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BACKGROUND INFORMATION

The Panama Canal is approximately 50 miles long and 10 miles wide and has a population of 37,900. The Panama Canal Company operates the canal and its supporting services, which include vessel repairs, harbor terminal operations, a railroad, an electric power system, a communications system, a water system, rental housing, retail stores, and service and recreational activities.

The Canal Zone Government administers the civil government in the Canal Zone. Functions provided include education, health, sanitation, fire and police protection, customs services, and postal services.

Although the canal has been in operation since 1914, the two canal agencies came into being in fiscal year 1952 following a reorganization of the canal enterprise by Congress, and the present financial history of the agencies dates back to July 1, 1951. The company operates under a Board of Directors appointed by the Secretary of the Army. The government operates under the supervision of the Secretary of the Army as the direct representative of the President.

In addressing the five major areas for which information was requested, I will cover the background material on investment, finances, and personnel before addressing the questions of transfer of property and functions to Panama.

First, the investment in the canal enterprise through 1976 is about $1.886 billion. Recoveries have amounted to about $1.134 billion, leaving an unrecovered investment of approximately $752 million.

The net book value of property, plant, and equipment for the Panama Canal is $501.8 million, and for the Canal Zone Government $59.6 million, for a combined enterprise total of $561.5 million.

Replacement value has never been computed. However, the $855 million dollar acquisition cost of all in-service property, plant, and equipment on the enterprise books adjusted to June 30, 1974, using the Department of Commerce's Gross National Product Implicit Price Deflators, is $3,573 million.

Finally, within the general background of investment you have asked for information about our routine capital investment and modernization program. Since 1952, the total amount of investment in capital replacements and improvements for the combined enterprise was $370 million. The Panama Canal Company has been able to finance its projects internally.

However, the Canal Zone Government needs are financed initially through appropriations, but the appropriation is paid back over the useful life of the asset.

Over the near future we do not expect company capital to exceed our in-house funding capability, which should average about $20 million a year. Over the long term there may be a need for appropriations because of the heavy impact of inflation on replacement costs. For the Canal Zone Government, we expect annual capital needs to be in the $4 to $7 million range.

Looking into the future of capital operations, our latest forecast is that oceangoing transits will rise from 33.4 per day in fiscal year 1977 to 46.7 per dav in the vear 2000. Tolls revenue at current rates will increase from $166.6 million to $300 million in the same period.

I should note that forecasting tolls and transits that far into the future is a hazardous undertaking and while we have presented our best estimate of the underlying trend of Canal traffic, events such as wars or new discoveries—for example, North Slope oil-could change those estimates.

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Although no toll rate proposals are under consideration at this time, the company is required by law to set tolls to recover all costs of operating and maintaining the canal. If our forecast of growth in tolls revenue is reasonably correct, and if historic inflationary cost patterns continue, it will be necessary to adjust tolls periodically to break even.

Since inflation should impact concurrently on the costs of alternatives to the canal, I do not envision that these periodic adjustments would erode the comparative advantage provided by the canal.

Future toll increases other than the periodic adjustments which we may have to make if revenues do not match costs are ultimately limited by the cost of alternatives to the canal.

The most comprehensive study we have in this regard estimated the theoretical maximum amount that toll rates could be raised based on a 1974 traffic forecast to be about 75 percent.

The Panama Canal has increased its toll rates twice since the 1974 forecast, once in fiscal 1975 and again in fiscal 1977. In addition, we have modified our measurement rules which has had the effect of another, smaller toll rate increase. The two increases and the measurement rule changes add up to a 50-percent increase in the last 3 years.

In view of the imprecise nature of estimating, it appears prudent to approach future increases on a conservative and gradual basis. Any theoretical maximum toll increase cannot be considered valid until tested, and since the effects of toll increases are most felt over the long term, it may be too late to readjust if the real maximum is lower than the theoretical maximum.

Now for some background material on personnel. Since the end of World War II, improvements in efficiency and productivity have enabled the canal organization to reduce its overall personnel level, in spite of increased transits. We feel that we are now at the minimum staffing level and will have to add personnel to handle the North Slope oil traffic.

