TABLE V-3.-ANALYSIS OF PANAMA CANAL IMPROVEMENT PROGRAM COSTS

$14.5

$0.7

$0.4

$0.1

$0.1

Description of project costs

Towing locomotives.-Towing locomotives would be procured in 3
stages, adding 6, then 20, and finally 20 more to permit the opti-
mum combination of regular and relay lockages at increasing
levels of traffic.

Locks control system. The existing control system would be re-
placed with a modern control system equipped with full electrical
interlocks, remote sensors, machine limit switches, and new com-
pact control panel boards.

Locks gate valves.-Valves would be installed in the 4 pairs of gates
at Pedro Miguel Locks when merry-go-round procedures are in-
stalled at Gatun and Miraflores to balance the capacity of the 3
locks. The project would speed up the water spilling part of the
lockage interval.

Merry-go-round lockage. Return track system would be rebuilt,
existing turntables would be modified or replaced, and return
track conductor slots would be rebuilt at Gatun and Miraflores
Locks. The merry-go-round procedure would enable a locomotive
to take a ship completely through the locks and then proceed
along a return track to pick up another ship. Adoption of the pro-
cedure would shorten the time required for lockages.
Navigational capability.-Navigational aids would be applied and
adapted to permit one-way traffic through Gaillard Cut during fog
and techniques for fog dispersal or prevention would be investi-
gated and tested,

$0.1 Annual costs of the projects, except as indicated, are number
marginal, including the new locks control system. Locks gate
valves, chain fenders, track alignment, culvert bulkheads, main
culvert intakes, merry-go-round lockage, navigational capability,
marine traffic control, and pumping capacity are stated in terms
of faster handling of all vessels, shortened overhaul outages,
increased water storage for all lockages, and safety and

convenience in operations. at the ess
The explanation of the allocation of marginal operating costs de-
scribes the specific assignment of extra towing locomotives to
vessels of 80 ft and wider beam and the longer lockage intervals
of these vessels. It is assumed that the relationships of number
of locomotives and lockage intervals of the several size classes
would continue although the times of the lockage intervals
would be reduced by other improvements. Size marginal costs
were estimated from the costs of the added number of locomo-
tives required for lockages and the longer times of lockages.
The balance of annual cost would be number marginal.
Tug assistance is a service already mandatory for large vesesls
and is provided in the costs of the large vessel classes. The
tieup service would be a new procedure and would be available
to all vessels when the locks chambers are not open. However,
the number marginal costs include a substantial amount for
"security service" which should not increase significantly with
increased traffic. It is assumed, therefore, that escalation of
number marginal costs to improvement program traffic levels
would provide for tug tieup service.

Tugs.-Tugs would be acquired because of the increase in the num-
ber of large vessels requiring assistance and, as relay lock pro-
cedures are adopted, tugs would be required to assist all vessels
in tieing up to the center approach walls.

Entrance channels.-Widening of sea approaches and entrance
channels would eliminate restrictions on ship meetings in the
channels. At the present time, navigation rules restrict large
ships to clear channel passage (other ships cannot meet them)
because of danger of collision due to hydrodynamic forces, cross
currents, and wind. As transit traffic grows and the number of
large ships increases, this restriction will have to be eliminated to
permit two-way traffic or idle lock time will result.

Marine traffic control.-Facilities and state-of-the-art equipment
would aid in more precise and better scheduling and control of
traffic under all conditions of operation. This would include a
modern communications system, electronic schedule preparation
and transmission, electronic monitoring of ships in the canal, and
a new marine traffic control center.
Channel deepening-The channel would be deepened by 11 ft.
Deepening would provide additional lockage water by permitting
Gatun Lake to fall from 82 to 76 ft minimum during the dry season.
it would conserve water by reducing the quantity used per lockage
since the height to which ships would have to be raised would be
reduced by 6 feet. Deepening would provide water for 13 additional
lockages per day.

Pumping capacity.-Seawater would be pumped into Gatun Lake
to replace water used in lockages.

Other improvements. Chain fenders would be relocated 310 ft
closer to the miter gates at the south end of Gatun Locks to reduce
travel time of locomotives and ships; radius of track at the curves
at Gatun Locks would be increased so that returning locomotives
would not have to reduce speed; lateral culvert bulkheads would
be installed at Miraflores to convert 6-day culvert overhaul from
lane outage to culvert outage; bulkheads and seats for main culvert
intakes and discharges would be renewed to reduce culvert water
pump-out time during overhaul of valves.

