the use of the United States under the Treaty, the United States
must agree to terms and conditions of any land licenses to be issued. Presumably
the United States will continue the present Canal Zone Government policy of
charging rentals only for land areas used for commercial purposes.
With respect to those areas not subject to the land use licensing procedure
established in Article IV of the Implementing Agreement, paragraph 5 of Article
IX of the Treaty provides that the owners of buildings located thereon "may con-
tinue to use the land upon which their property is located subject to the pay-
ment of a reasonable charge to the Republic of Panama." Subject to this stand-
ard of reasonableness, the amount of land rental rates to be charged in these
cases would, of course, be decided by Panama.
Question 05. In Article VI of the Agreement in Implementation of Article III
of the PC Treaty, the U.S. transfers to Panama all right, title, and interest in
the housing areas now operated by the PCC. Panama then places at the disposal of
the U.S., without cost. the use of such housing as is needed for housing to U.S.
employees. How would the use of such housing be related to the accounting of
the Panama Canal Commission and how would user charges, if any, be configured
for such housing?
Answer. We would propose that the Panama Canal Commission establish use-
right assets for those houses the Republic of Panama grants the United States
for its use. These use-right assets would be established using the net book
value of each house as recorded in the books of the Panama Canal Company and
would be amortized at the same annual dollar value as they were depreciated
under the Panama Canal Company books. The unamortized use-right for any
house turned over to the Republic of Panama during the life of the treaty would
be written off against the equity of the Commission.
Rental rates for these housing units would be established following the Panama
Canal Company's present rental comparability policy which follows the guidelines
contained in 0MB Circular A-45.
Question 06. Article VIII 2(d) of the Agreement in Implementation of Article
III of the PC Treaty stipulates that the Commission's contribution to the Social
Security System of the Republic of Panama for each applicable employee would
be equal to what the Commission would have paid under the Federal Employees
Health Benefits Plan. On what basis are employers' contributions computed under
the Panamanian Social Security System? Is there any difference between the
figures which would be derived from the normal employer contribution under the
Panamanian Social Security system as compared to the Federal Benefits Plan?
Answer. The employers' contribution to the Panama Social Security System is
8.75 percent of the employees' monthly salary. We have been informed that only
a small portion (1 percent or less) of this amount is apportioned to the Health
and Maternity Benefits Program of the system. All of the employee's contrilbu-
tion of 6.75 percent is apportioned to the Health and Maternity Benefits Program.
Effective January 2, 1978, the Company/Government's contribution to the Fed-
eral Employees' Health Benefits Plan for family coverage is $694.00 per annum
per employee regardless of the employee's rate of pay.
The average annual rate of pay for non-U.S. citizen employees is presently
$8.425.00. The employers' contribution to the Panama Social Security System on
this amount would be $737.00 per annum, of which about $84 is apportioned to
the Health and Maternity Benefits program.
Mr. BOWEN [presiding]. Thank you. I am pleased to be presiding
when two very good friends and two dedicated public servants are
testifying.






90


Both of you are doing an outstanding job in your respective capac-
ities.
I would like, at this time, to ask both of you just a few questions.
Mr. Secretary, in my visits to the Canal Zone and the opportunities
I have had to meet with employees down there in the last few years-
my last visit being 1 year ago at approximately this time-I found that
their great concerns have been over employment problems, over early
retirement, over their concern that the Defense Department should be
concerned about transfers to other positions, and over Federal employ-
ment here in the United States. I think all of us here in the Congress
are very deeply concerned about this entire area.
We are hearing from our constituents who live down there. We are
hearing from people who are writing to us who are not constituents:
They are all concerned about the question of compensation of em-
ployees, how they will be paid, and to what extent employees are being
consulted.
Could you comment just on this area?
Secretary ALEXANDER. Yes, Congressman Bowen, it has been a con-
tinuing concern of the employees and also of mine as a Stockholder-
of the Panama Canal Company.
In a trip to the Canal Zone last March, I met with leaders of em-
ployed groups. I have also met with individuals here in Washington
and with Governor Parfitt. Additionally, there have been meetings be-
tween employee groups and members of my staff.
I feel that it is imperative for us to make those benefits which are
offered to employees as fair as possible, particularly to those who are
involuntarily separated. We have to be fair as well to those who may
choose to leave voluntarily, but we must not provide benefits which
encourage people who are now good employees and would continue
to be good employees with the Panama Canal Commission to leave.
It is that kind of balanced approach that we want to achieve as we
try to develop employee benefits that would be equitable to the indi-
viduals involved.
I would place the highest priorities on those who might be in-
voluntarily separated if the treaties are ratified.
Mr. BOWEN. I note particularly in my part of the country, the South,
where we have a strong military tradition, that many of us do have
constituents who serve in the Canal Zone in one capacity or another,
we get a good deal of mail. We hear a great deal from employees who.
are concerned that our Government show the same kind of concern
for them that we seem to show for the Panamanians.
So you feel that you have an established structure of consultation
with employees and that you have a clear-cut decisionmaking process
established for determining employee benefits and compensation?
Secretary ALEXANDER. I do feel that we have established this con-
siltntion and we have a continuing cognizance of the claims of indi-
vidiial employees or those who would serve to represent them.
I do think that Governor Parfitt, his staff and I have a management
reslpoi nisibility to try to weigh those items that are presented to us,
looki,.,r at them from the perspective of our national interest and from
the point of view of the organization runninsf the canil. From that
inf(orm:iion we then try to make some sensible and equitable adjust-








