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accumulated "roll-over" of payments which were not made if a surplus was never or seldom earned? Conceivably, there could be an outstanding obligation of as much as $220 million in 1999. The interpretation of this part of the treaty is complicated by Paragraph 1 of Article XIII:

"Upon termination of this Treaty, the Republic of Panama shall assume total responsibility for the management, operation, and maintenance of the Panama Canal, which shall be turned over in operating condition and free of liens and debts, except as the two Parties may otherwise agree."

The issue therefore is whether the phrase "free of liens and debts" includes the treaty obligations under Article XIII (4) (c). A reasonable argument can be made that Article XIII (4) (c) is an obligation of the United States, and not of the Panama Canal Commission; and that, furthermore, (4) (c) clearly says that payment in any year is due only to the extent that "revenues exceed expenditures." The implication is that if no

surplus is earned by 1999, no payment is ever due.

On the other hand, an equally reasonable argument can be made that any accumulated unpaid balance is an obligation that must be paid under Paragraph 1 of Article XIII. The very fact that Paragraph (4) (c) was included in the Treaty suggests that the United States expected to pay something under its provisions, and Panama expected to receive something.

Yet the testimony of Administration officials made it

very clear that the United States never expected to pay anything under this provision of the Treaty, an attitude which has angered the Panamanians.

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1. THE AMBIGUITY OF ARTICLE XIII, PARAGRAPH (4) (c)

The problem with Article XIII, Paragraph (4) (c) is not

so much the legal ambiguity itself, but the contrast in expectations. When Governor H. R. Parfitt, Governor of the Canal Zone and President of the Panama Canal Company, testified before the Armed Services Committee, he pointed out that all the economic assumptions excluded the $10 million contingency payment from their calculations. He was questioned by the distinguished Senator from New Hampshire, Mr. McIntyre:

"Senator MCINTYRE. Governor, it is my understanding that our Government is of the opinion that the $10 million contingent payment is not to be included in the toll base, and you mentioned this in your statement, correct?

"Governor PARFITT.

"Senator MCINTYRE.

That is correct, sir.

Further, I understand that the

Panamanians expect this payment; is this true?

"Governor PARFITT. As recently as Sunday I was advised to this effect by several Senators who were visiting with the Panamanian Government.

"Senator MCINTYRE. How would you suggest this problem be resolved? I understand that Torrijos or somebody down there is saying that if they don't get the $10 million by the year 2000, they will expect 22 times $10 million, or $220 million in payment. Do you know of this?

"Governor PARFITT. I think that alludes to the fact that the treaty does say in any given year to the extent you don't pay the surplus it rolls over to the next year, and he is assuming then at the year 2000 it no longer rolls over, it is then paid off. It has been our negotiator's position that since the treaty says these funds will be paid to the extent earned, and if they aren't earned they are not a liability of the U.S. Government and they would not be paid.

"Senator MCINTYRE. It is obvious from your testimony today that you do not feel that if the $10 million contingency payment is not included in the toll base, it will be very unlikely that we will have a $10 million surplus running around.

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"Governor PARFITT. I feel very definitely if it is not included in the toll base, it will not be generally earned."

The gap between expectation and reality will thus

be affected by manipulation of the toll base. If the Panamanians are expecting the toll rates to be set high enough to earn a surplus, then there will be a feeling of betrayal and of being cheated if the United States deliberately sets the rates at a level where no surplus will be earned.

Moreover, there is the additional problem of defining what a surplus is. Accountants have ways of manipulating balance sheets so that a "surplus" can disappear with sleight of hand. The study prepared by American Management Systems, Inc., for the Armed Services Committee, took pains to point this out:

"What constitutes a surplus? Under the treaty, the Commission is required to pay as much as $10 million per year to Panama, to the extent that such monies can be paid out of surplus. During implementation, specific agreements are needed to define exactly what constitutes a surplus. Some of the points that should be covered include:

"--Precise definition of how much depreciation is allowed as an expense. Any increase in current depreciation rates is likely to become controversial.

"--Determination as to whether and under what conditions previous year deficits can be applied against subsequent surpluses....

"Determination as to whether to permit temporary toll surcharges (for additional capital expenditures or for covering deficits) which do not enter the surplus calculation. Such a device appears likely to cause controversy."

Such devices, even though legitimate in accounting practice, are all likely to increase the danger of frustrated expectations, a feeling that the United States was not negotiating in good faith when the treaties were written.

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The contention of the Administration was that no

ambiguity existed, and that the United States incurred no liability if a surplus were never earned. At the hearings of the Foreign Relations Committee, the distinguished Senator from Ohio, Mr. Glenn, raised the point with Ambassador Bunker. Senator Glenn asked:

"In the event there is a balance owing at the end of the year 1999, what will be the obligation of the United States to pay that balance?

"Ambassador BUNKER. No. There will be no obligation after the treaty expires, Senator.

"Senator GLENN. There will be no obligation.

"Ambassador BUNKER. No."

However, the difference between the Panamanian perception of the impact of Article XIII, Paragraph (4) (c), and the United States perception was underlined in a statement made by Panama's Economics and Planning Minister, Dr. Nicholas Barletta, in San Francisco. Superficially, his answer to a question from the audience at a Commonwealth Club meeting would appear to agree with the position of Ambassador Bunker; but clearly, his expectations were different. Dr. Barletta said:

"If there is an accumulated deficit by the time the treaty ends, in 1999, that's it, the U.S. is not committed to make it up if such amount has not been able to be collected from the revenues of the canal operation. We do not hope in our interpretation of this clause of the treaty, that the U.S. is committed to pay any such deficit that might have accumulated. However, I would like to say, that, in our estimation, the revenues of the Canal and all the projections and studies that have been made should be able to cover this second $10 million that should come to Panama if revenues permit, so I don't forsee much of a problem in respect to deficit."

Dr. Barletta's statement that "all the projections and studies

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that have been made" support his estimate that there will be sufficient surplus earned can only be based on economic fantasy. Indeed, none of the consultants hired by the United States government, or by Congress, suggest that the $10 million can be regularly earned. Governor Parfitt, who directs the day-to-day operations of the Panama Canal Company, is the one man in the world who is most intimately acquainted with Canal finance. pectations, based on realism rather than on politics, have already been quoted in his exchange with Senator McIntyre. In response to further questioning by Senator Bartlett, he went

even further:

His ex

"Senator BARTLETT. I believe you told Senator McIntyre that the Canal Commission would expect to set its toll revenue to meet its cost and that if this contingent payment was not included in the plan for setting tolls, there would be little surplus to pay the Panamaninas since the Commission is not a profitmaking organization.

"Senator BARTLETT. So what we would have here is a situation in which we have promised to pay the Panamanians out of any surplus which the Commission earns, but the Commission is not expected to have any surplus.

"Governor PARFITT. Under a situation which we now forecast, which is one of ever-increasing demand for additional tolls, we would not be generating surpluses, at least in very significant amounts.

"Senator BARTLETT. And if we include the contingency payment in the estimate of operating costs, we increase the chance of the Canal Commission running into debt, and we have said to the Panamanians that we will turn the canal over to them free of debt.

However, the intent of the Department of State and of the

Administration generally is most clearly shown in the draft im