Total improvement program costs.

3.5

.2

.2

.5

The beneficiaries of the sea approaches and entrance channels
widening would be the 3 large vessel classes. In addition to
easing the requirement for clear channel passage for these
vessels, they would also benefit from improved maneuverability
and additional room for recovery from critical situations. The
cost was assigned to the 3 classes on the assumed weightings
of 1, 2, and 4.
The canal's improvement program study estimates that channel
deepening would provide water for 13 additional lockages per
day and would allow additional draft for large vessles during the
dry season. Accordingly, it appears that additional water storage
provides service for a number of transits and for transits of deep-
draft vessels. The most logical method of assigning costs of this
canal improvement was to allocate the costs evenly between
number and size marginal and to allocate the size marginal costs
to the large vessels on the basis of their assumed weightings.

Pt. II-B (2) Indicate those factors internal and external to the Canal organization which can be correlated with the variability of Canal costs and revenues (e.g., U.S. and world inflation, population in the Canal Zone, ship transits). Discuss in particular the problem of inflation and the presence or absence of automatic stabilizers in the economy of the Canal organization. Answer: Some of the factors, internal and external to the Canal organization, which can be correlated with the variability of Canal costs and revenues,

are:

a. Legislatively imposed costs, e.g., extension of U.S. minimum wage standard to non-U.S. citizen employees, OSHA, contribution to health insurance, employment practices, freedom of information, Privacy Act, National Environmental Policy Act, etc.

b. Economic and/or political events-these may best be seen from two examples; the long closure and recent opening of the Suez Canal; and the nationalization of mines by Peru following which shipment of Peruvian ore through the Canal ceased.

c. Variation in the economy of Japan, a major user of the Canal, is a factor that impacts and must be correlated in projecting tolls.

d. World inflation, particularly of the runaway double-digit variety, is a factor that adversely affects both costs and revenues.

e. The Canal has been successful, absent double-digit inflation, by using various indices and evidences of Congressional intent, to correlate its revenues and rates to inflationary changes in cost of labor, material and supplies.

f. Population in the Canal Zone, and eligibility to use Canal Zone facilities are factors in developing estimates of anticipated workload.

Inflation in recent years has become a major factor to the economic wellbeing of the Canal. The Committee is well aware of the impact of double-digit inflation on all costs-the Canal was not exempt from this impact. In areas other than tolls Canal management was able to react to these increases through, for example, price increases. However, administrative restraints make the obtaining of an increase in tolls, in reaction to an adverse inflationary situation, extremely difficult.

There is, I believe, some merit in having an automatic stabilizer in toll rate structure that would rise or fall with inflationary changes. An action of this type would require detailed study and evaluation and then specific legislation. Pt. II-B (3) List the variable costs of the Canal which are deemed controllable and those which are deemed uncontrollable.

Answer: Other than productivity the variable type costs are uncontrollable. Wage rates are generally legislatively imposed and materials, supplies and transportation are purchased in the competitive market.

Pt. II-B (4) Are there any costs in the present Canal organization budget which are related to defense? What projects in recent years are related to defense of the Canal? Does the Canal organization have any financial responsibility for these?

Answer: There are no net costs in the Canal organization operation budgets that are exclusively related to defense. However, certain costs are incurred to provide services to the military and other U.S. Government agencies in the Canal Zone. These include operation of schools, fire protection, hospital and clinic services to personnel and dependents, and utilities. The costs, with certain exceptions, are fully recovered in billings to the agencies and individuals.

The exceptions include education of uniformed and civilian personnel over 21 years of age of military agencies at the Canal Zone's College, and education of dependents of foreign instructors at the Military schools, the cost of which is borne by the Company. The amount of unbilled tuition at reimbursable cost rates is about $450 thousand a year. The Military agencies advise that they have no authority to reimburse the Canal Zone Government for these costs. There have been no projects within the Panama Canal Company/Canal Zone Government in recent years relative to the defense of the Canal.

Pt. II-B (5) What is the effect of prevailing market interest rates on the finances of the Canal organization?

Answer: The effect of prevailing market interest rates on the finances of the Panama Canal organization is unmeasurable except possibly for the interest paid into the U.S. Treasury on the next direct investment of the United States in the Panama Canal Company.

