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- Permanent Link:
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Material Information
- Title:
- Panama Canal Commission authorization fiscal year 1981 hearing before the Committee on Armed Services, United States Senate, Ninety-sixth Congress, second session, June 12, 1980
- Creator:
- United States -- Congress. -- Senate. -- Committee on Armed Services
- Place of Publication:
- Washington, D.C.
- Publisher:
- U.S. G.P.O.
- Publication Date:
- 1980 [i.e. 1981]
- Language:
- English
- Physical Description:
- ii, 32 pages : ; 23 cm
Subjects
- Subjects / Keywords:
- Expenditures, Public ( fast )
- Genre:
- federal government publication ( marcgt )
Notes
- General Note:
- CIS Microfiche Accession Numbers: CIS 81 S201-8
Record Information
- Source Institution:
- University of Florida
- Holding Location:
- University of Florida, Flare Storage Collection
- Rights Management:
- This item is a work of the U.S. federal government and not subject to copyright pursuant to 17 U.S.C. §105.
- Resource Identifier:
- 022822303 ( ALEPH )
07164942 ( OCLC ) 81600852 ( LCCN )
- Classification:
- Y 4.Ar 5/3:P 19/5 ( sudocs )
Aggregation Information
- DLOC1:
- Digital Library of the Caribbean
- PCM:
- Panama and the Canal
- IUF:
- University of Florida
- IUFGOV:
- Centers of Excellence at UF
- UFPANCAN:
- Documents of the Panama Canal
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PANAMA CANAL COMMISSION AUTHORIZATION
FISCAL YEAR 1981
HEARING
BEFORE THE
COMMITTEE ON ARMED SERVICES
UNITED STATES SENATE
NINETY-SIXTH CONGRESS
SECOND SESSION JUNE 12, 1980
Printed for the use of the Committee on Armed Services
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U.S. GOVERNMENT PRINTING OFFICE 65-5780 WASHINGTON : 1980
COMMITTEE ON ARMED SERVICES JOHN C. STENNIS, Mississippi, Chairman HENRY M. JACKSON, Washington JOHN TOWER, Texas HOWARD W. CANNON, Nevada STROM THURMOND, South Carolina HARRY F. BYRD, JR., Virginia BARRY GOLDWATER, Arizona SAM NUNN, Georgia JOHN W. WARNER, Virginia JOHN C. CULVER, Iowa GORDON J. HUMPHREY, New Hampshire GARY HART, Colorado WILLIAM S. COHEN, Maine ROBERT MORGAN, North Carolina ROGER W. JEPSEN, Iowa J. JAMES EXON, Nebraska
CARL LEVIN, Michigan
FRANCIS J. SULULVAN, Staff Director JOHN T. TICER, Chief Clerk
(II)
PANAMA CANAL COMMISSION AUTHORIZATION, FISCAL YEAR 1981
THURSDAY, JUNE 12, 1980
U.S. SENATE,
COMMITTEE ON ARMED SERVICES, Washington, D.C.
The committee met at 8:24 a.m., pursuant to call in room 212, Russell Senate Office Building, Hon. Carl Levin presiding.
Present: Senators Levin and Byrd.
Staff present: John C. Roberts, general counsel; Edward B. Kenny, professional staff member; Christine E. Cowart, assistant chief clerk; and Karen A. Love, clerical assistant.
Also present: Frank Krebs, assistant to Senator Cannon; Quentin Crommelin, assistant to Senator Byrd; Charles Stevenson, assistant to Senator Culver; Peter Lennon, assistant to Senator Levin; and Mike Donley, assistant to Senator Jepsen.
OPENING STATEMENT BY SENATOR CARL LEVIN, PRESIDING
Senator LEVIN. Good morning, gentlemen. At the request of Chairman Stennis, I am chairing this morning the 1981 authorization for the Panama Canal Commission. The press of other committee business necessitated that we meet at this hour. I appreciate all you coming by at this time of the day.
The Panama Canal Act of 1979 established the Panama Canal authorization and appropriation scrutiny by the Congress.
Although many of us initially had reservations about this approach, including myself, we accepted it because many others felt that it would provide some additional protection to the U.S. Treasury and taxpayers while still allowing adequate flexibility to the Board and Administra-... tor in the operation of the canal.
The annual authorization cycle, of which this hearing is a part, is our opportunity to assure that both of these objectives are met.
We are now well in the first year of operation under the new treaty and under the new operating partnership with Panama. I hope that our witnesses today will inform us briefly as to the status of that new arrangement and any actions that we and the Congress can take on this authorization bill, or any other areas for that matter, to assure the continued smooth and efficient functioning of the canal.
Last year the Senate and the House were unable to resolve their differences over some provisions of the fiscal year 1980 authorization bill and, as a result, that bill was never enacted into law.
The Commission has, therefore, been operating on its appropriation but without the more precise guidance of authorizing legislation. The
(1)
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authorizing committees, the Senate Armed Services Committee and the House Merchant Marine and Fisheries Committee, do have an important role to play in overseeing the functioning of the canal.
We are hopeful that we will be able to act expeditiously on this matter and reach an early accommodation with the House on legislation sent to the President.
We have as our witnesses this morning Assistant Secretary of the Army, Michael Blumenfeld, who has had the primary responsibility within the Department of Defense for overseeing the old Panama Canal Company, and is now Chairman of the Board of the Panama Canal Commission; and General D. P. McAuliffe, Administrator of the Commission and former commander in chief of the U.S. Southern Command.
I am wondering if the third person at the table will identify himself?
Mr. SCHROEDER. I am Myron A. Schroeder, Chief of the Financial Planning Division of the Panama Canal Commission.
Senator LEVIN. We welcome all three of you.
You may proceed.
STATEMENT OF HON. MICHAEL BLUMENFELD, ASSISTANT SECRETARY OF THE ARMY (CIVIL WORKS), CHAIRMAN OF THE BOARD OF DIRECTORS, PANAMA CANAL COMMISSION, ACCOMPANIED BY HON. DENNIS P. McAULIFFE, ADMINISTRATOR,
PANAMA CANAL COMMISSION
Mr. BLUMENFELD. Thank you, Mr. Chairman.
Let me say it is good to be here and good to see you again.
CHANGES REQUESTED TO HOUSE BILL
I will enter my statement in the record and proceed briefly to summarize the key items. We would very much value the help of the committee in changing some of the provisions of the authorization bill that is now awaiting floor action in the House, and I shall focus on those.
I think they are changes that would be in the spirit with which this committee has approached the question of the Panama Canal authorization.
Information on the events that have happened since October, and on some of the preliminary decisions and considerations of the Panama Canal Board is covered in my statement, as are the prognoses for revenues and cost. I won't bother summarizing those in the interest of time, but will refer you to the full statement.
PROPOSED AMENDMENT
Let me focus on the proposed amendment to the bill which now awaits floor action in the House.
An insert in section 2(d)(1) of the bill provides that increases in expenditures for previously approved projects can be disapproved by any of the four authorization and appropriations committees or subcommittees. The phrase states, "Any of the committees or subcommittees may disapprove the increases in expenditures proposed by the Commission."
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The bill already provides for an overall project category limit that we accept and will comply with even if certain projects experience difficulties. The effect of requiring the second approval is to delay the start of certain projects, or to suspend or abandon ongoing projects.
BOARD AUTHORITY FOR REPROGRAMING
This course of action would obviously introduce inefficiencies and costs that are undesirable. We believe the Board of the Commission should be given the reprograming authority that it seeks, so long as the amount authorized and appropriated by Congress for the total capital program and the major categories within it is not exceeded. I think this is consistent with the treaty, it is consistent with Public Law 96-70, it is consistent with sound management practices, and it is consistent with the trust that ought to be afforded the Board of the Commission, with its five member U.S. majority which the Senate confirmed after careful consideration.
AUTHORITY TO INITIATE NEW PROJECTS
I recommend that the committee for similar reasons also adopt language authorizing the Commission to initiate projects that are not included in the budget submission, but have been subsequently determined by the Board to be necessary for efficient, continuous, and safe operation of the canal, on a 30-day notice and wait basis and with the understanding, of course, that these new project starts would not violate the ceiling for the various categories of capital projects.
There have been cases in the past where similar reprograming actions were necessary to assure safety and to increase canal capacity. There are examples of those in my statement. They prove, I think, the need for this authority we seek.
RESTORATION OF BUDGET LIMITATION
The remaining actions that I believe are necessary require restoration of certain budget limitations that were imposed by the House committee in this pending bill, in three activities. I will mention them only briefly. The Administrator will be prepared to provide more detailed justification, either this morning or in followup written answers if you have some questions.
LIMITATION ON HIRE OF VEHICLES
First, I believe all limitations on the hire of vehicles ought to be removed. The funds we have sought for hire of vehicles are required to provide a contract for shuttle bus service to transport employees where their duties are related to the actual movement of ships through the canal.
GUIDE SERVICE
Also, we seek restoration of a reduction of $68,000 in the operation of guide services. If we had to live with this reduction, one of two equally unfavorable actions would happen: either (a) the Commission would be required to remove the motor launch Las Cruces from service, or (b) it would have to reduce its visitor facility operations to an ineffective level.
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EMPLOYEE HOUSING MAINTENANCE
Finally, I would like to urge that the committee restore the limitation on maintenance of facilities in section (2a) (11) from the $3.7 million level proposed by the House Committee to the budget level that we requested, $5.1 million. This item covers only housing that is retained by the Commission for use by employees.
We can't afford to neglect housing maintenance. It is doubly imperative that we not neglect it because we have no plans to build new housing. The Commission has to live with what we have and that is a task that is challenging enough, given the problems of maintenance in a tropical environment.
