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CANAL OPERATION UNDER 1977 TREATY-PART 2
SUBCOMMITTEE ON THE PAN AMA CANAL
MERCHANT MARINE AND FISHERIES
HOUSE OF REPRESENTATIVES
NINETY-SIXTH CONGRESS FIRST SESSION
H.R. 111, H.R. 454, .R. 1511, H.R. 1716,
H.R. 1958, H.R. 2522
PROVIDING A BASIS FOR THE EFFICIENT OPERATION OF THE PANAMA CANAL AND PROVIDING FOR THE RIGHTS AND RESPONSIBILITIES OF THE UNITED STATES UNDER THE 1977 TREATIES BETWEEN THE UNITED STATES AND PANAMA
FEBRUARY 14, 15, 26, 28; MARCH 7, 13, 14, 1979-WASHINGTON, D.C.
FEBRUARY 23, 24, 1979-BALBOA, CANAL ZONE
Serial No. 96-2
Printed for the use of the Committee on Merchant Marine and Fisheries
U.S. GOVERNMENT PRINTING OFFICE
44-394 0 WASHINGTON : 1979
COMMITTEE ON MERCHANT MARINE AND FISHERIES
JOHN M. MURPHY, New York, Chairman THOMAS L. ASHLEY, Ohio PAUL N. McCLOSKEY, JR., California
JOHN D. DINGELL, Michigan GENE SNYDER, Kentucky
WALTER B. JONES, North Carolina EDWIN B. FORSYTHE, New Jersey
MARIO BIAGGI, New York DAVID C. TREEN, Louisiana
GLENN M. ANDERSON, California JOEL PRITCHARD, Washington
E (KIKA) DE LA GARZA, Texas DON YOUNG, Alaska
JOHN B. BREAUX, Louisiana ROBERT E. BAUMAN, Maryland
GERRY E. STUDDS, Massachusetts NORMAN F. LENT, New York
DAVID R. BOWEN, Mississippi DAVID F. EMERY, Maine
CARROLL HUBBARD, JR., Kentucky ROBERT K. DORNAN, California
DON BONKER, Washington THOMAS B. EVANS, JR., Delaware
LES AuCOIN, Oregon PAUL S. TRIBLE, JR., Virginia
NORMAN E. D'AMOURS, New Hampshire ROBERT W. DAVIS, Michigan JAMES L. OBERSTAR, Minnesota WILLIAM CARNEY, New York
WILLIAM J. HUGHES, New Jersey MELVIN H. EVANS, Virgin Islands
BARBARA A. MIKULSKI, Maryland DAVID E. BONIOR, Michigan DANIEL K. AKAKA, Hawaii MICHAEL OZZIE MYERS, Pennsylvania JOE WYATT, Texas
MIKE LOWRY, Washington EARL HUTTO, Florida EDWARD J. STACK, Florida BRIAN DONNELLY, Massachusetts CARL L. PERIAN, Chief of Staff ERNEST J. CORRADO, Chief Counsel FRANCES STILL, Chief Clerk JACK E. SANDS, Minority Counsel
SUBCOMMITTEE ON PANAMA CANAL
CARROLL HUBBARD, JR., Kentucky, Chairman
DAVID R. BOWEN, Mississippi ROBERT E. BAUMAN, Maryland
DAVID E. BONIOR, Michigan DAVID C. TREEN, Louisiana
JOHN D. DINGELL, Michigan ROBERT K. DORNAN, California
WALTER B. JONES, North Carolina WILLIAM CARNEY, New York
MARIO BIAGGI, New York GLENN M. ANDERSON, California PAUL N. McCLOSKEY, JR., California
MIKE LOWRY, Washington (Ex Officio)
JOHN M. MURPHY, New York (Ex Officio)
TERRENCE W. MODOULIN, Staff Director BERNARD TANNENBAUM, Special Counsel W. MERRILL WHITMAN, Consultant KENNETH C. FENDLEY, Professional Staff
Hearings heldFebruary 14, 1979, W ashington, D.C .................................................................... 1
February 15, 1979, W ashington, D.C .................................................................... 377
February 23. 1979, Balboa,'C.Z ............................................................................. 563
February 24,1979, Balboa, C.Z ............................................................................. 667
February 26, 1979, W ashington, D .C .................................................................... 847
February 28, 1979, W ashington, D .C .................................................................... 973
M arch 7, 1979, W ashington, D.C ........................................................................... 1329
M arch 13, 1979, W ashington, D .C ......................................................................... 1375
M arch 14, 1979, W ashington, D.C ......................................................................... 1607
Text ofH .R. 111 ...................................................................................................................... 12
H .R. 454 ...................................................................................................................... 109
H .R. 1511 .................................................................................................................... 165
H .R. 1716 .................................................................................................................... 176
H .R. 1958 .................................................................................................................... 239
H .R. 2522 .................................................................................................................... 247
Reports fromH.R. 111:
Arm y Departm ent ........................................................................................... 103
Am erican Battle M onum ents Com m ission ................................................. 250
Canal Zone Governm ent ................................................................................. 252
Postal Service ................................................................................................... 276
Sm ithsonian Institution .................................................................................. 277
State Departm ent ............................................................................................ 107
Transportation Departm ent ........................................................................... 282
Arm y Departm ent ........................................................................................... 160
Am erican Battle M onum ents Com m ission ................................................. 250
Postal Service ................................................................................................... 276
Sm ithsonian Institution .................................................................................. 277
State Departm ent ............................................................................................ 163
Arm y Departm ent ........................................................................................... 168
Canal Zone Governm ent ................................................................................. 170
Sm ithsonian Institution ........................................... ....................................... 277
State Departm ent ............................................................................................ 174
Arm y Departm ent ....................................................................................... 160,237
Am erican Battle M onum ents Com m ission ................................................. 250
Canal Zone Governm ent ................................................................................. 252
Postal Service ................................................................................................... 276
Sm ithsonian Institution .................................................................................. 277
State Departm ent ............................................................................................ 238
Transportation Departm ent ........................................................................... 282
H .R. 1958: State Departm ent ................................................................................. 244
H .R. 2522: State Departm ent ................................................................................. 279
A n analysis of H .R. 111, by W M errill W hitm an ..................................................... 285
Statement ofAlexander, Hon. Clifford L., Jr., Secretary of the Army ................................. 885
Alm, Al, Assistant Secretary of Department of Energy .................................. 132"
Anderson, Luis, secretary general, AFSCME Local 907 .................................. 800
Baglien, David, first vice president, AFGE Local 14 ...................... ................. 733
Benkert, W. M., president of the American Institute of Merchant Shipping. 1555
Statement of-Continued Page
Blake, Robert 0., International Institute for Environment and Development, and Chairman, Panama Canal Environmental Task Force ............. 1366
Prepared statem ent .......................................................................................... 1373
Blaylock, Kenneth T., national president, American Federation of Governm ent E m ployees ................................................................................................... 753
Blenman, Samuel, president, Pariaiso Civic Council ........................................ 635
Blocklin, Hans, vice president, Lykes Bros. Steamship Co., Inc ..................... 1559
Boggs, Hon. Lindy, a Representative in Congress from the State of Louisia n a ........................................................................................................................... 1447
Bouche', R. Georges, first vice president, Pacific Civic Council ....................... 614
Brands, Ely M., president, International Research Associates ..................... 1450
Breecher, Charles H ., jurist ................................................................................... 1330
Prepared statem ent .......................................................................................... 1357
Burke, Barbara, legislative assistant, American Institute of Merchant
Sh ipping ................................................................................................................. 1555
Campanella, Dr. Paul, JRB Associates ................................................................ 1635
Campbell, Dr. Alan K., Director, Office of Personnel Management .............. 1176
Carswell, Hon. Robert, Deputy Secretary of the Treasury .............................. 942
Challinor, David, Assistant Secretary for Science, Smithsonian Institution 1168
Chenille, Dr. Richard, president, Pacific Civic Council ..................................... 614
Chinn, Maj. David, Treaty Coordinator, USA TSA ........................................... 838
Christopher, Warren, Deputy Secretary of State ........................................ 377,1657
Clark, Capt. J. W., president of Delta Steamship Lines, Inc .......................... 1559
Prepared statem ent .......................................................................................... 1561
Cochran, Joseph E., civilian personnel officer, 193D Infantry Brigade ........ 827
Craig, Del. commissary officer, USA Troop Support Agency .......................... 838
Davis, Hon. Mendel J., a Representative in Congress from the State of
South C arolina ..................................................................................................... 1449
De Castro, Woodrow, De Castro and Robles ........................................................ 655
Dolvin, Welborn G., Department of Defense Representative for Panama
Canal Treaty A ffairs ............................................................................................ 479
Dornan, Hon. Robert K., a Representative in Congress from the State of
C aliforn ia ............................................................................................................... 407
Douglass, Daniel D., Canal Zone Bar Association .............................................. 655
Drummond, William R., president, Canal Zone Police Union, AFGE Lodge,
L oca l l896 .............................................................................................................. 812
Duncan, Charles W., Jr., Deputy Secretary of Defense .................................... 479
Dunworth, James, General Counsel's Office ...................................................... 655
Edwards, Hon. Jack, a Representative in Congress from the State of
A labam a ................................................................................................................ 1449
Faulkner, Capt. S. V., branch agent (I.O.M.M. & P.), Atlantic and Gulf
Membership Group, Panama Canal and Caribbean Branch ................... 667,673
Filos-Diaz, Dr. Jose A., assistant chief, Pulmonary Service and Allergy,
G orgas H ospital .................................................................................................... 831
Prepared statem ent .......................................................................................... 832
Flood, Hon. Daniel J., a Representative in Congress from the State of
P ennsylvan ia ........................................................................................................ 358
Foy, H. Miles, Attorney-Advisor, Office of Legal Counsel, Department of
J u stice ..................................................................................................................... 1290
Gaskins, Darius, Deputy Assistant Secretary for Policy and Evaluation,
D epartm ent of Energy ......................................................................................... 1322
Gender, Don B., civilian personnel advisor to Commander Southcom and
assistant civilian personnel officer, 193D Infantry Brigade (CZ) ................ 827
Gleason, Thomas W., president, International Longshoremen's Association,
A F L -C IO ................................................................................................................ 1581
A ppendix ............................................................................................................ 1590
Gordon, Clarence, president, Santa Cruz Civic Council .................................... 635
Graham, Alfred J., president, Central Labor Union-Metal Trades
C ou n cil ............................................................................................................... 667,673
Gravel, Hon. Mike, a U.S. Senator from the State of Alaska ......................... 1670
Prepared statem ent .......................................................................................... 1674
Haar, Herbert R., Jr., associate port director, Port of New Orleans ............. 1450
Prepared statem ent .......................................................................................... 1456
Hall, Hon. Sam B., Jr., a Representative in Congress from the State of
T exas ...................................................................................................................... 366
Hamilton, Frank, area counsel, 1. 0. M. M. & P ........................................... 667,705
Hannah, Kenneth, president, Cristobal-Margarita-Brazos Heights Civic
C ou n cil ..................................................................................................................... 645
Prepared statem ent .......................................................................................... 652
Statement of-Continued Page
Hansell, Herbert J., Legal Adviser, Department of State ............................... 464
Hansen, Hon. George, a Representative in Congress from the State of
Idaho ....................................................................................................................... 328
Haynes, Seabert, president, Pedro Miguel Civic Council ................................. 635
Hendrickson, John, Environmental Adviser and Senior Staff Officer of the
U.S. Section of the International Joint Commission ............................ 1628, 1635
Henry, Phillip, president, Rainbow City Civic Council and President,
Congress of Latin American Civic Councils .................................................... 645
Hudson, Gary, president, Coco Solo-France Field Civic Council .................... 647
Prepared statem ent .......................................................................................... 647
Hughes, Robert, geodesist, NM-12, Inter-American Geodetic Survey ........... 842
International Committee of Passenger Lines ..................................................... 1594
Joseph, Victor E., secretary-treasurer, Canal Zone Police Union, Local
1896 ......................................................................................................................... 812
Koczak, Stephen, special projects assistant, American Federation of Governm ent Em ployees .......... 4 .................................................................................. 1716
Kujawa, Leonard, partner, Arthur Andersen & Co ........................................... 1377
Lidinsky, Richard, Jr., assistant director of transportation, Maryland Port
A dm inistration ...................................................................................................... 1450
Lindley, Patricia, president, Canal Zone Bar Association ................................ 655
Maechling, Charles, Jr., attorney, Kirlin, Campbell, & Keating, Washington D .C ................................................................................................................... 1607
Prepared statem ent .......................................................................................... 1623
Mauge', Saturnin, president, AFSCME, Local 900 ............................................. 800
McAuliffe, Lt. Gen. Dennis P., Commander in Chief, U.S. Southern Comm and, Panam a Canal Zone ................................................................................ 519
McCauley, Mrs. Victoria, president, Gatum Civic Council .............................. 645
McDonald, Hon. Lawrence P., a Representative in Congress from the State
of G eorgia ............................................................................................................... 349
Mikulski, Hon. Barbara, a Representative in Congress from the State of
M aryland ................................................................................................................ 1446
Moss, Hon. Ambler H., Jr., U.S. Ambassador to the Republic of Panama,
D epartm ent of State ............................................................................................ 849
Munchbach, Mrs. Patricia, president, Gamboa Civic Council ......................... 614
Nemirow, Samuel B., Deputy Assistant Secretary for Maritime Affairs,
Departm ent of Com m erce .................................................................................. 523
Nolin, John, Department of Transportation ...................................................... 555
O'Donnell, James, president, AFGE, Local 14 ................................................... 733
A dditional statem ent ....................................................................................... 778
Oller, Jose, NM-7, purchasing agent, USAFSCO .............................................. 835
Ortman, David E., research associate, Friends of the Earth ........................... 1631
O strander, A llen ...................................................................................................... 655
Ostrander, Marcos, vice president Canal Zone Bar Association .................... 655
Parfitt, Harold R., Governor of the Canal Zone ................................................. 567
Paul, Hon. Ron., a Representative in Congress from the State of Texas ..... 370
Popper, David H., Special Representative of the Secretary for Panama
Treaty Affairs, Department of State ......................................................... 452,1011
Prior, J. Gregory, executive assistant, Port of Charleston .............................. 1450
Rinaldo, Hon. Matthew J., a Representative in Congress from the State of
N ew Jersey ............................................................................................................ 374
Robinson, Nicholas A., member, board of directors, Sierra Club ................... 1635
Prepared statem ent .......................................................................................... 1649
Rogers, Terry, legislative liaison, American Federation of Government
E m ployees ............................................................................................................. 1716
Royo, Richardo R., second vice president, Canal Zone Police Union, Local
1896 ......................................................................................................................... 8 12
Shefler, Stephen A., Deputy Assistant Secretary for Policy and International Affairs, Department of Transportation ....................................................... 55 5
Sheppard, Ralph, president, American Federation of Teachers, Local
29 ........................................................................................................................ 667 685
Prepared statem ent ................................................................................... I ...... 690
Sinclair, William, area director, American Federation of State, County. &
M unicipal Em ployees .......................................................................................... Soo
Starts, Hon. Elmer B., Comptroller General of the United States ................ 901
Steers, Philip L., Jr., former Financial Vice President, Panama Canal
C om pany ................................................................................................................ 1417
Symms, Hon. Steven D., a Representative in Congress from the State of
Id a h o ....................................................................................................................... :3155
Statement of-Continued pap
Tartar, Mark, vice president, CLU-MTC ........................................................ 667,684
Tinsley, Thomas A., Deputy Associate Director ................................................. 1176
Wall, Shannon, president, National Maritime Union ....................................... 667
Wampler, Hon. William, a Representative in Congress from the State of
V irgin ia .................................................................................................................. 373
W ashburn, John N ., attorney ................................................................................ 1720
Statement of February 7, 1978, for Senate Armed Services Committee.. 1722
Welch, W. Don, South Carolina Ports Authority .............................................. 1470
Werner, Capt. Norman, president, International Organization of Masters,
Mates, and Pilots, Pilot membership group, Panama Canal Branch ........ 667
Wheeler, James, representative, Pacific Civic Council .................................... 614
Williams, Cmdr. Hugh, U.S. Coast Guard .......................................................... 555
Wright, Michael, Director of International Programs, Nature
C onservancy .......................................................................................................... 1635
Prepared statem ent .......................................................................................... 1642
Zappacosta, Frank M., Assistant Director, GAO ............................................... 901
Additional material suppliedArmy Department: Questions of subcommittee and answers .......................... 888
D raft bill ............................................................................................................ 775
Federal Personnel Manual System ............................................................... 769
Public Law 95-454 ........................................................................................... 768
Clark, J. W.: Response to questions of Subcommittee ....................................... 1565
Commerce Department: Questions of committee and answers ....................... 526
Congressional Budget Office: Report on a Study of Panama Canal Tolls and
T raffic Levels ........................................................................................................ 1500
Additional questions and answers ................................................................. 507
Questions of committee and answers ............................................................ 483
Dorman, Hon. Robert K.: Summary of the OAS report ................................... 409
Dozer, Dr. Donald M.: Article of February 19, 1979, in Spotlight: You Can
Help Save the Canal But Time's Running Out .............................................. 365
Drummond, William R.: Placement Assistance for Panama Canal Zone
E m ployees ............................................................................................................. 820
Amount of Alaska Oil Going Through The Panama Canal ..................... 1325
Loss between crude and gasoline in refining .............................................. 1328
Loss if Alaska oil not transiting canal ......................................................... 1326
Questions of subcommittee and answers ..................................................... 1323
SOHIO PACTEX pipeline proposal .............................................................. 1327
Transit, east to west, of refined gasoline ..................................................... 1327
Views on transit of Alaskan oil if transiting a sea-level canal ............... 1325
Cost of living allowance- COLA .................................................................... 922
Department of Defense additional costs ...................................................... 923
Department of Defense educational cost for 2,600 dependents ............... 922
Questions of W. Merrill Whitman and answers ........................................ 937
Rem ovable N avy property .............................................................................. 936
Suggested language for frequency of payments ......................................... 920
Graham, Alfred: Excerpt from Conference Report 2149 of 85th Congress... 679
Haar, Herbert: Article: Lykes To Offer four sailings monthly from West
Coast to Far East; call most ports between Japan and Singapore ............. 1468
Article: Nedlloyd Expands U.S. Gulf/Mideast Ro/Ro Services ............... 1469
Economic impact of water-borne shipments via Panama Canal ............. 1525
Economic impact of waterborne shipment via Panama Canal for
Atlantic and gulf coast ports grouped by State ...................................... 1526
Highlights of legislation to implement the Panama Canal Treaty of
1977 ................................................................................................................. 1467
Hamilton, Frank: Revised joint P.C. Commission/Department of Defense
labor relations policy ........................................................................................... 707
Hansen, Hon. George-Report: Possible Effects of Increased Canal Toll
Fees and Restricted Access to the Panama Canal on U.S. Agricultural
Trade, by Janice E. Baker .................................................................................. 335
Henry, Phillips A.: Position paper of Congress of Latin American Civic
C oun cils ................................................................................................................. 631
Hubbard, Hon. Carroll, Jr.: CRS Study: Effect of the Panama Canal
Treaties upon provisions of the United States Code .................................. 1197
Treaty between the United States of America and the Republic of
Panama on the Execution of Penal Sentences ........................................ 1300
Additional material supplied-Continued Page
Kujawa, Leonard J.: Panama Canal Commission: Financial and Accounting
policies for viability and control ........................................................................ 1386
Library of Congress: Response to questions posed by Mr. Murphy ............... 1261
Lidinsky, Richard: Article:
Liner cargo changing patterns, by John R. Immer ................................... 1479
Excerpts from Sea-Level Canal Studies hearings ....................................... 1482
Import Far East Mini Bridge and All Water General Cargo
T onnage .......................................................................................................... 1478
Murphy, Hon. John M.:
Environmental Issues Affecting the Panama Canal ................................. 974
Introduction to statement of Hon. Daniel J. Flood ................................... 356
Office of Personnel Management:
Benefits under Panamanian Social Security .............................................. 1195
Inform ation on cost estim ates ....................................................................... 1193
Placement assistance for P.C. Zone employees ........................................... 820
Questions of the committee and answers .................................................... 1193
Parfitt, Gov. Harold R.: Questions of committee and answers ....................... 599
Robinson, Nicholas A.:
Article of October 25, 1977: "Panama Canal Treaty: Environmental
Issues .......................................... *"*****"**'*"*'***'***'******'**'**'***'**""***"*'**"******** 1660
Article of March 28, 1978: "Environmental Safeguards in Canal Treaty
C larified .. ....................................................................................................... 1663
Article of September 26, 1978: "Panama Canal Treaties: Safeguards
Stalled .. .......................................................................................................... 1665
Laws relating to civil service retirement ..................................................... 687
Questions concerning H .R. 7761 .................................................................... 691
Basic legal difference between a corporate and a noncorporate form
agency ............................................................................................................. 479
Could Congress require U.S. members on the Board to vote en bloc ..... 477
Memorandum on cost to the United States in connection with implementing the Panama Canal Treaty ................. : ......................................... 395
Precedents for a Binational Board or Commission ................................... 473
President's ultimate authority over toll rates and article III of
T reaty ............................................................................................................. 478
Questions of committee and answers ............................................... 415,856,864
Rate figures and the toll figures derivation ............................................... 390
Instance in which money retained by a U.S. agency is subsequently
paid to foreign governm ents ...................................................................... 949
Interest paym ents ............................................................................................. 954
Panama Canal toll rates, from Federal Register, August 28, 1937 ......... 971
Panama Canal Tolls, Senate Document No. 23, 75th Congress .............. 960
Panam a Canal traffi c and tolls ...................................................................... 956
Questions of the committee and answers .................................................... 945
Communications submittedAnderson, George; Arleigh A. Burke; Robert B. Carney; Thomas H. Moorer:
Letter to the President dated June 8, 1977 ..................................................... 363
Bennet, Douglas J., Jr.:
Letter of April 5, 1979, to Hon. Carroll Hubbard ....................................... 864
Letter of May 12, 1978, to Senator William V. Roth, Jr ........................... 1346
Briggs, Richard E.: Letter of August 17, 1977, to Hon. Ralph H. Metcalfe.. 1551
Comptroller General of the United States: Letter of January 3, 1979, to
H on. G eorge H ansen ............................................................................................ 0 9
Hansell, Herbert J.: Letter of July 24, 1978, to Frank M. Zappacosta ......... 9,33
Hawkins, Edward F.: Utter of May 8. 1978, to Richard A. Lidinsky Jr ...... 1476 Henry, Phillip A.: Letter of February 23, 1979, to Hon. John M. Murphy .. 6,30
Joint Letter from Eleven Groups of January 30, 1979, to President
C arter ................................................................................ 634
Jones, Herbert M.: Memorandum of January 24,
C hief, C anal Zone ................................................................................................. 809
Kite, Landon, White House staff assistant, dated May 3, 1978 ....................... 1728
Latin American Civic Councils: Letter of June 17, 1978, to the President .. 634
Lindley, Patricia J.: Letter of March 26, 1979, to Hon. John M. Murphy
w ith attachm ent ................................................................................................... 6 5 9
May, Albert E.: Letter of March 15, 1979, to Hon. Carroll Hubbard ............ 1579
Merin, Kenneth D.: Memorandum of February 12,1979, to Panama Canal
S ubcom m ittee ........................................................................................................ 1:32 1
Communications submitted-Continued Page
Miura, Takashi: Letter of March 9, 1979, to Hon. Carroll Hubbard, Jr ....... 1573 Moss, Ambler H., Jr.: Letter of March 21, 1979,, to Hon. John M. Murphy. 856 Murphy, Hon. John M.: Letter of December 7, 1978, to Rubens Medina ..... 1259 O'Donnell, James J.: Letter of March 6, 1979, to Hon. John M. Murphy .... 792
Reurs, John H.: Letter of January 27, 1978, to Governor Parfitt with
en closu re ................................................................................................................ 1599
Rivlin, Alice M.: Letter of December 19, 1978, to Hon. Robert L. Leggett ... 1500 Scanlan, Francis A.: Letter of March 9, 1979, to Hon. Carroll Hubbard Jr. 1578 Seeley, Ronald L.: Memorandum of January 30,1979, to Heads of Bureaus.. 818
Senators Byrd, Helms, McClellan, and Thurmond: Letter to the President
dated June 15, 1977 ............................................................................................. 362
Shore, Melvin: Letter of February 20, 1979, to Hon. John M. Murphy with
attached resolution .............................................................................................. 1549
Stathis, Stephen W.: Memorandum of February 14, 1979, to Merchant
M arine and Fisheries Com m ittee ..................................................................... 1321
Telegram from 11 environmental organizations on September 6, 1977, to
the P resident ........................................................................................................ 1634
Tierney, Paul J.: Letter of March 30, 1979, to Hon. John M. Murphy ......... 1604
Washburn, John Nelson:
Letter of March 6, 1978, to Senator John Sparkman ............................... 1725
Letter of March 23, 1978, to Senator John Sparkman ............................. 1726
Letter of April 2, 1978, to Senator Robert C. Byrd .................................... 1727
Letter of April 28, 1978, to President Carter .............................................. 1727
White, H. Loring: Letter of January 4, 1979, to Ralph Sheppard with
attachm ent ............................................................................................................ 693
Wyrough, Richard W.: Letter of August 2,1978, to Mr. Blenman ................. 639
Zappacosta, Frank M.: Letter of April 4, 1978, to Herbert J. Hansell ........... 934
CANAL OPERATION UNDER 1977 TREATY
MONDAY, FEBRUARY 26, 1979
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON THE PANAMA CANAL,
COMMITTEE ON MERCHANT MARINE AND FISHERIES,
The subcommittee met, pursuant to notice, at 9:30 a.m., in room 2261, Rayburn House Office Building, Hon. Carroll Hubbard, (chairman of the subcommittee) presiding. Present: Representatives Hubbard, Lowry, Bonior, Bauman, Carney, Wyatt, Murphy (ex officio), and Hansen. Staff present: Ernest J. Corrado, chief counsel; Carl L. Perian, chief of staff; Kenneth Merin, minority counsel; Kai Midboe, minority counsel; W. Merrill Whitman, consultant; Bernard Tannenbaum, special counsel; Terrence W. Modglin, staff director; Kenneth Fendley, professional staff member; and Anita C. Brown, clerk.
The CHAIRMAN. The committee will come to order. If Ambassador Moss and the subcommittee members will indulge me just a moment, I think it is crucial that some important points which have arisen in the last few days be included in the record. There are new developments which have come to light at the field hearings held in the Canal Zone this past Friday and Saturday and in the meetings and briefings our delegation had with Panamanian Government officials. Let me make a few general comments on the findings, of our field hearings and inspection visit,, which I think was a very successful one from the point of view of ascertaining the opinions of elements in the Canal Zone and Panama with respect to the legislation before us. Our visit to Panama, which I was privileged to lead, could not have been so productive had it not been for the courtesies extended by Governor Parfitt, General McAuliffe, President Royo, the Panama Canal Authority, and Ambassador Gabriel Lewis, and we certainly extend our thanks to them for the arrangements that they made.
The three sets of hearings Friday and Saturday were the chief reason for our visit to Panama. The hearings allowed us to go into some issues, such as canal finances and levels of tolls, in much greater depth. Other issues, such as the precise level of benefits that should be enjoyed by canal workers, the future status of present employees, and the problems of the transition period, were introduced in detail in the subcommittee's hearings for the first time. (847)
I believe there were some common understandings in the minds of many members of the visiting delegation at the conclusion of our visit yesterday.
First, we now more clearly understand the need to deal with the implementing legislation as soon as possible, so that the employees of the canal will have adequate time to determine their futures and so that all of the physical and organizational changes caused by the new treaty can be achieved. And this committee will act expeditiously.
We also recognize in a clearer way the critical nature of the 30month transition period specified by article XI of the treaty. This is the period which will require the closest kind of cooperation between the United States and Panama. The good faith and trust of both governments are at stake in the transition period, which will span about one-eighth, the first eighth, of the duration of the treaty.
Third, while we see that the financial benefits for canal employees are important in the substance of the implementing legislation, we also know that those now living in the zone, both United States and Panamanian, have a real fear about the deterioration of the quality of life in the canal area.
Residents there have serious doubts about the physical security of their families, a good educational system, decent housing, and career mobility in their work. They fear all of these will be lost. The prospective Canal Commission, and the Congress through implementing legislation, must do all that can be done to maintain the quality of services and life now fouud there.
In the final analysis, however, the terms drawn in the Panama Canal Treaty mean that the citizens of the government of Panama will have much to do with whether or not skilled employees remain on the isthmus or whether or not we, have an efficient canal.
This brings me to the last, and perhaps most important, matter arising from our trip. Some members of the delegation that visited the canal, including members who will play a major role in the shaping of the implementing legislation, became quite concerned that some of the key understandings that underlie the Panama Canal treaty are now in shambles.
Last year when the treaty debates were ongoing in the Senate, numerous amendments and reservations were turned back only by strong assertions that Panama and the United States had clear understandings of the meanings of certain provisions. Now we are hearing from some representatives of the Panamanian Government that these understandings do not exist.
If this is the case, at worst, there may, in fact, be no true treaty agreement to implement. At best, there will be a need to clarify the terms of the treaty in the implementing legislation. The terms will have to be drawn in a fashion that will allow no possible misinterpretation by Panama as to the intent of the United States, and in a way that will deny the executive branch the ability to conclude new terms with Panama that might be detrimental to U.S. interests.
In many senses, the Panama Canal Treaty that has been concluded between the United States and Panama is an incomplete
document, even with the implementing agreements. The treaty is an agreement to agree in more detail. It was intended that it be supplemented by other agreements of varying levels.
It is going to prove virtually impossible to arrive at other agreements or to do a good job in writing implementing legislation unless the basic terms of agreement are clear. Interpretations that violate not just the spirit but even the letter of the treaty, such as the demand for personal property not intended to be transferred to Panama, the demand for the payment of back taxes for a decade by organizations doing business in the Canal Zone-we were assured it would put many private enterprises out of business immediately if that were to go forward-and the upgrading of facilities not used for 20 years, imply that we really do not have an agreement at all.
In general, then, the field hearings and visits to the isthmus demonstrated the vital need to carefully write the implementing legislation. It also showed how much the understandings, or misunderstandings, between the United States and Panama are related to this legislation.
Ara;Dassador Moss, we are certainly privileged to have you here with us this morning. We appreciate the courtesy that you extended to the Committee in Panama this weekend, and we hope to clarify, or at least set clearly forward, the basic misunderstandings that clearly were pointed out to every member of this Subcommittee.
The subcommittee, in toto, was completely aware of the difficulties. If you will take the stand, we certainly would appreciate hearing from you.
STATEMENT OF HON. AMBLER H. MOSS, JR., U.S. AMBASSADOR TO THE REPUBLIC OF PANAMA,, U.S. DEPARTMENT OF STATE Ambassador Moss. Thank you very much, Mr. Chairman and members of the subcommittee. I appreciate very much this opportunity to meet with you to discuss the proposed implementing legislation for the Panama Canal Treaty.
