net direct investment of the Government made after July 1, 1951, depreciation on the net direct investment of the Government in the Panama Canal, together with the facilities and appurtenances relating thereto, and an appropriate share of the Corporation's obligation under section 246 (e) of this Act for the annual net costs of operation of the agency known as the Canal Zone Government. "(e) Capital investment for interest purposes shall not include any interest during construction, nor such portions of the net direct investment of the United States made before July 1, 1951, as defined in paragraphs (a) and (b) of section 246 of this Act." THE PANAMA CANAL COMPANY-PROPOSED UNITED STATES POLICY FOR CAPITAL STRUCTURE AND FISCAL METHODS A statement before the Panama Canal Subcommittee of the House Merchant Marine and Fisheries Committee, June 1954, by Robert E. Mayer, president, Pacific American Steamship Association, San Francisco 11, Calif. I. INTRODUCTORY In the past half century since the United States embarked upon the construction of the Panama Canal, so much has been said and written about it, and so many conflicting statements, reports, and allegations made, that it is difficult to draw a clear picture of the true economics of this great utility. Three things stand out, however, from a review this industry has made over the past several months: 1. Financial and accounting practices of the canal previous to congressional reorganization effective July 1, 1951, have been such, and records of the canal such, that it is not possible to say for certain whether the canal recovered the cost to Government to that date (GÃO 1952 audit, p. 4). 2. Overall public policy, the confusing and often changing policies of the administration of the canal previous to its corporate reorganization and the inadequacy of early records fail to justify the charging of interest on the canal investments made previous to July 1, 1951. 3. The Congress of the United States has never been presented with sufficient information to determine the value of the canal to the defense of the Nation, and thus in turn determine a proper division of the costs of the enterprise between the commercial users of the utility and the Defense Establishment. The proposals of the industry, as embodied in this statement, are based largely on these three premises. Those proposals ask for certain changes in the law which appear to be equitable in view of the inability of any amount of testimony to prove whether or to what extent the Government has been repaid. They offer a practical compromise which would end for all time the half-century of dispute over the canal. And they ask for a determination of the comparative defensecommercial values of the canal, upon which later adjustments could be made. It is the sincere belief of this portion of the canal's customers that if these proposals are adopted, the prospect of future controversy can be ended, and both Government and industry can be assured of the reliability of long-term planning with respect to the costs of the enterprise. II. THE INDUSTRY PROPOSALS 1. That effective July 1, 1951, when Congress reorganized the canal on an orderly, corporate basis, the Panama Canal Company be required to repay the full principal and interest to the United States on all public funds invested after that date. 2. That effective July 1, 1951, the Panama Canal Company start repaying to the United States, without interest, its investment made previous to that date. 3. That this committee by itself or through a special commission appointed by it, and representative of the public and private interests affected, make a determination of the national defense value of the canal, and thereafter adjust in accordance with such findings the amount of the investment made previous to July 1, 1951; and adjust the manner in which the Government is now paying its share of Panama Canal Company costs under the Canal Zone Code as amended. 4. That effective July 1, 1951, the operating_cost of the Canal Zone Government be divided equally between the Panama Canal Company and the Department of Defense. 5. That the annual annuity to the Republic of Panama insofar as it is chargeable to the Panama Canal Company, be limited to the amount now required to be paid by the Congress. 6. That the Canal Zone Code be amended so as to provide for the appointment of at least two representatives of the steamship industry of the United States to the Board of Directors of the Panama Canal Company. II. THE FINANCIAL PICTURE TODAY The Panama Canal Company made a profit of $2.3 million in fiscal 1952, the first year of its operation under the new corporate organization created by the Congress in Public Law 841. Following is the income statement for that year (ending June 30, 1952), as set out on page 41 of the 1952 Panama Canal Company report: TABLE 3.-Income statement, year ended June 30, 1952 Revenue and intracompany credits: Credit tolls on Government ships.. Sale of commodities.. Sale of services_. $26, 995, 771 3, 413, 728 25, 312, 769 21, 912, 929 2, 135, 871 20, 279, 420 100, 050, 488 51, 406, 991 22, 109, 809 4,842, 140 430, 000 2, 772, 364 81, 561, 304 18, 489, 184 9, 608, 229 102, 684 46, 381 -263 9, 757, 101 8, 732, 083 6, 363, 053 2, 369, 030 More revealing, possibly, than the income statement above, is the following statement of those annual charges which the Panama Canal Company will be required to pay in each succeeding year under the law as it now stands, and according to the capital structure which the corporation inherited from the former canal agency on July 1, 1951: Annual corporate charges [Millions of dollars] Arising out of operation of Panama Canal Company: Being 2 percent (estimate) on $326.4 million, the interest- Being the annual depreciation at varying rates on depreciable assets totaling $220.9 million as shown in table 10, p. 49, 1952 annual report. (Balance to be depreciated $103.6 million.) Arising out of operation of Canal Zone Government: Operating costs 1 Being that portion of total operating costs charged to corporation in 1952 under formula in sec. 246 (e), Canal Zone Code. Total. 