Mr. Chairman, I believe this bill, if adjusted as I propose, reflects the most accurate estimate that can be made at this time of the expected net revenues and required operating costs of the Commission luring fiscal year 1981.
I would appreciate the committee's help in getting the amendment which I have sought this morning.
I suggest that Mr. McAuliffe might summarize his statement as well, and then proceed to your questions.
Senator LEVIN. Thank you for your statement and the brevity of it. We will put the entire statement in the record.
[The prepared statement of Mr. Blumenfeld follows:]
PREPARED STATEMENT OF HON. MICHAEL BLUMENFELD, ASSISTANT SECRETARY OF THE ARMY (CIVIL WORKS)
Mr. Chairman, members of the Committee, I am Michael Blumenfeld, Assistant Secretary of the Army, Civil Works. As a portion of my responsibliity, I oversee the operation of the Panama Canal Commission on behalf of the Secretary of the Army. It is a pleasure for me to appear here today as you receive testimony concerning the Authorization Bill for the Panama Canal Commission for Fiscal Year 1981.
ORGANIZATIONAL MATTERS
Since my last appearance before this Committee on March 7, 1980, a number of actions have progressed. The members of the Board of the Commission have been appointed by the President following confirmation of the U.S. members by the Senate. I am the Secretary of Defense's representative on that Board.
The Board convened for the first time in Panama on June 2. I was selected to serve as Chairman of the Board. Primary items on the agenda included overview briefings on personnel and financial matters; a review of actions taken by the Commission thru May that might normally have been subject to Board guidance or decision; approval of the Board Regulations; establishment of the Executive Committee and three other Board committees; and preliminary discussion of a Code of Conduct. The meeting, I believe, established a sound framework for future operations. A second meeting is planned for late July, also in Panama.
As mentioned, the Board had preliminary discussions on a proposed Code of Conduct for Commission employees and Board members. The Board decided to defer further consideration until such time as there has been additional discussion between US and Panamanian representatives to clarify the standards of conduct that will conform to the laws of each country and are acceptable to all members of the Board. The Code Will be an agenda item at the meeting next month. As you are aware, after the Code is approved by the Board, the Department of State will undertake the negotiations required by the Panama Canal Act.
The Commission staff has formulated draft recommendations on the Panama Canal Employment System that will replace the Canal Zone Merit System. The new system continues merit system principles and protections for employees, and also carried out specific requirements of the Treaty related to personnel policy. While it is too early to discuss any particular provision of the system, I would like to highlight the policies that form the basis of the proposal.
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A. Training that will contribute to increased participation by Panamanians in all areas and levels of the Commission as required by the Treaty is receiving added emphasis.
B. Mechanisms have been established to maximize hiring of qualified Panamanian nationals. Already implemented is a system whereby Panamanian applicants who achieve a passing score on the entrance examination are awarded 11 additional points.
C. A five-year rotation policy for off-the-Isthmus recruits has been established, as required by the Treaty, in order to facilitate meeting local recruitment goals.
These are only a few of the policies being included in the proposal that will eventually become the Panama Canal Employment System. Suffice it to say that we are committed to the training and development of Panamanians over the course of twenty years. A key to Panama's ultimate success is their involvement in the employee selection and classification process. They must be able to identify, hire, train and retain the best people available for the Canal operation.
On May 27, the President signed Executive Order 12215 delegating to the Secretary of Defense certain powers and functions derived from Public Law 96-70. The order includes a requirement to exercise specific functions regarding Canal management, operations and maintenance through the Panama Canal Commission by redelegation of authority or other means. This Order replaces the temporary one issued last November. I continue to carry out the Secretary's functions with regard to the Commission.
I am pleased to report that the U.S. and Panama exchanged notes on March 25, 1980 that provided for a payment schedule for annuity, tonnage payments and public service cost reimbursement to Panama, and the repayment by Panama of the previously disputed back debt. The first check to Panama was presented that same day in the amount of approximately $29 million. This covers payment of five months of the annuity, public service charge, and tonnage payment to Panama, less one quarterly payment on the back debt and the whole of the debt accruing to the former Canal Zone Government and the Panama Canal Company from July 1 thru September 30, 1979. Checks of approximately $5 million were presented to Panama in April and May. These checks represent the monthly payments to Panama, less another quarterly payment toward the debt. The entire debt will be recovered by December 1981 thru quarterly offsets to the monthly Treaty payments. With the exchange of notes, any debt not paid by the Central Government of the Republic of Panama within 30 days of invoice will be offset against the next monthly payment.
CANAL TRAFFIC
We had anticipated increased shipments of North Slope Oil at the beginning of this fiscal year and had predicted that shipments would reach 500 thousand barrels per day in December. These shipments were late meeting our expectations, For the first eight months of this fiscal year, the daily average was 394 thousand barrels, with a maximum throughput of just over 500 thousand barrels per day in May.
We have noted a slight overall increase in the total number of oceangoing vessels transiting the Canal over the same period last year. However, principally because the increase in shipments of North Slope oil has failed to materialize, we are approximately $6 million below budget in toll revenues as of the end of May. In light of this, we have applied stringent budget constraints to assure we remain close to a break-even point by years' end, and we are approximately on target.
FISCAL YEAR 1981 REVENUES AND COSTS
Mr. Chairman, I have estimated-and as required by law the General Accounting Office has certified-that the revenues to be deposited by the Panama Canal Commission into the Panama Canal Commission Fund during fiscal year 1981 will amount to $406,363,000, of which $313,940,000 will come from tolls and $92,423,000 from other services. I further estimated that, in addition to those operating revenue receipts, the Panama Canal Commission wiil deposit into the Panama Canal Commission Fund in fiscal year 1981 certain other funds amounting to $3,750,000 comprised of collections from the Government of Panama Canal Company and Canal Zone Government accounts receivable and funds received from various sources. Total deposits for fiscal year 1981 in the Panama Canal Commission Fund are thus projected to be $410,113,000. This, coupled with the unexpended balance of the fund from fiscal year 1980, will far
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exceed the requested appropriation. As you may recall, our estimate was that $463 million would be deposited in the Panama Canal Commission Account in fiscal year 1980.
As you will note from the proposed Authorization Bill, we propose to establish an emergency fund of $25 million during fiscal year 81. This fund will be derived from revenues deposited in the Panama Canal Commission Fund in the Treasury plus the unexpended balance of the fund from 1980, which I have just mentioned. While the $25 million amount is short of the $40 million originally requested for fiscal year 1980, it appears adequate to cover any reasonably foreseeable emergency. It is certainly adequate to permit initiating emergency action while concurrently seeking a supplemental appropriation if required.
A second point of significance is the proposed capital program: $23 million has been requested for 1981, $17.9 million of that amount will be applied to transit projects. The sources of funds for this investment category are the depreciation allowance and the capital factor of 2.16 cents per Panama Canal ton included in the toll rate. In our estimation, this level of capital funding is adequate for nearterm requirements.
PROPOSED AMENDMENTS
I seek your assistance in revising certain items in the Bill currently awaiting floor action by the House of Representatives. If allowed to stand, these items will adversely affect the operation of the waterway and will certainly impede efforts to restore employee morale.
An insert in Section 2(d)(1) of the Bill provides that increases in expenditures for previously approved projects can be disapproved by any of the four authorization and appropriations committees or subcommittees. The phrase states, "Any of the committees or subcommittees may disapprove the increases in expenditures proposed by the Commission." The Bill already provides for an overall project category limit that we accept and will comply with even if certain projects experience difficulties. The effect of requiring the second approval is to delay the start of certain projects, or to suspend or abandon ongoing projects. The inefficiency and cost attendant to such a course of action argue strongly against the proposal. We ask that the language be deleted.
We believe that the Board should be given this reprograming authority so long as the amount authorized and appropriated by the Congress for the total capital program and major categories within it is not exceeded.
I recommend that the Committee also adopt language authorizing the Commission to initiate projects not included in the budget submission, but subsequently determined by the Board to be necessary for the efficient and safe operation of the Canal provided that 30 calendar days notice be given to both Houses of Congress and that such new project starts will not violate the ceiling for the various categories of capital projects. There have been cases in the past where similar reprogramming actions were ncessary to assure safety and to increase Canal capacity, such as replacement of the soft-nose center wall protectors at both Pedro Miguel and Gatun Locks as a result of marine accidents, and unprogrammed repair to the miter gates. Appropriate language was contained in Section 2(d)(1) of the Administration's Bill introduced in the House as H.R. 6516.
The remaining actions, which I believe are necessary, require restoration of budget limitations imposed by the House of Representatives in three activities. I shall mention each of these only briefly. The Administrator is prepared to provide more detailed justification.
Referring to the Bill, I first request that all limitations on the hire of vehicles, Section 2(a) (1), be removed. The funds are required to provide a contract for shuttle bus service that transports employees where duties are directly related to the actual movement of ships through the Canal. The cost of the contract is variable because of cost escalation clauses in the contract.
The reduction of $68,000 applied to the operation of guide services, Section 2(a) (6), would require one of two equally unfavorable actions. The Commission would either be required to remove the motor launch Las Cruces from service, or reduce the visitor facilities operations to an ineffective level. We therefore request that the limitation be raised to $340,000.
The final suggestion we offer is to restore the limitation on maintenance of facilities; Section 2(a) (11), from the $3.724 million level passed by the House to the budget level of $5,109 million. This item covers only housing retained by the Commission for use by employees. The proposed limitation constitutes a substantial adverse impact on an employee benefit ranking second only to pay as a
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recruitment and retention incentive. Given that the quality of housing now is only fair, and that more than 50 percent of the housing exceeds thirty years in age, we can ill afford to neglect housing maintenance. This is doubly inperative because there are no plans to build new housing. The Commission must live with what we have, and it is impractical not to maintain the existing assets.
