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ence of staff facilities for assisting the Canal Company both in transportation and business-management problems. The views of the General Accounting Office have been expressed in its various audit reports, especially those for the years 1953 and 1954, fiscal years in both cases. I include an excerpt from the 1953 report in the exhibit. The views of the staff of the Senate Committee on Government Operations are found in staff memorandum No. 83–2-34, issued on December 31, 1954, and entitled “Major deficiencies in the organization and operation of the Panama Canal Company and-Canal Zone Government as disclosed by audit reports of the Comptroller General of the United States.". I also include excerpts from that report in the exhibit.

One thing we might add, is that our proposal does not imply any criticism of the good faith of the military. What I mean is we do not have usual commercial customer relationship. Industry people who have studied the canal's operation under its present administration and under Public Law 841 have observed the accomplishment of some worthwhile economies at the canal in recent years. There remain, however, certain differences as to basic policy and interpretation of the Canal Zode Code which have led to litigation which I shall later mention briefly.

We believe that in time of peace the canal is mainly a commercial enterprise, providing transit for commercial vessels. This is indicated clearly by the $33.9 million in tolls collected from commercial vessels during fiscal 1955 as against $1.2 million credited to the Company for the transit of Government vessels, both military and nonmilitary. The converse is of course true in time of war.

Our proposal is based on the simple principle that a revenue-producing agency of this type, providing a service to industry, should be under the supervision of that Department of the Government which has the responsibility in matters related to the commerce of the Nation.

That concludes Mr. Sinclair's remarks on the first point, that is, transfer to the supervision of the Secretary of Commerce. Mr. Sinclair also wanted to comment on the provisions in the bill requiring a self-support formula for the business activities. His statement goes on this way:

Changes proposed to accomplish self-support of these activities are found at the foÎlowing places in the comparative print of the proposed new code sections that have been placed before you:

Page 7, lines 3-25.
Page 9, lines 13-14.

While I do not think we should take the time to read the other one, this one I think we should read. It is short language. It commences on page 7. So we can have it in focus I will read that section.

SEC. 248. (a) GENERAL PURPOSE OF CORPORATION. The corporation shall have, as its major objective, the economic and efficient transiting of vessels through the Panama Canal. In effecting such major objective the corporation shall operate the Panama Canal, including the locks, channels, towing facilities, and other facilities used in actual transit and to the extent found necessary to accomplish such purpose, it shall also operate facilities not used in actual transitand this is where the self-formula comesbut such additional facilities shall be operated in a manner to be self-supporting; the corporation shall allow as cost the items of overhead, maintenance and operation, depreciation, interest on investment, and a proportionate share of the net cost of the Canal Zone Government: Provided, however, That all goods and services supplied by the corporation and Canal Zone Government to its employees shall be exempt from such self-support requirement. The Administrator shall, at least annually, take whatever action is necessary to establish consumer prices in the Canal Zone on such a level as to establish a cost of goods and services in the Canal Zone equal to the current cost of equivalent goods and services in Washington, D. C., as established by the Bureau of Labor Statistics.

We will comment in considerable detail later on the Bureau of Labor Statistics pricing formula.

The language on page 9 is mechanical in character and is not important. It just makes another section.

The CHAIRMAN. We will put in the record in full the excerpts from the Bureau of the Budget study, and the excerpts from the General Accounting Office report, and from the staff memorandum of the Senate Committee on Government Operations.

(The excerpts are as follows:)

EXCERPTS FROM BUREAU OF THE BUDGET STUDY TRANSMITTED BY THE PRESIDENT

To CONGRESS ON JANUARY 31, 1950 (H. Doc. 460 OF THE 81st CONG.) From pages 10–12:

SUPERVISION OF THE PANAMA CANAL AND PANAMA RAILROAD COMPANY

Supervision of the Panama Canal and the Panama Railroad Company has been vested from the very beginning in the Secretary of War and his successor, the Secretary of the Army. President Theodore Roosevelt's letter of May 9, 1904, cites two principal reasons for requesting the Secretary of War to act as his representative in supervising the construction of the canal and the government of the Canal Zone :

(1) the War Department is the Department which has always supervised the construction of the great civil works for improving the rivers and harbors of the country and the extended military works of public defense;

(2) the War Department has from time to time been charged with the supervision of the government of all of the island possessions of the United

States, and continues to supervise the government of the Philippine Islands. Neither of these reasons would apply with equal force today. Construction has become incidental to the maintenance and operation of the canal. The War Department is no longer the agency which supervises the government of our island possessions. Reorganization Plan No. II of 1939 transferred all remaining functions of the War Department's old Bureau of Insular Affairs to the Department of the Interior.

Excellent reasons existed for not considering any change with respect to the Panama Canal at the time when the War Department was relieved of its remaining responsibilities over Territories and possessions in 1939. It was in September of that year that the President found it necessary to invoke the provisions of the Panama Canal Act by placing the canal under the direct command of the Army. To have placed the canal under any official other than the Secretary of War in 1939 and the ensuing war years would have been illogical and resulted in a divided command.