I have a prepared opening statement which I will now proceed to read before I will be available for the questions on the matters you raised, sir.
At present, in addition to its traditional diplomatic and consular tasks, the American Embassy in Panama is actively engaged, in close coordination with the Governor of the Canal Zone and the Commander-in-Chief of the U.S. Southern Command, in planning for the implementation of the Panama Canal Treaty, which comes into effect this October 1.
Previous executive branch witnesses before this subcommittee have covered a number of aspects of the draft versions of implementing legislation under consideration by the committee. There are two aspects in particular I would like to address this morning which are of special concern to the embassy. These are, first of all, our overall ob active in building a partnership with Panama in the canal enterprise, designed to maintain a safe and efficient canal; and, second of all, the need to safeguard the interests of American citizens in the present Canal Zone whose 1* will be affected by the implementing legislation.
First, I would like to make a few observations to the subcommittee about the cooperation I have observed thus far between the United States and Panama. Although there is a great deal of work to be done between now and October 1, and there are obviously a tremendous number of difficult decisions to be made by the United States and Panama individually as well as together, the cooperation between our Government and the Panamanian Government has been excellent.
The treaties are a mutual obligation to which both sides are committed, and in that spirit the work being done by both countries' planners to date represents an honest effort to complete the arrangements called for under the treaty.
We are fortunate in that many of the leaders of the Panamanian Government today were heavily involved in the treaty process over the last few years and are therefore extremely knowledgeable. President Aristides Royo, a young lawyer who became President of Panama last October 11, was a chief treaty negotiator for Panama. He has shown a particular sensitivity toward the needs and concerns of the United States citizens who live in the Canal Zone and who work on the canal.
President Royo has visited both the Atlantic and Pacific sides of the Canal Zone where he has met with American and Panamanian citizens who work there. As a gesture of goodwill, he recorded a television message in English to the American residents of the Canal Zone which was broadcast on the local Armed Forces television stations.
Ambassador Gabriel Lewis, a businessman who was Panamanian Ambassador to Washington during the treaty ratification process, returned to the private sector shortly after approval of the treaties, but now has come back to the Panamanian Government as Ambassador-at-Large and as the head of the Panama Canal Authority, the Panamanian organization which has responsibility for all planning for treaty implementation.
He has a strong team working with him in this effort, including three cabinet ministers, two top military officers, and a number of economists, lawyers, and other advisers, many of whom have earned university and post-graduate degrees in the United States. Panama has sent as its new Ambassador-designate to the United States, Carlos Lopez-Guevara, a distinguished international jurist, who holds a law degree from Harvard.
As Governor Parfitt has reported to you, numerous working subcommittees made up of representatives from our two countries have been working together since mid-1978 to plan for the implementation of the treaty in a wide range of subjects from operation transfers, such as the ports and railroads, to areas of employee and community interests, including personnel, housing, social security, utilities, the environment, and police and fire protection. Similar binational committees have recently begun work in areas of concern to our Southern Command and the Panamanian National Guard.
The goodwill and businesslike attitude which exists between our two countries is exemplified by the fact, as Deputy Secretary Christopher has already observed, that last month we signed three agreements with Panama which were called for under the new
treaty relationship. We have thus dispatched those portions of work in a very timely manner. The first of these accords was a new civil aviation agreement, which provides for the phasing over of our present air traffic control in Panama's air space to Panama over a 5-year period. During that time, we will be training Panamanian traffic controllers to begin replacing our personnel and also training Panamanian technicians in the use and maintenance of the equipment. The FAA agreement will represent a considerable cost savings to the United States.
The second agreement provides for a permanent United States cemetery at the present Corozal Cemetery in the Canal Zone, over which our flag will fly and which will be administered by the American Battle Monuments Commission in the same way that our military cemeteries abroad are maintained.
The third of these agreements is a prisoner exchange treaty, which will be submitted to the Senate for ratification, which provides that American citizens convicted of a crime in Panama can elect to serve their sentences in the United States and Panamanians convicted of a crime by a U.S. court can serve in their homeland.
It is apparent that we are already beginning to realize the benefits of our new partnership with Panama in the military field. During the last 2 months, conventional warfare exercises have been held by our 193d Infantry Brigade at the Rio Hato military base in cooperation with the Panamanian National Guard. This military area, large in size and ideal in terrain for such exercises, is deep into Panama's interior and would not have been made available to use except under the new treaty relationship. On February 16, 1 accompanied President Royo on a visit to the U.S. Army School of the Americas. President Royo, who was given full military honors on his arrival, stated in a press conference at the school that he wished it to continue in operation after the present 5-year agreement expires, and encouraged the beginning of talks between the United States and Panamanian representatives for that purpose. He has remarked to me that he is proud of the fact that there have been numerous Panamanian graduates of the school, and he hopes for greater Panamanian participation in it.
The foregoing remarks are background observations leading me to the first point I wanted to make about the committee's consideration of implementing legislation. The new Panama Canal Treaty was designed to create a working relationship between the United States and Panama in the operation and defense of the canal, so that it would remain efficient and secure in the future.
It is important that implementing legislation support the concept of Partnership with Panama for two essential reasons. First, during the period of our stewardship of the canal operation until the year 2000, there will be continuous need for full cooperation between both governments in numerous respects, and the canal's operation will necessarily be affected by the degree to which that exists. The United States has a dual mission with regard to canal operation: to keep it functioning efficiently and securely, as it has in the past, but also to bring Panamania s into all levels of its management so that they will 1 e perfectly prepared to operate the canal after the year 2000.
Although the treaty clearly puts the United States in control of the canal operation, that operation will function most efficiently if both sides regard it as a partnership. That will require an additional ingredient in addition to simple compliance with the treaty's terms. That element is the willingness of both sides to approach the task in a spirit of collegiality. We see that spirit developing on the isthmus today, in the detailed work being accomplished by technical experts of both countries, and implementing legislation can help promote that spirit by i ing life to the new institutions which will take effect under the treaty.
The principal new institution is the Panama Canal Commission itself. In my view, it is of great importance to follow the administration's proposal that the Commission be constituted as a government corporation, subject, as is the present Company, to the continuing oversight by the Congress of its activities and budget. This form would best provide for a close working relationship between both countries in the manner contemplated by the treaties. A government corporation would not only assure continuity in the canal's operation, but it would also be instrumental in bringing Panama's minority representatives on the Board of Directors of the Commission into a genuine decisionmaking forum on policy matters. In this way, over a period of years, Panamanians would develop a tremendous expertise and appreciation for the extremely intricate problems of managing canal operations, because they would share in the process of making important managerial decisions. They would also share responsibility for them.
In this respect, I would also like to point out that one of the principal concerns frequently expressed by Members of the Congress has been whether or not Panama would, after the year 2000, appreciate the need for adequate maintenance and capital improvement of the canal operation. I believe that a corporate structure would best convey the concept that the canal be operated as a business, on a self-sustaining basis, and that proper provisions for maintenance be made in its financial structure. Indeed, since much of the business of the board of the Government corporation would involve approval of canal maintenance programs, Panamanian members would be personally involved and would share responsibility for the upkeep of the canal.
Anyone who is familiar with Panama knows that the country has a large number of highly qualified people, a great many of them with university degrees from the United States. It is important, however, that Panamanian personnel be given the' opportunity to work as closely as possible with their U.S. counterparts in all aspects of canal management so that the institutional knowledge that we have concerning the canal's operation can be transmitted to them well in advance of the year 2000.
My second point involves safeguarding the interests of U.S. citizens. Mr. Chairman, both the administration bill and the bill introduced by yourself contain numerous provisions relating to the employment and to the quality of life of the U.S. citizens who are presently living in the Canal Zone. Governor Parfitt has given extensive testimony on this subject to the Post Office and Civil Service Committee. I wish to associate myself with the Governor's testimony. During the 4 months since my appointment as Ambas-
sador, I have had the opportunity to meet with numerous citizens' organizations and the labor unions in the Canal Zone, and I can attest to the fact that our citizens living there, although the great majority of them did not favor the treaties, have a high esprit de corps, love their work on the canal, and wish to stay if the terms and conditions of their employment and the quality of life in their communities remain similar to those which they enjoy today.
Many of them are apprehensive about the future, generally for two reasons. First, of course, they want to be assured of Panama's goodwill and sensitivity toward their concerns. Our Embassy, along with the Panama Canal Company and the U.S. Southern Command, is very mindful of this concern, as are the representatives of the Government of Panama. But, a second reason for their concern is the notion that Washington, by which they mean both the executive and legislative branches, may no longer care about them and may not provide for them in the ways promised in the treaties. In this respect, the provisions in both the administration's and the chairman's bills are of critical importance. It is in the best interest of the continued efficiency of the canal that these loyal employees and citizens be treated fairly, in recognition of the significant role they play today as well as the valuable contributions they have made in the past.
I should also add that we are asking our employees to undertake an additional, and highly essential, mission: that of training Panamanians, to assume increasingly greater responsibility in the canal organization. Many Americans in the Canal Zone with whom I have spoken are very much aware of this extra requirement and respond to the challenge with understanding and goodwill. We need their continued support, and I feel it is in our highest national *interest to enact the provisions made for the employees of the canal enterprise which are contained in the administration's proposed Hnplementing legislation.
In conclusion, Mr. Chairman, let me say that I believe there is every reason to be optimistic about the success of our cooperation with Panama in treaty implementations. Our Panamanian counterparts have shown their desire for a spirit of partnership in our great common enterprise. A new government in Panama took office last October which is composed of young, energetic, highlyeducated people who are determined to make their country an economic and social success. They have expressed a policy of vigorous stimulation of the private sector and have extended an open invitation to private foreign investment. An important part of their Program is continued cooperation with the United States in every area. They have demonstrated sensitivity to the concerns of the American citizens who live in the present Canal Zone, and have repeatedly stressed their desire for our citizens to remain in Panama after they retire. If we are able to implement both the spirit and letter of the treaties with respect to Panama and to our own employees, and if we can help maintain between both countries a true spirit of collegiality, we will assure that the Panama Canal will continue to provide its important service to our country and to world shipping.
Thank you, Mr. Chairman, and I will be able to answer any questions that you and members of your committee may have.
TheCHAIRMAN. Thank you, Mr. Ambassador. We appreciate your very forthright statement.
If the committee were looking for a spirit of collegiality on its visit to Panama, I am sure it would have recognized it. At the briefing by the Panama Canal Authority, there was anything but a spirit of collegiality. In fact, I found the Attitude of the chairman quite demeaning to the committee, particularly where he referred to the United States once again as the big boy on the block and asked how would we look in the eyes of the world if we did not put the Coco Solo Navy Base back in 100-percent operating condition.
Now, this is a base that was abandoned 25 years ago. It has had no relationship to the operation for the canal at any time, other than its defense during a World War II-Korean war period.
Now, where is the spirit of cooperation, let alone collegiality? The clear understanding was the United States would turn the canal over in operating condition. It was clear to us, from Governor Parfitt and the entire staff and operational people in the canal Zone that we are, in effect, upgrading existing functions for the operation of the canal. Then we come along and hear a demand for a 25-year-old Navy area to be put back in A-1 condition. You were sitting on one side of them, and I was sitting on the other when the statement was made, and I would appreciate your responding to that attitude.
Ambassador Moss. Mr. Chairman, I will respond to that. Certainly, the Director General of the Panama Canal Authority did raise this point. I am not going to present a brief in favor of everything he said there. I think other Panamanians have recognized that a demand to upgrade the Coco Solo facilities, which were abandoned many, many years ago and were precisely in the same state of repair when the treaty was negotiated as they are today, is one, frankly, without foundation.
The point that he said he was trying to make was simply that if there were some old and abandoned buildings, that.we had, perhaps, a problem together, in that we want the best possible appearance put on the transition period when the treaty comes into effect on October 1.
Nonetheless, I will say that the Panamanian Government has recognized in many ways the fine job that the Canal Company has done in maintaining the present facilities. Before your visit to the isthmus, in fact, an article published in the Panama Canal Spillway, the Panama Canal Company newspaper, on the subject of maintenance was reproduced in all Panamanian newspapers and had very favorable editorial comment from the Government-controlled press.
So I think that whereas you are seeing one manifestation on the part of the Director General about one particular set of facilities that concerned him, there is at the same time a general recognition on the part of the Government of Panama that the company is doing a superb job and is absolutely above reproach in all respects in maintaining the canal facilities that are going to be turned over, such as the bridge, for instance, in which new paving sections have just been completed; such as the railroad, in which there is a great capital and maintenance improvement program going forward even though the railroad is going to be transferred.
1 believe that throughout the Panamanian Government such recognition does exist. I would, however, share your view that the remarks we heard were an aberration from that general spirit, and an unfortunate one.
TheCHMRMAN.What I drew in addition to the fact that it was an almost total abrogation of prior understandings was an attitude that Ambassador Moss and Governor Parfitt, if they do not give in to any tantrum that is thrown by that Authority, will just be endrun up here in Washington and "we will get what we want up here."
Now, do you have that attitude, or do you pick that up from those meetings.?
Ambassador Moss. No, sir, I do not. The plan has been worked out where at least a survey of the condition of buildings will be made. This is not to say that we plan to-that anyone plans to upgrade facilities to improve the state of repair that they were in when the treaties were signed or that they are in at present. But at least to show whether there is any real basis for any concern, I know the Governor is planning right now to have a survey taken to show what condition buildings are in, just by way of information. I think that may lay to rest a lot of the apprehensions.
From timeto time in Panama, there have been feelings that, we would allow buildings to deteriorate or that we would carry material off. I think the article in Spillwav which I mentioned laid to rest in the minds of most Panamanians this particular question, because the evidence is totally to the contrary.
TheCHAIRMAN.Well, let us leave a couple of million dollars item and go to a $200 million item, the issue of the contingent payment to Panama, article XIII, 4(c) of the treaty.
Is it not true that State Department officials said repeatedly last year that the contingent payment to Panama did not have to be in the tolls base, and this was understood by Panama?
Ambassador Mow. That is correct, Mr. Chairman.
TheCHAIRMAN. IS it not further the case that Planning Minister Barletta of Panama stated in San Francisco last year that Panama recognized the contingent $10 million payment as just that, contingent on a surplus and not on the tolls base?
Ambassador Moss. That is correct, Mr. Chairman, and Planning Minister Barletta was the Panamanian who negotiated that portion of the treaty.
The CHmRmAN. Well, why do we now have new interpretations by Panama, by people who participated in the negotiation of the treaty, to the effect that they must achieve the $10 million each year?
Ambassador Moss. Let me say, Mr. Chairman, that it should be entirely clear between Panama and the United States that the United States does not have the obligation in any way to build into the toll base the article XIII, 4(c) contingent $10 million payment. This is not only reflected in the statements of Planning Minister Barletta, but in the understandings attached by the Senate to the treaty which were expressly accepted last June by Panama in the instruments of ratification.
I will say, just by way of explanation, that the opinion that you and your committee were given in its session with the Panama
Canal Authority was made, to be sure, by an official of the Panamanian Government. That means it has to be taken seriously Nevertheless, he stated that the opinion that was being given was his own and it was not an official government position. That is not to say that it need not be taken seriously. The fact is that it was made by a Panamanian government official, and therefore I understand your concern.
TheCHAIRMAN. You can understand the concern of the American taxpayer.
Ambassador Moss. As a legal matter, Mr. Chairman, I would say that we consider this matter to have been definitely settled in an understanding to the treaty which was added by the Senate and which were expressly accepted by the Government of Panama.
TheCHAIRMAN. A supposedly responsible official of the Panamanian Government brought it up to our hearing, and they specifically requested that we come over for that briefing and hearing. And I would think that it was a planned, stated fact for us to take back with us and perhaps to accede to that and change the previous understanding.
Ambassador Moss. Well, all I can say, Mr. Chairman, is that certainly, as far as I know, it is in no way the intention of the executive branch to make any concessions on that point. I think it is well settled in the understanding to the treaty; it is well settled in the negotiating history, and we certainly plan to make no concessions on that point.
I understand the concern of the committee, in that such a statement was made, even if not as an official Panamanian Government position, by an official of the Panama Canal Authority. All I can say is that I will try to see that this matter is resolved and put to rest to your satisfaction and to that of the committee.
The CHAIRMAN. This committee would like a clear statement prior to the time we mark up legislation as to the understanding of the Panamanian Government on that specific point.
Ambassador Moss. I will take that message back with me.
TheCHAIRMAN.We expect to mark up the third week in March.
Ambassador Moss. I can appreciate that concern, Mr. Chairman, and that will be, I think, an important message for me to carry back.
[The following was submitted for the record:]
DEPARTMENT OF STATE,
Washington, D.C, March 21,1979.
Hon. JOHN M. MURPHY,
Chairman, Merchant Marine and Fisheries Committee
Hon. CARROLL HUBBARD,
Chairman, Panama Canal Subcommittee,
House of Representatives, Washington, D.C,
DEAR MR. CHAIRMEN: During the hearing held before the Subcommittee on the Panama Canal of the Committee on Merchant Marine and Fisheries on February 26, 1979, 1 was asked a number of questions by yourselves and other Members and was requested to provide the Subcommittee with answers for the record. The principal issues about which the Members expressed concern were a statement made by the Director General of the Panama Canal Authority during the Subcommittee's trip to Panama to the effect that the United States should refurbish some old buildings in the Canal Zone prior to their transfer to Panama, and statements made on the same occasion by another official of the Authority to the effect that Canal tolls should be set to include the contingent payment of ten
million dollars annually under Article XIH 4(c) of the Panama Canal Treaty and that the Government of Panama had the right after October 1, 1979, to tax businesses in the Canal Zone on their operations prior to that date. With regard to the first point, I have discussed this matter thoroughly with Ambassador Gabriel Lewis, Director General of the Panama Canal Authority. He states that he did not say, and that it was never his intention to imply, that the United States had any obligation to upgrade the condition of buildings beyond their state of repair at the time of the signing of the Treaty. He did urge that the United States give some of the buildings a 'face lifting' by repairing broken windows and by painting, to provide a better image for the U.S. when the Treaty comes into effect. He also acknowledged that some buildings, abandoned for a great many years, were beyond repair and might best be demolished. As I stated in my testimony before the Subcommittee, surveys are being made to catalogue the buildings and their condition prior to transfer to Panama, but there is no obligation on the part of the United States to repair or refurbish buildings in the Zone. With regard to the other matters, I testified that the statements made by an official of the Panama Canal Authority had never been represented to me as positions of the Government of Panama, and that I did not believe them to be such. In order to obtain clarification of these issues in the form of an official response, I sent the following diplomatic note to the Foreign Minister of Panama: PANAMA, March 21, 1979.
I have the honor to refer to the Panama Canal Treaty and related agreements signed September 7, 1977, and which will enter into force on October 1, 1979. 1 wish to confirm the understanding of my Government that, in accordance with Article IX of that Treaty and Paragraph 1 of the Annex thereto, the laws of the Republic of Panama shall apply throughout all of its territory upon the entry into force of that Treaty. Therefore, except as specifically provided in that Treaty and related agreements, all business and non-profit organizations currently established in that portion of the territory of the Republic of Panama which constitutes the Canal Zone shall be subject to the fiscal jurisdiction of the Republic of Panama as of October 1, 1979, and thereafter, including during the
30-month transition period established in that Article.
Furthermore, Paragraph 1 Article IX of that Treaty establishes the principle
that the laws of the Republic of Panama shall apply to matters and events which occurred in the Canal Zone prior to October 1, 1979, only to the extent specifically provided in prior Treaties or Agreements. Therefore, it is the understanding of my Government that after October 1, 1979, your Government will not collect taxes or other charges or impose sanctions on such businesses or organizations related to their activities or operations or other matters or events
occurring in the Canal Zone prior to October 1, 1979.
I also have the honor to refer to Paragraph 4(c) of Article XHI of the Panama
Canal Treaty and to the instruments of ratification thereto. That Article provides, in part, that the Panama Canal Commission will pay to your Government out of Canal operating revenues a sum of up to ten million dollars per year to the extent that such revenues exceed its expenditures. It is the understanding of my Government that your Government accepts that the United States need not sell toll rates for the Canal at levels designed to produce revenues to cover
However, my Government will ensure that a notation concerning the provisions of Article XIH 4(c) will be made in each annual budget for the Panama
If the foregoing accords with the understanding of your Government, I shall
be grateful to have an acknowledgement from your Excellency.
Accept, Excellency, the renewed assurances of my highest consideration. I have received the following response from the Minister: DEAR Am.BAssM)OR:
I have the honor to acknowledge the receipt of Your Excellency's note of
today's date which states as follows:
I have the honor to confirm that the foregoing accords with the understanding of my Government."
Thus, we have received a satisfactory assurance from the Government of Panama that there is no difference in our respective views as to the meaning or application of Article XIII 4(c) and Article IX, Paragraph 1, of the Panama Canal Treaty. The remaining information which I promised for the record of the hearings of the Subcommittee will be transmitted directly by the Department of State.
AmBLER H. Moss, Jr.,
The CHAIRMAN. On the matter of retroactive taxation of businesses now operating in the Canal Zone, is it not clear to the Department of State that article IX, paragraph 1 of the Panama Canal Treaty precludes any retroactive assessment such as the type we heard about Saturday from Mr. Manfredo?
Ambassador Moss. That is the position of the Department of State, Mr. Chairman. In fact, it was precisely consideration of the protection of these businesses which led us to the inclusion of that paragraph in the treaties. We consider that that matter is settled, and article IX, paragraph 1 would specifically preclude the taxation of Canal Zone businesses on their business activities prior to October 1.
The CHAIRMAN. The treaty clearly says: "The law of the Republic of Panama shall be applied to matters or events which occurred in the former Canal Zone prior to the entry into force of this treaty only to the extent specifically provided in prior treaties and agreements."
Ambassador Moss. Again, Mr. Chairman, I might say just by word of explanation, not by word of excuse, that the fiscal authority of Panama, that is the fiscal jurisdiction over Canal Zone enterprises, has been a matter of contention between the United States and Panama during the whole history under the 1903 treaty. Panama has always claimed the right to tax those businesses. We were anxious, of course, in the treaty negotiations that that right not be recognized, or at least that provision be made, as it is made in the treaty, that this matter need never be litigated but be made moot by inclusion of such a provision in the treaty.
I think it may represent simply the desire of perhaps some elements within the Government of Panama not to give up on the point, but as far as the executive branch, is concerned, it is settled; the matter is absolutely clear and is settled in the treaty.
[Whereupon, Mr. Hubbard assumed the Chair.]
The CHAIRMAN. Well, I would appreciate your communicating to the Government of Panama that it would be virtually impossible for this committee to write legislation' with the misinterpretations, and the changes of such a stark nature, such as those that I have just discussed-on the upgrading of unnecessary and outdated property, on the article XIII contingency fund payments, on the taxation issue. If issues that we felt had already been clearly resolved are now subject to change, it is going to be very difficult for any committee to properly write implementation legislation. We would like the answers to those questions and an assurance, somehow, on the part of that government that they are going to be acting in this spirit of collegiality that we have heard about this morning, or certainly in some spirit of good faith.
Mr. HUBBARD. Mr. Bonior?
Mr. BONIOR. Thank you, Mr. Chairman.
Mr. Ambassador, I have not followed these proceedings to the extent perhaps that others have over the last 2 years, although since becoming a member of this subcommittee, I have felt, obviously, an obligation to make myself aware of the issues involved as best I could.
1, in my brief journey to Panama, was impressed with the spirit of collegiality. I had the feeling-and I am reluctant to draw the analogy because of a former President who often uses the analogy--of a football team marching down the field, but I had the feeling that we have gone, 90 yards, starting at our goal line, and we are just about ready to punch the ball in, if you will. Many of the important questions, certainly, have been settled with the treaty, and we are at a point, it seems to me, in which both countries, both entities are concerned about getting the maximum that is left in terms of negotiations.
While I can understand well the concerns of the American people and members of this committee concerning the issue of a contingency payment and I can understand the questions that were raised by members of this committee on retroactive taxes, I think I can also understand the feelings of members of the Panamanian Government about some statements that have been issued recently by Members of the Congress. I can understand, I think, their feelings, perhaps, concerning the confirmation of Panamanians to the Commission. I think, as Americans, we would be incensed if we were in their position, to have Americans confirmed by Panamanians.
I can understand their concern about the toll structure and some of the things we are about to consider, and I also can understand the whole question of how they will have to relate to the potential problems of, for instance, hydroelectric power and the cost to Zonians versus the cost to Panamanians.
So it seems to me what we have here is a question of-we are right there, pretty close; we have an October deadline. And it would seem 'incumbent upon this Government and the Panamanian Government to continue to work in that spirit of collegiality that you often mention in your statement to resolve these issues that have been brought up by both sides. The difficult part, it seems to me, is that we are under a time constraint to write implementing legislation, and it seems important to this member that we understand from President Royo, from former Ambassador Lewis, and other members of the Panamanian Government what is it that they are requesting of us, in addition to what we have, indeed, already requested of them in our latest trip.
I have no questions, Mr. Chairman. If the Ambassador would like to comment, I would enjoy hearing from him. Ambassador Moss. Mr. Chairman, if I just may make a comment on Congressman Bonior's statement, I think that he has pinpointed with great sensitivity the fact that building a partnership under the present circumstances does take a certain amount of work and a certain amount of goodwill on both sides and, of course, the reason is because we have had a relationship of a different sort over the past 75 years. It has often led to disputes and we have not always been on the friendliest of terms. And, of course, what we are faced with now is the requirement, under a terribly short time
constraint, and to try hard to lay aside all the old differences as well as the tendency to try to catch up and grab extra advantages, which, frankly, has been manifested through the years on both sides, and to work in a truly cooperative manner. That means, in many cases, setting aside old habits and adopting new habits, new mental attitudes, new approaches. It is something that does not always happen overnight, given the past history of the relations between the two countries.
But I think, as Congressman Bonior correctly observed, the spirit is there, the willingness is there, and the appreciation is there that a partnership is certainly the best way to work in the future. I think that we will see from time to time little aberrations from what would be a perfectly smooth functioning partnership. These are explainable, but I think these are aberrations, and in the main, the building of our partnership is proceeding very well.
Mr. BONIOR. I have no further questions or comments, Mr. Chairman.
Mr. HUBBARD. Thank you, Congressman Bonior. Congressman Bill Carney?
Mr. CARNEY. Mr. Ambassador, with all due respect to you and your position, I feel as though I was not in Panama for the last few days, but in another country, because I did not at any time feel that there was a spirit as you have discussed between the two nations, and certainly -and this was a great concern that I have had-I did not feel that there was an esprit de corps of the American citizens; in fact, they are quite confused, quite concerned, and they brought out the point that there has been an accident increase rate of 96 percent in fiscal year 1978 because of the lack of esprit de corps, because of the concern that they have for their well-being and the concern that they have for their status. I think that was the feeling of the Panamanians who work for us at the canal. I think that we certainly have a great deal of difference of opinion as to the way you read the situation and as to the way I have in the last three days, and I think the Panamanian Government certainly has a difference of opinion as to the way we read the treaty and the way they do.
I know the Chairman asked the four questions that I was most interested in hearing, and I am sure that you will provide us with that information. I would feel it impossible to formulate legislation without getting the answers that we need on those questions, particularly title XIII, chapter (c) on the $10 million. That is a considerable amount of money, and Mr. Manfredo did say that they would expect the United States to make up any deficits in any years. That could be over $200 million, as the chairman pointed out.
Gabriel Lewis indicated that they will levy back taxes. And I have a request of you, if I could-I would like to obtain a list, as well as the amount of tax that will be levied, and to which corporations they will do that. The Ambassador, Mr. Lewis, indicated that he had that information; it was not made available to us. I would like to get that list before we go too much further. Of course, once again, the chairman mentioned the improvements of some of our properties there. He did mention that they have been considered properties of no use to the American Govern-
ment and they have deteriorated, but now the Panamanian Government feels, "for the good will of the United States," that we should spend millions of dollars to make them look good.
Movable properties, is another question that I have; I have some grave concern about movable properties. On February 2, there was an order calling for the movement of some movable assets that the Navy had. We are not talking about the Panama Canal Company; we are talking about the Navy. They had an entire list of lathes and machinery that they used to repair the naval fleet, and that list on market values today was in excess of $100 million. It is true that the value, the book value was $15 million, but the replacement value was in excess of $100 million. On February 9, the Navy canceled that order.
I would like to know if the State Department was involved at all with that decision to cancel that order to move that propert,-. I think that is important before we go much further.
I have to say, after reading this statement, that I did n( ,Ind any sense of cooperation between the Panamanian Gove- -nent and the American Government down there. I could r-J . your statement be read without my making my personal o-:- -ations entirely to the contrary.
TheCHAIRMAN. Would the gentleman yield.?
Mr. CARNEY.Yes, Mr. Chairman.
TheCHAIRMAN.On the question of overall assistance to Panama, your very capable staff briefed us early Friday morning and Mr. Culbertson, the AID Director, discussed the level of aid to Panama over the past years and over the years to come, and it is our understanding that Panama was either number one or, at the very most, number three on the list as far as total payments and aid assistance is concerned, particularly in the areas of housing, sanitation, and schooling.
That is another reason that we find this misinterpretation-and trying, in effect, to gouge the zone for so much more-irritating and it just points up what Congressman Carney just brought out.
Mr. CARNEY. In the hearings that we had, the Panamanian nationals who worked for the Canal Zone expressed a concern about their well-being, Particularly the West Indians, the black Panamanians of West Indian ori i They expressed particularly that they felt that there were poor relationships between the Panamanian Government and their group.
It was also brought out that Panamanians in general who enjoy the benefits of working in the Canal Zone, the economic benefits of working in the Canal Zone, were somewhat concerned about their acceptance back into the normal economy of Panama, both from their economic well-being and from their social well-being. I think there is an underlying fear, and I think more from their social well-being than from their economic well-being. I was wondering if you could answer or perhaps speak on the human rights and civil rights issue of Panama. Specifically, we are talking about a group of people who have worked for the canal and have done a good job over the years; they are quite concerned. There is a report from the Organization of American States on human rights in Panama. Certainly, it is the administration's
policy not to favor countries that do not live up to our ideals of human rights, and that report certainly would not say that Panama does live up to these ideals.
Can you give me your opinion on that particular issue, specifically related to the West Indians who are working for the Canal Zone?
Ambassador Moss. Certainly, Mr. Chairman, I would like to respond to Congressman Carney's question and also to a few other points that you made, Mr. Chairman.
Let me start with the West Indians. A fairly large West Indian population came to the canal during the time of its construction and worked there. They came from islands such as Jamaica and various other parts of the Caribbean, lived by and large within the Canal Zone, continued to speak English, and continued to hold their own community values. Actually, up until a few years ago, the only available education provided for them was in the English language, so they were kept, really, as a community apart from Spanish-speaking Panamanians.
Now, of course, they never acquired anything other than Panamanian nationality at birth; they did not acquire U.S. nationality. So they were virtually in a position in many cases, of being Panamanians, who did not speak the language of the country and who, in most cases, did not belong to the majority religion of the country and therefore were culturally separate.