The Treasury's prescribed interest rate for the latter is based on average cost of coupon bonds outstanding. To the extent coupon bonds are issued and their interest rate relates to the prevailing market, there would be some impact on Company costs. The rate paid by the Company has increased over the last ten year period from 3.60% in 1966 to 4.649% in 1975. Thus, the interest cost to the Company for fiscal year 1975 was $3.2 million more than it would have been at the 1966 rate. The current rate of 5.199% for 1976 is well below current interest levels.

Otherwise, the effect of prevailing market interest rates is on suppliers of goods and services to the Panama Canal and on Panama Canal customerstransiting vessels and cargo, the impact of which as it might affect the Panama Canal is not measurable.

Pt. II-B (6) How has the interest-bearing investment of the United States in the Panama Canal Company changed in recent years? What decisions have affected the change and how much of a financial impact has this had on the Canal?

Answer: The interest-bearing investment of the United States in the Panama Canal Company has not changed significantly in recent years. The balance at July 1, 1965 was $329.8 million and at June 30, 1975, was $318.9 million. The decrease of $10.9 million is accounted for as follows:

Fiscal year 1966 through fiscal year 1975:

Capital payments into U.S. Treasury

Transfers of property to other U.S. Government agencies..

Total decreases.

Reactivations of plant.

Transfers of property from other U.S. Government agencies -

Total increases....

Net decrease of investment..

(Millions) $15.0

2

15. 2

3. 4

9

4. 3

10. 9

This decrease in investment impacts on financial operations through a reduction in interest cost. As a result of the above $10.9 million decrease, the 1975 interest cost to the Company was some $500 thousand less than it would have otherwise been.

Pt. II-B (7) The Canal organization has imposed a series of austerity measures in recent months to curb Canal expenses. What austerity measures have been imposed, how effective have they been, and who has been affected by the measures?

Answer: The tabulation below identifies in broad terms the austerity measures imposed by the Panama Canal Company:

Austerity measures were initiated to partly offset the Company's projected operating losses for 1976 and 1977. To that end, the austerity measures have been successful. The actual loss realized through February 29, 1976 was $5,283 thousand as compared to a budgeted loss for the period of $8,278 thousand. With possibly few exceptions, employees and dependents have been affected by the austerity measures. They were affected through job elimination, reduced paid working hours, reduction in services available to them, e.g., reduced retail store hours, reduced retail outsets, reduced postal services, reduced cafeteria services, etc.

Pt. II-B (8) 2 C.Z.C. 412 states that Canal tolls shall be prescribed at rates to cover, among other things, "an appropriate share of the net costs of the agency known as the Canal Zone Government." The section further states that the determination of the appropriate share shall take into account various factors in Company finances. Does the Canal organization believe that tolls revenues must completely cover the net costs of the Canal Zone Government? Have tolls revenues always covered the costs of the Canal Zone Government?

Answer: These questions, directed to the construction of Section 412, were considered in detail by the Merchant Marine and Fisheries Committee during the 86th Congress as shown in the following summary:

In 1955 certain steamship lines using the Panama Canal filed a complaint in the United States District Court for the Southern District of New York alleging that rates of tolls were excessive and praying for judgment to require the Panama Canal Company to prescribe new tolls on the basis of certain accounting changes proposed by the General Accounting Office and to refund the allegedly excessive tolls collected in the past. The District Court dismissed the complaint for lack of jurisdiction, holding that sections 411 and 412 of Title 2 of the Canal Zone Code conferred discretionary authority on the Panama Canal Company to determine the time when, in its judgment, new tolls should be prescribed. The court also ruled that, inasmuch as any new tolls determined by the Company had to be approved by the President, the Company's action in reference to tolls constituted advice to the President, not subject to judicial review. Finally, the District Court stated that, in any event, the plaintiffs lacked standing to sue because the Canal Zone Code did not confer upon them any private legal right. In reference to the demand for a refund of tolls, the court held that the action was in effect against the United States and was precluded by the doctrine of sovereign immunity.

On appeal, the U.S. Court of Appeals for the Second Circuit affirmed the decision of the District Court to the extent that it denied the demand for a refund of tolls, but in all other respects reversed the District Court and directed that summary judgment be entered for the plaintiffs. The Court of Appeals accepted the position of the General Accounting Office in reference to the effect of section 412 of Title 2 on the accounts of the Company; the court