1 Based on fiscal 1952. Variable year to year. $6.5 4. 8 9. 6 20.9 As already stated, the canal made a profit of $2.3 million in 1952. Its profit for 1953 is estimated at $7.2 million; for 1954, $5.0 million and for 1955 a deficit of $350,000. Thus it becomes obvious at a glance that any adjustment of the above-mentioned corporate charges is the answer to a profit or a deficit operation. And it is these charges mainly that have been the subject of controversy over the years of the canal's operation. Their importance is better understood when it is recognized that these are fixed charges, not varying with canal traffic, and fully due and payable whether ship transits are heavy or light. Many of the claims for adjustment one way or another have been unsound, and leave the conclusion that they were made only after a superficial study of the canal's history and finances. There seems ample ground also for the conclusion that some claims were made solely for the purpose of creating an artificial deficit at the canal. Others have been made without regard for the obvious defense value of the canal. This statement becomes one more discussion of the subject centered around these points of controversy concerning the capital structure or fiscal policies of the canal. As already indicated, this statement leaves unanswered the major basic question-the national defense value of the canal, past and future-and asks that Congress make a determination of that question by means of a special study, in which the military authorities be consulted and asked to devote research to it, based upon the canal's past service, including two world wars. There follows now a discussion of the points of controversy listed above under the heading "Annual Corporate Charges.' The discussion will attempt to state requirements of past and present law; recommendations of the General Accounting Office; observations of past authorities; and the present recommendations of this portion of the canal's users. IV. INTEREST ON THE GOVERNMENT'S NET DIRECT INVESTMENT IN THE PANAMA CANAL COMPANY Any discussion of this question requires first a short statement of the history of Government corporations. Government corporation history Coincidentally, "The employment of Government corporations as a means of carrying out a governmental activity had been negligible prior" to the Government purchase "in 1904 * * * (of) most of the stock of the Panama Railroad Company *** though the constitutionality of legislation enacted for such purpose was sustained by the Supreme Court of the United States as early as 1819 in McCulloch v. Maryland." "On January 22, 1932, Congress created the Reconstruction Finance Corporation which ushered in the unparalleled era of corporate organizations in the Government. *** The corporate form of organization was sought on the grounds that flexibility of operations and freedom from the controls which Congress had established for regular Government departments and agencies—including auditing and accounting controls—were needed" (quotations from pp. 2 and 3, GAO audit report of Government corporations and agencies, Rept. 861, 83d Cong., 2d sess., January 20, 1954). World War II brought on another wave of Government corporations, until by 1945, there were 101 such bodies. It became obvious to the Congress that with so much of the Government's activity being carried on through these bodies, closer attention must be given to their operations. Government Corporation Control Act The focusing of closer attention on the numerous Government corporations and noncorporate revenue-producing agencies established in recent decades came about as a result of enactment of the Government Corporation Control Act of 1945 (approved Dec. 6, 1945, 31 U. S. C. 841). This act for the first time applied uniform requirements of three general types with respect to all such Government bodies: (1) Submission of an annual budget under Bureau of Budget rules including an estimate of financial condition, analysis of surplus and deficit, etc., (2) annual audit by GAO of all Government corporations in accordance with principles and procedures applicable to commercial corporation transactions, (3) Annual GAO Report to Congress showing assets and liabilities, capital surplus or deficit, income and expense, etc. 1950 Senate report on Government corporations The first report of a cumulative nature under this new law is contained in Senate Report 2685, 81st Congress, 2d session, dated December 20, 1950, entitled "Audits of Government Corporations-Report of the Committee on Expenditures in the Executive Departments.' That previous to the enactment of the Government Corporation Control Act, little, if any, consideration was given by the Congress to subjecting Government corporations to uniform requirements as to accounting for the use of Federal funds by way of interest or