ments. Obviously we cannot accept every recommendation that an in-
dividual or an employee group would make. However, it is our obli-
gation to fully consider them.
Mr. BOWEN. That is a good analysis. I found in past years when I
visited down there that one observation was that they did not expect
to win on every issue, that they just wanted to be consulted.
They wanted to believe and know that somebody cares about them.
I think probably in the last year or so, since I have been there, there
has been some substantial development of involvement of employees
in what is going on around the country. It makes them aware that
somebody cares about them. I think you are heading in that direction.
Secretary ALEXANDER. They have a rightful claim to consultation.
Governor Parfitt pointed out that as the negotiations were going on,
employees were given very little information. As early as March of
this year, we provided them with general information as to what
might take place under a new treaty. There has been some discourage-
ment about not having all of their questions answered, but from my
personal meetings with employees, they have been quite pleased that
we have been as forthcoming aswe have.
Mr. BOWEN. I am pleased to hear that.
Governor Parfitt, let me ask you a question, too. I know in response
to one of the questions that the subcommittee put to you, you indicated
that the relationship of fixed and variable costs of allied operations
would be the same, 65 and 35.
Would it not be the case that the payments to Panama under the
treaty would be an additional fixed costs and that, in fact, would alter
substantially the ratio that you spoke of ?
Governor PARFITT. Our first assumption was that it would be dif-
ferent. However a quick estimate indicates it would not be. Our judg-
ment now is still that the ratio would be about two-thirds to one-third.
Mr. BOWEN. So despite the increase in fixed costs, you expect the
variable costs to go up so the ratio will remain somewhat the same?
Governor PARFITT. The net effect shows the same relationship would
prevail.
Mr. BOWEN. I note that earlier this year, this fall, the Wall Street
Journal quoted you as saying, "I am concerned about our ability to
generate tolls enough to meet the requirements of the treaty." Would
you comment on this ?
Governor PARFITT. As an operator, I have just gone through a very
difficult financial situation. I take a conservative view on the ability of
the canal to generate money. There is a development on the scene right
now which, in the short term, looks very favorable and will change
the outlook for the short term. That is the North Slope oil. My outlook
is more optimistic. I remain very conservative and very concerned as
to what our studies may show with regard to midterm and long term,
but I would prefer to await the conclusion of our detailed studies.
Mr. BOWEN. Speaking of the Alaskan oil situation, do you feel that
the increase in tolls will have any effect on the transit of Alaskan oil
through the canal ?1
Governor PARFITT. No. We do not think that situation will be af-
fected by any change in toll rates. There are other factors which de-
termine whether it will go through the Panama Canal or not.