Mr. Chairman, we believe this Authorization Bill, if adjusted as we propose, reflects the most accurate estimate that can be made at this time of the expected net revenues and required operating costs of the Commission during fiscal year 1981.
Again, I appreciate the opportunity to appear here today and bring you up to date on events, and to speak to the proposed Authorization Bill.
With your permission, Mr. Chairman, I will be followed by Mr. D. P. McAuliffe, the Administrator of the Panama Canal Commission. I recommend you hear Mr. McAuliffe's statement at this time, and offer questions to the two of us upon completion of his statement. Thank you.
Senator LEVIN. General McAuliffe?
STATEMENT OF HON. DENNIS P. McAULIFFE, ADMINISTRATOR,
PANAMA CANAL COMMISSION, ACCOMPANIED BY MICHAEL RHODE, JR., SECRETARY, AND MYRON A. SCHROEDER, CHIEF,
FINANCIAL PLANNING DIVISION
Mr. McAULIFFE. Mr. Chairman, I am pleased to appear this morning to request authorization for the fiscal year 1981 budget programs of the Panama Canal Commission.
Accompanying me are Michael Rhode, Jr., the Secretary of the Panama Canal Commission, and Myron A. Schroeder, Chief, Financial Planning Division.
With your permission, I would like to summarize very briefly my statement and have the full text placed in the record.
Senator LEVIN. It will be placed in the record.
OVERVIEW OF OPERATIONS UNDER THE TREATY
Mr. McAULIFFE. The treaty went into effect a little over 8 months ago. The Commission has gone through a period of significant adjustment to adapt to the changes. I am happy to report that, in spite of the traumatic impact of the entry into force of the treaties on our work force, our employees are coping well and the mission of transiting vessels through the canal is getting done as efficiently as in the past. This is not to say that all our problems are behind us. There is still much to be done, but we are receiving a great deal of cooperation, and the whole spirit of the enterprise is improving.
TREATY IMPACT ON WORK FORCE
Perhaps one of the most significant conditions of the entry into force of the treaties was the reduction that occurred in the work force of the Commission. Out of a work force in excess of 12,000 permanent employees, only 8,000 remained on October 1. Some of those were transferred to the Department of Defense activity, with the hospitals, the dependent schools, the postal system, and the retail stores. Others resigned and were employed immediately by Panama in the operation of the ports and the Panama Railroad. But there were others who were affected by reductions in force. Associated with it all was a traumatic impact on over a thousand of our employees who wound up
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in jobs for which they were not properly trained and, in many cases, at reductions in grade.
We have put into effect several programs to correct the adverse impact of those personnel actions and these are detailed in my statement.
I am pleased to report that employee morale is building again.
1981 APPROPRIATIONS REQUEST
With respect to our authorization request, we are requesting two appropriations totaling $419.5 million.
One is an appropriation of $394.5 million covering both operational and capital requirements of the Commission. Of that amount, $23 million is for capital equipment and construction, to remain available until expended.
A second authorization of $25 million is requested to establish the Panama Canal Emergency Fund. All funds authorized for appropriation to the Commission are to come from the Panama Canal Commission Fund or, in other words, from canal revenues.
The appropriation required for operating expenses is $371.5 million. The major cost components of this total are $184 million for personnel compensation, $78 million for treaty payments to Panama, and $38 million for supplies and materials.
The $23 million requested for the capital program will be dedicated primarily to meet the needs of the canal in terms of increased traffic capacity and safety and efficiency in operations.
The $25 million requested for establishment of the emergency fund is to be financed from the Panama Canal Commission Fund.
REVISIONS TO HOUSE BILL
I wish to join with Secretary Blumenfeld in soliciting the assistance of this committee in revising the language and provisions of the House bill that he has previously identified in his brief statement and which are addressed more fully in my statement.
Additionally, I did provide a letter to the chairman of this committee, June 2, outlining the same requests.
Mr. Chairman, this concludes my brief summary. We stand ready to answer any questions.
[The prepared statement of Mr. McAuliffe follows:]
PREPARED STATEMENT OF DENNIS P. MCAULIFFE, ADMINISTRATOR, PANAMA CANAL COMMISSION
INTRODUCTION
Mr. Chairman, Members of the Armed Services Committee, I am Dennis P. McAuliffe, Administrator of the Panama Canal Commission I am pleased to appear before you today to request authorization for the fiscal year 1981 budget programs of the Panama Canal Commission, the agency responsible for operation of the Panama Canal. Attending with me are Michael Rhode, Jr., Secretary; and Myron A. Schroeder, Chief, Financial Planning Division. I would like first to provide you a brief assessment of the general situation in the Panama Canal area in the period since the Panama Canal Treaty took effect.
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TREATY TRANSITION
The Treaty has now been in effect over eight months. While not a great deal of time, it is enough for an initial assessment of our programs. I believe that, for the Panama Canal Commission, we have been moving in a positive and favorable manner.
Considering the many possibilities for disruption of activities when the Treaty went into effect, I am pleased to report that October 1 passed smoothly without any adverse incidents. The Canal organization transferred functions such as health, education, postal, and retail services to the Department of Defense. Responsibility for jurisdiction, port and railroad operations, customs and immigration services was transferred to the Government of Panama. The two governments began to share responsibility for fire protection and police protection in the area. The interagency and binational planning involved in the transfer of these activities was substantial, with many built-in hazards and chances for failure, but the record now shows that the extensive prior planning, coordination and and preparation paid dividends. Personnel of both the United States and the Republic of Panama prepared seriously for the transition and put forth their best efforts to assure its success.
From the first day of the Treaty, the same spirit of cooperation has contributed to successful continuation of all activities by their new managers. The bulk of the bilateral agreements between the United States and Panama have been put into effect smoothly to the benefit of our organization and our people. Notable among these are the success of the joint police patrols in the Canal Housing areas and the coordinated fire protection services, as well as arrangements made by Panama to facilitate employee documentation, and automobile and driver licensing. The joint police patrols have been a particular source of reassurance to all.
A good indication of the new relationship now existing between the United States and Panama was evidenced on January 9. the anniversary date of the 1964 riots. The anniversary was celebrated with a march through the former Canal Zone and passed with less than the usual display of anti-Americanism.
Two major functions transferred to Panama on October 1 were the ports of Balboa and Cristobal and the Panama Railroad. The transfer of facilities and equipment was accomplished as planned, and both the ports and railroad continued normal operations under Panama's management. The Commission provided experienced personnel on a loan labor, reimbursable basis to advise and assist in the transition of these activities to Panamanian management.
Panama was experiencing problems of congestion in the operation of its ports, particularly the Port of Cristobal, due to an increased volume of container traffic, difficulties associated with the maintenance of materials handling equipment at the terminals, and labor problems. Panama, however, has taken steps toward resolution of these problems. Recently, as a result of a reorganization of the Treaty affairs function within the Panamanian Government, the railroad was reassigned to the National Port Authority, the agency responsible for operation of all ports in Panama. We view this as a positive step, and the arrangement seems to be working well.
Major functions transferred from Canal agencies to the Department of Defense were those related to health services and the Hospitals; dependent schools, including the Panama Canal College; the commissary stores; and postal service. These activities have continued to provide services to the authorized military and civilian communities. These transfers, however, did experience difficulties in adjusting to the new conditions-for example, the Army commissary system had a significant increase in customers-but major efforts have been made to continue acceptable levels of service.
During the first eight months of the new Treaty, the Canal organization has continued to fulfill its mission of transiting vessels safely and efficiently through the waterway. During that period, approximately, 8,942 oceangoing vessels transited the Canal, a number slightly above the level of the same period of the previous year. There has been no apparent decrease in traffic because of the 29.3 percent toll rate increase that was placed in effect on October 1, 1979.
The smoothness of the transition should not, however, cause us to lose sight of the traumatic impact of the Treaty on the Canal organization and its work force. The Commission's organization is still settling down after the massive personnel turbulence experienced last year. Some additional organizational changes are being implemented to meet Treaty requirements but these are designed to have minimal personnel impact.
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The morale of the work force, which understandably was extremely low at the time the Treaty took effect, is now beginning to build. Employee morale has been a matter receiving priority attention from management. The task is all the more difficult as issues impacting on the quality of life surface.
The full-time permanent work force immediately prior to October 1 was approximately 12,200 employees. The number of employees separated through a reduction-in-force was approximately 460 and 2,300 employees were transferred to elements of the Department of Defense. An additional 1,440 employees terminated their employment voluntarily through retirement or resignation. The combination of these actions reduced the full-time permanent work force to something over 8,000 employees, of which approximately 2,000 are U.S. citizens and 6,000 are Panamanians and third country nationals. We also employ up to 1,000 individuals on a part-time or temporary basis, of whom about 700 are Panamanians. Of the 8,000 permanent employees remaining with the Commission, over 1,300 were either reassigned to other jobs or reduced in grade, or both, on October 1.
Working to minimize the impact of these actions on personnel, a priority placement program is in effect which seeks to place U.S. citizen employees in like jobs in other Federal agencies in the United States. Another program is the priority reemployment program which assures that those employees who lost their jobs because of the Treaty have first consideration in hiring. The third program, the promotion priority program, is designed to give employees who lost grades preferential consideration for promotion back to their former grade.
The Panama Canal employment system currently under development, in accordance with the provisions of section 1212, the Panama Canal Act of 1979, includes provision for granting hiring preference to Panamanians, a five-year rotation policy for recruitment outside of Panama, and a reduction in the need for off-the-Isthmus recruitment through intensified local recruitment efforts and special training and development programs. The hiring preference for Panamanians provides for adding eleven extra points to the numerical scores of all Panamanian applicants tested after October 1 who have achieved a passing score. The five-year rotation policy has also been established. Procedures to implement the other changes are being developed at this time. We are also emphasizing training that will contribute to increased Panamanian participation in all areas and levels of the Panama Canal Commission, as required by the Treaty.
