Here, the Executive, with the hoped-for assistance of the

Senate, is proposing to usurp the authority of the House of Representatives on the disposition of property of the United States. If this can be done in the case of the Canal Zone, it can be done in the cases of Guantanamo, Guam, or Samoa. If the treaty power may override the legislation of Congress, then by a treaty with Mexico the Executive could presumably give back Texas, or grant Florida back to Spain.

If the Canal Zone is permitted to be occupied by Panamanian forces before the legal questions on the separation of powers can be determined by our Courts, there is no possibility short of war of ousting those forces if the proposed treaty should thereafter be declared void.

Senator ALLEN. Governor Parfitt is our next witness.

Governor Parfitt, we certainly thank you for the fine effort you have made in coming to appear before the subcommittee.

I have read your very excellent statement. It gives more background information about the Canal Zone and the Panama Canal and the Governor of Panama than we have obtained from any other source.

The questioning of the first witness has brought up so many facets of the problem that we have fallen far behind in our time frame. I am hopeful, inasmuch as your statement in the main touches upon facts and background rather than expressions of opinion and views and policies, that you might be willing to touch on some of the highlights of your statement and then give us an opportunity to ask you some questions, with the understanding of course that your full statement will appear in the record.

Would you oblige the committee to that extent, please?

Mr. PARFITT. Yes, sir. I have abbreviated my statement for this purpose. If 15 minutes would be appropriate, I will try to condense it to that time frame.

Senator ALLEN. Without objection, your statement will be included in the record in full.

TESTIMONY OF HON. HAROLD R. PARFITT, GOVERNOR OF THE PANAMA CANAL ZONE

Mr. PARFITT. Mr. Chairman and members of the subcommittee, I am Harold R. Parfitt, Governor of the Canal Zone and the President of the Panama Canal Company.

My statement addresses the questions in your letter of invitation to attend these hearings. With your permission, as just stated, I would like to cover the highlights now and commit the full text for the record. Senator ALLEN. Very fine. We appreciate that.

Senator HATCH. Before you begin, may I make one comment, Mr. Chairman? I have made a brief study of the constitutional issues involved here, and now have the benefit of Mr. Leonard's expertise. Mr. Leonard was previously with the Justice Department. I would like to see a refutation to his brief, because I think he is basically correct. We should encourage the testimony of witnesses or experts who might be inclined to refute what he had to say. In fact, I would delight in the prospect of doing that.

Senator ALLEN. I thank the Senator. There are several witnesses scheduled to testify who do have opposing views to those expressed by Mr. Leonard.

Senator HATCH. I thank the Chairman.

Senator ALLEN. The subcommittee wants, obviously, to hear all sides if there are more than two sides to this issue.

Governor Parfitt, please proceed.

Governor PARFITT. Mr. Chairman, as a preface I should note that matters relating to the defense of the Panama Canal or the conduct, status, or substance of negotiations for a new treaty relationship with the Republic of Panama are outside my area of responsibility.

I would like to give you very briefly some background information about the Canal Zone and the operation of the Panama Canal.

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 day 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

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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.

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

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.