They have been, I think quite rightly, concerned about their future under the treaties, because they have not assimilated into Panama's social structure. And for that reason, out of sensitivity to the particular problems and concerns of this group, we have included in implementing legislation a special immigration provision whereby they could quite freely migrate to the United States on liberal terms.
We do not know at this point and we do not have any hard evidence as to whether or not their concerns are justified, but just given the sociological background that I have described to you, I think there is certainly ample explanation as to why they feel that they are a people apart and do not know where they will come down into the social structure when it sorts itself out after October 1. 1 hope that provision for special immigration rules will allay some of their fears. That is an escape route if they feel that there is too much pressure on them to assimilate or there is discrimination against them because they have not, and that may meet some of their concerns. We do not have any accurate notion at the moment as to how many of them will take advantage of the special immigration provisions; we have not been able to get any kind of reasonable idea, but I think we will as the months go by. I certainly think that those special immigration provisions are very important; they would let a number of the people affected into the United States, as I say, on rather liberal terms when you consider our normal immigration laws, and I think those provisions ought to be passed.
Moving on to the concerns of employees generally, I understand perfectly what you mean and what you must have heard by way of concerns expressed by employees both American and Panamanian. I think the basis of their concerns in most cases arises from uncer-
dainty. They know exactly what their life is like now, what their benefits are, what their working conditions are, the quality of life, how they interact socially with the rest of the people in their community ies, and they are not so sure of what comes later. In many respects, of course, the Panamanian employees who express their concerns over labor conditions are expressing the same concerns that Panamanian and American employees are expressing over our labor conditions. In many cases, our executive branch has not fully defined the labor rules, wage rates, and benefits. A number of citizens are still worried about that.
I think as time goes on and as we work within our own Government and Panama works within its own government to try to define what the rules of the game are and come up with the answers and make it all clear, and as the two governments work together to settle some of these crucial problems-I think the big ones really are in the labor area-that the people's concerns will be allayed.
Now, I Would say that I think that the Panamanian Government has understood with great sensitivity the concerns about the American population in the Canal Zone, as to that aspect of the quality of life that bothers them about the disappearance of the zone-namely, the prospect of Panamanian policemen coming through their neighborhoods. Panama is taking steps to insure that there will be joint patrols and that special training is given to Panamanian policemen. I think they are very aware of it. Panamanian Government leaders have said publicly that they want the Americans who live and work in the Canal Zone to stay there; they want to make conditions right for them so that they do not feel they have to leave and so that they do not feel put upon.
I think it is very important to our official government representatives down there-the Governor, the commanding general, and myself-to keep following that problem and to keep making sure that those things get done. But I would say that I have seen considerable evidence of Panamanian sensitivity about that.
On the human rights situation generally, you may have seen the Department of State's latest human rights report on Panama. I think it shows a steady improvement in the human rights area; certainly in the core elements of human rights-freedom from torture, arbitrary arrest, and things like that-Panama comes out rather well in the Latin American spectrum. The whole picture, I think, generally is gradually improving in the human rights area, and we hope that it will continue to do so; we obviously urge and support that.
Amnesty International just published its 1978 report, and once again, it does not even list Panama in the listing of the countries that the report covers. That is not to say that people are not going to have some human rights complaints in Panama, as they do in practically every country, including our own, but I think there has been a notable improvement.
Let me address finally the question of the Navy property that you mentioned, because I think I ought to just say that I have not heard about this before; I have no knowledge of any decision which was made to move property or that it was scheduled to be moved. To my knowledge, if such a decision was made, there was, to the
best of my knowledge, no State Department and certainly no Embassy role in the reversing of such a decision. However, I will promise to look into that, Mr. Chairman and Congressman Carney, and try to get you an answer and find out what that is all about.
Mr. CARNEY.Mr. Chairman, I have a list of that naval property and the orders to remove it and the orders rescinding the movement of that property 6 days later. My question that I would like to have answered is, with these two sets of orders, has there been any State Department intervention?
Ambassador Moss. I will get that answer, as I say, Mr. Chairman. To my knowledge, there has been none, nor on the part of the Embassy. Of course, I spent 4 years as a naval officer and I know that the Navy can change its mind on occasion about things. But I will look into the particulars of this case to the best I can.
[The following material was submitted for the record:]
DEPARTMENT OF STATE,
Washington, D.C., April 5,1979.
Chairman, Panama Canal Subcommittee,
House of Representatives, Washington, D.C.
Hon. JOHN M. MURPHY,
Chairman, Merchant Marine and Fisheries Committee, House of Representatives, Washington, D.C.
DEAR MESSRS. CHAIRMEN: In his letter of March 21 Ambassador Ambler H. Moss provided you with answers to a number of questions asked of him during his February 26, 1979, testimony before the Panama Canal Subcommittee of the Merchant Marine and Fisheries Committee. He noted that the Department of State would be replying to other questions on his behalf.
During the hearing Congressman William Carney of New York asked whether there had been any involvement by the Department of State or the Embassy in a reported February 9 decision by the United States Navy not to remove certain Navy equipment from the Canal Zone. The Ambassador testified that to the best of his knowledge there had been no involvement in the February 9 decision, and certainly no Embassy role in it. The Ambassador is correct: neither the Department of State nor the Embassy was involved in the decision which was made by the United States Navy. It is my understanding that the Department of the Navy will be communicating directly with you on this matter.
In connection with Chairman Murphy's request to the Ambassador for a statement of the Governor of Panama's interpretation of the Panama Canal Treaty with regard to tax claims by Panama against organizations in the Canal Zone, Congressman Carney requested a list of the organizations involved and the amount of the tax being levied. I am pleased to note in this regard that the Panamanian Foreign Minister confirmed our understanding on March 21 that, under the Panama Canal Treaty, Panama will not collect taxes or other charges or impose sanctions against businesses or organizations operating in the Canal Zone for their activities prior to October 1, 1979.
Congressman Carney also asked for information concerning the amount of revenue being gained or lost as a result of the transfer of commercial and retail activities from the Canal enterprise to Panama under the Treaty. We have been informed by the Panama Canal Company that there is no significant gain or loss to the Canal resulting from the transfer of such activities to Panama. According to the Company, the activities of such a group generally have operated at a break even level, generating annual revenues and expenditures in the neighborhood of $60 million.
DOUGLAS J. BENNET, Jr.,
Assistant Secretary for
Mr. CARNEY. There is no doubt about the ability of the Navy to change its mind.
I would also like to point out that the West Indians, or the Panamanians that do not live in the Canal Zone will not enjoy those immigration rights, although they work for the Canal Zone governments or for the Panama Canal Company; if they live in Panama, they will not have that same enjoyment. They are the ones who expressed some fear for their civil and human rights.
You brought out an interesting point on the issue of utilizing the Guardia Nacional and our police department in the neit 30 months. Well, some of the members of the police department expressed a fear-in fact, one in particular expressed a fear for his life with this cooperation, and he was somewhat concerned about it. Would you like to make any comment on that, as to what we will do to protect the West Indians who cannot enjoy those immigration benefits and the members of our Canal Zone Police Department who feel that they could really be in a precarious situation?
Ambassador Moss. Certainly, Congressman Carney. First of all, on the immigration question, the West Indians who have served a certain number of years with the Company will be eligible even if they live outside of the Canal Zone.
Mr.CARNEY. How many years?
Ambassador Moss. I believe that is 15 years; those retired from the service now, or currently having 15 years of service. Now, that will include a lot of them that live in Panama. There may be some who retired or left the Company and did not complete that time of service, but we figure that this type of provision would include most of them and would include most of the group which would be most concerned, which is quite often the older part of the population.
Mr. CARNEY. But those with less than 15 years of service do not enjoy that immigration provision?
Ambassador Moss. That is correct. On the other hand, remember that these are not U.S. citizens-this is something we are doing for people who have been our employees. We are not talking about U.S. citizens here that we are trying to protect; these are foreign nationals. We are trying to be as generous with them as we possibly can, given the fact that they have been loyal employees of the Company.
Mr. CARNEY. I appreciate that.
Ambassador Moss. And it is really on the basis of their employment with the Company and with our organizations that we drafted these special immigration provisions, not simply because they are a different population within the country of Panama that we feel sorry for.
Mr. CARNEY. I appreciate that. I think that when you have a segment of the population that lives outside of the Canal Zone and have worked between 60 days, let us say, and 15 years, and they are concerned, I think that the U.S. Government should be concerned for their welfare, whether they worked for 2 days or 25 years in that situation.
I would like to know how we are going to protect those particular people.
Ambassador Moss. Congressman Carney, the, only way to do so would be, as we are proposing, through legislation, because I think that probably the immigration provisions on the books now might
be a bit difficult to comply with, and therefore only by further liberalizing the present administration bill or H.R. 111 would that be possible.
Mr.CARNEY. Thank you.
Mr. HUBBARD. Thank you, Congressman Carney.
Ambassador Moss, would you tell us exactly, please, what role the U.S. Embassy in Panama plays in the coordination of planning for treaty implementation?
Ambassador Moss. Certainly, Mr. Chairman. That is a complicated question. Of course, down on the isthmus, we really have three principal government organizations at work, in addition to the numerous departments and agencies who have set up shop there in the last 70 years.
We have, principally, the Panama Canal Company and Canal Zone Government, headed by Governor Parfitt; the Southern Command, headed by the Commander-in-Chief, General McAuliffe; and myself, as Ambassador.
We meet together in the forum known as the PRC, the Panama Review Committee, and generally review at all stages matters of common concern in carrying out Government policy and planning for implementation.
On the civilian side, the primary agency at work sorting out all these problems is a group now called the Binational Working Group, composed of about 26 subcommittees which work in ports, the railroads, boundaries, surveys, nonprofit organizations-a range of technical subjects-in which are represented Panamanians, Panama Canal Company officials, and a member of the Embassy in each case. So we coordinate in that manner
On the military side, a series of subcommittees has been set up strictly, at the moment, on a military-to-military basis, with our officers and officers of the National Guard, and they have not advanced quite so far in their planning stage as has the Binational Working Group set of subcommittees.
Those subcommittees, as I mentioned, have been actively engaged since the middle of last year, and that is a good sign that they have started. Of course, they have spent a lot of time just drawing up plans, identifying problems, and getting going.
I think all of us are quite aware-sometimes painfully aware-of the fact that there are only approximately 32 weeks left until treaty day and a lot of work is yet to be done. But I think that all of the work that is being done in these subcommittees is being done on a very professional basis by people sitting down as technical experts, looking at'what the problems are, and trying to figure out solutions to them. Of course, there are many problems.
I am very satisfied with that method of operating; I think it is a good way of coordinating. We just simply have to accelerate the work as we come down to the deadline.
Mr. HUBBARD. In how many planning subcommittees is the Embassy involved?
Ambassador Moss. We are involved in all 26 of these subcommittees, and what we have done, really, is not to set up a treaty planning unit in the Embassy, but really to consider the entire Embassy as one big treaty implementation planning team to work with Pan Canal and Southcom. That is the only way we, can do it.
We would not be able to have enough people to work on the problem if we had just one little office within the Embassy.
So we constituted the entire Embassy, including AID, to work on the problem and to cooperate in the subcommittees. We have got somebody assigned to each of them to cooperate with our counterparts in Pan Canal and Southcom.
Mr. HUBBARD.Mr. Ambassador, discussion of the embassy's role in planning brings to mind the sections in H.R. 111 and H.R. 1716 concerning the authority of the Ambassador. The language of section 109 of the Murphy bill, of which I am a cosponsor, differs slightly from section 102 of the administration bill.
Do you have any comments on the provision applying to the U.S. Ambassador?
Ambassador Moss. Mr. Chairman, I think they are roughly similar; let me see if I can find the page there. I just might have a couple of comments.
The administration bill says: "The ambassador to the Republic of Panama shall have full responsibility for the coordination of the transfer to the Republic of Panama of those functions that are to be assumed by the Republic of Panama pursuant to the Panama Canal Treaty of 1977 and related agreements,"; that same provision in H.R. 111 says: "The ambassador of the United States to the Republic of Panama shall coordinate with the Republic of Panama."
I think that the administration bill is a bit broader, because it says the Ambassador "shall have full responsibility for the coordination," which I think implies coordination not just with the Republic of Panama, but with the other U.S. Government agencies on the isthmus, such as the Panama Canal Company and Southcom.
I think it is important to stress that idea, that coordination has to take place among our U.S. Government partners down there, as well as between the Embassy and the Republic of Panama. I think in that sense, though, that may be a small distinction, but I think the provisions are roughly similar.
Mr. HUBBARD. I might say, Ambassador Moss, that many of the members of the subcommittee are happy to see the emphasis you have placed in your prepared statement on protecting our citizens in the present Canal Zone.
Too often, the Department of State seems to be representing, at times, the foreign country, not our own people. Do you see any difference in this situation.?
Ambassador Moss. Well, I think there is something that we have to be very mindful of, Mr. Chairman, and that is that the jurisdiction of the United States over the Canal Zone will disappear on the October 1, and there are thousands of U.S. citizens over there who need and want the Embassy to be involved with their problems and concerned with their lives. And, moreover, I think in the interest of overall efficiency of the operation, we simply have to be concerned with their lives, not only for humanitarian reasons, but as a practical matter, because it leads very directly to the efficiency of the operation and defense of the canal. So I think it is not only in the national interest, for the reason of protecting and safeguarding the interests of our citizens, but also, additionally, for providing for a smoother canal operation, that we
be concerned with all of their problems. And, as I say, we have to do that in a very coordinated way with our other Government agencies, and, I think, the Embassy definitely has a role in this respect. The citizens there need to be represented and feel represented by us.
Mr. HUBBARD. Thank you, Ambassador Moss. I call on Congressman Lowry from the State of Washington.
Mr. LOWRY. Thank you, Mr Chairman. Mr. Ambassador, the other members have stressed those important points that we are concerned about-the costs; it looks like perhaps some changes and differences in interpretation from those things that our Nation and Panama have entered into in good faith.
I am confident in your ability to represent those very important interests that we are all concerned with during the negotiations going those last 10 yards that Congressman Bonior has referred to.
I would like to ask a broader question. How important to the United States, in your opinion, is a stable and friendly nation to the United States in that part of the world?
Ambassador Moss. Congressman Lowry, I have worked on Latin American affairs for some time, both in public and private life, and I feel it is absolutely crucial. I think that Panama is a country that has very much of an orientation toward us. It welcomes our private corporations to come in and set up business.
Panamanians come to our colleges and universities; they have institutions they borrow from us, such as Lions Clubs, Rotary Clubs, Kiwanis Clubs. This is the type of friend we need to maintain and cultivate. I think that the pro-American attitude which is generally apparent on the part of most Panamanians is something that works very much in our favor in Latin America, and I think that this new relationship will encourage it.
I think, also, it is very much in our national interest to see Panama overcome its economic difficulties. I think this can be done through trade and cooperation and through private foreign investment, principally, and I think it is very much in our national interest to wish them well and help in a friendly and noninterfering way in their efforts to expand their economy and to be prosperous.
I think all these things are terribly important, and you are absolutely right about that.
Mr. LOWRY. Is it going to be possible in the future, 5 or 10 years from now, for there to be a stable democracy in operation in Panama that will realize the interests of private enterprise and free enterprise and the importance of that within our hemisphere and within our world?
Ambassador Moss. I hope very much that there is. The United States certainly should encourage this trend. As you may know, the Panamanian Government has adopted certain moves toward greater participation in the legislative process and toward direct popular election of the President by 1984.
At the same time, the Panamanian Government has, in fact, laid much more stress, since I have been there and since the new government came into power last October 11, on development of the private sector and working with the private sector in trying to create a better business climate.
These are all very encouraging signs. One does not like to make any predictions, with the world economy being in the shape it is in, but I think the trends certainly are encouraging and we shall do everything we can in the proper way to encourage these trends.
Mr. LowRy. What is your estimate of the costs of the implementation of this change we are going through? What is the annual and the overall cost?
Ambassador Moss. I am not an expert on the question of the full treaty costs. I know that during testimony during the Senate ratification process last year, in a letter from Secretaries Vance, Brown, and Alexander, the overall figure of $350 million during the lifetime of the treaty was mentioned. I think that figure, as do all figures in government and private life, has to be revised from time to time, and I think that it is probably under revision right now.
I am not aware of any different figure at this moment, but I think that it probably will be revised, one way or another. As for how that breaks down into annual costs, of course some of the costs will impact most in the next couple of years during the transition period-items such as military construction. I do not have a complete annual breakdown. I think we have to come up with a better revised figure for the total treaty cost package before we can estimate exactly where those costs would fall.
Mr. LowRy. How important would you consider those estimated costs of, say, $350 million over the life of the treaty in comparison to having a friendly neighbor in that part of the world?
Ambassador Moss. I think, Congressman Lowry, it is obviously an important sum of money; it is a large sum of money. At the same time, I consider it a good investment, because I think it will pay off rather handsomely in terms of our safeguarding our interests in the canal, its operation and defense, and in terms of everything we are trying to do in Latin America to protect our interests in the free world generally.
So, I think that, generally speaking, it is money that represents an investment that we can see a future return on.
Mr. LowRy. Do you recall the amount of money we spent a day in Vietnam?
Ambassador Moss. I do not have that figure, sir.
Mr. LoWRY. It would be 12 days.
Ambassador Moss. Twelve days' worth?
Mr. LoWRY.Yes; thank you.
I felt that that attitude of our people in Panama was excellent. As a newcomer that really benefited from that trip, I thought the attitudes were excellent. I also concur-and I do not want to distract from it-I concurred with the amount of concern of the rather members of this committee on those particular Points that they have gone through on having to renovate those old bases, and costs that were clearly not withm-i the good faith negotiations of this Nation.
We expect you to do that job, and we think you can. I think we are entering into a very positive situation there-. Ambassador Moss. Thank you, sir. Mr. LowRy. Thank you.
Ambassador Moss. Thank you, also, for your comment that we had moved 90 yards. I would have said somewhat less than that, but I appreciate the comment.
Mr. BoNIOR. As long as we do not have any end runs.
Ambassador Moss. Right.
Mr. HUBBARD. Before we call on Congressman Bauman who has just come in-we will give him time to collect his thoughts-we will call on Congressman Joe Wyatt, a member of our full committee, whom we are glad to have with us today in the subcommittee's hearings.
Mr. WYATT. Ambassador, the Chairman, pointed out a couple of things that he would like to see answered. One thing he mentioned in particular was the question of the electricity situation. Do you think we could get some clarification from the Republic of Panama in that regard, because I think that has a lot to do with the apparent costs to some of the nonprofit corporations that are in there, as well as the overall lifestyle of people, both American and Panamanian, who live there?
Ambassador Moss. Yes, Congressman Wyatt, that is an important question; it is one that is being worked out within the context of this Binational Working Group, in one of the committees. I think it needs attention, because, of course, there is a great disparity in electricity costs-the cost of electricity presently being furnished not only to American citizens who live in the Canal Zone, but also to nonprofit organizations such as churches.
I hope we can come up with a satisfactory resolution. We certainly regard it as a significant problem, because it is one of those many elements which goes into the quality-of-life situation. If too manv of those are out of kilter with peoples' expectations, then there is a perception that the quality of life is not going very well. So Ir-think all these things need detailed attention.
Mr. WYATT. Also, as I understand it, employees would lose the privileges of purchasing from the company store. Is this by treaty that they are going to lose these rights?
Ambassador Moss. Yes, sir, that is correct; that is in accordance with the treaty arrangement. This was a provision which the Government of Panama sought in the treaty arrangements, I think for reasons of adding to their economy. It is in accordance with the treaty.
Mr. WYATT. The Government of Panama is the one that wanted those particular provisions?
Ambassador Moss. That is correct.
Mr. WYATT. Third, could you give us some reason why there could have been, during the last several days when the committee was in Panama, differences that you got from the Pan anian leadership, versus what the treaty may say.?
I agree with the chairman; I think there are some real problems. I can see very little reason for us to go down there again to joust; this is a committee of the U.S. Congress. These feelings were not strongly held by not just the individuals who testified, or the visitors, but by various people in the Government of Panama itself. This is a general question.
Ambassador Moss. As I mentioned, I feel that the positions which vou heard at the end of the briefing session with the
Panama Canal Authority, which were certainly surprising to the members of the committee-and, frankly, surprising to myselfexpressed, as the speaker mentioned, his own opinion, and possibly the opinion of certain elements within the Panama Government, but not an official government position.
Nonetheless, they obviously have to be taken seriously, because he is, undeniably, an official of the Panamanian Government and of the Panama Canal Authority. So, as I mentioned to the chairman-and the chairman's message to me certainly was that they are matters that have to be cleared up, simply because of the way in which they were brought up.
I think it is an important distinction, however, to say that these were not official positions adopted by the Government of the Republic of Panama, nor, in fact, by individuals who had direct personal knowledge of those particular clauses of the treaty because they negotiated them.
But, nonetheless, I recognize their importance and the effect that such statements had on the members of the committee that heard them.
Mr. WYATT. Thank vou, Mr. Chairman.
Mr. HUBBARD. Congressman Bauman?
Mr. BAUMAN. Mr. Ambassador, you disappoint me, because I fully understood that you were going to laugh if you made the statement that you just made before this committee. I think, if I heard you correctly, that the statements made to us by the officials of the Panama Canal Authority-all of them Panamanian Government officials-did not necessarily represent the official position of their government, is that correct? Did you say that?
Ambassador Moss. That is correct.
Mr. BAUMAN. And you did not laugh.
Ambassador Moss. I made a correct statement. In fact, the speaker himself said that; he said they represented his personal opinion. I think that later he added that there were some people in the Panamanian Government who felt that way and that they were working on an official position paper.
That is not to say that I am claiming he made those remarks as a private citizen because, of course, when he is an official of the Government and stands before the members of the committee and makes a statement of this sort, these, of course, are not the remarks of a private citizen. I am not trying to make that case.
I am only trying to put into context the way in which the statements were made and, more precisely, where they fit into official positions.
Mr. BAUMAN. Mr. Chairman, I regret that I did not get here earlier this morning. I would almost think, if I didn't know better, that the State Department was in charge of the weather and the traffic between here and Easton, Md. It is not as though I have not discussed this matter with Ambassador Moss extensively in the last 4 days, because I have on numerous occasions and he has been very courteous to me. But I do want to state for the record, since I was not here earlier, that those of us who oppose these treaties in the House of Representatives and were disposed to deal with this implementing legislation in a manner that would try and salvage, as we view it, the best possible
case for the United States now have very serious doubts about whether we want to even bother with the implementing legislation; whether or not it might not be better, as I said yesterday in Panama, to seek some constitutional means to either repeal or to oppose these treaties completely, by whatever method is available to us.
Certainly, there is still a dispute about the House's right under article IV to dispose of property. Unless these questions are cleared up-and I gather from the briefing from staff, since I did miss your statement, many of the points that were raised by the Panama Canal Authority remain to be clarified and that report will be referred to this committee. Is that correct, Mr Ambassador?
Ambassador Moss. That is correct. The chairman requested, and I promised to do my best, to produce a satisfactory response for the members of the committee so that these matters which were raised during the course of that briefing would be clear in the committee's mind.
Mr. BAUMAN. I think that is essential, because it is incredible to me that in all these negotiations, you could serve as many months as you have dealing directly with the Panamanians-and then a congressional committee, who luckily happened to meet with these Panamanian officials on what we are now told is an unofficial or informal basis-and give us interpretations that are not only diametrically opposed to your understanding and our understanding, but to the treaty's specific terms.
That was confirmed to us by Governor Parfitt in our debriefing session. There is no right of the Panamanians to apply, retroactively, their laws, tax, criminal, or otherwise. There is no right for them to take our movable pro erty which is not needed for the operation of the canal. There is no right for the Panamanians to demand that we renovate dilapidated property. There is a right to remove a property, such as the locomotive that became such an emotional issue last week in Panama.
Now, if we cannot deal on a basis of understanding at this point, I do not know when we can. I would restate my own view, at least from this one member's finding, that what we saw in Panama was the basis for this Congress, if it is to act on implementing legislation, to adopt the strongest possible legislation to curtail the power not only of the Panamanians to misinterpret, but the power of the State Department and others in the administration who appear to be, at many points, not on the side of the position that many of us, at least, in the Congress hold.
I think it is unfortunate that we have come this far to a juncture where we have to write this legislation and have not resolved these issues. So I do hope that your guarantee of a full explanation will be given to this committee, and I also want to thank you for your many courtesies to me extended through the time that I stayed there.
Mr. Chairman, I have had so many questions asked and answered during the last 4 days, I do not think I need to ask any more and I thank you for your indulgence. Mr. HUBBARD. Thank you, Congressman Bauman, for your comments.
Are there any other questions, counsel?
Mr. HUBBARD.Mr. Ernest Corrado, counsel for the committee; go ahead.
Mr. CORRADO. Thank you.
Ambassador, as I understand it, the only drydock for thousands of miles around where the gates of the locks can be repaired is at Balboa, and I understand that this goes over to the Panamanians on October 1. If this is so, and I understand it is, it is a critical facility and it seems that there are some political-based questions, if I could ask a few, with respectto this situation.
Do we have any assurances from the Panamanians that they will allow the gates to be repaired there, and what will we do if they will not? What recourse do we have in the event of a refusal? Is there any protection for us in the treaty with respect to this?
Have there been any discussions with the Panamanians regarding the costs to be assessed for repairs when we float the gate down to the drydock? Are there any assurances in the treaty or from the Panamanians, or otherwise, that the costs for the repairs will not be exorbitant?
Has the Embassy taken any actions with the Panamanians to prepare them to take over this facility? Lastly, have there been any discussions or any preparation for training the Panamanian emDlovees who will run this facility?
Obviously, the reason I ask all of these things is, if the gate cannot be repaired for any of the reasons that I mentioned, it is obvious that the facility will not function. For the record, could we hear whether there has been any work done on this and whether we have any assurances that this will all function smoothly.
Ambassador Moss. Well, Mr. Corrado, I certainly think that both sides recognize the tremendous importance of having the facility to overhaul our lockgates. They go through periodic overhauls, and I think a complete overhaul something like, I think, every 25 years, where they are completely taken apart and put back together again. That is an essential part of the operation of the canal.
As for the specific discussions with the' Panamanians of the future of that maintenance and of the training of personnel, I am not an expert on that subject. I believe they have been taking place within the context of the discussions with the Panama Canal Company, because I know that on a number of technical levels and I believe that drydocks is one of them, Panamanian observers have been brought in and they are beginning to be apprised of the problem and of the nature of the work that is going to have to take place.
I am not aware of any specific discussions between the Panama Canal Company and the Government of Panama at this point as per the costs involved in drydock lock gate overhaul. I think it is a matter of great interest to both governments. Certainly, I believe that one place in which that question would be addressed, of course, will be in the board of directors of the new Commission, which will have a minority membership of Panamanians. So, in a way, the Panamanians will be sitting on both sides of the table. They will be negotiating the price for the overhaul of the lock gates; at the same time, other Panamanian interests,
possibly private interests, may be negotiating the price of that overhaul.
I am sorry that I am not an expert on the fine points and the details of the work that has progressed to date in discussing that particular subject. I do feel, however, that both sides recognize it as an important one, and one that certainly has to be dealt with, because it is O*ne of the essential functions of the operation of the canal. It is not one in which the Embassy has played a principal part. I think that is going to be worked more through the Panama Canal Company and the Binational Working Group, but it is one where we have an obvious interest.
Mr. CORRADO.With respect to the water situation, is it not true that most of the water sources and the backwaters will be under Panamanian jurisdiction after October 1, and have there been any agreements or any discussions with respect to the control of the mosquito?
Ambassador Moss. On water resources, there have been some significant developments that have taken place. One of the big problems in the Canal Zone and the adjacent areas of the watershed which are now in the Republic of Panama has been the progressive deforestation over the years.
If you see aerial charts of the 1950's down to the present, on both sides, in the zone and out of the zone, you will notice a considerable amount of deforestation. That, of course, has to be halted and, in fact, turned around and areas reforested, if the proper amount of rainfall is to continue to be available to the canal. We need 52 million gallons of fresh water for each ship transit, so it is very, very essential for the operation of the canal.
In that respect, work has been going forward on the creation of an environmental committee which will include American and Panamanian representatives. And even before that time, we are taking steps with the Government of Panama, through a new AID watershed management loan, to provide some loans to try to start the reforesting process again.
I think there is a tremendous amount of sensitivity on the Panamanian side and, of course, Panama has a stake in the tonnage that goes through the canal in that that is the principal source of their payments under article XIII of the treaty. So I think there is a great awareness on both sides, and actually plans in action which will attack the water problem and which will insure that the deforestation which has been devastating the isthmus can be turned around, and that proper care of the environment can be taken.
On the Panamanian side, they have plans in some of the areas you mentioned that fall back under Panamanian control in creating protection of the national park reserve, increasing enormously the amount of land included under national park protection right now.
So I think there is awareness of the essential value in protecting the watershed and, in fact, even improving it from its present state.
In the area of mosquito and pest control, of course this is one of the great historic features of why the canal was originally successful-the conquering of disease. The Panamanians. have been
trained progressively through the years, and through their ministry of health, have had a very good mosquito control project within their own territory.
I recall that sitting in my office one day, Panamanian Ministry of Health inspectors came in with funny-looking apparatus and asked if they could check my office for mosquitoes. This was obviously something learned through the long development by us, originally, and the work of Dr. Gorgas and the Americans who pioneered the sanitation of the isthmus.
I think that program seems to be going along very satisfactorily, both on our side and on theirs.
Mr. CORRADO. I understood that there has always been a constant program underway to control the mosquito, and it possibly could be a problem if, in fact, it was- not under our control and it could become a health hazard again.
Ambassador Moss. I hope that does not happen; I would not expect any reason why it should, given, I think, the recognition and the scientific capability on both sides to deal with that problem. As I say, just in my own observation, I have noticed the Panamanians doing a pretty good job on that side, too, working, as they have through the years, with our people who developed these sanitation methods.
Mr. CORRADO. One further question, Mr. Chairman, if I may.
Mr. HUBBARD. Go ahead.
Mr. CORRADO. Mr. Ambassador, we have found, from talking to the people in Panama* and from our hearings over the last few days, that, in fact, it may be necessary to appropriate funds, for example, with respect to the payment of early-out pension rights. And there were a number of other areas.
Furthermore, it is conceivable that in the next few years, the tolls revenues may go down instead of going up or remaining the same because of the pipeline that might be built from Long Beach to the Midwest or because of the swap of Alaskan oil. I recall that a few years ago, we went down there and they were operating even or with a loss.
Now, if this should happen again, I do not see where all the money will come from for the 30 cents per ton, plus the several $10 million payments we have to make. When Ambassador Linowitz testified before this committee on August 17, he stated: "The Canal itself will earn the money to pay that amount to Panama. The American taxpayer will not be asked to make the payment."
Now, it is conceivable that, in fact, it may be just the opposite. Would you care to comment on this statement and this situation?