Exclusive of temporary employees there are 3,395 U.S. citizen employees, and 9,230 non-U.S. citizen employees in the two canal agencies.

We have recently experienced an increased rate of resignations. When compared to the period of 1973 to 1975, the resignation rate among our U.S. citizen employees during 1976 was up 60 percent. The rate so far during 1977 is 49 percent over the comparable 1973 base period.

The total number of resignations from January 1, 1974, to May 31, 1977, among U.S. citizens in permanent positions was 748. Although the number is not of such magnitude as to cause great concern, we are concerned about the trend—which if unchecked could ultimately seriously affect our ability to perform the canal's mission.

To dispel some of the uncertainties about the treaty negotiations, the Secretary of the Army, with the concurrence of the U.S. treaty negotiators, authorized in March of this year the release to our employees of a 15-point list of assurances concerning employee rights that

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constituted the benefits and protections being sought for employees of the canal enterprise. A copy of the 15-point paper is submitted for the record.

Employee response to the announcement has been cautious and reserved to date. They are generally appreciative for having been authoritatively informed; however, there is a general feeling that the assurances are inadequate and leave many questions unanswered.

Because of the status and classified nature of treaty negotiations, the company has had no valid basis on which it could poll or project how many workers would be willing to remain with the canal operation under changed conditions resulting from the new treaty. The only known effort in this direction was an informal poll conducted in April 1977 by the Canal Zone Civic Council, which is an organization of community representatives.

Of the limited sampling of 285 U.S. citizens contacted, 62.8 percent said they would not consider remaining in the canal area and working for the canal organization if there were complete Panamanian jurisdiction.

Although this survey may not be a true measure of employee intentions, it is certainly a measure of their apprehensions. As such, it confirms the need for an extremely high degree of attention in the treaty negotiation process to the problem of retention of necessary U.S. citizen personnel.

Periodic demonstrations, acts of violence, and illegal intrusions into the Canal Zone have been a factor contributing to employee apprehension. During the past 2 years there have been many such incidents, of which the most significant are outlined in my statement. I will not repeat them here.

In spite of this there exists between the Panama National Guard and the Canal Zone Police a working relationship which at times is excellent. On balance, it could be called amicable. The degree of cooperation, however, varies. That depends, in the final analysis, on the larger aspects of the U.S.-Panama political relationship.

If it were not for the pressures resulting from the larger political scene the working relationship with the National Guard would obviously be quite satisfactory.

Your specific questions concerning the classification and disposition of property and supportive services bear directly on proposals being considered in the ongoing treaty negotiations.

As I indicated earlier, I have no direct responsibility regarding the negotiations themselves. The Company/Government has been afforded the opportunity to submit position statements and to provide technical data to the U.S. negotiators. We have also been called upon to answer specific questions regarding the canal and its supporting services. Our responses and recommendations have been made from the viewpoint of the operator of the waterway responsible for the continued effective operation of the canal.

We understand that these views are being balanced and weighed along with many other factors by our negotiators. Recognizing that formal agreement has not yet been reached and many issues still remain unresolved, premature public revelation of agency positions could have a negative impact on the conduct of effective negotiations. For these reasons, I am necessarily constrained from delving into specifics in addressing some of the matters covered in your letter to me.

With respect to the relative importance of facilities, we view each of the activities conducted by the Company/Government and its related facilities as being interrelated and interdependent and as contributory to the effectiveness of overall operation of the canal. We would hope that all agree that the Panama Canal has traditionally maintained a very high level of effectiveness. The absence of any one of the activities has the potential to diminish that effectiveness to some degree, with cumulative losses eventually reaching a point of ineffectiveness.

Some facilities are so basic as to be considered vital to the operation of the canal. The anchorages, breakwaters, channels and harbors, the three sets of locks, dams, navigational aids, power stations, tugs and dredges are examples of vital areas and facilities. The canal, of course, cannot operate without personnel and in order to retain a skilled and professional work force, appropriate facilities must be available to house them in a secure and quality environment and to provide them with sufficient supporting services.