When Executive Order No. 8232 is rescinded, however, the organization status of the Panama Canal and the Panama Railroad Company should be reappraised. The intent of the Panama Canal Act that in peacetime the canal and its adjuncts should be under civilian control is unmistakable. The canal itself, which has been aptly described as a great international public utility, is fundamentally a commercial waterway for international commerce. Operation of a vast commercial enterprise such as the canal and its adjuncts and the civil government of the Canal Zone is not necessary for the performance of the basic mission of the Department of Defense.

At the policy level the programs of the Panama Canal and the Panama Railroad Company have their most significant impact in the transportation area. Actions taken by the canal may vitally affect not only world trade and shipping but also intercoastal trade and transcontinental railroads. The question of tolls rates, for example, raises important issues which should be reviewed in the light of the objectives of national transportation policy. Neither the Secretary of Defense nor the Secretary of the Army has at the present the departmental responsibility or the staff resources to deal adequately with policy issues of this character. Military-staff channels are not and should not be used for this purpose. In the absence of other staff facilities the Secretary of the Army has been compelled to rely almost exclusively on his administrative assistant, who has numerous other important duties, and the Washington Office of the Panama Canal for assistance on Panama Canal matters.

Establishment of a special Panama Canal staff in either the Office of the Secretary of Defense or the Secretary of the Army would offer only a partial solution to the problem and might well further complicate coordination of transportation policy. The Commission on Organization of the Executive Branch of the Government recommended that

there be established in the Department of Commerce a grouping of all major

nonregulatory transportation activities of the Federal Government. The Panama Canal would clearly come under the Commission's definition of a "transportation activity.” Since the Secretary of Commerce is to be charged with coordination of transportation policy, it would be an entirely logical step to transfer to him supervisory authority over the canal and its adjuncts.

The working out of a satisfactory relationship between the canal and the Armed Forces on the isthmus does not require that they report to the same department head. A clear-cut separation of civilian and military functions has already been accomplished in such highly strategic areas as Guam and the American zone of Germany. In some respects a separation would simplify the solution of differences between the two agencies. The governor under existing arrangements operates at a serious disadvantage when he attempts to persuade the Secretary of the Army to overrule his military advisers. Often the best he can hope for is no action. Some of these questions could undoubtedly be settled more expeditiously by across-the-board discussions between the Secretary of Commerce and the Secretary of Defense. It would only be on rare occasions that unresolved issues would have to be taken to the President.

Suggestions that the canal be included in a Department of Overseas Affairs fail to recognize the unique status of the canal and the Canal Zone. There are significant differences between the Canal Zone and other Territories and possessions. The Canal Zone is unique both as to the purposes for which it was acquired and is maintained by the United States and its status under governing treaties and laws. It is essentially a United States Government reservation devoted to the purposes of the maintenance, operation, sanitation, and protection of the Panama Canal and its auxiliary works. From page 17:

4. It is recommended that responsibility for supervision of the Panama Canal and the Panama Railroad Company be transferred from the Secretary of the Army to the Secretary of Commerce.

The Panama Canal and the Panama Railroad Company should be included with the other major nonregulatory transportation agencies which the Commission on Organization of the Executive Branch of the Government has recommended be grouped together under the Secretary of Commerce. It is essential that Panama Canal policies be coordinated with the objectives of national transportation policy and such coordination can best be achieved through supervision by the Secretary of Commerce. Staff facilities already exist in the Department of Commerce which could be developed to furnish necessary assistance to the Secretary of Commerce in fulfilling his supervisory responsibility with respect to the Panama Canal enterprise. Such facilities do not now exist in the Department of the Army and the Department of Defense and military staff cannot satisfactorily be employed for this purpose.

In addition, the Department of Commerce is constantly engaged in studying business-management problems and is consequently in an excellent position to provide valuable assistance to the corporation in its conduct of the many varied commercial enterprises on the isthmus.

The historical reasons for placing the Panama Canal under the Secretary of War's supervision no longer apply. The construction stage of the canal's operation has long since been completed, and the Department of the Army is no longer the agency charged with the responsibility for government of Territories and island possessions.

In time of war or when war is threatened, the Panama Canal could be placed under military supervision and control as is now provided by the Panama Canal Act.

EXCERPT FROM GENERAL ACCOUNTING OFFICE AUDIT REPORT FOR 1953

From page 20:

The organization should be managed and operated primarily as a business enterprise. The canal is a commercial international waterway. We see no reason for continuing the regular operations of the canal under military domipance. That the Governor is not intended to apply military judgment to canal operations is made clear in Executive Order 10398, dated September 26, 1952, which states:

“1. As between the Commander in Chief, Caribbean, and the Governor of the Canal Zone, the views of the former shall prevail with respect to determinations as to whether any aspect of the protection of the Canal Zone pertains to its military security, protection, and defense, as distinguished from the protection afforded by the civil authorities. Should the Governor of the Canal Zone disagree with any specific decision of the Commander in Chief, Caribbean, under this paragraph, the said Governor may, through the Secretary of the Army or through the Board of Directors of the Panama Canal Company, as may be appropriate, appeal such decision to the President."