Ambassador Moss. I would only want to comment that the treaty was negotiated and written without actually taking into account the contribution that would be made by Alaskan oil. That, of course, has been an unexpected boon that has added quite a number of millions of dollars to the canal's revenues over the last year or so.
I think the expectations are that even if a pipeline were built that would take some time and the Alaskan oil would continue to flow through the canal for at least a couple of years, which would be the highest cost years in the transition period, in operation under the treaty.
Now, no one can sit here and make an economic forecast and guarantee you that the canal will continue to be prosperous through the years. I think however, that certainly in the short run, there is not the prospect for a severe downturn in toll revenues. Indeed, I think that under the treaties, simply because of the disappearance of U.S. jurisdiction and therefore the nonapplicability of Federal minimum wage provisions in the present Canal Zone, that suggests certain areas in which costs in the future might be cut in which they are not able to be cut today.
So I think there is no reason for undue pessimism about the ability of the canal to pay for itself and to generate the revenues required. Incidentally, when the treaty was negotiated, our negotiators, in testifying before this committee and others, gave estimates varying anywhere from 25- to 40-percernt increases in tolls. The present estimate, of course, is way below that, partly because of the inflow of Alaskan oil, but also through the general traffic pattern.
So I think the outlook, certainly for the period of time that we can foresee it, is one which would give rise to optimism about the economics of the canal enterprise. Of course, I do not want to pontificate about that at great length; that is not my special area of expertise. But I think that on the evidence that I have seen, we can make such a statement certainly with respect to the short run.
Mr. CORRADO.One of the things of concern is that I recall, before the treaty negotiations reached fruition, several times the Panamanians were on record in this committee as talking about a 300- to 400-percent toll increase, which I think certainly indicates their philosophy with respect to toll increases.
Now, there have been two toll increases already, and a de facto third one. The traffic just will not bear a heck of a lot more. I do not care what anybody says; it is not going to bear a heck of a lot more. You may find yourself coming and going in circles, because if there is any kind of further substantial toll increase for Panamanian payments, for example, the container operators will go land bridge in the United States.
I talked to a number of the foreign operators and they have said: "We will make other arrangements, too." I just think, aside from the Alaskan oil problem, which I realize was a boon, there is a propensity there for economic disaster, and certainly a raid on the pocketbook of the U.S. taxpayer, ultimately. That is what I personallv lDredict will happen.
Am- bassador Moss. Well, I would only say that I think that the best guarantee now is that we have total control over the toll raises between now and the year 2000. 1 think what you may be primarily concerned with would be what the Panamanians would do after the year 2000.
Now, since they will be working with us for 21 years, I think they will, over that period of time, have a very good appreciation of the sensitivity of traffic to toll increases-a kind of an appreciation which perhaps was not present at the time of the early part of the negotiation of the treaties, simply because they had never been involved in studying questions such as toll sensitivity, as had been the Panama Canal Company and other agencies interested in the subject.
.I think that is why the treaty scheme is a sound one, because it gives us a 20-year period, working with our colleagues in their minority representation on the Board of Directors of the Commission, to understand fully that the Canal is a very competitive business in the world of transportation; that there are other forms of transportation that compete very hard with it.
They will learn this by traveling around to different port areas, as do our Panama Canal Company people, understanding the concerns of the shippers as to possible toll increases in the future. I think that over that period of time, they should become very cost conscious and conscious of toll sensitivity as we have become over the years.
Mr. CORRADO. That will de end, I think, to some extent upon who the American representatives of the Commission are, and also the Panamanians. But I fear that somewhere along the line in the next 20 years, and even sooner, there may be a severe dislocation with respect to the tolls and the revenues. Thank you very much, Mr. Ambassador.
Thank you, Mr. Chairman.
Mr. HUBBARD. Thank you, Mr. Corrado.
Is there unanimous consent that Congressman George Hansen, who has testified before our subcommittee, may ask one question?
Mr. BONIOR. Mr. Chairman, I reserve the right to object, but I will not object. I think the Congressman has been involved in this issue for a long time and has deep interest, but I just wish that that type of invitation would be given by other committees.
I have, on occasion, attempted to do the same thing in other committees and have been rejected by the chairman. It would seem to me that if a Member of the Congress has an interest in a piece of legislation and has worked on it, that, indeed, he or she should be able to ask questions and to participate.
I will not object, for that reason. But anytime the opportunity comes along where I get to make my point of view known, I certainly want to do that.
Mr. HUBBARD. You do have different types of chairmen; I agree with that. [Laughter.]
I am on the House Banking Committee and the House Merchant Marine and Fisheries Committee; I can see differences on those two committees. But, let us go ahead and allow George Hansen to ask his question.
Mr. BONIOR. Before you do, I just would like to be excused, and make the observation that I have not seen a nationalist mosquito. In fact, I have been told that most of the mosquitoes are binational in Panama. They bite with equal fervor, I understand, although I was not bitten by a mosquito in Panama, although I was bitten by other things while I was there.
Speaking of mosquitoes, I have to go over to the Alaska hearing, because we have some important legislation that we have there, so I ask your indulgence and I commend the Ambassador for his statement.
Mr. HUBBARD.We thank Congressman Dave Bonior of Michigan for being here.
Go ahead, Congressman Hansen.
Mr. HANSEN. Thank you, Mr. Chairman, and I just have one short question. I do think that the point made by Congressman Bonior about committee courtesies was a good one. You and I share another committee, the Banking Committee, and perhaps we can exert whatever influence we have in extending similar privileges there and beyond.
I would like to ask you, Mr. Ambassador-I am sure the question has been asked many times, but very pointedly-you were involved in the treaty negotiations, and is it your understanding that any deficiency in tolls that would apply to payments to Panama would be made up by U.S. taxpayers?
Ambassador Moss. If I interpret the question correctly, SirMr. HANSEN. Any deficiency in toll income that created a shortage in payments to Panama.
Ambassador Moss. If there were insufficient toll revenues to cover the payments to Panama, then it is my understanding that they would not be owed by the U.S. taxpayer. Let us take a simple and perhaps the most extreme example. If the canal, due to an earthquake or a landslide, simply were not to function, then I would say that under the treaty there would be no money coming out of toll revenues, and therefore no article XIII payments.
Mr Hubbard. Congressman Bauman?
Mr. BAUMAN. I just want to make one statement while the Ambassador is still here, so that if he has any disagreement with it, he could let us know for the record. And any other of the Members who were in Panama, I would like to hear their disagreements, although Mr. Lowry and Mr. Carney are the only two.
I was given to understand that when we met with the Panama Canal Authority that they represented not only the official position of the Government, but that they had been working individually for many months with the American authorities to work out the various areas of their disagreement.
And in the specific case of the claim that Panama has now made as of last Saturday, and has not refuted, that the second $10million contingency had to be budgeted into the tolls, that statement was made at length and in detail by Mr. Manfredo, who is rumored to be the deputy administrator under the new treaty, along with the American. Now, whether that comes about, I do not know. And it was made at the specific request of Ambassador Lewis, who is in charge of the Canal Authority on the Panamanian side.
The answer was at great length and very specific that that was their position and their understanding, and he reiterated that to me at least twice privately during the discussion; once before I asked him the question-I warned him of the question-and once after.
Now, the quality of the other answers on the other issues I have mentioned were the same, and I know that a member of your staff, after our press conference in Panama, was talking with a number of members of the press and seeking to give the same impression that you gave this morning, that the Canal Authority people were not speaking for the Government.
Now, I think they were, and until their positions are changed, we are operating in a very uncertain area that may very well influ-
ence the legislation. Now, if you wish to disagree with me, Mr. Ambassador, I wish you would now.
Ambassador Moss. Congressman Bauman, I do not wish to disagree with you; I just wish to make a bit more precise the context in which the remark was said.
The gentleman who made the statement said very specifically that that was his personal opinion, and he gave to understand that that may be the opinion of some of the elements of the Panamanian Government. But he did say very specifically that it was not the position of the Panamanian Government, as such.
I have never received any official notification, in writing or orally, that that was the position of the Panamanian Government. Nevertheless, that having been said, which I think will help to put it in the context in which the remark was made, I am not going to try to make a case that he only said it off the top of his head or as a private individual. He is a government official and therefore is responsible for what he says.
For that reason, the chairman made a very strong point this morning to me, which I take very seriously, that some word of understanding is required by the members of this committee, and I take that very seriously. But I think it is important to state precisely the context in which the remark was made because the official representations of the Government of Panama are, to the best of my knowledge, those expressed in the protocol of exchange of the instruments of ratification, in which the Panama Government very clearly and expressly accepted the reservation added to the Panama Canal Treaty by the U.S. Senate which says precisely that the article XIII payments need not be included in the toll base.
As far as I am concerned, that is the only possible legal position for that issue.
Mr. BAUMAN. It was late in the afternoon on Saturday and we had been holding hearings for about 7 or 8 hours, but I do not recall Mr. Manfredo qualifying his statement, saying: "This is my personal view and does not represent the Government's view."
On the contrary, when I asked him the question at the break so that he would not be surprised, he scurried around and got some consultation with Ambassador Lewis and others. The specific question I put to him was: "What is your Government's position on these tolls and this second $10 million?"
If he is going to sit before seven Members of Congress, including the chairman of this committee, and toss off a personal opinion in a delicate matter like this, it calls into question the competency of some of the people negotiating on both sides. But I await with great interest the real, true position of the Government of Panama. Thank you, Mr. Ambassador.
Mr. HUBBARD. Lastly, I believe, we have a couple of questions from Mr. Bernie Tannenbaum, consultant to the full Committee on Merchant Marine and Fisheries on the subject of the Panama Canal. Then we will have our next witness. Mr. TANNENBAUM. Mr. Ambassador, it is conceivable, is it not, that the canal will be operating in the red in the foreseeable future?
Ambassador Moss. Mr. Tannenbaum, it is not my understanding that in the foreseeable future, that problem could exist. Now, no one can make any economic predictions, I do not think, about anything over a very long period of time. So, therefore, as to the long term, I would not want to say. But in the short term, from the evidence I have seen and the studies made by the Panama Canal Company and others, it is my judgment that there is no short-term risk of the canal operating in the red.
Mr. TANNENBAUM.Well, it may not be probable, but it is possible, is that correct?
Ambassador Moss. Well, I think anything in the world is possible. I
Mr. TANNENBAUM. You have a canal operating with gross revenues of a little over $300 million right now. The payments to Panama alone are being increased from $2 million, some odd, to $75 million a year, and with a contingent payment, $85 million a year. That payment increases in 5 years by maybe another $25 to $50 million, so the annual payments will soon be over $100 million a year just to Panama.
Ambassador Moss. Only if the traffic increases.
Mr. TANNENBAUM. No. On the 30 cents per ton payment, there is an escalation provision built into that, and I am sure that very shortly we will be paying them well over $100 million; probably somewhere between $100 and $150 million a year just to Panama.
If we have a recession like we did in 1974 and we lose some of the grain shipments and we lose the Alaskan oil shipments, I think it is a serious problem and something we should consider.
Now, of course, you have ways of making things break even by not paying the interest payment that has historically been paid and by transferring costs to the Department of Defense, but these are really payments by the American taxpayer, are they not?
Ambassador Moss. I would also like to say that there are other possibilities now of cutting costs which possibly do not exist under the present arrangement, simply because of the greater flexibility with regard to labor costs and contracting for services.
When, for instance, a contractor comes into the Canal Zone to perform a piece of work, he has to pay a minimum of $2.90 an hour, when the minimum wage in Panama is 60 cents. This is true for any work'done in the Canal Zone by anyone, whether it is by a Canal Zone enterprise or a Panamanian enterprise coming in.
So I just say that by way of suggestion that there are ways of cutting costs that may be even-more flexible in the future than 'at present. I think that, certainly, one would first turn to cutting costs. Raising toll rates, of course, is another way. We had reckoned, in negotiating the treaties, that toll increases of somewhere in the neighborhood of 30 percent were what we budgeted for. As a result, of course, of the favorable economic situation, if we were not to continue the interest payments, the toll raise would be about half that amount.
Sensitivity studies have shown that you could increase the tolls by somewhere between 75 to 100 percent without a fall off in revenue, so that there is flexibility built in. That is why I think that, certainly for the foreseeable future, unless there were a world
economic disaster that hit very suddenly, it is hard to see that the canal would be faced with a deficit operation over the short term.
As I say, I am not an economic expert and do not want to hold myself out as one, but over the short term, just from the evidence I have seen, that would not be the case.
Mr. TANNENBAUM. The only difference I have with you there is that I think the sensitivity studies which said between 75 and 100 percent preceded our previous increases of almost 50 percent.
Also, on the question of lowering of the wage base for the Panamanians, you are then going back to the gold and silver standard problems, and that creates some serious problems in my mind.
Ambassador Moss. I am not suggesting that there should be a policy of lowering the wage base at all. I think, to the contrary, that that would buy a considerable amount of labor difficulty. I am only suggesting that with regard possibly to future increases in the Federal minimum wage which the Congress may enact or with regard to the contracting for outside services and in other respects, if done in a proper way, there possibly is a cost flexibility which we will have in the future which we do not have at present.
Mr. TANNENBAUM. Well, I am a great admirer of yours, and I wish I could share your optimism. Another point here, though, is that Congressman Murphy and the other members raised the question of the serious differences of the treaty interpretations between our Government and Panama, involving hundreds of millions of dollars and perhaps going to the core of the treaties themselves.
Do you know of any other major areas of differences which have arisen, other than those discussed this morning?.
Ambassador Moss. I think one possible area-and I do not know if it is a difference or not-but I think one thing we have to be
mindful of is the labor provisions. Certainly, in statements made by A ambassador Lewis and others, they have stressed that there should not be any continuation of, as you described it, the silver and gold roll notion in the future; in other words, that all Panamanian and U.S. employees ought to be on the same wage level.
That is a decision that the Department of the Army and the Panama Canal Company are studying. Our position is that we have managerial flexibility there. I think that is one area to which we have to look at carefully and make sure that we are on the same wavelength. It is not so much a question of treaty interpretation as a question of policy, and I think that is a very real and important issue which both sides face.
Mr. TANNENBAUM. One final issue here. Do you have any evidence of anticipated additional costs which will be added to the canal operation post-October 1979? An example would be that yesterday we heard that the railroad is operating at a loss, and the Panamanian officials indicated that they expect it to be operating at a profit very shortly. I wonder if the profit will just be added cost to the U.S. operation.
Ambassador Moss. No, sir. As I understand it, the profit arises from some plans that they have to improve the railroad, possibly with some international institutional support, to extend it into commercial areas on the Colon side, and then up into the sugarproducing country near Veraguas, and actually to improve the
rolling stock and to add other features in such a way that it would be turned into a profitable operation.
I have heard no demand that any of that come from the United States, but I think it is merely a prediction of what they would hope to do with the railroad in the future.
Mr. TANNENBAUM. Do you think there will be any other operational cost increases by reason of the Panamanians operating the ports and causing additional costs to other agencies, like DOD, which are really U.S. taxpayer costs?
Ambassador Moss. Certainly, a lot of additional costs have been discussed-such things as military costs and other things that have been identified. I do not personally know of any additional costs other than the ones that have been identified and discussed and debated so far. I just do not know of any additional ones other than those that are on the public record and are a matter of knowledge.
Mr. TANNENBAUM. I heard one thrown out the other day o f $46 some-odd million for just reconstructing certain buildings in other areas while contracting the U.S. operations.
Ambassador Moss. I think that may have been part of the military construction costs which, of course, are now and have been under scrutiny.
Mr. TANNENBAUM. Thank you very much.
Mr. HUBBARD. I have one final question that I did not anticipate, but I have been asked to ask, and it is a question that is pertinent.
Mr. Ambassador, in the recent trip by the committee to Panama, members of the committee heard continually from the Zonians about the loss after next October 1 of such prerogatives as commissary and PX privileges after 5 years for the canal employees. Is that right?
Ambassador Moss. That is correct, sir.
Mr. HUBBARD. I understand that there is no such cutoff of commissary privileges for employees of the Embassy 5 years from now, is that correct?
Ambassador Moss. That has not been discussed with the Panamanian Government. It is certainly not in the treaty, but I would say it is a different situation.
Mr. HUBBARD. How?
Ambassador Moss. In that around the world, our embassies abroad and foreign embassies in the United States generally enjoy free import privileges as a matter of comity. The Embassy, for instance, would be able to set up a commissary in its own basement if we wanted to, and I think that is really a question aside from the treaties.
The Embassy has had commissary privileges off and on through the years from the military forces. Before my time, I gather that sometimes the Embassy has had them and sometimes it has not. But I think that question is not as important as the general principle that embassies generally around the world enjoy import privileges on the basis of reciprocity with other countries, and that really is not something that enters into the treaty relationship, but is a question of diplomatic practice apart from the treaty relationship.
Mr. HUBBARD. Would you not agree, though, that it is difficult to justify the disparity of treatment between the employees in the
Embassy and disenfranchised employees formerly enjoying such privileges when the zone was in existence?
Ambassador Moss. I will agree with you that apart from the legal aspect of the problem, there may be sort of a public relations or political aspect to it, only in that sense. But, as I say, I think the question is really a much broader one and involves our reciprocal practice around the world.
Mr. HUBBARD. I am informed that Congressman Carney has one more question.
Mr. CARNEY. Mr. Chairman, I appreciate your giving me this additional opportunity to ask the Ambassador a question, but realizmg that he is going to be 2,400 miles away, I think I should.
Mr. Tannenbaum was asking questions pertaining to additional costs. There would be a 14-percent increase in the cost to use the canal; 6 percent of which is brought about by the amount of money we have to pay to Panama.
Now, in the treaty, we have lost certain facilities that generate revenues in the Canal Zone. The Panamanian Government, now will own those facilities on October 1. Do you have any idea of how much revenue we will lose because the nation of Panama will gain those? For instance, the docking facilities in Balboa, and then how much of that would be reflected in the increase of tolls?
Ambassador Moss. Congressman Carney, I know that we will be giving up certain facilities that are revenue-producing. We will also be giving up certain facilities which are unprofitable or which lose money.
Now, again, I am not an expert on this, but I believe that when you balance the profitable against the unprofitable activities over the years, it probably comes out to a slight gain. I am not aware of the figure; I can try to supply that for you.
But, of course, there are both sides of the ledger; we also give up some losers, such as, for instance, the railroad.
Mr. CARNEY. The reason I ask that question is, apparently, we are going to be losing a lot more than we are gaining, because there is an 8-percent difference in the tariff to use the facility, as of October 1, and I can only account for 6 percent. I have been trying to get some sort of an accountability of why the tolls are going up 14 percent.
Now, I have been told that one of the reasons is because we are losing some facilities that generate a profit, and I would like that clarified as quickly as possible.
Ambassador Moss. I will ask the Panama Canal Company to try to come up with that figure; they are the ones who calculated the 14-percent figure and who have made the studies in total increase requirements. I will certainly endeavor to get that for you.
Mr. CARNEY. Thank you very much, Mr. Ambassador. Thank you, Mr. Chairman.
Mr. HUBBARD. I believe that finally does complete the questions, and we appreciate the question by Congressman Carney, as we do each of the questions by the Members of Congress and staff members.
We very much appreciate you, Ambassador Moss. I think I speak for each member of our subcommittee who have known you briefly or for a long time when I say that you are a plus and a real credit
to our country, and we admire you and congratulate you on the work you are doing.
In your position, at times you will disagree with some of the Members of Congress, but you always have shown us respect, and we thank you for being with us this morning.
Mr. BAUMAN. Mr. Chairman, I want to join in thanking the Ambassador, also. And may I ask, were there any representatives of the Panamanian Embassy present during the testimony this morning.?
[There was one acknowledgment.]
Mr. BAUMAN. Gracias.
Ambassador Moss. Thank you, Mr. Chairman. I thank you and the other members for your generous remarks.
Mr. HUBBARD.We next welcome Hon*. Clifford L. Alexander, Jr., Secretary of the Army. We apologize for the delay in reaching you as a witness. We anticipated you would be gone by now. But we will move as quickly as we can.
At this time I do have to make a unanimous consent request and make some brief announcements. H.R. 1958, a bill introduced by Congressman George Hansen, to "protect the interest and express wishes of the taxpayers of the United States on the Panama Canal Treaty of 1977" has been added to the list of bills to be considered in these hearings. This brings to five the number of bills we are now considering.
We will, of course, be asking for agency reports on House bill 1958, Mr. Hansen's bill.
At this time I would like to ask unanimous consent that all of the bills which are the subject of these hearings, and the accompanying section-by-section analyses and reports thereon, be placed in the record on the first day of our hearings, immediately after opening statements.
Is there any objection? Hearing none, it is so ordered.
I further ask unanimous consent to place into the record of these hearings, immediately after H.R. 111 and agency reports thereon, an analysis of that bill with appendices as written by Merrill Whitman, congressional consultant to the committee. This analysis was a part of the briefing book previously sent to all members.
Is there any objection to that unanimous consent request? Hearing none, it is so ordered.
Next, to prepare the subcommittee for future unanimous consent requests, I want to announce that I will ask that several studies in relation to the implementation of the new Canal Treaty and arrangements have been prepared for the committee to be placed in the hearing record, either before or after the testimony of the administration witness to which they most closely relate.
Is there any objection? Hearing none, it is so ordered.
Our second witness this morning is Hon. Clifford Alexander, Secretary of the Army, who has held this position since 1977. Before that time he served in a number of very distinguished posts in the Government, and has been an attorney in private practice for many years.
The Secretary of the Army has been for some time the officer of the United States designated by the President to be the sole stockholder of the Panama Canal Company, and supervisor of the Canal
Zone Government. As stockholder, the Secretary appoints members of the Board of the Company, and he also is delegated the President's authority with respect to employment and the coordination of employment practices in the Canal Zone.
So, Mr. Secretary, we are especially interested in questioning you, please, about the perspectives for the Board of the Panama Canal Commission, the ramifications of the Panama Canal employment system, and several other regulatory aspects of the Commission.
Mr. Secretary, we will ask you to give us your testimony and to answer questions. And if you desire to stay on afterward and visit with us, please feel free to do so.
STATEMENT OF HON. CLIFFORD L. ALEXANDER,, JR.,, SECRETARY OF THE ARMY
Secretary ALEXANDER. Thank you, Mr. Chairman, and members of the committee. It is a pleasure to be here with you today.
As you know, my primary responsibility as Secretary of the Army is to head the Department of the Army. However, I also have a major responsibility for overseeing the effective operation of the Panama Canal.
VVhile the administration's legislation does not implicitly assign an oversight role, I can tell you that the Secretary of the Army will continue to have this oversight responsibility.
There are a number of differences in the two major pieces of legislation you are considering. Conversely, a number of the sections are generally parallel.
I would like to highlight the differences in certain key sections in which I believe the administration's version to be markedly superior in facilitating the continuing efficient operation of the canal.
I consider the form that the Panama Canal Commission is to take as one of the most important differences in the two pieces of legislation. Our proposal continues it as a corporate agency while H.R. 111 would make the Commission an appropriated fund agency.
Next, the employee provisions in both bills are very similar. But H.R. 1716 would place all employees of the Commission under the same labor management policy, while H.R. 111 would place all employees of Federal agencies operating in the former Canal Zone area under the same labor management policy.
Further, the administration's bill deletes the requirement to pay interest to the U.S. Treasury. This would enable the maintenance of the lowest toll rate practicable. H.R. 111, by contrast, continues to include the interest and, in addition, requires that amortization of the investment be included in the toll base.
There are a number of other differences, many important, between the two bills. I am confident that they have been, or will be, brought to this committee's attention during the course of these hearings. But let me focus on the three key aspects that I have mentioned.
As recommended in H.R. 1716, the corporate form of the Panama Canal Company has proven for almost 30 years that it is an efficient system of operating the canal. While the canal enterprise has a unique operating environment and unique responsibilities, it is
primarily and essentially a business enterprise. It therefore requires a combination of managerial and financial flexibility.
To operate the, canal efficiently, the Commission will have to deal successfully with the problems of functioning in a foreign country. If local authority is not granted the Commission to resolve problems with Panama, every incident could have the potential for escalation into a country-to-country confrontation. By separating the Commission as a corporate entity, the likelihood of such escalation could be diminished.
Authority for decisionmaking to meet operational problems requires that the Commission be granted financial flexibility in order to carry out its responsibility for financial self-sufficiency. In order to achieve financial self-sufficiency, the Commission must be able to adjust its costs and rates to respond to changing traffic.
The Government corporation form proposed by the administration for the Panama Canal Commission would essentially continue the organizational form of the present Panama Canal Company, which was created by Congress in 1950 in recognition of the business activities inherent in the canal operation. Under the corporate form, the Company has been able to maintain an amazing degree of stability in its toll rates and its service to shipping and has never needed a congressional appropriation.
While successful Company operation is attributable in large part to the managerial and financial flexibility it enjoys in its corporate form, it also has maintained a high degree of accountability to Congress. The 1950 legislation established the Company and set forth the guidelines for its operation; the budgetary controls imposed by the appropriations committees that annually review the budget assure that the Company is spending within its revenues; and audit by the GAO, which reports upon the Company's accounting procedures and policies, further assures that the Congress maintains control over the corporation.
Congress has consistently, for more than 50 years, incorporated many Government agencies which function primarily as commercial activities. The incorporation of the Panama Canal Commission, which like the Company, will be in the business of transiting ships, would therefore appear to be entirely appropriate. H.R. 1716 would take this approach and would retain for the Commission all of the congressional controls which have pertained to the Company.
The remarkable record of achievement of the Panama Canal Company during its 28-year existence as a corporate entity also supports the argument that the Commission should be a corporate rather than an appropriated fund agency. The Company has operated on a self-sufficient basis since its creation, while at the same time paying back to the Treasury millions of dollars on the investment of the United States in the agency and many more millions in interest on that investment.
Further, it has also invested a considerable sum of internally generated funds in capital improvements to Company facilities, while at the same time financing capital improvements to Canal Zone Government facilities. Although it is authorized both appropriations and a $40 million borrowing authority, it has not required the use of either, even during a period of operating losses. This record of the Panama Canal Company speaks for itself on the
question of the efficiency with which a corporate agency can operate.
In the area of labor relations, the administration's bill proposes that all employees of the Panama Canal Commission, both United States and non-United States, be covered by a labor-management policy tailored to meet the needs of the unique situation in Panama.
U.S. employees of other Federal agencies operating in the area would be covered by Federal labor-management relations enumerated in title VII, Civil Service Reform Act, while the heads of these agencies would be given the option to place their non-U.S. employees under the Panama Canal Commission's labor management program.
The Panama Canal Commission is a unique organization, with a work force which will become increasingly Panamanian at all levels over the next 30 years.
A labor relations system focused largely on local conditions and issues would be most appropriate in terms of facilitating-or at least avoiding interference with-the gradual transition to Panaian control of canal operations. Coverage by a separate labor relations policy, dedicated to the local situation, will serve to facilitate the evolutionary process which will be taking place.
This will not be true, however, for DOD elements in Panama which will continue to perform the same functions as they do today until phase out of their operations. In all other areas of the world we apply the labor relations policy specified in title VII of the Reform Act to our U.S. citizen employees and we believe that this should also be the case for the DOD-U.S. employees in Panama.
The administration's proposed bill also provides for a package of personnel benefits. Because of the great decrease in the size of the Panama Canal Commission in comparison to the Panama Canal Company and the Canal Zone Government, we have projected that some 2,600 employees, both United States and non-United States, will lose their jobs through a reduction-in-force action. Due to the size and complexity of this action, and in consideration of its impact on the lives of employees and their families, we ask passage of H.R. 1716 by May 31 so that critical preparatory actions can be completed by the treaty effective date.
The most critical problem that will develop by late passage of the proposed legislation involves the transfer of over 3,000 employees to local Department of Defense activities. If passage is unduly delayed, this transfer would be seriously hampered because of the lead time required by law and regulation to effect such actions and to guarantee observance of employee rights.
If passage is delayed beyond October 1, the transfers will be prevented because the Department of Defense activities will not have been legally authorized to pay the transferred employees from appropriated funds. Inasmuch as the Panama Canal Commission is precluded by the treaty from continuing the functions in question, it would then be necessary for the Commission to terminate these employees. This would be chaotic, not only for the Commission, but for all Federal agencies operating in the area. One of the primary goals of the Panama Canal Company is to maintain the toll rates as low as practicable in order to continue to
attract shippers worldwide. As mentioned earlier, the Company has been successful in this endeavor. It will, however, be necessary to raise tolls to accommodate the increased payments to Panama provided for in the treaty. We want to keep the tolls increase as low as we can, consistent with sound business practices.
Initial estimates indicate that a tolls increase in the neighborhood of 14 percent under the administration's legislation would meet the Commission's financial requirements, provided that, as recommended in the administration's bill, interest on the investment is no longer required.
Under H.R. 111, with its interest and amortization of the investment, it is estimated that the increase would be considerably more, approximately-and I stress approximately-35 percent. We operate a utility for world shipping, and the tolls must be kept low enough so as to be financially advantageous for the shipper to use the canal.
We are asking the Congress to now pass the necessary legislation authorizing the United States to properly operate and defend the Panama Canal, and to effectively carry out the functions authorized through our treaty. We believe that H.R. 1716 accomplishes this.
Thank you very much. I will now answer any questions you have.
[Questions submitted by the subcommittee to the witness and answered for the record of the hearing follow:]
QUESTIONS OF SUBCOMMITTEE ANSWERED BY MR. ALExANDER
Question. How would labor-management provisions of H.R. 111 and H.R. 1716 affect the ability of the Secretary of the Army to negotiate collective bargaining schemes for the Canal and other agencies in the Canal area? How will the H.R. 111 provision on labor-mangement relations applying to all agencies relate since the Treaty guarantees collective bargaining only for the Commission?
Answer. H.R. 111 would require the Secretary of Defense to establish a labormanagement relations policy, providing for collective bargaining between management and employees of all government agencies in the Canal Zone. H.R. 1716 would require the President to establish such a policy applicable only to employees of the Panama Canal Commission, US citizen and non-US citizen employees alike. In practical terms, under both bills the labor relations policy would be installed by the Secretary of the Army after consultation with all interested parties.
H.R. 1716 would make inapplicable to US employees of the Panama Canal Commission the provisions of Title VII, Federal Service Labor-Management Relations, of the Civil Service Act of 1978 (5 U.S.C. -71). A separate policy (now in draft form entitled "Joint Panama Canal Commission/Department of Defense Labor Relations Policy") would apply to all employees of the Commission, US and non-US. The Joint Policy could also be administratively applied to non-US employees of the US Southern Command (SOUTHCOM) if the Commander-in-Chief, SOUTHCOM, so determined. other non-DOD agencies in the Canal Zone would be free to apply Joint Policy provisions to their non-US employees. Title VII would automatically apply to US employees of all government agezicii;s (exclusive of the Commission) in the Canal Zone.