I am pleased to advise that an exchange of diplomatic notes took place between the United States and Panama on March 25 which effectively settled the issue of collection of overdue receivables. By one note, Panama has agreed that amounts owed to the former Canal agencies will either be paid in cash in nine quarterly installments or may be offset against treaty payments due Panama. In the other note, the United States agreed that the Commission will make treaty payments in monthly remittances, except for any amounts that may become due under the contingent payment provided for in Article XIII(4)(c). Any payment due Panama under this latter provision would be made no later than April 30 of each year. To date, Panama has received $40.8 million, representing $42.7 million in treaty payments less $1.9 million in offsets for amounts due from Panama.
Another event of particular signifiance was the first meeting of the Commission Board, held earlier this month in Panama. The Board began to address many issues, and I believe the foundation was laid for successful participation by Panama in the management of the Canal.
I should now like to move from the general situation to our authorization request.
AUTHORIZATION REQUIREMENTS
The authorization request covers two appropriations for the Panama Canal Commission in fiscal year 1981, totaling $419.5 million. One is an appropriation of $394.5 million covering both operational and capital requirements of the Commission. Of that amount, $23.0 million is for capital equipment and construction to remain available until expended. A second authorization of $25.0 million is requested to establish the Panama Canal Emergency Fund. All funds authorized for appropriation to the Commission are to come from the Panama Canal Commission Fund.
OPERATING EXPENSES
The appropriation required for operating expenses in 1981 is $371.5 million. The major cost components of this total are $184.4 million for personnel compensation, $78.6 million for Treaty payments to Panama, $38.5 million for supplies
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and materials, and $16.7 million for liberalized retirement benefits, in accordance with the implementing legislation.
The appropriation requested for 1981 represents an increase of $8.2 million over the amount appropriated for operations in 1980. Most of this increase reflects pay raises and other cost escalations, offset by a decrease of $6.7 million in reimbursable technical support services to Panama. However, the 1981 program does provide for a higher level of maintenance in the transit area, additional pilots, tug crews, and deckhands related to increased transit work-loads, and industrial training.
With respect to industrial training, an expansion of the apprentice training program will allow a greater number of local recruitments for skilled labor benefiting the Commission in the long term and meeting the requirement for increased participation by Panamanians in the operation of the Canal.
The $78.6 million for Treaty payments to Panama is comprised of a $10 million fixed annuity payment, a $10 million payment for public services that Panama is now providing, and a $58.6 million payment calculated on the net tons transited.
CAPITAL PROGRAM
The Commission's capital program reflects $23 million in budget authority for 1981 and is dedicated primarily to meet the needs of the Canal in terms of increased traffic capacity and safety and efficiency in operations. Accordingly, the major portion of the resources requested, $17.9 million, will be applied to the transit operations function.
Improvements in the waterway itself are designed to facilitate the transit of the larger class of ships, now using the Canal in increasing number, and to ease the navigational problems in certain difficult curves in the waterway. These projects will permit two-way traffic in some areas now restricted to one-way movements and reduce the potential for marine accidents through improvements in navigational safety. Also programmed in this year is construction of a ship tie-up station near the Pedro Miguel Locks which will contribute directly to an increased throughput of transiting ships.
We have planned the obligation of $7.4 million for improvement and additions to our floating equipment in 1981. The major procurement is for a replacement tugboat at the cost of $4 million. This acquisition is part of a long-range plan to replace over-aged and underpowered tugboats and to increase the tug fleet as the transit workload demand materializes. The 1981 program also provides for the replacement of a large work boat and a small dredge tender, and a dump scow.
Another project of major significance in our capacity improvement efforts is the installation of additional lighting in the Locks chamber at Gatun Locks at a cost of $1.3 million. We presently restrict the transit of the larger class of vessels to daylight. The added light in the Locks chambers will allow such transits to begin earlier and clear later in the day, and facilitate the handling of other wide beam ships in the Lock chambers at night time.
EMERGENCY FUND
The Panama Canal Act of 1979 authorized the establishment of the Emergency Fund. The request for a $25 million authorization for 1981 is based upon a current assessment of the amounts that could be required immediately for additional expenditures over those appropriated to defray emergency expenses or to maintain continuous, efficient, and safe operation of the Canal. Factors considered in arriving at this amount were the costs of correcting slides, removal of vessels obstructing the Canal, clean up of a major oil spill, and the potential for additional costs of increased Canal traffic. In arriving at that figure, it was also presumed that in the event that $25 million proves insufficient to overcome the emergency, a request authorizing additional funding would be expetitiously processed.
PANAMA CANAL COMMISSION FUND
The Panama Canal Act of 1979 provides that no funds may be appropriated to or for the use of the Commission for any fiscal year in excess of the revenue estimated for deposit in the Panama Canal Commission Fund during the year, plus prior deposits to the fund remaining unexpended at the begining of such year. The 1981 request is in compliance with such provisions of this act.
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CANAL TRAFFIC AND TOLLS
Our budget for fiscal year 1980 is based on a forecast of oceangoing transits of 13,765 for the year or 37.6 daily and tolls revenue of $299.6 million. For 1981, the budget predicts a 1.9 percent increase in oceangoing transits, or 14,020, with tolls revenues of $313.9 million.
Our estimates of North Slope Oil movements in the current fiscal year projected shipments averaging 400 thousand barrels per day during October and November, increasing to some 500 thousand barrels daily during the remainder of the year. The forecast for 1981 assumes continuation of the 500 thousand barrels level predicted for 1980, combined with some growth in other segments of traffic.
Tolls revenues through the first eight months of 1980 are short of budget targets by about $6 million. Nearly $4.3 million of the shortfall can be attributed to lower than expected shipments of North Slope Oil during this period. For the past four months, however, shipments of North Slope oil have risen sharply, and during April and May have slightly exceeded the budget targets. Most other elements of traffic remain near budget levels. Our budget estimates of costs and revenues for 1981 indicate that existing tool rates will be adequate to cover all costs of operations of the Canal as required by law. Detailed descriptions of the operating and capital programs for the Commission for fiscal year 1981 are included in the justification booklet previously furnished to the Committee.
Before leaving the subject of Canal traffic I would like to mention one significant trend which is impacting on operations and makes the need for Canal improvement more compelling-that is the increase in the size of ships transiting the Canal. A decade ago, only about 12 percent of transits were by vessels having beams in excess of 80 feet. This past year, vessels of this size accounted for more than 42 percent of all oceangoing transits. Moreover, the growth in transits of the largest vessels-those having beams over 100 feet-has been more impressive. While in 1969 such vessels accounted for about two percent of oceangoing transits, today they account for over 15 percent and further increases are expected to occur. This shift in the size of ships is being taken into account in our capital program.
HOUSE ACTION ON AUTHORIZING LEGISLATION
The House Merchant Marine and Fisheries Committee has reported on H.R. 6515, the authorizing legislation for the Commission in 1981. Certain provisions of that bill, if allowed to stand, will adversely affect Canal operations and employee morale.
CAPITAL PROJECT COST INCREASES
Subsection 2(d) of H.R. 6515 provides the Commission with authority to increase expenditures for approved individual capital projects so long as such increases do not exceed the dollar limitation placed on the capital category to which the project belongs, or the appropriation total itself. However, the Commission's Board must have approved such increases and so notified the appropriate committee and subcommittees of the House and the Senate. The purpose of this authority is to permit the Commission to accommodate to individual instances of cost escalation, changes in project scope, or other unanticipated cost increases, and yet remain within specific limitations on project groupings and total fund availability. The bill provides the additional stipulation, however, that any of the Committees or Subcommittees may disapprove the increases in expenditures proposed by the Commission.
It is requested that this provision allowing committee or subcommittee disapproval be deleted. In reality, this would constitute a second approval of capital projects previously authorized by the Congress. Its effect could be to defer or suspend work on a capital project until the prospect of disapproval was removed. In the case of work in progress, the delay could be considerable and adversely affect the orderly execution of the capital program. It will introduce inefficiencies in capital construction efforts and equipment acquisition through delay and uncertainties, and conceivably result in abandonment of some projects partially complete, with no offsetting advantages occuring in terms of fund control or existing expenditure limitations.
NEW CAPITAL PROJECTS
The House bill does not allow the Commission to initiate work on capital projects which were not included in the originally approved budget program. The need for such authority often becomes vital, such as in the event of marine accidents,
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landslides and other acts of nature which would require immediate corrective action and the use of capital resources.
The experience of Canal operators over the years demonstrates the need for capital expenditures on projects not anticipated nor included in the capital program at the time of origination. For example, marine accidents were responsible for destruction of the softnose center wall protectors at Pedro Miguel and Gatun Locks; emergency action was necessary to restore the launch landing at Ft. Davis used to transport workers to and from transiting vessels; and a survey at the Locks disclosed that latches for the miter gates, an essential component or our flood control contingency plans, were either deficient or missing. In each instance, immediate remedial action was taken and all work was approved by the Board of Directors of the then Panama Canal Company, in accoi d with policies and procedures in effect at that time. In all of these cases, time was critical and deferral of work to satisfy procedural requirements of the normal budget cycle would have been unwise and in some cases hazardous to safety. The cost of any such project would be absorbed within the fund limitations established for the project category to which it would apply and within the total of the capital appropriation.
LIMITATION ON MAINTENANCE AND ALTERATION OF FACILITIES OF THE GOVERNMENT OF PANAMA
The House Bill limits expenditures to $3,724,000 for maintenance and alteration of facilities of the Government of Panama which are used by the Commission. The agency request was for $5,109,000. Although it is not apparent from the title, this category of expenditure includes the upkeep and improvement of employee housing, and for 198 1, the total amount requested is targeted for this purpose. While ownership of Canal housing resides with Panama, the Commission retains use rights. Accor dingly, the impact of the proposed limitation falls directly on the employee and his family in the form of reductions to his standard of living, and indirectly on the Commission in lower morale of the work force with its productivity consequences. Deteriorating housing facilities would also affect the capability of the Commission to recruit and retain the necessary skilled employees.