92


Mr. BOWEN. What about whether the cost of operating the canal
might be more closely tied to the economy and inflationary conditions
in the Republic of Panama? Do you think that is a possibility?
Governor PARFITT. There are always possibilities in the Panama
Canal. Our costs of supplies and materials are affected by inflation
both in Panama and the United States.
Mr. BOWEX. Mr. Secretary, I know that in your answers to ques-
tions for the record, you mentioned that governmental authority and
responsibility of the canal should not be fragmented, that only one
agency should have the responsibility for supervising the canal. Will
you elaborate further on that for us?
Secretary ALEXANDER. Yes, sir. It seems to me that in order to have
the efficient management that is required by the canal enterprise, it
would be logical to have one unit of the executive branch exercise
responsibility, with clearly delineated lines to the President of the
United States. If multiple agencies are involved, representing the Con-
gress, the public, and the users, then to put a finger on who is respon-
sible becomes more and more difficult.
I do think that the past history of canal operation has indicated
that the present arrangement has worked pretty well and, therefore,
an entity that is structured in a similar vein, until December 31, 1999,
when the canal passes to Panama, would seem to make sense.
Mr. BOWEN. Referring to earlier testimony with respect to the em-
ployee situation, another issue is the goal that you have in reducing
the canal employees' cost of living so as to keep to a minimum the re-
cruitment necessary.
Would you give us an observation on that ?
Secretary ALEXANDER. Governor Parfitt has indicated with respect
to recruitment that our long-term goal is to have as many Panaman-
ians as possible involved in the running of the canal. I am sure the
committee knows that presently three-fourths of the employees of
the Panama Canal enterprise are Panamanian. It would seem that if
we can keep seasoned people and provide adequate training, as is called
for in the treaty, then the transition can be orderly, and the same level
of service that people have come to expect of the canal will be main-
tained beyond the year 2000 when the Government of Panama assumes
full responsibility.
IMr. BowEX. Perhaps just one further question which I might direct
to Governor Parfitt.
There lias been a lot of speculation about what the attitude is in the
other Latin American countries. A number of people have suggested
that a great many Latin American nations are not particularly entlhu-
siastic about the treaties, but they feel obligated to their Latin Ameri-
can neighbors to support it publicly. Privately they have indicated
substantially less than enthusiasm for the treaties.
Whether or not that is accurate. I don't know. I would like to ask
you whether or not you have heard from othlier Latin American coun-
tries or from Latin Americans about the subject of toll increases and
what their attitude would be. Some project an increase of 30 or 40
percent. You said optimistically you hoped the traffic would be such
that. it might be as low as 25 percent. Let us assume it would be 40
pl ercent.American
What have you heard from Latin Alerican shippers?






93


Governor PARFITT. We heard from our Latin American neighbors
'that they did not take kindly to an increase in toll rates. They don't
like the prospect because it impacts on their economies more so than
it does on the United States.
I have not heard any indicate that the feeling was so strong as to
;sway their political decision which is to support the treaties.
Mr. BOWEN. As to elasticity of demand and use of the Canal, what
kind of surveys did you make and what conclusions did you come to
regarding use of the canal as a result of an increase in tolls?
Governor PARFIrrTT. Our last studies were completed in 1974. There
-are similar studies which we won't have until January. At that time,
we will know more about the sensitivity.
Mr. BOWEN. This is a subject which is discussed throughout Con-
.gress, and it is of great interest throughout the country-what the
impact would be on the citizens of the canal in having the toll charges
go up. We will look forward to those studies.
Governor PARFITT. Our data predates two toll increases. We need
another sampling, and we expect to have the results in the latter part
"of January.
Mr. BOWEN. At the rate we are going, that will give us plenty of
time for consideration here in Congress.
I believe counsel for the minority does have some questions he would
like to ask.
Mr. NONNENMACHER. Mr. Secretary, I have a question that borders
*on the political area.
As Ambassador Bunker pointed out. the contingent payment of $10
million a year to Panama would be possible only if the canal would
operate efficiently enough to make a surplus. You said you hoped it
continued to provide operating and maintenance costs.
What would happen if the Panamanian Government insisted that
this contingency of $10 million should be considered as a basic cost in
view of the structure of the Commission? It is American-Panamanian
5 to 4, but is there any likelihood of any real political hassle over that?
Do you think that is pretty well taken care of ?
Secretary ALEXANDER. My recollection of the treaty language would
indicate that it is taken care of. It is contingent upon the surpluses
which would actually exist. There is the accumulation feature that is
also provided for in the treaty. If in 1 year there were a $5 million
"profit" over and beyond the 30-cent toll payment, the $10 million fixed
payment, and other costs, then the $5 million not paid would be
carried forward to the following year.
I do not sense that there is any lack of clarity on the part of tlhe
Panamanian negotiators as to the interpretation of this provision.
Mr. NONNENMACHER. Is there any question in your mind as toany
possible trouble at the end of the 23-year period with the Panamanians
demanding a lump sum for any of that accumulative sum that has not
been paid?
Secretary ALEXANDER. No.
Mr. NONNENMACHER. You think that has been clarified? There
-would be no such demand?
Secretary ALEXANDER. As I remember, the earlier demands from the
Panamanian negotiators were for an initial payment of $1 billion, and
.over $100 million a year. Our negotiators, I think quite skillfully,
21-73S8-78-pt. 1-7