The Panama Canal Commission is a unique organization, with a workforce which will become increasingly Panamanian at all levels over the next twenty years. A labor relations system focused largely on local conditions and issued would appear to be most appropriate in terms of facilitating-or at least avoiding interference with-the gradual transition to Panamanian control of Canal operations. Coverage by a separate labor relations policy, dedicated to the local situation, will serve to facilitate the evolutionary process which will be taking place. This will not be true, however, for DOD elements in Panama which will continue to perform the same functions as they do today until phase out of their operations. In all other areas of the world, we apply the labor relations policy specified in Title VII of the Reform
Act to our US citizen employees and we believe that this should also be the the case for the US employees in Panama.
By the terms of Title VII of the Reform Act, non-US employees of US government agencies employed outside the United States are excluded from its coverage. This provision appears to mandate a labor relations system for Panamanian and other non-US employees of DOD elements which is more attuned to local conditions and customs.
Thus, two elements form the basis for our advocacy of H.R. 1716: (1) the statutory exclusion of non-US employees in the Canal Zone (and the concomitant inclusion of US employees) and (2) the unique characteristics of the Panama Canal Commission which require a distinct and dedicated labor relations policy.
Question: Would meetings of the Board of the Panama Canal Commission be open for public scrutiny under the provision of law requiring such meetings be generally open to the public? Need there be any special language to insure that such meetings be closed?
Answer: We assume that you are referring to the open meeting provisions of the Government in the Sunshine Act, 5 U.S.C. 552b. Those provisions apply to "any agency headed by a collegial body composed of two or more individual members, a majority of whom are appointed to such position by the President with the advice and consent of the Senate." 5 U.S.C. 552b(a)(1). The term "agency" -includes 94any executive department, military department, Government corporation, Government controlled corporation, or other establishment in the executive branch of the Government." 5 U.S.C. 552(e).
There is no doubt that under either H.R. 111 or H.R. 1716, the Commission would constitute an "agency" within the meaning of section 552(e), However, as established by H.R. 1716, the Commission would not fall within the scope of section 552b(aXl). Although the Commission would be headed by a collegial body (the Board of Directors) appointed by the President (see Section 205 of H.R. 1716), such appointments would not be with the advice and consent of the Senate. Therefore, reading the terms of the statute literally, the open meeting provisions would have no applicability.
The answer with respect to H.R. 111 is more difficult because the Board of Directors would be appointed by the President with the advice and consent of the Senate (see Section 102(b) of H.R. 111). The significant question is whether the provision that the Board "shall act under the direction of the Secretary of Defense" (section 102(a) of H.R. 111) would cause the Government in the Sunshine Act not to apply. The answer to that question is simply unclear. The argument can be made that the Commi ion would not be "headed by a collegial body" because the Board of Directors ultimately would be subject to the direction of the Secretary of Defense. It is our view that the provisions of H.R. 111 for "direction by the Secretary of Defense" is inconsistent with paragraph 3(a) of Article III of the Panama Canal Treaty of 1977 which provides that "the Panama Canal Commission shall be supervised by a Board." Accordingly, if it were considered to apply the provision of the Sunshine Act to meetings of the Board, an explicit provision to that effect should be included in the implementing legislation. However, we do not consider direct application of that statute to be desirable.
As a practical matter, we have no objection to the general concept that the meetings of the Panama Canal Commission should be open to members of the public. However, compliance with the explicit provisions of the Government in the Sunshine Act often can be a complicated and burdensome exercise. Moreover, given the substantial involvement of the Republic of Panama in the affairs of the Commission, application of the Act may in certain instances cause unforeseen problems. Accordingly, the better approach would be not to have the Act apply to the Commission but to have in the legislative history of the Treaty implementing legislation an expression of Congressional intent that, to the extent feasible and practical, given the peculiar situation of the Commission, Commission meetings should be open to the public.
Question. Under the plans of the Executive in connection with the provisions of H.R. 1716, would the Stockholder of the Commission be a general coordinator for matters affecting the Panama Canal with respect to the Commission as well as other entities connected with Canal operations? Answer. The role contemplated by the Administration for the Stockholder of the Commission would be the same as that provided by the current law for the Stockholder of the Panama Canal Company, i.e., he would represent the United States in its capacity as owner of the Canal Agency. It is the Administration's intent that the President would retain his statutory role as Stockholder. In this role he would appoint the members of the Board supervising the Commission. It is intended that
five cabinet level U.S. agencies would be represented on the Board under the Chairmanship of the DOD representative, who would be the Secretary of the Army. This would provide for coordination of matters affecting the Panama Canal with respect to the Commission as well as other entities connected with Canal operations.
Mr. HUBBARD. Thank you, Mr. Secretary.
No provision in the legislation directly addresses the question of the Commission's Board operations. If one or more of the seats on the Board are for any reason vacant, would language stating that the Board will continue to function as long as a certain number of members are sitting be desirable?
Secretary ALEXANDER. No, Mr. Chairman. Section 206 of the bill provides for the conduct of business by the Board with a quorum consisting of fewer than all of the members present at a particular meeting.
This section also preserves the U.S. majority on the Board. We expect vacancies on the board will be filled probably by both countries. We therefore believe the proposed language is unnecessary. Just by virtue of the U.S. majority, it will be able to assure the Commission's bylaws and mode of operation are consistent with the U.S. interest.
Mr. HUBBARD. How will the United States coordinate the activities of the five U.S. members of the Commission's Board of Directors?
Secretary ALEXANDER. While the proposal legislation does not address the point, the President has directed that an interagency group cochaired by representatives of the Department of Defense and State coordinate with other involved agencies-Treasury, Transportation, and Commerce-in the formulation of policy positions which the U.S. Board members will carry out.
Mr. HUBBARD.Mr. Secretary, how do you feel about the concept of limiting the terms of members of the Commission's board of directors?
Secretary ALEXANDER. To limit their terms of office?
Secretary ALEXANDER. I would feel, sir, this would be unnecessary and that it would be appropriate they be representatives from the U.S. Government and that they would serve at the pleasure of the President. The President could appoint someone else, but I should think they would serve at the pleasure of the President.
Mr. HUBBARD.Will the United States and Panamanian members of the Commission be subject to the executive branch rules on financial disclosure or ethical conduct?
Secretary ALEXANDER. I believe legally, both United States and Panamanian would not be, in that they're in an advisory capacity as Board members.
For practical purposes, it is important that those who are on the Board would be subject to the recently passed legislation that goes into effect on July 1. They would be Presidential appointees and would have submitted all the forms required and would have the matters out in public, in terms of their net worth and whatever potential conflicts there might be.
But I don't believe the law requires that someone in an advisory capacity, as the Board would be, to actually be subject to these provisions.
Mr. HUBBARD.Would the Deputy Administrator or other highranking Panamanians, other than Board members, be subject to such rules?
Secretary ALEXANDER. I do not believe the Board members would be, for the same reasons as would be true for Americans. In terms of employees, they would be subject to the same rules that the upper-level U.S. employees would be subject to.
Mr. HUBBARD. In its testimony the State Department spoke briefly to the Office of the Chief Engineer. What is your view of this Office, which is established by House bill 111?
Secretary ALEXANDER. I do not believe we need that specific office. The Administrator and Deputy Administrator will provide for the overall supervision, and the necessity for that kind of expertise would be included, obviously at high levels within the staff. But as a specifically designated position, I do not believe it would be necessary.
Mr. HUBBARD. Aside from the Panama Canal Commission, agencies of the United States in the canal area will have an opportunity to opt in or out of the Panama Canal employment system.
Could you explain the theory behind the employment system and why you feel it should be an optional system for U.S. agencies?
Secretary ALEXANDER. As far as DOD, as I indicated in my statement, we believe they should continue under title VII of the Civil Service Reform Act.
For the new Panama Canal Commission, the flexibility that would be given to us in a Commission that is in transition, with more and more Panamanians, and a Commission that is unique in terms of its function for the next 20-plus years, we feel it would be useful to have a specifically tailored program for that Commission and to give to non-U.S. citizens, Southcom, and other potential DOD entities, an opportunity to opt into it if they so desire.
Mr. HUBBARD. In response to questions for the record you made reference to a Joint Panama Canal Commission, and a Department of Defense labor relations policy.
Would you please explain the origins and the present status and meaning of that policy?
Secretary ALEXANDER. Article X of the Panama Canal Treaty requires us to develop a labor relations system-a collective bargaining system-for the Canal Zone after consultation with labor organizations. We began considering how to meet this requirement last spring and determined that there were at least five different options possible. All were based on Executive Order 11491, as amended, Labor-Management Relations in the Federal Service. The five options were presented to the various agencies in the Canal Zone as well as to unions having recognition in the Panama Canal Company/Government and the U.S. forces early last summer. In August, the AFL-CIO formally presented us with a sixth option.
While we were considering the AFL-CIO comments, the Civil Service Reform Act--CSRA-was signed by the President on October 13, 1978. Title VII of the act governs Federal sector labor relations and represents a significant change from Executive Order 11491. These changes also had to be considered when revising the Canal Zone policy. Thus, the labor relations policy you refer to
represents an amalgam of our ideas, Panamanian-based agency and union comments, and the major provisions of title VII, CSRA.
We are in the final stages of consultation with the AFL-CIO on the policy. It will contain all salient features of title VII, CSRA, as required by both H.R. 111 and H.R. 1716. The one major exception will be that the dispute resolution machinery will be wholly dedicated to the unique local situation rather than being provided from Washington, D.C., by the Federal Labor Relations Authority. The policy will apply to U.S. and non-U.S. citizen employees of the Panama Canal Commission. It could also be administratively applied to non-U.S. employees of Ussouthcom and other Federal agencies in the area. Title VII, CSRA, automatically applies to U.S. employees of all Government agencies exclusive of the Commission-in the Canal Zone.
Mr. HUBBARD. How do you expect the collective bargaining scheme that is adopted for the canal area will affect either the personnel regulations issued by the Commission and other agencies, or the concept of U.S. control of the canal for the next 20 years?
Secretary ALEXANDER. I would think that under both Chairman Murphy's bill and the administration's bill the concept of consultation with the Board and the Department of the Army would be in order. So I don't see great variations, in terms of practicality, how the ultimate judgments would be reached through the collective bargaining process.
There would not be collective bargaining, for example, over wages, as there would not be in other Federal entities.
Mr. HUBBARD.What was that last statement?
Secretary ALEXANDER. There would not be collective bargaining over wages, just as in other Federal entities.
Mr. HUBBARD. On page 7 of your statement, Mr. Secretary, you talked about a reduction in force of 2,600 employees. The canal organization now has 14,000 employees, and the canal Commission will have about 8,000 employees. This would mean a loss of some 6,000 employees.
What happened to the other 3,400 employees? Are they retiring.?
Secretary ALEXANDER. No, sir. Several of the functions that are now performed by the Canal Zone Government will be undertaken by agencies of DOD. Some 3,400 of the Canal Zone Government employees will be transferred to the DOD.
Further, some additional personnel will be eliminated during the 30-month period after October 1 in other zone functions, such as police and fire, which will be phased out.
Mr. HUBBARD.Who will take over that?
Secretary ALEXANDER. That will be taken over by the Government of Panama.
Mr. HUBBARD. Lastly, what are the reasons for the change in reporting channels cited on page 1 of your statement, to the effect that, as a stockholder of the Commission, you would be reporting to the President through the Secretary of Defense?
Secretary ALEXANDER. The reason for this is, in all other areas of my responsibility, with the exception of the Corps of Engineers, the reporting is through the Secretary of Defense. It seemed to us to be a more orderly and sensible route, while much would be delegated
to the Secretary of the Army, that the reporting mechanism be the same or similar-as on most other functions.
Mr. HUBBARD.Chairman Murphy.?
The Chairman. Thank you. I welcome Secretary Alexander to the Committee.
I have no questions, but I have some questions which I would pose to the Department. I appreciate your testimony.
Secretary ALEXANDER. Thank you.
Mr. HUBBARD. I recognize Congressman Bauman, the ranking minority member.
Mr. BAUMAN MR. Secretary, I know my colleagues have heard me make this statement before, but just for your own edification and indeed, it is that-we were told, the people of the United States and the Congress, by President Carter, by Secretary Vance, by Mr. Linowitz and Mr. Bunker, and uncounted other offic, Js, that the treaty would not cost the taxpayers of the United -les one single dollar more.
Now, when we were in Panama previously and had o,- :-in to
talk to General McAuliffe, it appears that an estin f the
annual cost being transferred to DOD, for the functions DOD will assume from the Canal Company and Canal Government, the original estimate is from $60-65 million annually, and it has now risen to at least $80 million annually by 1984. This means anywhere from a $11/2 to $2 billion in 20 years will be assumed by the taxpayers as a result of this treaty, instead of one single dollar.
I would ask you to give the committee, to the extent possible, an accounting of all the projected costs for the life of the treaty, and if you also can, the Defense Department as a whole. We have to assume that is now projected so that we can have that figure before we start our markup. I think it will bear on the type of bill in some respects, if you could provide that for us.
Secretary ALEXANDER.Certainly, sir.
I could just for the present provide what is in our budgets, and there is precision as to those. There was a payment, as you know, of $10.9 million under the contingency fund in the 1979 budget for the Defense Department. And there is a fiscal year 1979 supplemental request of $36.9 million before the Congress, and of that, $32.2 million was for the Army.
For the 1980 fiscal year budget, the DOD amount is $89.5 million, and of that, $51.2 is Army-related. So the total for DOD through fiscal year 1980, with some precision, is $137.3 million.
Mr BAUMAN. That is the projected operating cost, as well as military construction required to carry that out? If you could give us some detailed accounting beyond the totals, it would be helpful. Mr. Secretary, in your statement you say you will continue to have the primary authority of oversight under the treaties and under the law in terms of the President's bill, the administration's bill. We have been assured of the same thing by Secretary Christopher and other witnesses.
If that is the case, what is the objection to writing into law that the Department of Defense or yourself would advance more appropriate than the Secretary of Defense, who will in fact continue to have this authority.? Because at one point we were told the admin-
istration might at some point want to transfer it to the Department of Transportation.
Secretary ALEXANDER. Certainly, as you indicated, there was discussion within the administration of that. The decision has been that it would be through the Defense Department and primarily the responsibility of the Secretary of the Army. The tradition, as you well know, has been the Secretary of the Army has been the stockholder.
I believe, however, that the President should retain his flexibility in this regard. I believe there are several logical reasons for it continuing this way. It is our position that this will take place, and is the most orderly way to proceed for the future of the United States and for the canal traffic.
Mr. BAUMAN.Well, you might want to confirm your Opinion of what will happen in law.
Let me ask you one other question. There has been some discussion about the inability of the Congress to pass on the legislation by the required date, or even the possibility that the Senate-House conference might get bogged down.
I notice you say that. if action isn't taken by October 1, the Department of Defense will be unable to pay a certain number of employees to carry out the functions assigned them undet the Treaty; is that correct?
Secretary ALEXANDER. That is correct, sir.
Mr. BAUMAN. So it would not be very easy for the administration, under its general executive discretion, to implement this treaty if, indeed, the people who are expected to carry on the operations now aren't being paid.
Secretary ALEXANDER. It is the legal responsibility of all of us under the treaty to do the best we can to implement it. Obviously, it's a treaty of the United States and we'll do the best we can.
The point I intended to raise in my statement was the hardships placed, not only on us in Government, but particularly individual employees of the Canal Zone now who might, through employment actions, be RIF'd, to have proper notice served on them or their families.
So there would be significant problems if much of the legislation were not completed by or before May 31. Obviously, I have no control over the will of your committee, nor of the CongressMr. BAUMAN.Very few of us do.
Secretary ALEXANDER. Certainly the chairman of this sub-committee and Chairman Murphy have indicated that markups will be taking place in March. We only hope the legislation will follow in due time.
Mr. HUBBARD. Do you believe that the Panama Canal Treaty best serves the interests of the United States?
Secretary ALEXANDER. I certainly do, personally, yes, and for a whole host of reasons.
Mr. HUBBARD. Thank you.
Mr. CARNEYMr. Secretary, I appreciate your coming in today. I would like to ask some questions that haven't been referred to in the presentation. I am a new member of this committee, and my line of questioning has to do with our ability to defend the canal.
Can we, today, defend the canal from terrorist attacks?
Secretary ALEXANDER. I think the 193d Brigade, which is our principal unit in Panama, is quite competent. I have seen them train and they are prepared to meet certain terrorist contingencies.
But can we protect against any and every single contingency; I can't say we could. I think it's in our best interest to always be alert to those contingencies and to continue to work with the Government of Panama, as we are, to try to spot any problems that might arise.
That, of course, is one of the reasons the treaty itself is useful, where we have cooperation between the two nations.
Mr. CARNEY. So basically the canal could be deemed impassible at any time and we really cannot guarantee that won't happen today, or from the time of October 1 and the year 2000. And, of course, after that, we can't guarantee anything.
Secretary ALEXANDER.Well, I would not be that pessimistic. It seems to me there are certain contingencies that we cannot protect against, but there are also many, many more that we are capable of protecting against. General McAuliffe and Anson can see to it that those contingencies will be protected against. We have highly motivated and well-trained soldiers, and they have done their training exercises and done them extremely well.
I think to be a prophet of doom would be inaccurate. Again, we have all heard the stories during the debate over the treaty, that if you drop a glove in the lock it will freeze the lock and shipping will be halted for such and such a period of time. Those contingencies are possible, but the probability is diminished significantly by the cooperation between the two governments, and I think by the strong presence of the 193d Brigade.
Mr.CARNEY. Do you think under the terms of the Treaty, where we lose the 5-mile buffer zone inside the canal, that our ability to defend the canal diminishes?
Secretary ALEXANDER. Not one bit. We couldn't have people on every inch of those 5-miles on either side, and 51 miles across. We have certain defense commitments which will continue to be met. We are able to do that in those zones.
As you know, many parts of those zones are wooded areas, and we have methods of overflying those and knowing what is going on there. But their ownership is not going to increase any problems.
Mr. CARNEY. Will it decrease the probability of any terrorist action?
Secretary ALEXANDER. I thinkthereare somewhowould speculate that it does. I think it is better to say, through the cooperation between the two governments, that their mutual interest is in the preservation of a safe canal for international shipping, and it is our responsibility to work and preserve that; and also, it requires the cooperation of the Panamanians as well. I think that will be forthComing.
Mr. CARNEY. Of those some, then, you would be in that category that feels we would enhance our ability? Secretary ALEXANDER. I think we would be capable of maintaining our defense of the Panama Canal throughout, and I think that will continue.
Mr. CARNEY. Do you anticipate a reduction in military forces over the next 20 years in the Panama Canal?
Secretary ALEXANDER. I would not anticipate at the present time a reduction. Of course, it's up to us within the Defense Department to continually assess our needs there. I could not really speak to the future, nor for the other services there as well.
Mr. CARNEY. Do you feel the presence of large defense forces in the Panama Canal has an effect on military capabilities in South America?
Secretary ALEXANDER. I believe General McAuliffe's command, as it relates to your question, insures that the entire region would be properly protected.
Mr. CARNEY.My next question, then, would be: Are we making any contingency plans, any efforts to find out where we can have this type of military exposure in the proximity of South America, or even within the countries of South America, once we lose them in the year 2000?
Secretary ALEXANDER. As far as the year 2000 is concerned, and the possibilities at that stage, it really would only be reasonably assessed at least a decade from now, probably more. I don't think we should say that any part in that section of the world would be precluded, and that includes everybody potentially. I would not exclude any country at this stage.
Mr. CARNEY. But you do feel their presence has a stabilizing effect on other nations now?
Secretary ALEXANDER. I think it's a very useful presence; yes.
Mr. CARNEY.When will we lose the jungle training school?
Secretary ALEXANDER. The jungle training school continues to the year 2000.
Mr. CARNEY.We will control that area to the year 2000 in the jungle training school?
Mr. CARNEY. You don't have the ability to project over two decades, I guess, the military capability, our military capability. So in general, would it be fair to say that you, as the Secretary of the Army, feel our defense capability in the canal would remain the same with or without the treaty?
Secretary ALEXANDER. I would say it's fair to say that we have a treaty, and having that treaty enhances our relationship with the sovereign state where the canal is located, and that is useful from a foreign policy point of view, and it is probably useful in terms of, many would say, in cutting down the problems that might arise in having some country being antagonistic to us. So it's a yes and no answer to that, I guess. I perhaps am oversimplifying it.
We know the long history of some good relationships and some not so good, relating to the fact that we, as the Panamanians construed it, were in the middle of their country and that had an effect on them, and potentially could have an effect on the people.
Now, to the credit of their government at the time, there was no damage to the canal. I don't believe, however, that has been the issue. The issue has been, do you reduce the number of people you potentially have, and I think reasonable people can say that can be reduced by treaty. I think it's in our best foreign policy interest; yes.
Mr. CARNEY. I seem to recall many occasions in the past few years where our best interests in foreign policies have not been the best interests in our ability to defend our Nation.
However, the point I am trying to bring out is that-I'm not trying to bring the point out, but I would like you to express it for me. Is it your feeling that we will reduce the chance of having a Panamanian national, through some terroristic act, deny us the use of the canal because of the treaty?
Secretary ALEXANDER. Again, with the treaty in effect, I would guess that reasonable people could come to the conclusion that you therefore cause fewer people to feel antagonistic toward the canal and its function. I think that has certainly been the foreign policy position of our country.
The essential point is, the canal itself, I believe, will be protected by our presence; it will be important for both countries to continue to have the canal function well for the interests of international shipping.
And if I could put on my other hat, that of a stockholder, it is important in that context, particularly in our work with the Panamanians, because it is in their mutual interest to have the canal function, and in the best interests, economically, of international shipping.
Mr. CARNEY. If I might continue, do you believe there are any other nations in South or Central America, or let's say Cuba, for instance-do you believe any of those nations have the capability of breaching the canal, for whatever reason, and rendering the canal useless?
Secretary ALEXANDER. I guess every nation could breach it, but I don't think they could make it useless.
Mr. CARNEY. In other words, you feel our defenses are adequate now to prevent any foreign nations from attacking the canal, say from the air or something like that?
Secretary ALEXANDER. That is correct.
Mr. CARNEY. Your concern would be for someone in the near proximity of the canal to go up and perhaps sink an oil tanker or something like that in the lock area?
Secretary ALEXANDER. Well, I guess there are many potential hypothetical, but very few of them are realistic. I think we are prepared to do our job.
Again, I don't want to mislead you and say we can protect against all contingencies, but I think on a very significant number of them we can.
Mr.CARNEY. Thank you, Mr. Chairman TheCHAIRMAN. Thank you.
I would ask counsel to clarify some of the financial differences between H.R. 111 and H.R. 1716.
Mr. TANNENBAUM. Mr. Secretary, I am sure you agree with Congressman Murphy and the other Members, that they are as concerned as you are, and as the administration is, in keeping the tolls as low as possible.
Secretary ALEXANDER. I don't just agree with you, but I know of Congressman Murphy's interest. Is the canal functioning well in the best interests internationally.?
Mr. TANNENBAUM. Yet the administration points to its magic formula by keeping tolls increases to 14 percent, versus a 35percent increase that you state exists in the Murphy bill, in H.R.
Aren't we really kidding ourselves here? The difference between the two bills on the cost element is a shifting of the costs? In the administration's bill the costs are shifted directly to the U.S. taxpayer, whereas the Murphy bill considers all the existing elements of the costs?
Secretary ALEXANDER. I don't think in either piece of legislation are these particular costs borne by the U.S. taxpayer. They are borne by international shipping.
The contention we would make is that adding amortization costs, and adding an interest Dayment that is now running just over $20 million to the requirement, would cause us, in order to be a selfsufficient entity, to have to increase tolls, of approximately 14 percent versus the 35 percent.
Mr. TANNENBAUM. Then we get into the question of using the words "adding" or "subtracting." The interest cost has been a cost of the canal operation for quite a few years, isn't that true?
Secretary ALEXANDER. It has, indeed, yes.
Mr. TANNENBAUM. And the administration's bill proposes to subtract it and charge it to the taxpayer, which as Congressman Bauman pointed out, runs in the face of the statements previously made by the treaty negotiators before the Congress.
Secretary ALEXANDER. The administration feels that without the requirement of the interest payment, that the toll rates could be maintained and the toll increase could be maintained at approximately 14 percent.
Mr. TANNENBAUM. I understand that. But by shifting the interest costs, which I think amounts to about 11 percent of the toll base, if I understood Governor Parflitt's analysis correctly, that is just shifting that 11 percent cost to the U.S. payer, which he estimates would be in the range of some $20 to $26 million a year.
Secretary ALEXANDER. I would not see it as a cost. I would presume an interest payment is subject to whatever the capital it is being paid on. It is not as if it were an appropriated amount coming from the U.S. taxpayers, so I don't see it in that sense.
But now I see the argument and understand the argument, and I suppose it's terminology that we differ on. I also believe it's important that we realize if those two items are added, that potentially the toll increase could be some 35 percent.
Mr. TANNENBAUM. Yes; we understand that, and we're very concerned about it.
You take the other components of the differential between 14 and 35 percent, the other costs again would be indirect costs, which would be chargeable directly to the U.S. taxpayer. There's no question about that, is there?
Secretary ALEXANDER. I don't know that I follow the other costs you're referring to.
Mr. TANNENBAUM. Let's take amortization. If you charge amortization, then you really are reducing interest and depreciation. So for the long haul it's a wash. I can see that factor as being not a very serious one, but-
Secretary ALEXANDER. It lessens. It isn't a wash at the present time, I don't believe.
Mr. TANNENBAUM. Initially it looks good, to say it's only a 14percent increase. What I'm saying is that, in the long run, you have the serious problem-such as the payments now to Panama which you just heard me discuss with Ambassador Moss-and now it's acknowledged those payments would be $65 million a year, plus another $10 million on the contingency item.
I think there is no question but that such payments would be well over $100 million because of the increments mandated by the treaty within the next 5 or 7 years, and probably as high as $150 million per annum. during the term of the treaty.
Are you concerned about this canal operation running in the red in the foreseeable future?
Secretary ALEXANDER. It has been in our interest to see to it our operation is run in a fiscally sound manner, and I think it can continue to do so.
The contingency payment, although I gather there's some talk about it in Panama, it is certainly my understanding, and that of many others, that it's contingent upon what the profits show. If it doesn't show anything, then the contingency payment can not be realized.
The other items, as Ambassador Moss indicated, are treaty-related items, and the $10 million payment that relates to the operation of the canal. I know in the early days of the canal, from 1914 or so, until the seventies, there were no toll increases whatsoever. There have been toll increases, a little over 19 percent, two of them, since that time. It's a more realistic period, frankly. So I would guess in the future, in a reasonable period of time, there may be some additional toll increases.
I would not be a prophet of doom, that the canal will run in the red in the future.
Mr. TANNENBAUM. Just on that one item, the payments to Panama, you go from $2 million to $100 million, or $150 million a year-Secretary ALEXANDER. On those figures, the projection, as I remember it, for the fiscal 1980 budget, is $54 million. Then there's a $10 million payment under the treaty itself, and then potentially another contingent payment after that.
I believe those are the
Mr. TANNENBAUM. There are three $10 million payments.
Secretary ALEXANDER. Well, one is for services, and one presumes you have services that are worth $10 million.
Mr. TANNENBAUM. And the $55 million payment is to be reevaluated in 5 years, and then biannually. It certainly will increase that overall payment substantially, and I would imagine within the next 10 years it will double.
Secretary ALEXANDER. I don't feel competent to say what may happen in a decade from now. I would only give those figures that I know presently within fiscal year 1980, on those payments payable to Panama.
Mr. TANNENBAUM. I don't think there is any question but that the dollar value today is half what it was 10 years ago, and with the increments called for in the treaty of those 10-percent pay-
ments, I don't think it will be less than that over the next 10 years. So the $54 million, just automatically, if we hold our costs down, will more than double in that period.
Secretary ALEXANDER. I hope it doesn't.
Mr. TANNENBAUM. I hope it doesn't either.
Mr. HUBBARD. Is there any objection to Congressman George Hansen asking a couple of questions? All right.
Mr. HANSEN. Thank you, Mr. Chairman.
Mr. Secretary, we were or* finally told there would be no cost to the American taxpayers for the treaties, but now, of course, we find $2 or $3 million cropping up for the transfer of graves, and find within the line items of the Air Force budget that we're going to fund post office expenses that were covered by the Panama Canal operation before. We're going to fund police expenses, and the sanitation expenses which are a part of the $10 million annual payment to Panama. Then there is the loss of income from some of the facilities in the zone and the increase in tolls. Finally, as we discussed this morning, we guarantee the payments to Panama that the tolls don't cover.
All of this brings us down to another open-ended question. Beyond the year 2000, if we still are committed, as the treaties provide, to some defense of the canal, and we have vacated our bases as required don't we get into a base rental problem similar to the agreements we have had to make around the world, agreements which cost us hundreds of millions of dollars per year?
What do you envision as far as our payments to Panama beyond the year 2000 for military bases and other commitments?
Secretary ALEXANDER. Congressman, I could not give you an estimate of what those costs would be.
Mr. HANSEN. There will be expenses?
Mr. HANSEN. And they probably will be considerable?
Secretary ALEXANDER. I would say there will be expenses, but I would hate to guess that far out.
Mr. HANSEN. There are a lot of people who wonder how Panama can make it after the year 2000 without the U.S. subsidy providedfor the next 20 years. It appears that the military subsidy of hundreds of millions for base arrangements is one of the ways they're going to do it. It is all very simple-they can then charge rental on bases that they haven't been able to heretofore.
Another question would involve the fact that the Secretary of Defense, through your office, arbitrarily released $10.9 million contrary to congressional instructions for pretreaty readjustments of Army facilities in Panama. This action occurred after there had been a direct rejection of a request for permission by the House Appropriations Subcommittee on Military Construction regarding the possibility of going ahead with realignment work before the treaties were to be implemented as stipulated by the Brooke amendment directing that instruments were not to be exchanged until the March 31, 1979.
In fact, the memos from your agency were very direct in saying this was for treaty implementation.
Is it a regular practice for you to defy a subcommittee of Congress and proceed with something that they have absolutely told you no on?
Secretary ALEXANDER. That's a question that obviously, any way I answer it, I'm doomed. So let me not answer it-or I'll answer it this way:
The Army does not defy Members of Congress, nor committees of the Congress. The history of this, as I believe you know, is the Defense Department consulted with the Southern Command, General McAuliffe, and we construed it to be a necessity under the emergency funds to expend these moneys. There has been, I think, an exchange of correspondence on this
Mr. HANSEN. Mr. Alexander, where there hasn't even been an opportunity for Congress to act on treaty implementation, and when you assumed in your agency, through the Department of Defense, that you could proceed with treaty implementation before the Congress even acted, how can you justify this course of action, especially when the matter was run before a committee of Congress and you were denied the opportunity pointblank, by the chairman of the Military, Construction Subcommittee, Mr. McKay.?
I might mention that Governor Parfitt made the same request of another subcommittee chairman, of the Appropriations Committee, and he was also denied. He managed to properly abide by the denial. But here, under your direct jurisdiction, you are making treaty implementation provisions without any authorization from the Congress.