retirement of Government investment, is indicated by the following comments on page 3 of that report: "Although certain individual Federal revenue-producing enterprises had earlier been subjected to GAO audit, the introduction of the true commercial-type audit of such governmental instrumentalities followed passage of the Government Corporation Control Act in the 79th Congress (Public Law 248, December 6, 1945).” This Senate report is a basic document on the subject for two reasons. It consists of the Senate's report on some 79 separate GAO audits, each attempting to apply the uniform commercial-type audit to Government corporations established as the result of laws developed by differing committees of Congress, depending upon the portion of the United States economy affected. The Senate report itself and the 79 GAO audits behind it constitute a monumental task, which no industry could undertake. Second, the statement is basic because it was "During this present (81st) Congress (that) the audits have for the first time become current ***"' Pages 5 and 6 of the Senate report pose the precise question of public policy being discussed here. Opening the section on interest the report defines the question thusly: "This question is whether all Government revenue-producing enterprises, whether incorporated or unincorporated, should pay interest to the Treasury on capital furnished from public funds." In its discussion of the question, the report makes these observations: 1. Many corporations conduct their affairs through borrowings from the Treasury on an interest-free basis. 2. Funds so provided constitute indirect subsidization. 3. Citing 2 examples RFC in fiscal 1949 held $350 million interest-free Federal funds, and showed a $5.2 million net income, whereas interest of $7 million (2 percent) would have put RFC about $2 million in the red. The Export-Import Bank held large interest-free Government funds and GAO showed that had interest been charged the $47 million net income for the year would have been reduced 50 percent. 4. The Senate committee staff states that the issue is one "susceptible of very convincing arguments both for and against." Continuing, it states, "The question must be considered in the light of the circumstances which led to the establishment of the individual enterprise." After commenting on the depression role of RFC; the power, flood control, and other needs fulfilled by TVA; and the foreign trade promotion need fulfilled by the Export-Import Bank, the report states, "As with all Government undertakings, these three and others in the same general category must be considered to be to some degree philanthropic, or, better, in the 48155-54- -18 general public interest, and Congress may well conclude that consistency lies rather in preserving the continuity of the programs as thus far conducted." [Italic added.] 5. "The staff, being aware as it is of both sides of the question, takes no position thereon ***" Interest-free United States funds in other Government corporations This committee, charged with responsibility for congressional policy at the Panama Canal and for the welfare of the maritime commerce of the United States and the American merchant marine should, in examining the question of interest at the Panama Canal be substantially interested in what the Congress has done in that regard with other Government corporations and revenue-producing agencies. As mentioned above, preceding the Government Corporations Control Act (1945) and before the close scrutiny and consistent recommendations to Congress by the GAO, the finances of these corporations were virtually uncontrolled. Billions were spent through corporate activities directly benefitting various segments of the economy-various private interests. Members of this committee are familiar with early challenges to some of this legislation, on the basis that they constituted class legislation. The industry has caused a study to be made of these various Government corporations with respect to the question of interest or dividends, and feels that the results will be of interest to this committee. The following tables and comments thereon show that the Government has pumped billions of dollars into corporate activities benefiting private interests, without regard to interest or dividends on that investment in most cases. The first table (table 1) indicates 39 corporations to which the Government has furnished public funds in the form of interest-free investment in capital stock. The Government's investment as of June 30, 1952-this is the close of the last fiscal year for which GAO audits are available amounted to over $308 million. TABLE 1.-Government-owned revenue-producing corporations, with Government's investment in capital stock interest-free, from inception In connection with the Federal banks for cooperatives, it is interesting to note that the enabling statute (12 U. S. C. 1134 (d), 1134 (1)) authorizes these banks to pay dividends not exceeding 7 percent annually. "But no dividends have ever been paid" (H. Doc. 165, 83d Cong., p. 47). The Federal intermediate credit banks have paid the Government a token return of $8.5 million in the form of franchise taxes, as provided for in the statute. The law makes no provision for dividends—or interest-in this case. Similarly, in the case of the production-credit corporations "no dividends have ever been paid by these corporations inasmuch as the law does not provide for dividends (H. Doc. 165, 83d Cong., p. 31). |