W,-'


94


determined a figure that would be paid and which was in the realm
of reason while at the same time relates directly to the earnings of the
Company. There is no expectation, as I understand it, that if there is an
accumulation of unpaid $10 million contingent payments, that the
sum would be due at the end of the treaty period. The United
States assumes no obligation in this regard. There is no indication
in the treaty language and certainly, from my knowledge, there is no
indication from the negotiations that Panama has such an expectation.
Mr. NONNENMACHER. Thank you.
I have another question. This is regarding your proposal that after
the first 5 years of the treaty, when employees will no longer be au-
thorized to use the PX's uand commissaries, additional compensation
would be provided to employees to offset associated increases in their
cost of living. They will receive a hike or boost in pay.
I do not think you have given any estimates what that would cost.
It would be of help to receive such an estimate.
In view of the history of the building of the canal, it is my under-
standing that the PX's and commissaries were established because
Panama had a monopoly on all the goods and services required by
employees, and the employees could not even break even on their
wages, so the U.S. authority set up the PX's and commissaries in or-
der that they could earn enough money over and above what they
had to pay out.
There is a possibility, I do not say it is going to happen, but Pan-
ama might find itself in that monopoly situation again. Will the prices
be held down to modest prices, or be raised where we might find, even
to our sorrow that we had not continued the PX's? I just throw that
out as a background to show that in my opinion it is going to be hard
to gage what the cost of living might be, and what your employees
additional compensation will have to be if we don't know what the
prices will be that Panama will charge for the goods they no longer
can get at the PX's and commissaries.
Secretary ALEXANDER. We do not have precise figures. However.
there would be a saving of some $3 million as the result of not havillng
to run the stores presently operated by the Panama Canal Company.
We think that the cost of living differential would probably be less.
We do not have a precise figure. When we do, we will see that it is
provided to the committee.
[The following information was supplied:]
Precise computations cannot be made until we are well into the new treaty
period.
Mr. No-ONNENM-3AC1H-ER. Thank you.
AMr. METCALFE (presiding). Mr. Tannenbaum, do you have any
questions?
Mr. TANNENRAULM. Yes.
The Comptroller General and others have pointed out numerous
financial issues not clarified in the treaties which would have a deva-
stating impact depending upon the interpretation. Won't these issues.
if not resolved before treaty approval, eventually result in future dis-
putes with Panama?
Governor P.ARMTT. There is a potential. I would hope it would b)e
treated under legislation that is contemplated by the administration.