Secretary ALEXANDER. The request was made and followed, I think, according to the powers within the Defense Department, to utilize their $10.9 million within their contingency fund.
Mr. HUBBARD. Thank you so much, Secretary Alexander. We appreciate your presence here today and your good testimony, and answering our questions personally.
As one who has served in the U.S. Army, and only reaching the high rank of captain, I congratulate you on the iob you're doing with our Army. I hope you keep up the good wo-rk a nd that you will come back and be with us again
Secretary ALEXANDER. Thank you, gentlemen.
Mr. HUBBARD. Our next witness is the Comptroller General of the United States, the Honorable Elmer B. Starts. Mr. Starts has testified before the subcommittee and several other committees of the Congress on the subject of the Panama Canal, but this will be his first testimony on this particular bill before the House for consideration. The subcommittee will be addressing questions on the substantive and technical financial aspects of the legislation Welcome, Mr. Starts. We're happy to have you with US.
STATEMENT OF HON. ELMER B. STARTS,, COMPTROLLER GEN. ERAL OF THE UNITED STATES ACCOMPANIED BY FRANK M. ZAPPACOSTA, ASSISTANT DIRECTOR,, GAO Mr. STAATs. Thank you very much, Mr. Chairman. I realize the hour is late, and 'in the interest of saving the committee's time, I believe I can start my statement on page 8-the material preceding that relates to the question of organization.
Mr. HUBBARD. Your entire statement will be included in the record.
Is there any objection? Hearing none, it will be inserted in the record.
[The following was received for the record.]
STATEMENT OF ELMER B. STAATs, COMPTROLLER GENERAL OF THE UNITED STATES
MR. CHAIRMAN AND MEMBERS OF THE SuBcommITTEE: We appreciate this opportunity to discuss the recently introduced legislation for implementation of the Panama Canal Treaty. A little over a year ago when we testified before the Senate Armed Services Committee, we stated that the treaty-implementing legislation would be the key determinant of the financial viability of the Panama Canal Commission. This is still our view and we, therefore, are gratified that most of our previously expressed concerns have been addressed either in the Senate resolution of ratification or the proposed legislation.
Today, we would like to discuss the fundamental organizational, accounting and financial issues; compare how these issues are dealt with in H.R. 111 and the Administration's bill, H.R. 1716; and offer suggestions for legislative consideration.
WHAT FORM OF ORGANIZATION IS BEST SUITED FOR THE NEW COMAMION?
As you know, the Panama Canal Company is a government corporation which operates under the provisions of the Government Corporation Control Act. The Administration's bill H.R. 1716 would continue this form of organization for the new Panama Canal Commission. H.R. 111, on the other hand, would organize the Commission as an executive government agency. In our previous testimony, including testimony before this Subcommittee, we recommended that the new Commission be operated as a government corporation. We continue to hold this view. Even though the Commission could operate as an executive agency, the administrative burden and loss of management flexibility involved in a change from a government corporation would not be compensated for by improvement in congressional oversight. Before discussing the specifics which underlie this conclusion, I would like to briefly review the rationale for the 1950 legislation which completed the separation of the business-type and government activities of the Canal organization by creating the present Panama Canal Company and Canal Zone Government.
In 1950 testimony before this Subcommittee, the Bureau of the Budget, now the OMB, took the position that the financial controls generally applicable to government-type programs, such as civil government, health and sanitation were not appropriate for programs which were essentially business operations. BOB noted that the operation of the Canal was a business which produced revenue, was expected to be self-sustaining, and required considerable operating flexibility. The Bureau of the Budget concluded that the business-type budgeting, accounting and auditing provisions of the Government Corporation Control Act were more appropriate for the business of operating the Canal than were the provisions of the Budget and Accounting Act of 1921 under which the Canal organization was then operating. The GAO concurred in this conclusion because we had found that the accounting system was inadequate for determining and presenting revenues, costs and expenses and net profits or losses. The Bureau of the Budget s conclusion was also in line with the Hoover Commission recommendation that
* straight4ine business activities be incorporated so as to secure greater
flexibility in management and simpler accounting, budgeting and auditing
We believe that the successful operation of the Panama Canal Company since the 1950 legislative changes has demonstrated the appropriateness of the corporate form of organization.
What changes would H.R. 111 require? Section 234 of the bill would require the Panama Canal Commission to establish and maintain its accounts pursuant to the Accounting and Auditing Act of 1950, the basic legislation governing accounting for executive agencies of the government. Under this change, the commission would have to develop an accounting system which would conform to the principles, standards and related requirements prescribed by the Comptroller General for executive agencies. Ths accounting system would include a series of accounts not now maintained by the Panama Canal Company such as appropriation, allotment, and obligation accounts. In addition to requiring the establishment of a new series of accounts designed for executive agencies of the government, H.R. 111 would require the new Commission to continue to maintain the business-type accounting
system required of government corporations. The result would be a hybrid accounting system creating additional administrative burden for the Commission. GAO audits would continue
Both H.R. 111 and H.R. 1716 provide that the General Accounting Office shall audit the Panama Canal Commission. The Administration's bill, H.R. 1716 would allow for commercial type audits under the Government Corporation Control Act. H.R. 111, however, requires a two-pronged audit. Section 236(a) of the bill requires a GAO audit pursuant to the Accounting and Auditing Act of 1950, while Section 236(b) requires that our report be in the form of an audit report for a government corporation. In fact, the language of this subsection is virtually identical to Section 106 of the government Corporation Control Act which specifies what should be included in audit reports for government corporations. In essence, these sections would require GAO to audit the Commission in accordance with standards established for government agencies and for government corporations. From an audit and reporting standpoint, this requirement would increase the complexity and degree of GAO's involvement.
Before leaving the subject of audits, we would like to note several other differences between our current audits of the Panama Canal Company and the provisions of H.R. 111. First, the Company is now required to reimburse GAO for our audits; H.R. 111 does not provide for reimbursement. Second, H.R. 111 would require annual audits with a report to the Congress no later than 6 months after the end of the fiscal year. Under a 1975 amendment to the Government Corporation Control Act, GAO is required to audit each corporation at least once in every 3 years. At the present time, we are conducting the majority of the examinations required by the Act on a biennial basis which has proved to be satisfactory. Our last audit of the Panama Canal Company covered the fiscal periods 1977, transition quarter, and 1976. Because of the financial significance of the Treaty, we are following up this audit with an audit of fiscal 1978. After the first few years under the new organization, however, biennial audits may again be satisfactory. Would a change in organization improve congressional oversight?
Since the creation of the Panama Canal Company the Corporation's activities have been under the same form of congressional oversight as the approximately 100 government corporations now in existence. The Company's budget is reviewed annually by the Office of Management and Budget and the cognizant authorization and appropriation committees of Congress. No funds have been appropriated for the Company; instead, the Company is authorized to use funds and the $40 million borrowing authority available to it. The Company's budget, however, is subject to the imposition of limitations on spending. For instance, the fiscal 1979 budget limits general and administrative expenses to $31.3 million and the purchase of passenger motor vehicles to 48. The current procedures afford the Company managerial flexibility to adjust the level of operations and expenditures on the basis of business experience. To date, the Company has been self-sustaining and has not used its borrowing authority.
H.R. 111 would require existing funds and future revenues to be deposited in the general fund of the Treasury. Expenses would be met by annual appropriations. In addition, the Commission would be authorized to draw on a $10 million emergency fund to be established in the Treasury to defray emergency expenses and to insure continuous operation of the Canal. In essence, congressional oversight and control would revert to the system which existed prior to the creation of the Company.
We think that these changes are unnecessary and that there is adequate congressional oversight and control under the existing system for reviewing the Company's activities. There is now ample opportunity for congressional modifications and limitations to the Company's annual budget. We are wary of a reversion to the old system which unduly restricted managerial flexibility and which failed to emphasize management responsibility for self-sustaining, business-like operations. Under the changes proposed in H.R. 111, there could be an erosion of management responsibility and a temptation to subsidize operation of the Canal through appropriations. For these reasons, we would prefer to see the Panama Canal Commission organized as a government corporation subject to the existing system of congressional oversight and control.
SHOULD THE UNITED STATES FORGO INTEREST PAYMENTS AND RECOVERY OF ITS INVESTMENT?
As we have previously testified, the questions of whether the United States continues to receive interest payments and also attempts to recover its investment
44-394 0 79 pt. 2 5
are policy questions which should be decided by implementing legislation. These decisions will have significant financial implications for the new Commission, future toll rates and U.S. consumers and taxpayers.
From inception, interest has been charged on the U.S. investment in the Panama Canal enterprise. When the present organization was established in July 1951, interest charges were continued for the Panama Canal Company but not for the investment in the Canal Zone Government. As of September 30, 1978, the U.S. investment in the equity of the Panama Canal enterprise was $589.8 million. Of this amount only $318.9 million was considered to be interest-bearing. The remainder, which has been legislatively determined to be non-interest bearing, consists of reinvested earnings ($187.3 million), investment in the Canal Zone Government ($65.4 million) and the Thatcher Ferry Bridge ($18.1 million). *BAD MAG TAPE**ERR01*
The applicable rate of interest is determined by the Secretary of the Treasury and under present practice it is the computed average coupon rate on outstanding bonds as of July 31 of each year. For fiscal 1978, the rate was 6.071 percent and interest payments were $19.3 million. Since interest payments are an operating cost for the Panama Canal Company, toll rates have been set to recover this cost.
Under Senate Reservation 6 to the Panama Canal Treaty, the Panama Canal Commission would continue to pay interest, at a rate determined by the Secretary of the Treasury, unless new legislation provides otherwise. By eliminating the requirement to pay interest, the Administration's bill, H.R. 1716, would reduce the Commission's operating costs and relieve some of the pressure to increase toll rates. But it also would reduce Treasury receipts and, thereby, increase the burden on U.S. taxpayers. H.R. 111, on the other hand, would retain interest payments to the Treasury at the expense of higher Canal operating costs and toll rates Highej toll jates ho e ej, have an impact m U.S. cati ens as producers an consumers by adding to the cost of goods shipped through the Canal. E
Concerning recovery of the U.S. investment, the existing practices differ between the Panama Canal Company and Canal Zone Government The Company repays invested capital only through dividends declared by the Board of Directors. The Company has repaid $40 million in dividends since its incorporation. The capital invested in the Canal Zone Government, however, is being systematically repaid. Its operating cost and capital programs are initially financed by appropriations. The government charges users for services and pays the revenues into the Treasury. The difference between these revenues and expenses including depreciation, which is the net cost of the government, is then paid into the Treasury by the Company. Therefore, the entire costs of the government, including the capital investment, are being recovered.
Section 412(b) of H.R. 111 includes amortization of the U.S investment as a cost to be included in the toll base in addition to depreciation. This cost representing accelerated depreciation of assets, however, is excluded from the calculation of the annual $10 million contingent surplus payment to Panama called for in Article XIII, 4(c) of the treaty. Therefore, if the Commission's revenues met all costs including the accelerated depreciation of assets, Panama would be assured of receiving the $10 million contingent surplus payment. The United States would retain annual amounts above $10 million and, thereby, recoup only a portion of its investment. Obviously, if the intent of H.R. 111 is to recover the U.S. investment then the accelerated depreciation charges should be included both in the toll base and as an element of cost for the calculation of the contingent surplus payment.
The Administration's bill, H.R. 1716 would continue the existing practice of not requiring the recovery of the U.S. investment in Canal except through dividends. Under the treaty, however, dividends could be paid only after the $10 million contingent surplus payment to Panama.
It is not clear from our analysis of the studies prepared by the Company or the executive branch that toll rates can be raised high enough to cover both interest payments and complete recoupment of the U.S. investment. There is a practical limit to toll rate increases beyond which total earned revenues would fall as traffic would be diverted to alternative shipping methods and new trading patterns would emerge. Last year, Governor Parfitt expressed concern about the long-range ability to raise toll rates to cover projected costs. His concern was based on anticipated cost inflation and foreseeable drop in North Slope oil traffic because of alternative pipeline development. Because of the uncertainty about the Canal's long-range revenue potential, we think it may be difficult to recover the U.S. investment through accelerated depreciation charges which would significantly increase toll rates closer to the point of diminishing returns. On the other hand, the Canal has historically generated adequate revenues to pay interest on the U.S. investment.
Existing legislation requires the Panama Canal Company to make annual interest payments to the Treasury to the extent earned. If not earned in any given year, interest payments shall be made from subsequent earnings unless the Congress otherwise directs. We believe that these provisions should be incorporated in the treaty-implementing legislation and that interest payments should be specifically considered an operating expense in the calculation of the $10 million contingent payment to Panama. The implementing legislation should also address the possibility of any unpaid interest liability upon termination of the treaty.
Based on the current value of the interest-bearing investment, and the applicable rate of interest for fiscal year 1978, interest payments over the life of the treaty would amount to about $400 million. This is only a rough projection. The actual annual amounts and cumulative total would depend on the value of the interestbearing investment after property transfers to other U.S. Government agencies and to Panama and on the applicable rates of interest which are determined each year.
WHAT TREATY RELATED, COSTS HAVE BEEN IDENTIKED?
Costs associated with the Panama Canal Treaty have been the subject of considerable discussion in testimony before your Committee and other Committees of the Congress. We would like to highlight some of the costs, excluding the additional treaty-specified payments to Panama of about $60 million each year (that will result in increased toll payments by users), which we believe are directly or indirectly related to the Treatv and will be borne by U.S. Government agencies unless otherwise legislated. Some of these costs have been estimated for the life of the treaty while other costs are stated on an annual basis because they would vary widely each year. Therefore, it is not possible to accurately estimate the total cost. At a minimum, however, the cost would be about $399 million. If the Commission is not required to pay interest on the U.S. investment, there would be additional costs of about $20 million each year, or approximately $400 million over the treaty lifetime.
The estimated costs would include:
Early optional retirement payments estimated at $270 million.
Severance pay liability estimated at $3.5 million for employees losing their
Defense relocation and other costs were originally estimated at $43 million.
The current estimate for the first 5 years is $88 million. This estimate includes treaty-related construction to be completed by October 1, 1979, estimated at
Discharging the existing accrued annual leave and repatriation liability for
employees scheduled for transfer to DOD is estimated at $6.3 million for leave and $3.7 million for repatriation. DOD would have to request appropriations for payment of these liabilities if no funds are transferred. We recommend that the implementing legislation specifically require the Commission to transfer the necessary funds either to DOD or to the Treasury. If this authority is not provided for by legislation, then the Commission would be relieved of this
liability, thereby, increasing the Commission's income.
Loss on retail store inventories estimated at $2 million.
Disinterment and reinterment of remains of United States citizens estimated
at $1.7 million.
General and administrative expense associated with a reduction in force and
related activities estimated at $1.8 million.
Cost for health services by DOD estimated at $32 million direct funding less
recoveries of $10 million, net cost $22 million.
State Department personnel costs associated with Embassy consular activities
for visas and passports estimated for fiscal year 1980 at $184,100.
Other identified costs for which estimates are not available are:
Additional educational costs for dependents of the estimated 2,600 employees
transferring to the Department of Defense.
Adjustment of compensation for the loss of exchange and commissary benefits
after 5 years by U.S. citizen employees of the Panama Canal Commission.
Concerning retirement costs, we would like to add that both H.R. 111 and H.R. 1716 would establish a special early retirement program for employees who leave government service, either voluntarily or involuntarily, and provide higher than normal retirement benefits for those who stay off. We have been asked by the House Post Office and Civil Service Committee's Subcommittee on Compensation and Employee Benefits to analyze each of the provisions that would add to the retirement system's liability with particular attention on their justification and cost.
Our analysis is currently in process. The Office of Personnel Management's initial rough estimate of the added retirement outlays is $9 million a year for 30 years
which is an unfunded liability of $270 million. The Office is now preparing a more precise estimate which we will be evaluating.
HOW SHOULD THE COMMISSION'S ASSETS BE VALUED?
Both H.R. 1716 and H.R. 111 provide for the depreciation of assets, but neither bill states the basis to be used for the valuation of the assets assumed by the Commission. Annual depreciation charges would be an expense to be recovered through tolls and also would be included in the calculation of the contingent payment to Panama. To avoid any misunderstanding by all parties concerned, we believe that the implementing legislation should establish the basis for valuation of assets.
By way of background, when the present Panama Canal Company was established in 1951, the Company's charter prescribed the criteria for valuation of the transferred property. The original cost of $634.7 million was adjusted for defense costs, interest during original construction, suspended construction projects, accrued depreciation and an economic valuation allowance, making the net transfer value $402.1 million. The transfer value was approved by the Bureau of Budget and accomplished in three stages, February 1, 1950, July 1, 1950, and July 1, 1951, or about 11/2 years. The valuation and inventory process which cost about $750,000 required the creation of a special staff of engineers and accountants.
The assets to be transferred to Panama and U.S. Government agencies at varying times, as well as those to be assumed by the Panama Canal Commission, are now stated at net book value which is cost less depreciation and allowances. We recognize that other bases of valuation, such as current and replacement costs, can be applied to these assets. The revaluation of assets, however, would involve the substitution of another basis and identification of the assets that would continue to be used in operations and those to be disposed of or retired. This would be accomplished through a detailed inventory which we have advocated in prior testimony. We understand that the Company is presently in the process of inventorying only those assets to be transferred to Panama. Although we have not fully analyzed the alternative methods of valuing the assets to be transferred to the Commission we believe that until some operating experience has been gained, for the transition period at least, the most expedient and preferred method would be to make the transfer at book value when the Treaty goes into force on October 1, 1979.
In closing, we would like to comment on three other matters-amortization of the "Use-rights," the Panama Canal Emergency Fund and the administration of payments between the United States and Panama-which may require some revisions to the implementing legislation.
Amortization of use rights
Both H.R. 111 and H.R. 1716 provide for the amortization of the U.S. rights to use certain assets. Ownership of these assets, principally housing, will be transferred to the Republic of Panama on October 1, 1979, but the United States will continue to use them as the need exists. It is not possible to establish an exact value for the right to use a particular house because the United States may relinquish its useright at any time during the treaty. Therefore, the Company's proposed policy is to establish the use-right value at the net book value of the assets at September 30, 1979, and amortize the asset at the same annual dollar value as they were depreciated under the Panama Canal Company. Since these amortization charges will be considered operating costs of the Commission, they should be included in the toll base. We note that there is a possible oversight in H.R. 111 in that amortization charges for use-rights are specifically mentioned in Section 234 as an expense but Section 412(b) of the bill fails to include it as a cost to be recovered through tolls. Panama Canal emergency fund
The Panama Canal Company has the authority to borrow up to $40 million from the Treasury for any purpose. H.R. 1716 would continue the borrowing authority for the Commission. H.R. 111, however, would replace this authority with an Emergency Fund on which the Commission could draw. There may be some confusion about the amount of the proposed Emergency Fund. Section 233 of the bill stipulates that the fund would be $10 million but the section-by-section analysis mentions a $40 million fund which would be consistent with the existing borrowing authority. Administration payments between the United States and Panama
The treaty stipulates certain annual amounts which the United States shall pay to Panama but does not specify whether payments may be made semi-annually, quarterly or more frequently. The treaty also provides for reimbursement of each party for services rendered. For example, the United States shall reimburse
Panama for railway shipments and Panama shall pay for utility services which the United States continues to provide. The treaty, however, does not provide detailed guidance on the administration of these payments.
We think that the treaty implementing legislation should address the question of frequency of payments because of the cash flow implications for the United States. Neither H.R. 111 or H.R. 1716 specifically cover this question.
Section 251 of H.R. 111 does provide that Panama's payments to the Commission may be offset against amounts due the Republic of Panama by the United States. From a financial standpoint, an offset of payments appears to be an equitable arrangement.
We also suggest that consideration be given to incorporating Senate Understanding 1 to the treaty in the implementing legislation. This understanding provides a mechanism for establishing the quality of public services to be provided by Panama. The understanding also provides that the United States would pay $10 million for each of the first 3 years. Based on an examination of the actual costs to Panama for providing the services, payments for each of the following 3 years would be adjusted by one-third of any excess or deficit. The procedure would continue through the life of the treaty.
Mr. Chairman and Members of the Committee, this completes our prepared statement. We will be pleased to answer any questions you or members of the Committee may have.
Mr. STAATS. In general, we support the Secretary of the Army, that their organization is desirable. We don't think it diminishes in any way the congressional oversight role. And our audit authority would be continued.
I would first like to address the question of interest payments, on the interest-bearing investment, and on the question of the recovery of the investment itself.
As we have previously testified, the questions of whether the United States continues to receive interest payments and also attempts to recover its investment are policy questions which should be decided by implementing legislation. These decisions will have significant financial implications for the new Commission, future toll rates, and for U.S. consumers and taxpayers.
From inception, interest has been charged on the U.S. investment in the Panama Canal enterprise. When the present organization was established in July 1951, interest charges were continued for the Panama Canal Company but not for the investment in the Canal Zone Government.
As of September 30, 1978, the U.S. investment in the equity of the Panama Canal enterprise was $589.8 million. Of this amount, only $318.9 million was considered to be interest bearing. The remainder, which has been legislatively determined to be noninterest bearing, consists of reinvested earnings of $187.3 million, investment in the Canal Zone Goverment of $65.4 million, and the Thatcher Ferry Bridge, $18.1 million.
The applicable rate of interest is determined by the Secretary of the Treasury and under present practice it is the computed average coupon rate on outstanding bonds as of July 31 of each year. For fiscal 1978, the rate was 6.071 percent and interest payments were $19.3 million. Since interest payments are an operating cost for the Panama Canal Company, toll rates have been set to recover this cost.
Under Senate Reservation 6 to the Panama Canal Treatv. the Panama Canal Commission would'continue to pay interstate a rate determined by the Secretary of the Treasury, unless' new legislation provides otherwise. By eliminating the requirement to pay interest, the administration's bill, H.R. 1716, would reduce the
Commission's operating costs and relieve some of the pressure to increase toll rates. But it also would reduce Treasury receipts and, thereby, increase the burden on U.S. taxpayers.
H.R. 111, on the other hand, would retain interest payments to the Treasury at the expense of higher canal operating costs and toll rates. Higher toll rates, however, have an impact on U.S. citizens as producers and consumers by adding to the cost of goods shipped through the canal.
We believe that only about 30 percent of the canal traffic is destined to U.S. ports. The remainder is destined to other nations' ports.
Concerning recovery of the U.S. investment, the existing practices differ between the Panama Canal Company and the Canal Zone Government. The Company rep'aiys, invested capital only through dividends declared by the Board of Directors. The Company has repaid $40 million in dividends since its incorporation.
The capital invested in the Canal Zone Government, however, is being systematically repaid. Its operating cost and capital programs are initially financed by appropriations. The Government charges users for services and pays the revenues into the Treasury.
The difference between these revenues and expenses, including depreciation, which is the net cost of the Government, is then paid into the Treasury by the Company. Therefore, the entire costs of the Government, including the capital investment, are being recovered.
Section 412(b) of H.R. 111 includes amortization of the U.S. investment as a cost to be included in the toll base in addition to depreciation. This cost representing accelerated depreciation of assets, however, is excluded from the calculation of the annual $10 million contingent surplus payment to Panama called for in article XIII, 4(c) of the treaty.
Therefore, if the Commission's revenues met all costs, including the accelerated depreciation of assets, Panama would be assured of receiving the $10 million contingent surplus payment. The United States would retain annual amounts above $10 million and, thereby, recoup only a portion of its investment.
Obviously, if the intent of H.R. 111 is to recover the U.S. investment, then the accelerated depreciation charges should be included both in the toll base and as an element of cost for the calculation of the contingent surplus payment.
The administration's bill would continue the existing practice of not requiring the recovery of the U.S. investment in the canal, except through dividends. Under the treaty, however, dividends could be paid only after the $10 million contingent surplus payment to Panama.
It is not clear from our analysis of the studies prepared by the Company or the executive branch that toll rates can be raised high enough to cover both interest payments and complete recoupment of the U.S. investment.
There is a practical limit to toll-rate increases beyond which total earned revenues would fall as traffic would be diverted to alternative shipping methods and new trading patterns would emerge.
Last year Governor Parfitt expressed concern about the longrange ability to raise toll rates to cover projected costs. His concern was based on anticipated cost inflation and foreseeable drop in North Slope oil traffic because of alternative pipeline development. Because of the uncertainty about the canal's long-range revenue potential, we think it may be difficult to recover the U.S. investment through accelerated depreciation charges which would significantly increase toll rates closer to the point of diminishing returns. On the other hand, the canal has historically generated adequate revenues to pay interest on the U.S. investment.
Existing legislation requires the Panama Canal Company to make annual interest payments to the Treasury to the extent earned. If not earned in any given year, interest payments shall be made from subsequent earnings unless the Congress otherwise directs.
We believe that these provisions should be incorporated in the treaty-implementing legislation, and that interest payments should be specifically considered an operating expense in the calculation of the $10 million contingent payment to Panama. The implementing legislation should also address the possibility of any unpaid interest liability upon termination of the treaty.
Based on the current value of the interest-bearing investment, and the applicable rate of interest for fiscal year 1978, interest payments over the life of the treaty would amount to about $400 m i lion. This is only a rough projection. The actual annual amounts and cumulative total would depend obviously on the value of the interest-bearing investment after property transfers to other U.S. Government agencies and to Panama and on the applicable rate of interest which is determined each year. But I think as a rough measure, the $400 million figure is a good figure.
Costs associated with the Panama Canal Treaty have been the subject of considerable discussion in testimony before your committee and other committees of the Congress. We would like to highlight some of the costs, excluding the additional treaty-specified payments to Panama of about $60 million each year-that will result in increased toll payments by users, of course-which we believe are directly or indirectly related to the treaty and will be borne by the U.S. Government agencies unless otherwise legislated.
Some of these costs have been estimated for the life of the treaty, while other costs are stated on an annual basis, because they could vary widely each year.
Therefore, it is not possible to accurately estimate the total cost. At a minimum, however, the cost would be about $399 million. If the Commission is not required to pay interest on the U.S. investment, there would be an additional cost of about $20 million each year, or approximately $400 million over the treaty lifetime. These two figures added together are about $800 million.
The estimated costs would include: early optional retirement payments, estimated at $270 million; severance pay liability, estimated at-that figure should be $4.6 million-for employees transferring to Panama or losing their jobs; defense relocation and other costs were or* finally estimated at $43 million. The current estimate for the first 5 years is $88 million. This estimate includes
treaty-related construction to be completed by October 1, 1979, estimated at $10.9 million.
Discharging the existing accrued annual leave and repatriation liability for employees scheduled for transfer to DOD is estimated at $6.3 million for leave and $3.7 million for repatriation. DOD would have to request appropriations for payment of these liabilities if no funds are transferred.
We recommend that the implementing legislation specifically require the Commission to transfer the necessary funds either to DOD or to the Treasury. If this authority is not provided for by legislation, then the Commission would be relieved of this liability, thereby increasing the Commission's income.
Loss on retail store inventories are estimated at $2 million; disinterment and reinterment of remains of U.S. citizens is estimated at $1.7 million; general and administrative expense associated with a reduction in force and related activities is estimated at $1.8 million.
The cost for health services by DOD is estimated at $32 million direct funding, less recoveries of $10 million, with a net cost of $22 million.
The State Department personnel costs associated with Embassy consular activities for visas and passports are estimated for fiscal year 1980 at $184,100.
Other identified costs for which estimates are not available are: Additional educational costs for dependents of the estimated 2,600 employees transferring to the Department of Defense; the adjustment of compensation for the loss of exchange and commissary benefits after 5 years by U.S. citizen employees of the Panama Canal Commission.
Concerning retirement costs, we would like to add that both H.R. 111 and H.R. 1716 would establish a special early retirement program for employees who leave Government service, either voluntarily or involuntarily, and provide higher than normal retirement benefits for those who stay.
We have been asked by the House Post Office and Civil Service Committee's Subcommittee on Compensation and Employee Benefits to analyze each of the provisions that would add to the retirement system's liability with particular attention to their justification and cost.
Our analysis is currently in process. The Office of Personnel Management's initial rough estimate of the added retirement outlays is $9 million a year for 30 years, which is an unfunded liability of $270 million. The Office is now preparing a more precise estimate which we will be evaluating. That $270 million is a part of the $399 million figure that I mentioned earlier.
The question we would like to address now is how should the Commission's assets be valued. Both bills provide for the depreciation of assets, but neither bill states the basis to be used for the valuation of the assets assumed by the Commission. Annual depreciation charges would be an expense to be recovered through tolls, and also would be included in the calculation of the contingent payment to Panama. To avoid any misunderstanding by all parties concerned, we believe that the implementing legislation should establish the basis for valuation of assets.
By way of background, when the present Panama Canal Company was established in 1951, the company's charter prescribed the criteria for valuation of the transferred property. The original cost of $634.7 million was adjusted for defense costs, interest during original construction, suspended construction projects, accrued dep, i tion and an economic valuation allowance, making the net transfer value of $402.1 million.
The transfer value was approved by the Bureau of the Budget and accomplished in three stages, or in a period of about 11/2years. The valuation and inventory process, which cost about $750,000, required the creation of a special staff of engineers and accountants.
The assets to be transferred to Panama and U.S. Government agencies at varying times, as well as those to be assumed by the Panama Canal Commission, are now stated at net book value, which is cost less depreciation and allowances.
We recognize that other bases of valuation, such as current and replacement costs, can be applied to these assets. The revaluation of assets, however, would involve the substitution of another basis and identification of the assets that would continue to be used in operations and those to be disposed of or retired.
This would be accomplished through a detailed inventory which we have advocated in prior testimony. We understand that the Company is presently in the process of inventorying only those assets to be transferred to Panama. Although we have not fully analyzed the alternative methods of valuing the assets to be transferred to the Commission, we believe that until some operating experience has been gained for the transition period at least, the most expedient and preferred method would be to make the transfer at book value when the treaty goes into force on October 1, 1979.
In closing, we would like to comment on three other mattersamortization of the use rights, the Panama Canal emergency fund, and the administration of payments between the United States and Panama-which may require some revisions to the implementing legislation.
Both bills provide for the amortization of the U.S. rights to use certain assets. Ownership of these assets, principally housing, will be transferred to the Republic of Panama on October 1, 1979. But the United States will continue to use them as the need exists.
It is not possible to establish an exact value for the right to use a particular house because the United States may relinquish its useright at any time during the treaty. Therefore, the Company's proposed policy is to establish the useright value at the net book value of the assets at September 30, 1979, and amortize the asset at the same annual dollar value as they were depreciated under the Panama Canal Company.
Since these amortization charges will be considered operating costs of the Commission, they should be included in the toll base. We note that there is a possible oversight in H.R. 111 in that amortization charges for use-rights are specifically mentioned in section 234 as an expense, but section 412(b) of the bill fails to include it as a cost to be recovered through tolls.
The Panama Canal Company has the authority to borrow up to $40 million from the Treasury for any purpose. H.R. 1716 would continue the borrowing authority for the Commission. H.R. 111, however, would replace this authority with an emergency fund on which the Commission could draw.