Housing is considered by our employees to be second in importance only to their pay. The quality of Canal housing, on the average, is only fair, but it is adequate for the area and our situation. More than 50 percent of the housing inventory is over 30 years in age and quarters here incur an accelerated rate of deterioration due to the tropical environment. The programmed maintenance and improvements contemplated in the $5,109,000 requested are considered to be the minimum amounts required for furnishing a merely acceptable level of quality of accommodations for our work force. The proposed limitation constitutes a substantial reduction resulting in an extremely adverse impact on employee morale and an attendant detrimental effect on recruitment and retention efforts. Furthermore, recognizing that we will not construct any new housing units in the future, it is incumbent on the Commission to maintain those quarters available ini a manner that will extend the useful life of the houses to the maximum term possible. For these reasons I ask that the amount providedin the House Bill be restored to $5,109,000.
HIRE OF PASSENGER CARRYING VEHICLES
The Commission hire of passenger carrying vehicles covers two contracts for shuttle-bus service to transport deckhands and certain locks employees to and from their job sites. The contracts are full-service contracts covering drivers, fuel, vehicle maintenance and repair and other contractor costs. Due to the volatility of the fuel market, the contracts are not fixed-price contracts. There are escalation clauses which allow the contractor to pass on certain costs incurred.
The shuttle bus service is an indispensable component of the Commission's overall transit function. The loss of this service would severely disrupt the movement of vessels through the Canal. With the potential for sharp increases in contractor costs, any estimate of future costs is highly susceptible to change and an operational limitation based thereon is not a prudent action. The shuttle bus service is far too critical to our mission to be exposed to such a risk. Therefore, I request that no limitation be imposed on this essential transit service.
OPERATION OF GUIDE SERVICES
The Commission's guide service activity consists of two principal operations. One is the operation and maintenance of the motor launch, Las Cruces, and the other is the operation of visitor facilities at the Lock sites. Operation of visitor
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centers accommodates over 300,000 visitors annually who observe Lock operations firsthand while multi-lingual guides explain the events as they unfold. An observation platform and a theater for slide and film presentations are available. The guides also conduct tours and present briefings to civic and educational groups, representatives of foreign countries, cruise ship passengers, and official visitors to the Commission. The service is an important function in the Canal organization promoting goodwill towards the United States as well as the Panama Canal Commission.
The motor launch Las Cruces serves a twofold purpose. It supports the goals of the guide service by providing partial transits of the Canal as a part of the tour program. These trips, scheduled every other Saturday, have provided guided tours of the Canal for over 4,000 tourists and visitors in 1979 at a nominal fee. Even more important, perhaps, is the contribution to employee morale provided by the Las Cruces. The motor launch is primarily available to employee groups for recreational and social purposes for periods of two to four hours on a reimbursable basis. The utilization of the launch by employees is extensive and beneficial to both the agency and the employee. It is especially important at this time that we do no more in the way of diminishing the quality of life for Canal workers and their families.
The House bill proposes to limit expenditures for these services to $272,000 an amount which, if applied to operation of visitor facilities, would reduce this activity to an ineffectual level; if applied to the Las Cruces operation, its use would be sharply curtailed and possibly eliminated. Neither alternative would serve the needs of the Commission and its employees. I ask that the limitation be increased to $340,000, the amount in our original budget request.
As a result of the various limitations contained in the House bill, the appropriation requested by this agency was reduced $1,129,000. While the reduction is not welcomed, we do not ask for restoration of the $1,129,000. What we ask is that, within the reduced appropriation total, the limitations be revised to the original amounts for those specific activities I have cited, and that our needs for capital reprogramming authority within approved project group and appropriation fund limitations be recognized and granted.
Mr. Chairman, that concludes my prepared remarks. I shall be pleased to answer any questions that you or other members of the committee may have. Thank you.
Senator LEVIN. I thank both of you.
First of all, I want to commend you for the way the canal has been operated. It appears to be operating smoothly. The transition appears to have taken place smoothly and that is a great credit to your efforts, as well as some of the foresight of people like you in putting together both the treaty and the implementation legislation.
INITIAL BOARD MEETING
What has been the experience on the Board? Has it been a harmonious situation on the Board, or have there been some basic differences between the Panamanian and American members?
Mr. BLUMENFELD. The first meeting, which took place for 3 days in Panama on June 2-4, was basically harmonious. There were a number of instances in which the Panamanians registered objection to various policies the Commission has adopted since October 1, but unanimously passed a motion which commended the Administrator for the work which has been done in the absence of a Board to date, and indicated that while the Board would want to reappraise in more detai /certain of the policies and the actions that have been taken, it ratified those actions taken to date, subject to possible change based on the review I mentioned.
BOARD COMMITTEES
The Board proceeded, I think, fairly smoothly to its own organizational matters, including establishment of a budget and finance committee, a personnel committee, and a special committee on longrange canal improvement. Committees will do much of the preparatory
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work of the Board by addressing issues prior to full Board action.
As was mentioned, I was elected Chairman at that first meeting, and the Board approved the regulations by which it will operate.
I would say basically that it was a productive and harmonious first meeting.
EMERGENCY FUND
Senator LEVIN. Did you address the problem of the emergency fund authorization in your total statement?
Mr. BLUMENFELD. Yes.
Senator LEVIN. Have you explained in that how the legal status issue has been resolved?
Mr. BLUMENFELD. The legal status issue?
Senator LEVIN. Of the emergency fund, how you have been able, in effect, to achieve an emergency fund with respect to the problem we had last year?
Mr. BLUMENFELD. We are seeking in 1981 the authorization of that emergency fund. My statement and that of Administrator McAuliffe indicate authorization of that fund would be feasible within the restraints on what may be authorized and appropriated by the Congress.
Senator LEVIN. The upshot is that there is a $25 million emergency fund authorized in 1981; is that correct?
Mr. BLUMENFELD. If a bill which is identical in that respect, in both the House and the Senate versions, is enacted, that is the case. It will be authorized. There will still remain the matter of appropriation.
TREATY PAYMENTS
Senator LEVIN. Have you addressed in your statement the question of negotiations relative to the scheduling of payments to Panama and the payment of debts owed to the Commission by Panama?
Mr. BLUMENFELD. Yes. I am very pleased to report that agreement was reached in late March on a schedule both of payments by the United States and of repayments by Panama. Panama's complete back debt will be repaid by December 1981, and there are provisions for any future unpaid obligations of Panama that develop to be offset quarterly from the monthly treaty payments.
GAO REPORT
Senator LEVIN. Secretary Blumenfeld, the GAO recently completed an overview of the problems in implementing the treaties. One of the issues they addressed was assurance of procedural guaranties for U.S. citizens accused of crimes by the Panamanian authorities. This is a sensitive area for our citizens in Panama.
The GAO seemed to think that substantial problems remain to be solved. I am wondering if you would comment on that?
Mr. BLUMENFELD. I think these are problems remaining to be solved. I think progress is being made. We are accompanied by Mr. Richard Wyrough, from the State Department, who is prepared to speak in more detail on that issue, or we can elaborate for the record if you would prefer.
Senator LEVIN. We would prefer that. If you will give us the current status of that, it will be useful. Also, if you would comment for the record on the question of taxation of U.S. businesses. GAO noted that contractor exemption from local taxes was not yet fully accepted by
65-578 0 81 3
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Panama. As you will remember, the question of taxation of U.S. businesses was a matter of great concern to the Congress, and I wonder if you could bring us up to date on this issue.
Mr. BLUMENFELD. Certainly.
[The information follows:]
PROCEDURAL GUARANTEES
The Government of Panama has assured us that the annexes to the two implementing agreements to the Treaty which contain the procedural guarantees in question are self-executing under Panamanian law. Until a contrary statement or action is taken, we are prepared to accept these Panamanian assurances.
Our attitude in this regard parallels the view we have repeatedly expressed regarding the Panama Canal Act and our actions under it. We have asked Panama to judge us on our actions; in effect, we have said that how we fulfill our Treaty obligations through our internal law should not be of particular concern to Panama, as long as our actions comport with the requirements of the Treaty.
The same holds true of Panama--we are not inclined to question its internal legal procedures unless they would clearly result in actions inconsistent with the Treaty. To date we have been given no reason to believe that Panama will fail to provide the full range of guarantees required by provisions of the Treaty and related agreements.
Recognizing the importance of these procedural guarantees to the morale of our citizens, our Embassy has been instructed to monitor this situation closely. A full and detailed comment on this section of the GAO repoi t is under preparation.
TAXATION OF CONTRACTORS
Before addressing the contractor taxation issue raised in the GAO report, it is important to make clear that this problem is completely separate from the issue of retroactive taxation by Panama of enterprises in the former Canal Zone which came up several times during the Congressional consideration of the Treaty implementing legislation. This issue was fully resolved at that time and remains so.
The GAO report's discussion of contractor taxation concerns the provisions of the two major Treaty implementing agreements which provide for post-Treaty exemption of designated contractors from Panamanian tax under certain circumstances. Both governments clearly agree that this exemption is valid and effective, but dicussions are proceeding to better define the circumstances in which it applies.
Designated contractors are exempt from Panamanian tax under the implementing agreements providing they are subject to "substantially equivalent" United States tax. This language reflects an effort by the negotiators: (a) to avoid subjecting the U.S. Government to an indirect tax which might result from the imposition ot a Panamanian tax on such contractors, and (b) to avoid giving U.S. contractors a "tax free" competitive advantage over their Panamanian competitors in bidding on contracts.