I believe we must not only consider facilities and activities each of which contribute in its own way on a selective, individual basis, but note that the cumulative effect of these facilities on canal operations needs also to be weighed.

With respect to geographical land requirements, and I am speaking only to operations and not to defense, the relinquishment to Panama of certain portions of the existing Canal Zone now would have little or no impact on effectiveness of operations, in fact I see practical advantage in relinquishment of jurisdictional responsibility over certain areas, examples being Gavilan Point, Shaler Triangle, and Fourth of July Avenue on the Pacific side. In others, I see practical advantages to Panama without commensurate disadvantages to canal operations: for example, the France Field parcel on the Atlantic side.

Therefore, under a new treaty relationship the present canal operating area could be reduced in size provided we were to retain sufficient lands and waters to accommodate canal operations and supporting activities,

In dealing with any transfer of facilities it is my view that they should be considered on a case-by-case basis against the following criteria: First, that as a minimum this agency's standards of quality, reliability and cost be met; second, in appropriate cases, that services to be provided this agency be made available on a priority basis; third, that the transfer not compromise our capability to respond to emergency situations involving the canal or its supporting facilities and personnel; and fourth, that any such transfers not seriously impair our ability to retain a stable and yet skilled and professional workforce.

With respect to environmental controls, the Canal Zone today is a very healthy place to live, but this is true only because of the extraordinary efforts of the United States starting with our highly successful disease eradication program just prior to actual canal construction and continuing through the present time.

I consider it indispensable to continue to maintain this high environmental standard in the operation of potable water and sewerage

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systems, refuse disposal, control of food and beverage quality, control of mosquitos, pest insects, bats and rodents, air and water quality monitoring, and pesticide control.

In my judgment it is also essential that controls be maintained over the Chargers River watershed and the area in the vicinity of Gaillard Cut. Programs such as the Gaillard Cut bank stability program are necessary environmental measures which must be continued in order to assure that the waterway remains open and safe for shipping.

Speaking to the question concerning transfer of employee services, any diminution of employee services would incur opposition from our employees. As I mentioned earlier, the retention of a skilled and professional workforce is an essential ingredient of an effective canal operation.

It follows, therefore, that the absence of any one of the existing employee service activities would in some way adversely affect our employees and the cumulative losses could be serious enough to erode the workforce.

In my judgment, then, proposals related to the transfer of employee related services should be evaluated with the same care as would be applied to the transfer of any operational activities. An additional very important factor, equally applicable to the transfer of any activity, would be the need for special provisions in order to ameliorate any adverse impact on those employed in the transferred service.

In fiscal year 1977, gross costs estimated for all logistical services provided are $184 million. A comparable cost figure for similar services which might be obtained from Panamanian sources cannot be determined with the possible exceptions of water, power, and telephone service.

I have, in the record here, provided comparative data which show that costs to users would be significantly higher if standard Panama rates were to be substituted for existing Canal Zone rates on water, power, and telephone service.

Each of our three public utility systems are interconnected with Panama's in some fashion. In a purely technical sense, therefore, it may well be feasible to integrate the respective systems. Recognizing, however, that utilities impact directly on our ability to sustain operations and as such are facilities vital to the canal, consideration of further integration of these systems should be subject to the criteria emphasized throughout my testimony; that is, quality, reliability and cost, priority for canal requirements, impact on employees, and emergency preparedness.

Mr. Chairman, I have tried to forthrightly address the questions set forth in your letter and I very sincerely hope the information I have provided will be helpful toward the purpose of these hearings.

Should the committee desire additional data concerning my testimony I would be pleased to furnish it.

This concludes my statement.

Senator ALLEN. Thank you very much, Governor Parfitt, for a very fine statement.

Senator Scott, the senior minority member of the subcommittee, was recently in Panama on a factfinding mission, where he was able to talk with Governor Parfitt.

I am going to ask you to start the questioning if you will, Senator Scott.

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