A civilian governor could comply with the above order as well as a military governor and could deal in international affairs as well. In addition, an attitude of cost consciousness would contribute greatly to more economical operations, and civilian management would provide a continuity in key managerial positions which is not possible under the present system of relatively short assignments by personnel of the Armed Services.

FROM STAFF MEMORANDUM No. 83–2-34 OF DECEMBER 31, 1954, OF THE SENATE

COMMITTEE ON GOVERNMENT OPERATIONS ENTITLED “MAJOR DEFICIENCIES IN THE ORGANIZATION AND OPERATION OF THE PANAMA CANAL COMPANY AND CANAL

ZONE GOVERNMENT" From part 4, (1) (c):

Forty years have elapsed, however, since the completion of the construction of the canal, and the Canal Zone is now in precisely the same position as other Territories and island possessions. Although the Military Establishment is still responsible for the defense of these areas, it has no responsibility either for their government or for the operation of commercial enterprises. (See Reorganization Plan No. 2 of 1939.)

In the light of the foregoing, there appears to be much substance to the conclusion of the Comptroller General that the Panama Canal is a commercial international waterway which should be managed and operated primarily as a business enterprise. Although recognizing that the Military Establishment must retain responsibility for the canal's defense, as it does for all of the United States, its Territories and possessions, the Comptroller General observes that no reason exists why the regular operations of the Canal and its related and associated activities, including the Zone Government, should continue under military dominance. From part 4, (1) (d):

In a recent survey of duplication of government activities and facilities, made by the Comptroller General, he found that they include commissaries, warehouse, post exchanges, theaters, steamships, motor pools, bakeries, laundries, hospitals, housing, docks and piers, cold storage plants, fire-fighting facilities, oil handling and storage facilities, shipwright shops for small craft repairs, various types of heavy construction equipment, asphalt, concrete and rock-crushing plants, photographic units, printing plants, office machine repair units, civilian personnel offices, and 17 miscellaneous retail stores.

The Comptroller General points out that these activities and facilities which are presently carried on and maintained by the three commands of the Military Establishment (Army, Navy, and Air Force), in a majority of instances, duplicate those carried on and maintained by the Panama Canal Company and the Canal Zone Government. Furthermore, he states that, in many instances, each of the three sister services carries on activities and maintains facilities which duplicate one another. He notes further that although the Company has terminated a few of these activities, the military has, for the most part, done little or nothing with respect to consolidation and elimination of duplicating facilities.

In commenting on the origin of this vast network of duplicating activities and facilities, the Comptroller General notes that prior to World War II, the facilities of the canal organization were, in general designed to meet the needs of all Government agencies in the Canal Zone, including the Armed Services. To meet expanded needs during World War II, the Armed Services constructed or installed many facilities which duplicated those of the canal organization. With the end of the war and the reduction in military personnel in the zone, total facilities became excessive to total Canal Zone needs. Nevertheless, the Armed Services continued to operate many of their own activities, and the effects of this are reflected in the unit operating costs of the canal activities which are intended by the Congress to be operated on a commercial basis. The reduced volume of business without a corresponding reduction in cost of operating facilities results in increased unit costs, and, although the financial burden on the Company through loss in revenue and increased unit costs cannot be accurately determined, it is obviously substantial.

Mr. MAYER. At present these activities operate at substantial losses. To some extent these losses are due to the duplication of facilities resulting from World War II, as has been noted in the audit reports of the Comptroller General and the staff memorandum of the Government Operations Committee to which I have already referred, and an excerpt of which is included in the exhibit submitted in support of this statement.

Again, in fairness to the present administration at the canal, industry people who have visited the zone in the past 2 years and who have studied closely the annual reports of the canal have observed that there have been consolidations and elimination of duplications to some extent. These have been in bakeries and hospitals as examples, and there is currently a proposal for consolidation of firefighting forces.

The proposal on page 7, lines 3 to 10, and page 9, lines 13 to 14, in the comparative print are an effort to limit the authorized activities at the canal to those necessary for accomplishnig the mission there, “the economic and efficient transiting of vessels through the canal."

The language immediately following that would require that other operations, such as the railroad, steamship lines, ship-repair facilities, hotels, and so forth, be operated on a self-supporting basis according to usual business practice, and according to a formula set out in the text. Losses from these operations are now the subject of litigation, wherein the industry contends that they may not under the law be charged to tolls. We shall be glad to furnish you with copies of this complaint if you wish them, also copies of a brief which the complainants have submitted to the court. Part I of that brief outlines the reasons why we believe that under existing law the Panama Canal Company is acting wrongfully in charging the losses of the business activities against tolls.

BLS pricing formula for employees: On page 7, lines 17 to 25, in the comparative print, it is provided thatall goods and services supplied by the Panama Canal Company and the Canal Zone Government to its employees shall be exempt from such self-support formula. This is proposed by the industry as being in compliance generally with American industrial practice for personnel living abroad. Personnel at the canal should be entitled to the same kind of living, as nearly as it can be supplied, at the same cost as it is obtainable by their fellow Government employees in the United States. They are there at the convenience of the Canal Company and their salaries are based upon United States standards. We do not expect them

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