What has developed in the implementation of this provision can be described fundamentally as a definitional problem involving the term "substantially equivalent." This Treaty language was based on certain technical assumptions on how the tax laws of the two countries would be applied; in practice, the situation has proven to be more complicated than these assumptions.
A U.S. team composed of representatives of the Departments of Defense, Treasury and State, and including international tax law specialists, has been meeting with their Panamanian counterparts in an effort to work out a mutually satisfactory procedure to put this Treaty provision into practice. As a result, substantial progress has been made, to the point where only a handful of areas remain unresolved.
Another series of meetings has been scheduled for the week of June 23 here in Washington. As the GAO report states, a mutually satisfactory solution to this complex, technical issue has required time, dedicated and expert effort, and cooperation. We think we are close to a resolution of this matter which meets the requirements of the Treaty and its agreements, as well as the tax laws of the two countries.
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RELATIONS WITH PANAMA
Senator LEVIN. What has been the relationship since the implementation legislation has taken effect between the two countries in Panama?
Mr. BLUMENFELD. I think the relationship has been quite good. I think we are addressing difficulties that exist in a cordial and open manner. I am encouraged by the state of relations thus far.
$1.1 MILLION REDUCTION IN HOUSE BILL
Senator LEVIN. General McAuliffe, on page 17 of your statement, after you go through some of the changes that were made by the House committee in the proposed bill, you indicate that you do not request the restoration of the million dollar cut, but merely a change in the specific language of the bill.
Would you welcome a restoration of that cut?
Mr. McAULIFFE. Yes, Mr. Chairman, I would welcome a restoration of the cut because these funds are needed overall for our operation, for the maintenance of our physical plant, and to assist in implementing the necessary capital projects for the future.
My willingness to accept a $1.1 million reduction is really a forthcoming offer in an effort to eliminate the specific ceilings on project categories that appear, or will appear, in the House bill. These specific ceilings will be, from my point of view, the point of view of the operator, exceedingly difficult to live with. I would be willing to offer up a reduction in the overall amount just to eliminate those ceilings.
RESTORATION OF HOUSE REDUCTION
Senator LEVIN. If the final product is going to have the flexibility you need, it may be necessary for us to insert the requested amount of funds as well at this point. We will have something to go to conference on?
Mr. McAULIFFE. Yes, sir.
Senator LEVIN. I am just wondering whether or not, if we did reinsert the funds, we would be putting in unneeded funds? We don't want to do that just for a conferenceable item.
Mr. McAULIFFE. I assure you, sir, we need and can use that additional $1 million.
Senator LEVIN. You prefer the flexibility if you are given a trade-off?
Mr. MCAULIFFE. That is correct.
PANAMA AREA WAGE BASE
Senator LEVIN. There was controversy, General McAuliffe, during consideration of the implementation legislation, on the question of ,wage rates. Many members, including myself, wanted a minimum wage law to apply to Commission employees, while others were concerned about the cost implications of applying the minimum wage law.
There was also some real possibility of inequities among employees doing the same job.
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I am wondering what progress you are making in devising an overall wage system that makes sense?
Mr. McAULIFFE. First of all, Mr. Chairman, the new wage system to which you refer, the Panama area wage base, which was pegged at the U.S. minimum wage that was in effect when the treaty took effect and would increase 2 percent per annum thereafter, that wage system is in effect.
We find that it is reasonably competitive with other wages for similar skills in the country of Panama, although there is some question that, at the rates of pay under that system for the more skilled craftsmen, for example, the degree of competitiveness is narrowing considerably. It is something that we are going to have to keep our eye on in the future.
In terms of steps that we are taking toward resolving the wage issue, we have recently placed into effect a compromise wage for certain specific skill categories that can be recruited in Panama, but if there are insufficient numbers available there, can also be recruited in the United States.
So, within certain specific skill categories, I have been authorized to put into effect a compromise wage rate which I think will help out in this matter of remaining competitive in hiring in the skilled areas.
AMERICAN BUSINESS INTEREST IN PANAMA
Senator LEVIN. How have American businesses been doing since the implementation legislation went into effect and the treaty went into effect? Are they generally satisfied with the relationship?
Mr. McAULIFFE. You refer to American businessmen?
Senator LEVIN. The business community in Panama.
Mr. McAULIFFE. They seem to be doing fairly well, although the rather seriously depressed economy of Panama is giving problems to all businessmen there, whether they be American or Panamanian or third country.
One thing that many of the businessmen have commented on to me is the fact that since the treaties have gone into effect, they have been able to count on a certain stability within the country, and even though the economy is depressed, the stability resulting from the assurance that the United States and Panama worked out an accommodation is beneficial to the business interests.
Senator LEVIN. I have a number of other questions which we will be submitting to you for the record. I hope that we can mark this bill up as expeditiously as possible. The chairman did want to drop by to say hello. He might have some comments whbQwe can mark it up.
There may be other members of the committee who will have questions for the record.
We thank you for coming by and for your work.
Is there anything else you want to add before we adjourn?
PANAMA CANAL BOARD MEMBERS
Mr. BLUMENFELD. No, sir. We much appreciate the tremendous help which you have given in shepherding through the nominations of the Panama Canal Commission Board members and your work in
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leading this effort to come up with a good 1981 authorization bill; the executive branch and the President himself much appreciate those efforts.
Senator LEVIN. Thank you for that.
There is one other question I want to ask.
FIRST MEETING OF BOARD
What was the attendance at that Board meeting that you had a few weeks ago?
Mr. BLUMENFELD. All nine Board members attended, as well as some invited guests.
Senator LEVIN. Do you send minutes of those meetings as a normal matter to these committees, both in the House and in the Senate?
Mr. BLUMENFELD. NO, sir; we have not.
Senator LEVIN. Are they public?
Mr. BLUMENFELD. No; they are not public documents.
Senator LEVIN. Any problems in sending us minutes of meetings?
Mr. BLUMENFELD. I anticipate no such problem.
Senator LEVIN. Could you send minutes of those meetings to this committee?
Mr. BLUMENFELD. Yes, indeed.
Senator LEVIN. Mr. Blumenfeld and Mr. McAuliffe, we thank you all. Thank you all for coming today. Thanks for the good work.
We are going to come back into session.
We now have the opportunity to have the question directly from Senator Byrd, rather than for the record. We, of course, welcome Senator Byrd and call upon him.
Senator BYRD. Thank you very much, Senator Levin. I appreciate it.
CABLE FROM PRESIDENT OF PANAMA
General McAuliffe, are you aware of President Royo's cable dated May 1 to President Carter which protested naval maneuvers in the Caribbean, including a planned amphibious landing at Guantanamo Bay on May 8, 1980?
Mr. McAULIFFE. I am generally aware of it, sir. I have not seen the message, but I am aware of it.
Senator BYRD. I have a copy of the cable and request that it be interred in the record.
[The information follows:]
PANAMA
ROYO SENDS MESSAGE TO CARTER ON U.S. MANEUVERS
PAO40240 Panama City LA ESTRELLA DE PANAMA in Spanish 3 May 80 pp A-1, D-6
[Text] President Aristides Royo has expressed his concern to U.S. President Jimmy Carter over the announced U.S. maneuvers in the Caribbean, specifically at the U.S. naval base in Guantanamo, Cuba. In a cable to President Jimmy Carter, Royo states that "the Republic of Panama does not consider these maneuvers ordinary exercises, since they go against the many efforts which all the countries in the region have been making to have the area considered a zone of peace." President Royo's message to President Carter is dated 1 May. It is believed that it was received in Washington shortly before the U.S. President announced the suspension of the maneuvers in the Caribbean. The text of the message is as follows:
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Mr. Jimmy Carter, President of the United States, White House, Washington, D.C., Dear Mr. President:
I wish to express to you our concern over the military maneuvers which the armed forces of your country have scheduled for next week in the Caribbean area, which has ceased to be the private sea of the United States because of the dignity of the sovereign states that exist there.
The Republic of Panama does not consider these maneuvers ordinary exercises, since they go against the many efforts which all the countries in the region have been making to have the area considered a zone of peace that is not subject to interference or disturbances by any power.
We hope that your government will reconsider the original plans in order to avoid greater tension, thereby permitting us to continue to work together to achieve greater understanding among the countries of the region.
Respectfully, [signed] Aristides Royo, president of the Republic of Panama.
Senator BYRD. Did anyone in the executive branch consult with you or members of the Panama Canal Commission in connection with the Royo communication?
Mr. McAULIFFE. Not with respect to that particular communication. It would have been appropriate, I think, to consult with the commander in chief of the U.S. Southern Command, since he is the officer responsible for the defense of the canal. My responsibilities are in the canal operation and the canal operation was not affected at all in that respect.
Senator BYRD. Are you aware of any response by the President or the administration to the Royo cable of May 1?
Mr. McAULIFFE. No, sir; I am not. Again, the matter might not have been brought to my attention because I am the canal operator.
U.S. MILITARY IN PANAMA
Senator BYRD. Would you describe the major military units stationed in the former Canal Zone? Is there a special forces battalion in the Canal Zone and if so what is its designation?
Mr. McAULIFFE. I am aware of the U.S. military forces in the area that formerly was the Canal Zone. I used to be the commander in chief of the U.S. Southern Command up through September 30 of last year.
The forces comprise on the Army's side an independent brigade. It has a number of maneuver battalions in it. It also has a special forces battalion, the 3d Battalion of the 7th Special Forces Group.
Senator BYRD. Are you aware of any Department of Defense or Department of the Army plan or study involving the reorganization of special forces which would lead to the deactivation of the Special Forces Battalion you have identified?