There may be some confusion about the amount of the proposed emergency fund. Section 233 of the bill stipulates that the fund would be $10 million, but the section-by-section analysis mentions a $40 million fund which would be consistent with the existing borrowing authority.
Now, the treaty stipulates certain annual amounts which the United States shall pay to Panama, but does not specify whether payments may be made semiannually, quarterly, or more frequently.
The treaty also provides for reimbursement of each party for services rendered. For example, the United States shall reimburse Panama for railway shipments, and Panama shall pay for utility services which the United States continues to provide. The treaty, however, does not provide detailed guidance on the administration of these payments.
We think that the treaty-implementing legislation should address the question of frequency of payments because of the cash flow implications for the United States. Neither bill specifically covers this question.
Section 251 of H.R. 111 does provide that Panama's payments to the Commission may be offset against amounts due the Republic of Panama by the United States. From a financial standpoint, an offset of payments appears to be an equitable arrangement.
We also suggest that consideration be given to incorporating Senate understanding 1 to the treaty in the implementing legislation. This understanding provides a mechanism for establishing the quality of public services to be provided by Panama.
The understanding also provides that the United States would pay $10 million for each of the first 3 years. Based on an examination of the actual costs to Panama for providing the services, payments for each of the following 3 years would be adjusted by one-third of any excess or deficit. The procedure would continue through the life of the treaty.
This completes our prepared statement, Mr. Chairman. Mr. Zappacosta, to my left here, and I would be glad to respond to any questions you have.
Mr. HUBBARD. Thank you very much, General Staats.
The Members of the House have a conflict, and we would ask you to please bear with us and understand that we have 10 rollcall votes. This one now is 15 minutes in duration, and following that we have nine more of 5 minutes each. So there is no way we can meet earlier than 3 o'clock to reconvene.
The best we can do is recess at this point.
Mr. STAATS.Would you like for us to come back at 3?
Mr. HUBBARD. Please. And also Mr. Carswell, please; 3 o'clock is the earliest possible time we could reconvene. [Whereupon, at 12:35 p.m., the subcommittee was in luncheon recess, to reconvene at 3 p.m. the same day.]
AFTERNOON SESSION 3:11 P.M.
Mr. HUBBARD. The subcommittee will again come to order. Our apologies for the delay caused by 10 roilcall votes in the House.
Let's assume that's going to be adjournment. Four bells will be good news in this regard.
And so it is.
Mr. Staats, to the questioning now, if you would, please.
In 1977 testimony before this subcommittee, you advocated a corporate form for the Panama Canal Commission, but you also stated: "New capital budgets should receive close scrutiny by the administration and Congress to insure that only essential capital investments are made."
Doesn't the need to scrutinize the capital program lend itself toward an appropriated-fund agency?
Mr. STAATS. Mr. Zappacosta will-Mr. HUBBARD. Sure, Mr. Zappacosta?
Mr. ZAPPACOSTA. Not necessarily, Mr. Chairman. You could actually scrutinize the capital program under the normal corporate type of structure. If the Congress so desired, they could place the limitations on the capital expenditures.
Incidentally, we reviewed the capital program and issued a report on May 11, 1977; we looked at the 5-year plan. But in the budget review process this could be done-it could be done either way. There's no definite reason it has to be in appropriated form in order to have the controls.
Mr. STAATS. Mr. Chairman, the reason we stress this point-it's a particularly important point that if legislation does not require repayment of the unpaid capital investment, then we think you ought to look at any new capital improvements pretty carefully here in the Congress from the point of view of turning over the Canal in the year 2000.
It would be an important point either way, but it would be particularly important if there was no provision made in the legislation for repayment of the capital investment.
Mr. HUBBARD. Thank you. Governor Parfitt, in his statement, talks of a tolls surcharge on vessels in order to help finance the capital program for the Commission.
What financial restraints would you recommend be tied to the disposition of any surcharge imposed?
Mr. ZAPPACOSTA. Well, if you are going to impose any surcharge for capital improvements, then the surcharge would have to be specifically earmarked for that purpose-if that is what the surcharge is going to be.
Mr. STAATS. I'm not clear what a surcharge would achieve that you could not achieve by accelerated depreciation arrangements.
The line that has to be drawn here is what kind of improvements are necessary to operate the canal as long as we have the responsibility for it, and to turn over the operation in an operable condition in the year 2000, as against improvements that may not be essential for that purpose.
That is, again, one of the reasons that we felt that the Congress ought to give special scrutiny to new capital investment.
Let me say this additionally. With respect to the corporate form historically-and this is true of all government corporations-Congress can impose in any year any restriction it wants to impose on the operations of the corporation-and this in fact is done. There are administrative cost limitations, limitations on capital improvements by the Congress-but unless the Congress does that in some restrictive way, then it goes ahead and is operated by the Board of Directors.
But that opportunity is always present on any government corporation in the annual budget review.
Mr. HUBBARD. Has the General Accounting Office had any discussions with the Government of Panama or the Panamanian comptroller general as to the transfer of property or financial arrangements under the treaty?
Mr. STAATS. No we have not. We have indicated to the Ambassadors, former Ambassador Jorden and Ambassador Moss, that should it be indicated that this could be useful in any sense to the Panamanian Government, we would be happy to cooperate with the Comptroller General of Panama.
But we thought it would be better to leave it that way and leave it at their initiative rather than our volunteering directly a role which they might not appreciate.
Mr. HUBBARD.Would you tell us now about your assessment of the progress made by the Panama Canal organization in preparing for the entry into force of the new treaty arrangement. More specifically, has the complete inventory of assets you recommended in 1977 been accomplished?
Mr. STAATS. No, it has not been accomplished. I would like Mr. Zappacosta to elaborate on that.
We renewed that suggestion in the statement which I presented here earlier today.
Mr. ZAPPACOSTA. Actually, Mr. Chairman, the inventory is in process. The policy of the company has been a multiphased type of operation.
The first basic thing they are doing is to actually inventor the assets for the activities that are going to be turned over either in whole or in part to the Republic of Panama or will be going over to DOD or any other Government agency.
The rest of the assets are not being inventoried at this time, based on our understanding; it is still in process-it has not been completed, according to our information.
Mr. STAATS. And there remains the question of how you value those assets that we refer to in our statement.
Mr. HUBBARD. Has identification of property to be turned over been made?
Mr. ZAPPACOSTA. Well, that would be part of the process of the inventory. Actually, I think that is going to be done once you have taken the inventory, then it will be necessary to make a specific identification with the provisions of the treaty.
Mr. HUBBARD. Do you have any suggestions as to provisions that should be placed in this implementing legislation we seek to pass, to make sure that everything has been properly done by October 1?
Mr. STAATS. Are you referring to the facts of what should be done in the taking of the inventory or the valuing of the assets?
Mr. HUBBARD. Both.
Mr. ZAPPACOSTA. Well, we advocated that once before. We felt that a complete inventory should be taken, because you are going to start off with a new type of operation. However, in 1951 the last inventory that was taken, the last complete inventory, cost somewhere in the neighborhood of $750,000 and required a staff of about 54 engineers and accountants to do it.
At today's prices it would probably cost you somewhere in the neighborhood of maybe $1 or $2 million. It's hard to say.
But if you are going to have a sound basis to start from, from an accounting standpoint, you should have a complete inventory. But at least a half a loaf is better than none. If you are going to at least inventory the assets that are going over to Panama-when the treaty enters into force, then you should put in a procedure whereby you will periodically review and take inventories-have your own internal audit organization to do that. In our annual audit we make test checks. Then I think you would have a pretty good fix on it.
Mr. HUBBARD. Lastly, I gather from your comments, Mr. Starts, on page 6 of your testimony you think that in the initial years of the Commission's existence whether as a corporation or an appropriated fund agency, there would be a need for an annual audit in order to insure that funds are being spent properly; is that correct?
Mr. STAATs. That's our present view on the matter; yes, sir.
Mr. HUBBARD.Congressman Bauman.
Mr. BAUMAN.Mr. Starts, you placed before us several arguments in favor of retaining the corporate form of the company's operations. Let me relate to you my own view, which is essentially a political problem that I have with that continuation.
It appears to me from all that I have heard in these hearings and from the reading that I have done on the treaty negotiations and the text itself, that the commission form of government lends itself very easily to the appointment of people whose sympathies don't necessarily lie with perhaps the majority of the Congress as to the manner in which the canal should be run in the next 20 years.
Already we have had a number of indications that the State Department is in fact working against even provisions of the treaty, advising the Panamanians to make claims for property that the treaty clearly doesn't give them. In this atmosphere, it doesn't lend much confidence to people like myself that we continue the corporate form that indeed does give flexibility which now ought to be den I* e-d.
Would it be possible, do you think, to continue the corporate form and impose upon it an annual appropriations process out of the revenues of the canal, which would be earmarked in the U.S. Treasury, so that there would be no question about the amount of income and the amount of expenses-an earmarked fund, but subject to annual appropriation in advance-and graft onto that fund
an emergency procedure-or perhaps not even an emergency procedure-but a procedure for contingencies, something like we have in the Trade Act where they could submit requests to the appropriate committees of the Congress and within a certain time, if no action was taken, say 30 days, they would be able to spend the money for that unforeseen purpose.
I think you see what I am driving at.
Mr. BAUMAN. And I see no other way to solve this, because we have no influence over appointees to the Commission, and I frankly have no confidence at all that they will carry out the will of the Congress.
Mr. STAATS.Well, let me respond in two parts. First, certainly you could write a statute along the lines that you have indicated, and that would be the manner in which the usual operating agency of the executive branch would be financed by appropriations. Revenues which it generated go to the Treasury and the Congress appropriates a certain amount each year.
The reason we came out where we did is that the Panama Canal is a utility-type operation; it's a business-type operation. And you cannot foresee what the volume changes may be during the course of the year-no one can.
So there has to be some flexibility there, and if you were to write it in the form of an appropriated agency, then I think you would inevitably want to give it flexibility, from the operating point of view, and you would have to take into account the fluctuating nature of the business that is involved here.
The counter to that is that we feel that, even with the corporate form, as proposed, the Congress has an opportunity to review the operations and impose whatever controls and restrictions they want under the Corporation Control Act.
I guess we would prefer to see you do it in that way. The review is made, of course, by the Appropriations Committee, but there is no reason why there could not be an annual review by this committee as well.
So we don't really see that the Congress loses in terms of oversight and direction by virtue of having the corporate-type organization which is contemplated in the proposed legislation.
And, in addition, we will be doing more than just a financial audit. As the chairman suggests, we would contemplate that we would do a financial audit annually for at least a period of time. At the present time, we have discretion to make either an annual audit or an audit within a 3-year time frame on all Government corporations.
But in this case we would undoubtedly want to make an annual audit.
But in addition to that we are available to respond to the requests of the committee, to review any particular aspect of the operation. And we would be more than pleased to respond to such a request that would come from this committee. Mr. BAUMAN. I have no doubt of that, but all of the provisions that you describe as now being available to us constitute oversight after the fact, constitute an assessment of what has been done.
What I am looking for is a projection, at least on an annual basis, and a justification of the Commission's operations. It seems to me that under the Government Corporation Control Act, we have little more than oversight. And in fact such corporations are given the right to act, for instance, without reference to the fiscal year limitations.
Mr. STAATS. I think you can go beyond that. I think you can, as we suggest in our earlier testimony, that you can put a limitation on capital improvements, and types of improvements. That could be written right into the annual review of their budget.
And you can put a limitation on administrative costs.
There is no limit in the Corporation Control Act as to the kind of restrictions that the Congress may choose to write.
And that is in advance, rather than hindsight.
Mr. BAUMAN. I don't understand in the absence of a specific appropriation bill being reported or an authorization bill annually, we could write such restrictions into the law unless it were a separate piece of legislation, which would immediately be vetoed by the President, since it would not be grafted upon any appropriation bill where the force would be to go ahead and sign it despite the restriction.
In other words, if the administration is of a mind to implement this treaty as the Panamanians want to, as they apparently are now, we would never have any real control. Sure, we could try, but it wouldn't get out of committee, or if it came to the floor and passed both Houses, which is unlikely, it would be vetoed.
So we are caught in a bind.
Mr. STAATS. Well, your judgment on that might be at least equally as good as mine, but in the past there has been a long history of Congress placing restrictions on corporations-in advancethrough the appropriations process.
And I wouldn't want to speculate what this President or any other President might do.
Mr. BAUMAN. I am aware of that history, but I just think we have reached a point in the history of this particular facility, which is, of course, unparalleled, and we have to assume the worst, it seems to me, based on our past relations with Panama-not the worst in the sense that everything's going to go wrong, but the worst in the. sense that the Congress will probably lose a large measure of the control it had in the past.
So I appreciate your thinking on it.
Let me ask you, if I may, Mr. Chairman-you have given us a rather extensive estimate of the cost of the implementation of the treaty, and if no other testimony should lay to rest the song that it was not going to cost the taxpayers $1, this certainly has.
But did you also include in the new-rated items the operating costs of the Department of Defense on an annual and cumulative basis for the life of the treaty? It's my impression that I didn't see that in there; you talked about the military construction figures. Mr. ZAPPACOSTA. No, sir, they are not. These are strictly the military construction costs.
i When you mentioned that this morning, Mr. Bauman, in referring to your discussion with General McAuliffe, I was kind of
curious as to whether you said it was $80 million per year or whether it was $80 million for the first 5 years into the treaty.
Mr. BAUMAN. Well, Mr. Bonior was present, and my recollection-and it never was really answered squarely-when I asked General McAuliffe at the briefing-his response-I have the figure, entertained the figure-was roughly $60 to $66 million annually to start. The cost to DOD previously had come out of the totals and had been paid by the zone government for the company.
And he said it would be somewhere in the neighborhood of $60 to $80 million-and I think he said $80 million within about 5 yearsafterwards he had no projections.
Mr. ZAPPACOSTA. Over and above the construction costs.
Mr. BAUMAN. Yes; you could see why I am interested, because obviously this-Mr. ZAPPACOSTA. We certainly would be interested in it also, because we'd like to check on it and see exactly what that figure represents.
Mr. BAUMAN. Well, of course, it triples the estimate given in your statement of the cost of implementing procedure.
Mr. ZAPPACOSTA. Right, and basically this is the information we received from SOUTHCOM and also from DOD.
Mr. BAUMAN. So you don't have the operating costs. Perhaps you could provide us a figure for that.
Could you tell me exactly what would be lost if interest is not paid? The interest payments are now deleted there under this legislation.
Mr. ZAPPACOSTA. $400 million-that's a rough estimate.
Mr. STAATS. That's over the period until the year 2000.
Mr. BAUMAN. I also noticed in your statement on page 10-you talk about the contingent payment. Is your reading of the treaty and the projections you have made based on the understanding that Panama has no right nor does the Commission have a right to raise the tolls to meet that contingency, that the contingency is only available if in fact income and expenditures are in such a position that they can pay it, but there is no absolute necessity to project totals for payment?
Mr. STAATS. It's our understanding that this $10 million would be out of surplus. I don't know of any reason, unless the statute specifies otherwise, that they could not raise tolls enough to generate a surplus out of which they could make the $10 million payment.
Mr. BAUMAN. But the treaty standing alone without further elaboration does not require that payment.
Mr. STAATS. That's right. And we raised that question extensively last year in the hearings before this committee and before the Senate. And we received a reply to Mr. Zappacosta here, from the legal advisor of the State Department, a letter which I think would be useful, Mr. Chairman, to your committee, and we would be happy to have it placed in the record.
But it is very explicit on this point that you have raised a question about.
Mr. BAUMAN. Well, the State Department quite obviously has taken that position and continues to take it. However, on Saturday, when we met with officials of the Panamanian Government, as you
may know, they very clearly contradicted their view and felt that there was an obligation
Mr. STAATs. That is precisely the reason we asked the legal advisor to respond to our question, because we, through our office in Panama-we have an office in Panama-had learned about the same question on the part of certain Panamanians as to whether or not $10 million was truly out of surplus or whether it was an obligation to be paid; and, second, whether it would carry over from one year to another so that in the year 2000 any unpaid amount out of the $10 million would then be due and payable from the U.S. Government.
Mr. BAUMAN.What was your estimate on that last point? Is it cumulative and payable?
Mr. STAATS. No. It is our understanding now from the State Department that it would not be cumulative and payable. But we believe it would be wise to have this nailed down, if I might put it in those terms-nailed down in the legislation. Our whole point last year and again this year is that it would not be advisable or wise to leave these issues open to become irritants and problems of misunderstanding later on.
And the implementing legislation is one way, it seems to us, the Congress can exercise its discretion on these matters.
It should not be enough simply to have a communication from the State Department on their understanding, which could be subject to later discussion and negotiation with the Government of Panama.
It seems to us that the wise thing to do would be to have this explicit. And the only way we know how to make it explicit is for the Congress to exercise its discretion and put it in the implementing legislation.
Mr. BAUMAN.Well, Mr. Chairman, like I said, I couldn't more firmly agree with you on that point, and I am doubly convinced over the weekend.
One last question, if I may-I don't want to monopolize the time.
On page 19 you advise us that we should create in the legislation a system governing the frequency of payments. Are you familiar with the fact that the Government of Panama last November sent a letter to U.S. officials, a very brief four-paragraph letter, in which they stated their desire to be paid first of all a $10 million annuity payment annually in advance; and, second, a $10 million contingency payment annually in advance; the 30 cents per canalton to be made every 2 weeks; and, last, $10 million for sanitation facilities?
Mr. STAATS. I am not familiar with such a communication and my colleagues here are apparently not either.
Mr. BAUMAN.Well, what does that do to the cash-flow situation, for instance, if every 2 weeks you had to deliver 30 cents per canalton, which will now be about $55 million a year? Mr. STAATS. The payment formula we think could be spelled out in the statutes, and that is what we have recommended. Mr. BAUMAN. But you have not been privy to any judgment they haven't asked your judgment on what system of payments should be made?
Mr. STAATS. Not to the best of my knowledge.
44-394 0 79 pt. 2 6
Mr. ZAPPACOSTA. Mr. Bauman, we have not seen the letter. In general conversation we were made aware of it, that they wanted some sort of payment other than an annual payment. However, we have not been asked to give our views on it; we haven't even seen the letter.
Mr. BAUMAN. Well, the only reason I raise it now is because General Staats has made this recommendation about frequency of payments, and it seems to me that the Canal Company could be stripped of its ability to respond on a cash basis, if every 2 weeks they have to turn over-for all I know they may want it in cash.
And then what happens to the operation of the canal? We are talking about $55 annually at the current increased rate of tolls.
Mr. STAATS. We say on page 19 of our statement that the treaty stipulates certain annual amounts which the United States shall pay to Panama, but does not specify whether payments may be made semiannually, quarterly, or more frequently. The treaty also provides for reimbursement of each party for services rendered.
Then we go ahead and say we think the treaty-implementing legislation should address the question of frequency of payment because of the cash-flow implications for the United States.
Mr. BAUMAN. Thank you very much. Thank you, Mr. Chairman.
Mr. HUBBARD. Congressman Dave Bonior.
Mr. BONIOR. Thank you, Mr. Chairman. Mr. Staats, I didn't have a chance to hear your testimony. I was absent this morning, and I would like to submit some questions to be answered for the record.
Mr. STAATS. Be very happy to respond.
Mr. BONIOR. To follow up, though, on the last point that was raised on page 19-1 did peruse the statement in the time that I have been here, and you don't seem to suggest any type of implemental legislation as far as the administration-Mr. STAATS. Don't seem to be what?
Mr. BONIOR. You didn't suggest-on page 19:
We think that the treaty-implementing legislation should address the question of frequency of payments because of the cash-flow implications for the United States. Neither bill specifically covers the question.
Are you recommending anything to us for-Mr. STAATS. I see your question. I have not personally thought about exactly what we would recommend to you to write into the legislation. Mr. Zappacosta may have some suggestions on it. If not, then we will give it some thought, if you would like, and suggest some language to you.
Mr. BONIOR. I think that would be helpful.
Mr. STAATS. We would be happy to do that.
[The following was received:]
SUGGESTED LANGUAGE FOR FREQUENCY OF PAYMENTS
The frequency of payments should consider the operating cash requirements of the Commission, and such payments should not be prepaid. Further, payments should be made according to a schedule mutually agreed to by both parties.
Mr. BONIOR. I have no further questions. Mr. HUBBARD. Congressman Bill Carney. Mr. CARNEY. Thank you, Mr. Chairman. On page 12 you talk about the yearly payments to Panama. You say approximately $60
million. I believe the figure that we have been using now is $75 million.
Is there any reason why you have a difference in there? We talked about $55 million in tolls and $10 million.
Mr. ZAPPACOSTA. That's $10 million fixed annuity, about $51 million based on the 1980 budget estimate at 30 cents a ton, less the $2.3 million that you currently pay them. It comes out to about $60 million.
We are saying additional cost right now.
Mr. CARNEY. Well, the figure we have been working with is 75 the last 3 days, and we got that from the Panama Canal Zone.
Mr. ZAPPACOSTA. Well, if you take the $10 million for the fixed plus the $55-you get your $65. Then if you are talking about an additional $10 million for the public service, then, of course, you are going up to that figure.
Mr. CARNEY. OK, I just wanted that clarified. Would you care to estimate what you think the additional military construction cost might be after the 5-year period? I see that you have an estimate for the first 5 years. Would you think that that would become static? We'd have additional military construction costs in the following 15 years.
Mr. ZAPPACOSTA. We don't have anything beyond the estimate for the first 5 years, outside of the fact that we do know that at the end of the treaty there will be some material turned over to Panama, as far as military-type facilities. We think something like in the neighborhood of $353 million.
Mr. CARNEY. Well, that we are aware of. I just was-what I am trying to bring out is for the next 5 years we will have a military construction program estimated to be about $80 million, I believe.
Mr. STAATS. $88 million is the figure we have.
Mr. CARNEY. $88 million. Do you estimate any further military construction program?
Mr. ZAPPACOSTA. We haven't seen any additional estimate.
Mr. CARNEY. Fine, thank you.
Mr. STAATS. This is information that we got from the Defense Department, but, to the best of my knowledge, they have not made a projection beyond the 5-year period.
But we could inquire further.
Mr. CARNEY. I know these are very hypothetical questions.
The figure that we are trying to nail down as best we can is what this is really going to cost the American taxpayer. It seems that every day that we have testimony that figure goes up and up and up. And it's because we can speak to people who have their figure on different costs-so that's why I was pursuing this.
I am trying to get it down to something that I can really feel is a comfortable figure.
The other two additional costs that you cannot identify at this time-would you try to, could you be in a position to give us some sort of idea of what the cost would be to educate those 2,600 dependents?
Mr. STAATS. The item referred to on page 15? Mr. CARNEY. Yes.
Mr. STAATs. I think we could make an estimate on that. Mr. CARNEY. Would you be kind enough to provide that for us?
Mr. STAATS.Yes, indeed.
[The following material was received for the record:]
DEPARTMENT OF DEFENSE EDUCATIONAL COST FOR 2,600 DEPENDENTS
The Department of Defense estimate of the educational cost for the dependents of the estimated 2,600 employees transferring to the Department of Defense is not available as of March 14, 1979. We understand, however, that the Department of Defense is presently in the process of preparing their estimate of Treaty-related costs that will include the educational cost, and this information will be incorporated in a state Department reply on cost data.
Mr. BoNIOR. Would the gentleman yield on that point?
Mr. CARNEY. Yes.
Mr. BONIOR. We had testimony in Panama concerning the college also, the 2-year college that's run in the Canal Zone.
Could you include the costs on that in terms of at least the transition period, the 36-month period? Or are those figures included already in your detailed estimates on pages 13, 14, and 15?
Mr. ZAPPACOSTA. Basically the construction costs included in that $88 million. There is an $8.9 million figure in there for DOD schools, which includes the Pan Canal College.
Mr. WYArr. Which is $1 million, isn't it?
Mr. ZAPPACOSTA. Just about $17 million, yes, sir. It's $8,925,000 for all schools.
Mr. BONIOR. I thank the gentleman.
Mr. CARNEY. I thank you, Mr. Bonior, you took the question right out of my mouth. I was concerned about that.
And, again, on the following area, the compensation for loss of exchange and commissary benefits to U.S. citizens, on compensating them, could we get some sort of estimate on that?
Mr. STAATS. That would be more difficult, but we can give you a ball park figure.
[The following was submitted:]
COST OF LIVING ALLOWANCE-COLA
We would like to point out that there are different methods of computing a COLA and there are several factors such as the rate of inflation, salary base, and number of employee entitled to the COLA that make it very difficult to estimate the cost at this time. However, we understand that in his testimony, Governor Parfitt estimated the cost to be about $10-11 million, based on 15 percent of the 1980 average wage adjusted for a 7 percent inflation factor, and will submit the details of the calculation. This would be one method computing the COLA. Another method would be the one presently used by the State Department in accordance with the Standard Regulations, Government Civilians, Foreign Areas (Section 941.1). This method is based on a survey of the cost of living at a given post, exclusive of quarter costs, compared to Washington, D.C. The computation of the allowances takes into consideration, the marital status, family size, income level and post classification based on the survey. We would like to point out that as of December 14, 1978 (Section 920 of the regulations), only 2 out of 17 State Department posts in the vicinity of Panama are receiving post allowance. The posts are Caracas, Venezuela and Paramaribo, Surinam, which have a post classification of 20 and 10 respectively. Using the post classification for Caracas and Paramaribo as hypothetical examples, for an estimated 1,700 employees with a salary range of $24,000 $25,999, a rough estimate of the COLA would be as follows:
Caracas (post class 20).
1 family member: 1,700 x $2,080 yr. = $3,536,000 yr.
2 family members: 1,700 X 2,420 yr. = 3,910,000 yr.
3 family members: 1,700 x 2,420 yr. = 4,114,000 yr. Paramaribo (post class 10).1 family member: 1,700 X $1,040 yr. = $1,768,000 yr.
2 family members: 1,700 X 1,150 yr. = 1,955,000 yr.
3 family members: 1,700 X 1,210 yr. = 2,057,000 yr.
However, to arrive at a precise estimate under this method, it would be necessary to know number of family members of each ernployee and salary range.
Mr. CARNEY. Ballpark would be fine. At least we are getting somewhere now, and I appreciate your cooperation. We are starting to see the light at the end of the tunnel, I believe.
If I might just summarize-then, you feel that the concrete cost that you can identify now would be about $400 million?
Mr. STAATS. That's in addition to the $400 million that would be lost if we do not-Mr. CARNEY. Charge the interest.
Mr. STAATS. Interest on the interest-bearing investment.
Mr. CARNEY. Right. Now we are at $800 million, depending on how you would like to interpret that.
Mr. Bauman said before, of course, that General McAuliffe indicated that the additional cost to DOD could run between $60 and $80 million; there could be a conflict with some of your figures-we could be hitting the same things twice. I think that's how I read your answer.
Could we try to clarify that? And then I think we would really be down to a point where the members of this committee will know exactly how much the taxpayer in the United States is going to have to pay to implement this treaty?
Mr. STAATS. We could get the head of our office in Panama to get from General McAuliffe the figures that he has used, so we could reconcile our data with his.
Would that take care of it?
Mr. CARNEY. I think that would, and then I think finally we would have some kind of figure that we could work with. We have identified some costs that we cannot put a figure on, but we realize that they will exist-and I think then this committee can act from a standpoint of having some intelligence as to the cost.
And I appreciate it. I thank you very much for your testimony, too, by the way.
Thank you, Mr. Chairman.
[The following was submitted:]
DEPARTMENT OF DEFENSE ADDITIONAL COSTS
The Department of Defense additional costs referred to by General McAuliffe of $60-$80 million was not available as of March 14, 1979. We have been informed that the Department of Defense is currently in the process of developing the Department's incremental costs for the life of the Treaty.
Mr. HUBBARD. Thank you, Congressman Carney. I now call on counsel for the full committee, Mr. Ernest Corrado.
Mr. CORRADO. General, in line with the-Mr. HUBBARD. My apologies, Congressman Wyatt. Go ahead, Ernie-he doesn't mind. I will come right back to you, Joe.
Mr. CORRADO. Mr. Comptroller General, we have heard all the figures that have been laid out with respect to costs-and these don't take into account the 30 cents per ton or the three $10
million incremental figures. I look at the budget and I see that the line item for tolls in 1977 was $163 million; it's projected to be $180 million and then $188 million.
Where, in your opinion, will all this money come from? Obviously the tolls can't supply it. The toll figures that are projected can't even come anywhere near addressing the cost.
Where, in your opinion, will this money come from?
Mr. STAATS.Well, of course, we do know there is a great deal of difference of opinion as to how high we can raise those tolls and not divert traffic overland, for example, from Japan. We do know that the pipeline will be in operation before too long from Long Beach to Midland, Tex., which will divert certainly part of the North Slope oil off of the canal traffic.
These are all very difficult matters to estimate. The special study made last year indicated that maybe an overall increase of, what, 35 percent?
Mr. ZAPPACOSTA.Of 35 to 37 percent.
Mr. STAATS.Would be possible.
Mr. ZAPPACOSTA.Maximum of 75 percent.
Mr. CORRADO. You mean maximum to the point where you will divert traffic?
Mr. STAATS. At some point it becomes counterproductive. But I am not sanguine myself with respect to any set of figures, except in a broad range, that I would want to rely on as to where that point will be reached.
For example, I am told that the profit margin in banana sales is so small that any substantial increase in tolls might be enough to discontinue the shipments.
The Panama Canal Company, I believe, is in the process of updating the data with respect to the amount of increase in the tolls that could be made without diversion of traffic in any substantial amount.
That is to be available I believe byMr. ZAPPACOSTA. By mid-March, so we understand.
Mr. STAATS. In about 2 weeks.
Mr. CORRADO. You know, we have had numbers of studies over the years on this very question, and I can remember some years ago when the figure 25 percent was used. Well, we have exceeded that in the last two toll raises, and a third de facto toll raise. And I know the figure 30 to 37 percent has been used before we hit the so-called point of no return, but if you talk to the shipping public, U.S. flag, and the consumer and foreign flag, they will tell you a different story even from that.
And when we consider these tremendous costs in addition to the cost to be paid to Panama, I don't know if you agree or not, but where will the money come from? Because obviously it won't come from the tolls.
Mr. STAATS.Well, you may be right about whether it can come from the tolls or not, and I agree with you-it certainly is a good question. If it doesn't come from the tolls, there is only one other place it can come from, you know that.
Mr. CORRADO.Well, that's where I was trying to get to. Thank you very much.
Thank you, Mr. Chairman.
Mr. HUBBARD. Thank you, Ernie. Congressman Wyatt?
Mr. WYATT. Mr. Staats, do you have any information on the increase in oil costs-increases by virtue of the fact of increases in the tolls in the two bills?
Mr. STAATS. On oil flowing through the canal?
Mr. WYATT. Right.
Mr. STAATS. I don't have it; no, sir.
Mr. WYATT. Obviously you've done studies. What is the percentage of petroleum as part of the total shipments through the canal?