95


Mr. TA.NNENBAU.M. I believe the Comnptroller General stated that
there are a number of financial issues that must be resolved. There
is a tremendous economic package which is up in the air. I wonder if
Panama realizes that this economic package is up in the air. Wouldn't
they consider it a breach of good faith if they did not receive
the economic package or if they did not receive thle $10 million ad-
ditional sum or if, as you say, there is an increased current evalu-
ation of the assets allowed and recouped for the United States or if
interest is returned to the United States on its investment?
All of these factors, if the implementing legislation call for re-
payment, would increase the tolls substantially more than 40 percent?
Governor PARFITT. If I understand you correctly, certainly, if the
Congress were not to approve the waiver of the interest payments,
it is now about $18 million, that would be an added cost to the toll
structure and therefore again, bump against the sensitivity curves.
Mr. T..ANNENBAUM. And the reserve for replaceiieijit not contenm-
plated in the 40-percent figure?
Governor PARFITT. The 40-percent figure would include in our
judgment right now a reservation of enough funds for capital in-
vestmenlts, increased amounts required beyond depreciation.
We have included in our cost estimates a factor which runs a1out
$7 to $10 million in extra funds required above depreciation accru-
als. That has been used in our estimate to determine expectations of
what moneys are needed and our 40 percent would derive those moneys
if our estimates are accurate.
We would generate enough money to pay off the capital programs
and our operating-maintenance cost.
Mr. TANNENBAUM. I know I asked a complex, compound question
before. I do not recall your responding to the question as to Panama's
reaction if we were to seek recoupment of these expenses?
Governor PAR nTT. I don't know, but the negotiators in Panama
understand contingent payment is clearly that. If there is no require-
ment of the U.S. Government to pay unless it can be generated as
surplus from operating revenues and there is no requirement to pny
Panama at the termination-I am told they understand it now. I
do not know about the future. The treaty seems to cover the contin-
gent payment, that we only pay it from operating revenues if reve-
nues are in excess of expenditures. It remains for us to define the reve-
nues and expenditures. We hope to do that in the implementing
legislation.
Mr. TANNENBAUM. I have one more question.
Congressman Murphy feels that leaving such vital issues up in the
air would create more problems than they will solve. The treaty agree-
ments as provided will lead to further disputes with Panama which
we have not had.
Secretary ALEXANDER. I would differ.
The treaty is clear on the point of the contingent of $10 million.
I have heard no discussion from the negotiators or anyone else that
there is a requirement to make a lump-sum payment for any accumu-
lations at the end of the treaty period. I disagree with the charac-
terization as made on that point.




7


96

Mr. TANXENBAUMr. It is not my characterization. Coinptroller Gen-
eral Staats has indicated at least half a dozen items in which there are
serious ambiguities.
Secretary ALEXANDER. Then I would disagree that there are ali-
b)iguities regardless, of who made such statements. I do not think am-
bi,,uiity exists on these issues.
Governor PARFITT. Mr'. Staats indicated that some of these issues
were moot in the treaty-it didn't say one way of another-and it
would have to be covered within the body of the legislation. The in-
terest payment-he said clearly that we have to determine whether
we will continue to pay interest on the investment.
The administration hias announced, through negotiators, that they
intend to seek legislation to remove the interest payments. We have a
problem if the Congress refuses to accept that.
Mr. TAN.NENBAU.Mi. That would create serious problems, would it
not?
Governor PARFITT. Only if you are unable to generate the extra
amount of money to make up for the interest payment of $20 million-
which is a distinct possibility.
Mr. TA N N EN n.Auxr. Thank you.
Air. METCALFE. Thank you. I have just one final question to ask.
AWhat is the ratonale for the discontinuance of payment of interest
on the investment?
Governor PARFITT. I am now aware of the rationale of the negotia-
tors, just the determination they would seek legislation.
From the standpoint of the Commission, I view it favorably be-
cause of the uncertainty of the Commission to generate funds to meet
all of its commitments. I am not familiar with the rationale that the
administration would recommend that we no longer pay interest.
Mr. MAfETC.ALFE. Thank you.
I would like to express our appreciation to Secretary Alexander for
being with us today and also Governor Parfitt who is no stranger to us.
We appreciate you coming before us. Thank you very much.
Secretary ALEXANDER. Thank you.
Governor PARFITT. Thank you.
Mr. METCALFE. The next witness will be Lt. Gen. WV. G. Dolvin,
Deputy Negotiator, Department of Defense for Panama Canal
Negotiations.
Thank you very much for waiting. We will be happy to hear your
testimony.
[The questions posed to tlhe witness by the Subcommnittee, and
answered in the statement follow:]
QUESTIONS POSED TO DEPARTMENT OF DEFENSE
1. Please estimate at least the approximate value of real and personal prop-
erty and assets of the U.S. Armed Forces (not the Panama Canal Company.
C'aiiil Zone Government or other non-military agencies) to be transferred to
Panama (a) upon the entry into force of the treaty; (b) the value of all prop-
erty ,nd assets to be transferred subsequent to the entry into force of the treaty
;mitd before the lermiination of the treaty ; and (c) the value of all property and
assets tlimtt must be transferred by the termination of the treaty. Explain this by
c.ha rts and r grapids. if possible.
2. Will I'.S. (o.,-1r1rmilm t warships and similar craft pay tolls under the treaty?
:3. If tlhey vill pl).y tolls. how will the payment to Pamnama of $.30 per Panama
(;lilt Ioil "or its ('(lIivil'ncy'" be (leterllinled for warshipl)s and other craft pay-