Mr. McAULIFFE. I had heard of such a study last year. It was my impression that the impact of that reorganization in Panama would have been minimal. I have lost touch with the study since that time, since retiring on September 30.
CUBAN FINANCING OF PANAMANIAN OLYMPIC TEAM
Senator BYRD. Mr. Blumenfeld, a translation of Panamanian press accounts indicates that Cuba is financing the Olympic team that Panama is sending to Moscow. Can you shed any light on that?
Mr. BLUMENFELD. I am afraid I can't, Senator. I think the question you have addressed to Administrator McAuliffe, as well as this one to me, reflect responsibilities and matters outside the scope of
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the operation, management and maintenance of the canal with which we are charged.
Senator BYRD. You are interested, I assume, in Panama as such?
Mr. BLUMENFELD. Of course, but I have not the details on the ramifications of the Panamanian decision with respect to its Olympic team's participation.
Senator BYRD. Do you know of any Cuban assistance to the Panamanian Olympic team?
Mr. BIUMENFELD. I am not personally aware of any.
FORMAL CANAL COMPANY INTELLIGENCE SECTION
Senator BYRD. The former Panama Canal Company had an intelligence and security section which maintained information bearing on individuals and groups which might pose a threat to the safe and efficient operation ot the canal. Would you describe what has become of that intelligence section, including the disposition of its records?
Mr. MCAULIFFE. Senator, that particular section was disbanded with the elimination of the Canal Zone Government, that elimination having taken place on October 2, as the treaty took effect.
The records that were maintained in that intelligence section have been-and I am 90 percent sure on this; and if I may, I will recheck for the record-turned over to the Intelligence Directorate of the Southern Command.
[Additional information follows:]
The Internal Security Office of the Canal Zone Government was reorganized into an Industrial Security Office on October 1, 1979. The intelligence and security section having to do with maintaining information on individuals and groups constituting a potential threat to the Canal was disbanded on entry into force of the treaty. The records of this section were offered to the Intelligence Director of the Southern Command.
Senator BYRD. What was the purpose of disbanding it?
Mr. MCAULIFFE. Because it was in effect a function of the Canal Zone Government and the government itself was disbanded.
COMMISSION INDUSTRIAL SECURITY OFFICE
I might add, Senator, that I retain within the Commission an Industrial Security Office. That office is responsible for planning, you might say, the internal security of our canal facilities. There is some information that that office has retained from the Canal Zone Government, but the information is much less, let us say, of an intelligence nature than had been the case up to the end of September.
COMMISSION NEED FOR INTELLIGENCE AND SECURITY OFFICE
Senator BYRD. You feel that we do not need that additional intelligence?
MI. MCAULIFFE. I now rely completely upon the U.S. Southern Command for that, since they have the full responsibility for defense. My reliance is on that command for defense matters. I do, of course, have a small police force which will remain with the Commission until 1982, when it is phased out under the terms of the treaty.
Senator BYRD. Evidently it was felt necessary previously to have such an intelligence and security section and now it is not considered necessary?
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Mr. McAULIFFE. Since the Commission is oriented to the commercial operation of the canal, the requirements for intelligence and for the preparation of defense plans has been stripped out and I, as the operator, am satisfied with the arrangement that I have with the Southern Command, because in a real sense I have to depend on the Southern Command for the forces necessary to do something about any threat to the canal.
Senator BYRD. Why did we need it in the past?
Mr. McAULIFFE. It was a complementary operation to the intelligence activities of the Southern Command. In the past the Canal Zone had a separate government; it handled all sorts of governmental things, like customs, like clearing people in and out of the zone, and in terms of handling all law and order problems.
Now, with the disappearance of the Canal Zone, and most of the areas in which we live being under Panamanian jurisdiction, the situation does not lend itself to a separate intelligence collection activity or any separate kind of police actions by the Commission.
We are, as I mentioned, oriented toward canal operations. We rely very heavily upon U.S. military forces there to provide us the security and protection that we need. We do not administer any areas except the canal operating area.
I do maintain a small security force that in effect protects the locks and industrial facilities against sabotage and tampering and that kind of thing. But the force is so small that I have to be prepared to call upon the Southern Command to assist, and they are prepared to respond.
Senator BYRD. Since the Panama Canal Treaty went into effect, has the Panama Canal been closed at any time?
Mr. MCAULIFFE. No, sir.
Senator BYRD. I understood that the canal was shut down for 3 days as a result of a Panamanian strike?
CLOSURE OF CRISTOBAL PORT
Mr. McAULIFFE. I believe you may refer to the port area of Cristobal. That is the port area on the Caribbean, or Atlantic, side. That was closed down for 2 days back in January because of a strike. The port areas were transferred to Panama on October 1, as was the Panama Railroad. The closure of that port, while causing problems within Panama, did not affect or close down the operation of the canal.
As a matter of fact, our pilots and other harbor personnel who normally use the Cristobal Port were still able to come and go during that strike without interference.
Senator BYRD. Had that port been closed prior to the turning over of the canal to Panama?
Mr. MCAULIFFE. I believe that it may have been closed down during a period in 1976 when there was a work slowdown and work stoppage within the Panama Canal, itself. But I will have to reconfirm that for the record. I don't know of any other closure.
[Additional information follows:]
The Port of Cristobal was shut down in 1962 for a period of one day by labor seeking higher pay for workers. There has not been a closure of the Port of Cristobal since that date through October 1, 1979, although there have been some instances of unrest. Since October 1, 1979, the Port has been closed for two days, January 28-29, 1980, due to a labor dispute with the Government of Panama.
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Senator BYRD. Since the Panama Canal Treaty went into effect, the port has been closed by a 2-day strike?
Mr. MCAULIFFE. That is correct.
Senator BYRD. The classified method for operating the locks and the canal, has that information been turned over to the Panamanians?
Mr. McAULIFFE. No, sir; that remains with the Commission.
NICARAGUA ARMS SHIPMENTS
Senator BYRD. Are you aware of any evidence that during the civil war in Nicaragua arms were shipped to Nicaragua through the Panama Canal or offloaded at ports in the former Canal Zone?
Mr. McAULIFFE. No, sir; I am not aware of anything like that.
USE OF CANAL BY CUBA AND U.S.S.R.
Senator BYRD. How often is the Panama Canal used by Cuban or Soviet merchant ships and warships?
Mr. McAULIFFE. Soviet ships use the canal regularly. I believe that in the course of the year we see 400 or 500 various Soviet ships. These are either personnel carriers-what I mean by personnel are cruise ships-or cargo ships coming through the canal.
There has similarly been regular use of the canal by Cuban ships but I do not have the regularity of it. I would say that it is a number considerably less than those of the Soviet ships. I will insert a table showing Communist use of the canal for the record.
[The information follows:]
CANAL TRANSITS OF VESSELS FROM COMMUNIST COUNTRIES
Country Fiscal year 1979 Fiscal year 1969
U.S.S.R. ----------------------587 104
Bulgaria- - -5 11 Cuba., 61 43 Czechoslovakia-.....---------------------- -1 4
East Germany ... 55 6 Peoples Republic of China. 10 0 Poland----------- 75 32
Yugoslavia.. 92 33
Total -------886 233
Senator BYRD. Has there been any significant change in the numbers of Cuban and Russian ships going through the canal?
Mr. McAULIFFE. No, sir. I believe these numbers have remained about the same for quite a number of years.
Senator BYRD. Thank you very much.
Thank you, Mr. Chairman.
Senator LEVIN. If there are no additional questions at this time we will adjourn this hearing.
As I indicated, there will be additional questions submitted for the record from members of the committee.
[The questions, with answers supplied, follow:]
QUESTIONS SUBMITTED BY SENATOR CARL LEVIN, ANSWERS SUPPLIED BY SECRETARY BLUMENFELD, CHAIRMAN OF THE BOARD, PANAMA CANAL COMMISSION Question. You have requested only $25 million for the emergency fund instead of the $40 million authorized; is that sufficient to give you the kind of flexibility that fund was intended to provide?
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Answer. While the $25 million amount is short of the $40 million originally requested for fiscal year 1980, it appears adequate to cover any reasonably foreseeable emergency. It is certainly adequate to permit initiating emergency action while concurrently seeking a supplemental appropriation if required. Such a request would presumably receive expeditious handling by the Congress.
The $40 million authorization in Public Law 96-70 was patterned after the $40 million borrowing authority previously authorized for the Panama Canal Company. That borrowing authority was used by the Company both to backstop programed obligations under the Anti-Deficiency Act and to serve as a reserve source of funds to finance operations should the inflow of tolls revenue be cut off as the result of a Canal closure. For this latter purpose, the Company adopted a policy of holding in reserve funds equivalent to a 40-day loss of tolls revenue.
Since the Commission operates directly from appropriations rather than from the revenues it generates, it has no requirement for a reserve either to backstop programed obligations or to protect itself against a temporary cut off of tolls revenue. It does, however, have a requirement for a reserve to defray emergency expenses and expenses arising from unforeseen traffic increases in the event annual appropriations prove inadequate for such purposes. These requirements call for a lesser amount of reserve than was needed by the Panama Canal Company.
The $25 million requested is based on the need to fund for the potential of an emergency of major proportion occurring two years in succession. A two-year, rather than a one-year, reserve is necessary because of the time it would take to replenish the Emergency Fund once a withdrawal is made. Withdrawals from the fund will be replenished prospectively from Canal tolls-a recovery cycle taking at least a year. Accordingly, without a two-year reserve, the Commission would be without a source of emergency funds during the interim between any initial withdrawals of funds and their replenishment through the appropriation and tolls process.
Question. I am happy to see the two countries have completed their negotiations concerning the scheduling of payments to Panama and the payment of debts owed to the Commission by Panama. Could you give us an idea how many bilateral agreements are still in the negotiation stage? How are these negotiations progressing?