Mr. STAATS. Oh, yes, we can get that. There is no problem in getting that. I don't have the figure offhand.
Mr. HUBBARD. We will have the Energy Department with us Wednesday who will be best informed on that.
Mr. STAATS. That data is available, I know that.
Mr. WYATT. But you think the biggest problem in terms of increase in tolls is with the shipment of oil.
Mr. STAATS. I think that's one of the biggest question mark.- ith respect to the future traffic, because one of the main items sulting in the increase in revenues has been the North Si': oil.
Mr. WYATT. In fact, the Canal Company was losing i.- until, what, 1976?
When there was (a) an increase in tolls, 1976-1977, and (b) a rather large increase in the movement of oil.
Mr. STAATS. Right. If you would like for us to get the data for you, we would be happy to do it.
Mr. WYATT. I think I have seen it.
Mr. HUBBARD. If the Energy Department cannot supply us with that information Wednesday, then we would maybe ask you to help inform us.
Mr. WYATT. Probably more important than that would be those other transshipments that could potentially be affected by an increase in tolls. You mentioned bananas, in other words. Are we talking in terms of food costs for the American consumer going up?
Mr. STAATS. Well, the one that we have been thinking about most directly is one that was mentioned here this morning, and that is on your containerized shipments from the Far East. At some point it is cheaper to ship those overland by rail than it is to go through the canal.
I think the best we could do probably would be to give you the major items that now constitute their revenues and give you our own analysis as to what sensitivity there might be with respect to those shipments.
Mr. WYATT. Thank you. Thank you, Mr. Chairman.
Mr. HUBBARD. Congressman George Hansen.
Mr. HANSEN. Thank you, Mr. Chairman. It's good to see you again, Mr. Staats.
I wondered, on the $70 million approximate surplus there is in the Panama Canal operating fund, has there been any recommendation made as to what to do with this? Should there be a retirement of part of the $319-million debt, or should it be left there as a contingency operating fund-or what would your recommendation be?
Mr. STAATS. I am not sure I am clear with respect to your question.
Mr. HANSEN. There is approximately $70 million that exists in the Panama Canal fund as a surplus.
Mr. STAATS. Yes; I see the figure.
Mr. ZAPPACOSTA. Well, actually, Mr. Hansen, after the company has determined, in accordance with 0MB instructions, the liquidity requirements that are necessary, then I think it would be prudent for the Board of Directors to declare a dividend to the Treasury.
Mr. HANSEN. I would think so.
Mr. STAATS. And that would be, of course, credited against the investment which we have identified in our statement.
Mr. HANSEN. Would it be necessary to include this in legislation in order to assure that this happens, considering the flexibility of treaty terms, as we have seen them?
Mr. STAATS. You are really getting at the question of whether or not the investment should be repaid before the canal is turned over to Panama.
And the one way you could do that would be to accelerate depreciation, and those costs, then, would have to be worked into your toll base again. Some part of the $70 million conceivably could be used for that purpose also.
Mr. HANSEN. I might ask you now-I think it's been developedI haven't been here for your whole testimony-but I did read and follow your testimony as you delivered it earlier. And as I understand, there is going to be a substantial cost, $800 million or more, as far as taxpayers are concerned in the transfer of the Panama Canal; is that correct?
Mr. STAATS. That would be a minimum.
Mr. HANSEN. And there will be a substantial cost also to consumers in terms of the toll increases that are anticipated, would that not be a fact?
Mr. STAATS. Well, that is a cost that is involved in the toll increases directly, would be a cost to the general public for that portion of the traffic which originates in the United States or is destined to a U.S. port.
Mr. HANSEN. And tolls can only go so high, and then you reach a point of diminishing returns, as far as traffic through the canal is concerned.
Mr. STAATS. Yes; that is a point we have just been discussing here. It's not at all clear, and there is not agreement as to what that point is, but everyone agrees that in principle there is such a point.
Mr. HANSEN. So if that point is reached one way or another, then it does become incumbent upon the taxpayers, to fulfill the obligations of the treaty in terms of payments to Panama and this type of thing; is this correct?
Mr. STAATS. I think that's a correct interpretation.
Mr. BONIOR. Would the gentleman yield Just a second?
Mr. HANSEN. Yes, sir.
Mr. BoNIoR. Congressman Hansen's question about $800 million-you said "minimum."
Mr. STAATS. Well, it's a minimum if you assume-that you are not going to forgive the interest on the interest-bearing capital investment.
Mr. BONIOR. OK, I just wanted to clear that.
Mr. STAATS. That's the $19.3 million current rate, which will go up over a 20-year period-that translates to about $400 million.
Mr. HANSEN. And does the gentleman anticipate, with regard to Alaskan oil, that a problem may arise in terms of its ability to compete with Near Eastern oil with perhaps a resultant diversion of that oil to Japanese or other oriental markets as an adjustment pursuant to the law of supply and demand?
Mr. STAATS.Well, you could be right on that. I was not really thinking about that so much as I was the fact that part of the increase in the traffic for oil from the North Slope has been due to the fact that the pipeline is not operating from Long Beach to Midland, Tex.
Mr. HANSEN. Does the gentleman have an estimate-you have talked about book value, talked about depreciated value-what would replacement value be. Do you have a ballpark figure of what the replacement value would be for the Panama Canal?
Mr. STAATS.We do not have. It would be very high.
Mr. HANSEN. $10 billion, $20 billion?
Mr. STAATs. I have no basis for a particular figure.
Mr. HANSEN. Probably scare you to estimate, wouldn't it?
Thank you, Mr. Chairman.
Mr. HUBBARD. Thank you, Congressman Hansen. Bernie Tannenbaum, staff counsel, do you have some questions?
Mr. TANNENBAUM. I have a couple of questions, Mr. Chairman. On page 17, to follow up the question just asked, you suggest that the preferable method for valuing the assets would be the book value. Of course, that is the net depreciated book value.
Don't we have a problem with the replacement of these items over the term of the treaty and keeping them in good repair? The obligation under the treaty is that in the year 2000 they be turned over in good working condition, free from all expenses.
So wouldn't the proper valuation to be placed on these assets be one that would assure that the depreciation that is set aside would be sufficient to keep them in good working condition throughout the term of the treaty.?
Mr. STAATs. Well, that sounds logical to me. But the question here that we have raised earlier, in terms of Congress monitoring the capital investment program, has to do with at what point you are making investments which are really designed to keep the operation going and turned over in an operating condition, as against those which might represent a major improvement in the entire operation, which would not be required for that particular purpose.
Mr. ZAPPACOSTA. Also, are you suggesting, Mr. Tannenbaum, that you revalue those assets to current value? Mr. TANNENBAUM.Well, current value might be-Mr. ZAPPACOSTA.Or using an index, price-level index? Mr. TANNENBAUM. A replacement value possibly. Mr. STAATS.You are speaking only for a new capital investment? Mr. TANNENBAUM. So that there would be sufficient funds available i taken out of depreciation so as to be sure to maintain the equipment.
Mr. ZAPPACOSTA. Remember this: If you revalue, you are increasing the depreciation charge and you are bumping that toll rate up again.
Mr. TANNENBAUM. I realize that the problem is, how do we, without supplementing the budget, how do we maintain these assets in good working condition throughout the term of the treaty, unless the-Mr. ZAPPACOSTA. If you were replacing any asset that's coming in after the treaty has gone into force, naturally it will be based on the cost at that point in time of replacement of the new asset, and it then would be depreciated over the remaining life of the treaty.
But if you start off, say, on October 1 and revalue all those assets as shown in our 1977 report, where we put in price-level statements-you can see what the effect on depreciation is. Under historical dollars for fiscal year 1977, the annual depreciation charge was $18,896,000. Under price level dollar valuation, it was $41,883,000. You went from a $4.4 million profit to a $23 million loss. That's based on current toll rates.
Now, the replacements would be at the current dollar value, yes, and would be depreciated. But to revalue the existing assets would have an effect on toll rates.
Mr. STAATS. I think the distinction here is a very important one. You are talking only about new investments. You will still get normal depreciation against that. And that would be worked into your rate base.
Mr. TANNENBAUM. I gather you do share with the members of this committee the concern that the Commission will be able to continue to operate in the black, and that it is a serious concern for us to contemplate.
Mr. STAATS. Yes; we have stated that concern here in our statement today. But I guess the bottom-line question, here which we all face is how far can you raise the tolls without their becoming counterproductive. I think that is the bottom-line question, which I am not sure that anyone can provide a 100-percent answer to today or at the time you will have to act on this legislation.
Mr. TANNENBAUM. And I gather, too, that you are not too impressed with the magic formula in H.R. 1716, which keeps the toll increase down to 14 percent for the reasons you stated; namely, that those costs are just being transferred to the taxpayers.
Mr. STAATS. That's right.
Mr. TANNENBAUM. One point, just for clarification. You estimate that the 30-cent-per-ton payment for 1980 would be $61 million, did you say?
Mr. ZAPPACOSTA. Yes; based on their budget figure for 1980, it was around 62 million, yes.
Mr. TANNENBAUM. And then we had the other 10 million-Mr. ZAPPACOSTA. It was $51 million plus the $10 million fixed annuity. Then what we did was subtract out the $2.3 million that is currently being paid, and came down to a round figure, $60 million.
Now, if you add on top of that the $10 million for public services, you are up to $70 million.
Mr. TANNENBAUM. Well, Governor Parfitt uses a $54 million figure plus the $10 million.
The other thing, too-on the interest rate charge-you pointed out that the current rate is, of course, escalating and that the interest charge-he estimates that close to $26 million.
Mr. STAATS. That's the reason I used the word "minimum," because we are talking here about the long-term rate, and as your debt turns over, that rate is bound to go up. So the $400 million is based on the current interest rate, and everyone knows that it will go up some.
Mr. TANNENBAUM. Am I off the wall in suggesting that the payments directly to Panama will soon exceed $100 million a year?
Mr. ZAPPACOSTA. It depends basically on what the rate of inflation is going to be when you revalue the 30 cents a ton biannually.
Mr. TANNENBAUM. But even assuming the current rate of inflation?
Mr. ZAPPACOSTA. And if your tonnage keeps up, it's entirely conceivable.
But getting to your interest question, the rate that would be used, if they continue to use the July rate, the computed interest rate on the long-term bonds for fiscal year 1979 would be 6.509, whereas it was 6.071 for fiscal year 1978.
Mr. TANNENBAUM. And that's a bargain rate under today's interest costs.
Mr. ZAPPACOSTA. Now, the question is this: The July rate was used, I think, in the past when you had a June 30 fiscal year, and now that the fiscal year has changed to September 30, you may want to continue with the interest factor and consider changing that date to possibly the interest rate as of September 30.
And, of course, like the example in this case, September 30 will be 6.587. That's just on the long-term bonds. If you use the whole marketable issues of the Treasury, then, of course, it's going to be closer to what you are talking about-it's going to be up there.
Mr. STAATs. But the long-term rate is the proper one, we think.
Mr. TANNENBAUM. Thank you very much.
Mr. HUBBARD. Are there any other questions for Mr. Starts by a member of the committee?
Mr. BAUMAN. Just one last question, Mr. Starts. When you handed down your opinion regarding expenditure by Department of the Army for $10 million plus the military construction cost last fall, that was preceded by a colloquy on the floor in which I participated with the gentleman from Utah, Mr. McKay, as well as report statements from the Appropriations subcommittees denying the expenditure of those funds. The ultimate outcome was a ruling that, in an emergency situation as was characterized by the appropriate officials, it is legal to go ahead and do so. May I infer from that that anything we say in our reports regarding these cost matters and expenditures are really worthless if indee(fan emergency is declared by the Executive, so if it's going to have any impact you have got to write it into law? Mr. STAATS. Let me say this about the problem that we faced in this particular case. We get asked the same question in a hundred different situations literally during the course of the year. Over time our office has had to take the language of the act itself as governing. And the reason for that is that the legislative
history in one body as against the other may be quite different; the Senate may take one position, the House take another position. It is the language or the wording of the statute itself that we think has to be governing. We don't know of any alternative to that.
It seemed to me that the question which has been raised here, if I may say so, is more a question of whether or not the Department of Defense acted in a manner which ran counter to the obvious sentiment, feeling about the matter, in the House. I don't think there is much question about that.
But we were asked the legal question, and that is what we have to use as our authority, if we have to disallow an expenditure. That is, what we have to rely upon is the wording of the statute itself.
Now, whether or not the Department of the Army and the Department of Defense acted properly in this case, without coming to some agreement with the House, is another question. But all that we could do was act on the legal question that was before us.
Mr. BAUMAN. Well, I appreciate that answer because I think it would serve as a good guideline for anything we might be drafting here. There is a tendency on the part of the Congress, as you know, to compromise things out in the belief that a report means something beyond the words on the paper-and, as you indicate, it sometimes doesn't even mean the words that are on the paper.
So I appreciate that legislative guidance.
Thank you, Mr. Chairman.
Mr. HUBBARD. Congressman Carney.
Mr. CARNEY. I have one more question of Mr. Starts. Concerning liabilities, supposing the canal was exposed to a liability of, say, a passenger ship going through or something like that where there was an extensive liability, and the canal was at fault and they were subject to this large financial loss, where would that be taken care of.?
Mr. ZAPPACOSTA. Are you talking about marine accidents.?
Mr. CARNEY. Yes, that would be my example.
Mr. ZAPPACOSTA. At the present time what the Panama Canal Company does is, they have set up a provision for marine accidents, and through charges to operations. Basically, what they do is, once they receive a claim and after all the investigation has come about as to whether or not it was in fact the fault of the company or the fault of someone other than the company, then the charge or the payment of that claim is charged against that provision that has been set up in the statements by a periodic charge to the operating cost.
They do the same thing for lock overhauls. In other words, what you are trying to do is even out your charges. Instead of going up like this, they are trying to even it out, so they are taking a periodic charge annually and putting it into a reserve, so to speak.
And when you actually incur the expense, it is charged against the reserve.
Mr-CARNEY. A self-insurance program.
Mr. ZAPPACOSTA. In a sense, yes.
Mr. STAATS. Exactly, that's right.
Mr. CARNEY. As of October of this year now, will they continue that program of having a self-insurance program, so to speak? And if there wasn't enough funding in that self-insurance program to
cover this type of contingency, would the taxpayer of the United States be subject to that liability?
Mr. ZAPPACOSTA. Well, actually, if they operate under a corporation, based on their estimate, they would put aside out of their revenue a provision for this. As a matter of fact, in fiscal year 1977, at the insistence of the General Accounting Office, we made them adjust to the extent of about $957,000-almost $1 million-in that provision, because of the fact that the actual charges for accidents were greater than what had been provided for.
Mr. CARNEY. Would you be in that position to make them adjust between now and 1999, if you felt it necessary?
Mr. ZAPPACOSTA. In the audit, certainly; under any audit we would.
Mr. STAATs. That's right.
Mr. HANSEN. Would the gentleman yield?
Mr. CARNEY. Yes.
Mr. HANSEN. I would just like to make one observation. They have a situation like that now where they had a cruise ship run aground in the channel. This incident created extensive damage; and meant that they had to send the passengers home by air, drydock the ship and cancel a further cruise that was planned, causing at least a half-million-dollar liability.
Under the new treaty, the drydocks go to Panama and canal operations won't have first call on these drydocks as before, which is going to increase the expense or the liability involved in one of these types of incidents.
Therefore the gentleman has a real strong point in the fact that expenses are going to escalate which had been minimized before under the Canal Company where they had priority call on the drydocks and everything else. Such minimizing of charges and the liabilities will be practically impossible from now on under the new treaties, the canal will no longer have first call on those docks, but will get access in the order of things as Panama sees it.
That is according to Governor Parfitt.
Mr. ZAPPACOSTA. That's entirely possible, Mr. Hansen, but still, from an accounting standpoint, this provision would still be set up-it would still have to come out of the revenues. It could possibly cost you more; we don't know.
Mr. CARNEY. I have one last question. Do you have any idea of how much revenue we will lose now because we are losing areas like the drydocks in Balboa-how much revenue the Panama Canal Company generated to offset the cost of running the canal, but now that will go directly to the Panamanian Treasury?
Mr. STAATS. I think we have that.
Mr. ZAPPACOSTA. Well, as a rough estimate, basically if you take the tentative statements for fiscal year 1978-the Company would have this broken down by their various operations, but just as a wild ballpark figure, they had a total of $331 million in total revenues; of that $195 million was from tolls. So you have other revenues of $135 million.
Now, it could be from everything; it is from the rental of your housing, your retail operations; it's from your marine bunkering, railroad, and what have you.
Mr. CARNEY. Well, everything you have mentioned now we lose and that would go directly to the Panamanian Treasury, so, in other words, we are talking about a sizable sum that we are going to have to make up.
Is that what makes the difference in the 14-percent increase of the tolls, proposed 14-percent increase?
Mr. ZAPPACOSTA. It's additional costs that also are going in there, the additional payments to Panama.
Mr. CARNEY. Well, I understand that; 6 percent of that would be the additional payments.
Mr. ZAPPACOSTA. That's right. It's a combinationMr. CARNEY. It's a combination of the two.
Mr. ZAPPACOSTA. But let me caution you. This figure I am quoting you now is just a wild ballpark figure. I mean, you would have to get the minute detail of it. I'm just saying other revenues total this much, and it can encompass everything. It can encompass revenues for the operations that aren't going over, but the ones that are going over are revenue producing.
Mr. STAATS. That would be your starting point to make that kind of analysis that you are seeking. That would be the outside figure. What the actual figure would be would be somewhat less than that, but I don't think we can give you the details today.
Mr. CARNEY. Those costs, in fact, would be covered by the 14percent increase; is that correct?
Mr. ZAPPACOSTA. I would think so.
Mr. CARNEY. Thank you. Thank you, Mr. Chairman.
Mr. HUBBARD. The general counsel is called on for clarification. Ernie Corrado.
Mr. CORRADO. I would just like to say that, although the port facility, such as the Balboa drydock, goes over to the Panamanians, we find out now that in article V, the United States actually will have the use of those facilities in these situations that may arise. In other words, we will be able to put our employees in down there and use it and pay for the materials.
So it is a little different from the whole thing going over totally. Apparently there is a reservation out for our use in article V.
Mr. CARNEY. I fully understand that, but if a foreign flag ship needed to use that facility, the Canal Zone would receive that revenue and that would offset the cost of running the canal. Now that goes to the Treasury of Panama, so they had to raise the revenue, the totals, to offset that.
Mr. CORRADO. I don't think this affects your argument with respect to the revenue. I just wanted to make sure that the record was not unclear, though, since I raised it this morning about the Balboa drydock, that it is a total reversion-a total giving over to Panama. Apparently article V does reserve the right for us to use the port facilities, which doesn't affect the revenue aspect of it.
But I wouldn't want the record to remain unclear with respect to our rights to use it if occasion arises and to pay for the materials.
Mr. HUBBARD. Minutes ago the letter that was referred to-do you have that entered in the record? Mr. ZAPPACOSTA. I gave it to the reporter. [The following was received for the record:]I
THE LEGAL ADVISER,
DEPARTMENT OF STATE,
Washington, D.C, July 24,1978.
Mr. FRANK M. ZAPPAcosTA
Assistant Director, US. General Accounting Office Washington, D.C
DEAR MR. ZAPPAcosTA: This is in response to your letter of April 4 posing several questions concerning the interpretation of the Panama Canal Treaty. The delay is regretted.
The following responses are keyed to the questions posed in your letter.
1. a. The procedure to be followed in implementing Article 111(5) of the Treaty is set forth in an understanding adopted by the Senate and agreed to by the Republic of Panama. That understanding provides in pertinent part:
Before the first day of the three-year period beginning on the date of entry
into force of the Treaty and before each three-year period following thereafter, the two Parties shall agree upon the specific levels and quality of services, as are referred to in paragraph 5 of Article III of the Treaty, to be provided during the following three-year period and, except for the first three-year period, on the reimbursement to be made for the cost of such services.* * If payments made under paragraph 5 of Article III for the preceding three-year period, including the initial three-year period, exceed or are less than the actual costs to the Republic of Panama for supplying, during such period, the specific levels and quality of services agreed upon, then the Panama Canal Commission shall deduct from or add to the payment required to be made to the Republic of Panama for each of the following three years one-third of such excess or deficit,
as the case may be.
Thus, the Canal Commission is to pay Panama $10 million a year for the first three years of the Treaty. Any difference between that amount and the actual cost to Panama of providing services during that period, however, will be made up through adjustments to the payments in the subsequent three-year period.
1. b. It is contemplated that Panama will transmit to the United States its determination of the costs incurred in supplying the public services both during the initial three-year period and thereafter. The initial assessment of the validity of the cost data submitted by the Republic of Panama would be made by the appropriate agency of the United States Government, presumably the Panama Canal Commission. Pursuant to the aforementioned Senate understanding, "there shall be an independent and binding audit, conducted by an auditor mutually selected by both Parties, of any costs disputed by the Parties."
1. c. As indicated in the answer to question 1. a. above, the level and quality of services to be provided is to be agreed upon prior to each three-year period, including the first three-year period. The Senate understanding specifies that the services to be agreed upon are "to be limited to such as are essential to the effective functioning of the Canal operating areas and the housing areas.* *
2. a. & b. Yes. We have consulted with the Panama Canal Company, and it is contemplated that the Canal Commission would respond to reasonable requests of the utilities agencies of the Republic of Panama for such cost data.
3. a. The use of the terms "expenditures" and "surplus" in Article XIII (4Xc) does not mandate the use of any particular system of accounting. Rather, the provision reflects the agreement of the two Parties that all legitimate costs attributable to the operation, maintenance and improvement of the Canal, including the payments to Panama provided for in Article 111(5) and Article XIII (4)(a) and (4)(b), would be deducted from the revenues of the Canal each year, and if a surplus existed, Panama would receive the amount of such surplus up to the maximum specified in the Treaty. Within this framework, the United States would have discretion, pursuant to its authority under Article III of the Treaty to manage, operate, and maintain the Canal, to adopt any generally accepted accounting system to determine the amount of any surplus. This interpretation is buttressed by an understanding adopted by the Senate and agreed to by the Republic of Panama which provides:
Nothing 'in paragraph 4(c) of Article XIII of the Treaty shall be construed to
limit the authority of the United States of America, through the United States Government agency called the Panama Canal Commission, to make such financial decisions and mcur such expenses as are reasonable and necessary for the
management, operation, and maintenance of the Panama Canal."
3. b. The Treaty provides for payment of up to $10 million out of the operating surplus in a given year. It further provides that "in the event Canal operating revenues in any ear do not produce a surplus sufficient to cover this payment, the unpaid balance Zall be Paid from operating surpluses in future Years in a manner to
be mutually agreed upon" (emphasis supplied). There is no provision for payment out of surpluses accumulated by the Canal Commission in past years.
3. c. No. The $10 million contingent payment is payable in a given year only to the extent that revenues exceed expenditures.
3. d. An understanding adopted by the Senate and agreed to by the Republic of Panama provides that "toll rates . need not be set at levels designed to produce revenues to cover the [contingent $10 million] payment to the Republic of Panama."
3. e. In the event of a short-fall in revenues, the contingent $10 million payment would not be payable under the terms of the Treaty, inasmuch as it is contingent upon the existence of a surplus of operating revenues over expenditures in a given year.
4. a. As you correctly note, the respective commitments of the U.S. and Panama set forth in Article X, paragraph 7 of the Treaty with respect to current employees of the Panama Canal Company/Canal Zone Government do not constitute absolute guarantees of continued employment at the same terms and conditions in effect at present. Rather, they are qualified by the phrase "to the maximum extent feasible." In our view, the effect of this qualifying phrase is to make clear that neither the U.S. nor Panama is required to take steps that are simply not feasible from a practical standpoint, such as retaining personnel in positions that are no longer required for the conduct of the activity in question; conversely, the Parties are obligated by these provisions to take in good faith all reasonable and practicable steps open to them to carry out their respective commitments with respect to the employees.
We will be discussing with Panama their plans for implementing their commitments with respect to employees of activities to be transferred to Panama. Hopefully we will then be better able to assess the full impact of the transfer of these activities on the workforce.
4. b. The Treaty does not establish any obligations with respect to the payment of severance pay. This is a matter which would be governed entirely by U.S. domestic law and regulations.
4. c. No. Panama's commitment to retain existing employees of transferred activities to the maximum extent feasible and to ensure, to the maximum extent feasible, that the terms and conditions of employment applicable to such personnel employed in these activities are no less favorable than those in effect prior to the entry into force of the Treaty, is independent of any benefits that may be afforded such persons by the United States.
I hope the foregoing information will be of use to you in your assessment of the financial impact of the Treaties.
HERBERT J. HANSELL.
U.S. GENERAL AccoUNTING OFFICE,
Washington, D.C, April 4, 1978.
Mr. HERBERT J. HANSELL,
The Legal Adviser,
Department of State
DEAR MR. HANSELL: Our current assessment of the financial impact of the Panama Canal Treaties has raised several questions as to the interpretation of certain articles of the Treaties. We would appreciate receiving the Department of State's interpretation or position to the questions enumerated below.
1. Article II, paragraph 5, of the Treaty states that the Panama Canal Commission shall reimburse Panama the amount of $10 million a year for police, street cleaning, traffic management and garbage collection services, and that every 3 years the cost involved in furnishing the services, shall be reexamined to determine whether an adjustment of the annual payment should be made because of inflation or other relevant factors affecting the cost of such services.
a. Does this require a flat payment of $10 million a year for S years regardless of cost
b. After the 3-year period, will the payments be based on cost data supplies by
Panama and adjusted accordingly, and who will examine the validity of the cost
c. Have any standards been established to ensure the quality of the services to be
provided by Panama?
2. Article VI, paragraph, of the Agreement in Implementation of'Article III of the Panama Canal Treaty, provides in part that 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 persons in the area, other than United States citizen employees and dependents; and the utilities agencies of the Republic of Panama will be responsible for setting rates for and billing such customers, and shall reimburse the Commission for its cost in providing such services.
a. Is it contemplated that the Commission will supply the utility agencies of the
republic of Panama cost data for the services rendered by the Commission? b. Will the utility agencies of the Republic of Panama have access to the cost data for
3. Article XIII, paragraph 4(c) of the Treaty, states that the Republic of Panama will receive an annual payment of up to $10 million to be paid out of Canal operating revenues to the extent that such revenues exceed expenditures of the Panama Canal Commission, and if operating revenues in any year do not produce a surplus sufficient to cover this payment, the unpaid balance shall be paid from operating surpluses in future years in a manner to be mutually agreed. a. Was the term "expenditures" intended to pertain only to cash outlays and synonomous with the term "disbursement", or does it equate to the term "expense" or 91cost" in the accounting sense, which under the accrual basis of accounting would include amounts paid or payable, as well as amounts for non-cash expenses such as depreciation and reserves?
b. Was the term "surplus" intended to mean cumulative net profit as defined in the
accounting sense as "earned surplus"?
c. Is the $10 million contingent payment to the Republic of Panama a binding
obligation of the United States, if the revenues do not exceed expenditures? d. Was it intended that the $10 million contingent payment be excluded from the toll
e. What are the relative priorities of payment in the event of a shortfall in revenues?
4. Article X, paragraph 7, of the Treaty provides that the Republic of Panama will hire former Canal entity employees at salaries and fringe benefits comparable to the former salaries, "to the maximum extent feasible." The Panama Canal Company is currently estimating that it must pay severance pay to all employees whose functions are being assumed by Panama. We understand that this is being based on an interpretation that there is no absolute requirements nor guarantee that Panama will provide employment or comparable benefits. a. What is meant by "to the maximum extent feasible"? b. Are employees retained by Panama entitled to severance pay by the Canal Organization?
c. If retained employees received severance pay, would this have a financial affect on
the enumeration to be paid by Panama?
Please advise us if you have any questions or wish to discuss the request for information. I can be reached on 275-5889.
FRANK M. ZAPPACOSTA,
Mr. HUBBARD. We have a few more questions.
Mr. CARNEY. On that clarification, if I might ask, do we have right of first use under Article 5?
Mr. CORRADO. We do not have the right for first use. Absolutely not.
Mr. CARNEY. And just for a matter of record, the figures that we talked about before do not include the loss of that $135 million revenue? That's an entirely different thing, right?
Mr. ZAPPACOSTA. What's that again, Sir?
Mr. CARNEY. Well, I am saying that we are losing $135 million in revenue that the Canal Zone made other than the revenue they made through tolls, and we are losing some of that.
Mr. ZAPPACOSTA. That's right.
Mr. CARNEY. And that is not part of the $400 million we spoke of, because that is considered recapped by adding on 14 percent of the toll.
44-394 0 79 pt. 2 7
Mr. STAATS. Just to be sure there is no misunderstanding here, the 135 that Mr. Zappacosta referred to are revenues, but there are costs that have to offset part of that; that's the revenue side of the ledger.
But there are costs that have to be looked at also. And we would be losing those, too.
Mr.CARNEY. Right, I agree with you on that.
But the problem is that there is a third entry, and that's the Bank of Panama who's getting the revenues which weren't there before; they stayed within the Panama Canal Zone, all that money-and the costs stayed within that.
I don't want to get into this, but we are involved in a three-way party now, for instance, with providing electricity to the people who are going to rent those same houses and use the same facilities, only we will provide the electricity and Panama will bill them.
So there could be an increased cost to the people living therethat type of thing.
I know it is not a full $135 million, but certainly we are going to lose some more money to Panama. It will be a windfall profit to Panama. That's the point I am trying to bring out. And, more specifically, it is not part of the $400 we talked about.
Mr. STAATs. Yes.
Mr.CARNEY. Thank you.
Mr. HUBBARD. And I believe counsel was in agreement that we do not have first use, to answer your question.
Mr.CARNEY. Thank you, Mr. Chairman.
Mr. HUBBARD.Congressman Bauman.
Mr. BAUMAN. Is GAO involved right now in any assistance to the inventory that is being taken of equipment and so on in the Canal Zone?
Mr. ZAPPACOSTA. As far as actual taking inventory, no, sir. We observed some of it that is being taken by the various divisions and the general auditor of the company.
We have not gone out and actually taken it. In the course of our annual audit of the financial statements, however, we do a certain amount of independent testing.
Mr. BAUMAN. Then you have no knowledge of this instance that came to our attention about the possibility of the Navy having decided to remove a great many movable personal property and
Mr. ZAPPACOSTA. I will check on that for you, if you like.
Mr. BAUMAN. I would appreciate it. Thank you, Mr. Chairman.
[The following was received for the record:]
REMOVABLE NAVY PROPERTY
We do not have the specific details of the property in question or the basis for the Navy's rationale and reasons for deciding to remove personal property at this time (March 14, 1979). However, we have been informed that the Navy is currently preparing a response to the question, and after we have had an opportunity to review the response, we will pursue the matter further with the Department of Defense.
Mr. HUBBARD. Thank you, Congressman Bauman. Are there any other questions?
Hearing none, we want to thank you, Mr. Starts, the Comptroller General of the United States, for appearing before our suficom-