Answer. Four major issues, and approximately 35 others of a more technical nature, are being resolved in diplomatic channels or by the Coordinating Committee. The status of issues is discussed below.
CEMETERY AGREEMENT
The Cemetery Agreement has been accepted by negotiators of both countries, and awaits ratification by the ROP National Assembly for Community Representatives. The next session is scheduled to convene on October 11, 1980.
PUBLIC SERVICE STANDARDS
Standards of performance for fire protection, garbage and trash collection and street sweeping, road and street maintenance, street lighting, and traffic management have been agreed upon at subcommittee level and forwarded to Panama's Representative for approval at the Coordinating Committee as soon as possible. Agreement at subcommittee level on the standard for police protection has been withheld by Panama pending completion of review by the Guardia National, but we understand that agreement is imminent. Panama has not yet developed a method for verifying costs incurred in the performance of public services. However, the Comptroller's Office in Panama has just recently proposed that a meeting be set up in the near future to discuss compiling, supporting, and reporting of the cost for these services. In the event progress is not made in the near future on this matter, the subject will be raised in the Coordinating Committee.
LAND USE LICENSING
Panama is currently developing a procedure for licensing of other land uses pursuant to Article IV of the Agreement in Implementation of Article III of the Treaty. The Commission has repeatedly emphasized the importance of this matter, most recently in a special meeting with DEPAT officials on May 27, 1980. On June 11, the Panamanian Representative to the Coordinating Committee agreed to pursue this as a matter of the highest priority.
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SEA LEVEL CANAL STUDY
In preliminary discussions between our two governments, the U.S. has informed Panama that we were "favorably disposed" to participate in a feasibility study with Panama and Japan. The U.S. and Panama have a Treaty obligation to carry out jointly a sea level canal feasibility study by the year 2000. Both we and the Panamanians have expressed the view that a tripartite study with Japan would meet this Treaty obligation. Following a visit to Japan by President Royo in late March, a Japanese-Panamanian communique was issued expressing interest in early "multilateral" consultations.
OTHER ISSUES
There are also about 35 other bilateral agreements pending formal approval of the Coordinating Committee. Some of these agreements are complete and in effect, requiring only ratification by the Committee. Others are in draft form and are undergoing legal review within the Commission. Approximately 15 of these agreements are still in the negotiation stage. The problem regarding taxation of contractors was discussed previously.
Question. Mr. Secretary, I understand that you have just returned from the first meeting of the binational Board of the Commission. There were several issues regarding the functioning of the Board, such as the quorum question and the Code of Conduct, that were to be dealt with in regulations or bylaws. Did the Commission discuss these matters, and are you optimistic as to their resolution?
Answer. Yes, Senator, the Board discussed the matters to which you refer in great detail. I would say that the Board focused harmoniously on its responsibilities for the smooth and efficient operation of the Canal while implementing the provisions of the Treaty between the two nations. In order to accomplish this, it was necessary to adopt regulations for the internal operation of the Board. The Board-adopted regulations included the requirement for a quorum, which will consist of a minimum of five Board members of which a majority of those present are nationals of the United States.
As regards the Code of Conduct, after some discussion, it was decided that more work was needed on the Code and it will be an agenda item at the July meeting.
QUESTIONS SUBMITTED BY SENATOR CARL LEVIN, ANSWERS SUPPLIED BY DENNIS
P. MCAULIFFE, ADMINISTRATOR, PANAMA CANAL COMMISSION
WAGE RULES IN TRANSFERRED ACTIVITIES
Senator LEVIN. What have the Panamanians done regarding wage levels for the functions they have taken over from the old Company/Government?
Mr. MCAULIFFE. The Government of Panama has maintained the same pay and classification systems which existed in the Panama Canal Company on September 30, 1979. Specifically, the systems consist of wage categories and grade levels determined by the nature and difficulty of work; pay steps within grade levels; and a minimum wage of $2.90 per hour.
The systems apply to all employees of the activities assumed by Panama. Future pay adjustments will be determined by the Government of Panama.
AMERICAN BUSINESSES AND NON-PROFIT ENTITIES
Senator LEVIN. Mr. McAuliffe, the recent GAO analysis of treaty implementation pointed up several unresolved issues regarding the regulation of American businesses and nonprofit organizations in what was the Canal Zone. Could you give us a little background on this problem? How many such businesses and organizations are there? What difficulties are they encountering? What progress are we making in solving these problems?
Mr. MCAULIFFE. Prior to October 1, 1979, there were approximately 130 commercial and 305 non-profit activities authorized to operate from sites in the former Canal Zone. The commercial activities are directly related to the operation of the waterway, and include petroleum companies, shipping agents, tank branch offices, and professionals, such as attorneys and dentists. Some small-scale concessionaires, such as beauty, barber, and shoe repair shops, also operate in Commission housing areas. The non-profit activities include religious, welfare, fraternal, and
recreational organizations which support the U.S. and non-U.S. citizens residing in Canal area communities.
Because these organizations were located in the Canal Zone prior to treaty implementation, they benefited from lower costs for utilities and other community services, as well as access to U.S. health, educational and commissary facilities. Freedom from Panamanian taxation, customs duties, and labor laws, further substantially reduced the cost of operation for these organizations and their personnel. With the entry into force of the treaty on October 1, 1979, however, eligibility for these benefits and immunities was lost in whole or in part.
These changes appear to have had less of an adverse financial impact on commercial than on non-profit activities. Commercial activities have, as a rule, passed on higher costs of operation to their customers. Non-profit activities, which rely on membership support, have had difficulty finding additional sources of income to cope with the higher costs of operations in Panama. Both U.S. and Panama officials are aware of the financial plight of non-profit activities in the Canal area and have agreed on arrangements to attenuate the impact of the treaty during the 30-month transition period. One such arrangement provides for a gradual increase of utility rates for non-profit activities from the September 30, 1979, Canal Zone employee rate to the higher charged in Panama. This will be accomplished in incremental steps over the 30-month period.
LAND USE LICENSES
Senator LEvIN. A related problem mentioned by GAO in its report concerns land use licenses for businesses and other entities. What is being done to solve this problem? Are any of these businesses and entities that are being threatened with double rents going out of business entirely?
Mr. McAULIFFE. One of the factors affecting Land Use Licensing was the dissolution of the Panama Canal Authority (PCA) in January 1980 and the transfer of its responsibilities to various Ministries of the Government of Panama. Meetings are again underway with the PCA's successor, a much smaller office, entitiled DEPAT, which is located within the Panamanian Ministry of the President. Topics under discussion include those listed in the GAO report. We are also working with Panama on establishing bilateral processes for the issuance of Land Use Licenses in accordance with Article IV of the Implementing Agreement of Article III.
Some of the key factors contributing to the delay in resolution of Land Use License issues include (a) differences in interpretation of the treaty terms, and
(b) a lack of existing comparable mechanisms in the Panama legal or civil structure for issuing permits to private individuals or commercial activities to use land owned by a government entity. In many cases, differences in interpretation of treaty terms are so great that quick resolution of problems is not expected.
We are aware that Panama's Director of Revenue (Bacienda y Tesoro) is presently billing some 470 commercial and non-profit activities located in the former Canal Zone. We are not aware, however, of any circumstance where double billing is being claimed as the primary reason for dissolution of a commercial or nonprofit activity in the Canal area. We are aware of the case of Foster Construction de Costa Rica, Texaco, and IBM in which these companies have reported double billing by Panama for use of Commission facilities. The billings may be placing some of these organizations in the position of making a decision to discontinue activities.
PUBLIC SERVICES
Senator LEVIN. Mr. McAuliffe, could you please discuss for the Committee the progress we are making in developing a sound system for verifying and evaluating the costs of public services now provided to the Commission and DOD by the Government of Panama? This was a matter of concern during the treaty debate, and I understand we still do not have a full understanding of the way in which the Panamanians price these services. Is that so?
Mr. McAULIFFE. It is correct that we still do not have a cost reporting system for the public services being provided by the Government of Panama.
As early as April 1979, the Panama Canal Company submitted to the Government of Panama for its consideration a draft procedure providing for the systematic reporting and verification -of costs incurred by the various Panamanian agencies in performing the public services for the Commission. In September 1979,
27
the Government of Panama submitted a counter-proposal to which the Commission responded in November 1979 with its evaluative comments and a request that the two parties meet to discuss further the points in question in order to arrive at an agreement in the near future.
To date, no formal response to our comments has been received even though several attempts have been made to elicit action on the part of the Government of Panama to successfully resolve this long-standing matter of joint concern. The latest of these appeals was forwarded to the Director of the Office of the Comptroller for the Canal area in May 1980, to which we received a response on May 27, 1980, indicating that they would be in contact with us to discuss the method to be used for cost reporting. We will continue to pursue this matter with Panama.
Senator LEVIN. What about the quality of public services? Have you been satisfied so far with the services you have been purchasing from Panama?
Mr. McAULIFFE. Most public services being purchased from Panama have been provided since October 1, 1979, at a level generally comparable to that provided by the Company/Government prior to that date. Standards for these services have not yet been fully agreed by Panama. In the area of roads and street maintenance, performance has lagged and the quality is barely satisfactory. Panama's work effort has been severely hampered by late release of funds for acquisition of materials and equipment, and by labor problems. Road and street maintenance began only two months ago, missing the dry season climate, most favorable for this type of work. Notwithstanding the problems, our direct working relationship with counterpart operating personnel responsible for this function in Panama remains good, we will continue to press Panama to provide service as contemplated by the standard.
RETIREMENTS
Senator LEVIN. Mr. McAuliffe, we heard dire predictions last year concerning the flight of experienced American personnel from Panama that would result from implementation of the Treaty. How severe was that impact now that it is behind us? Was it larger or smaller than we had anticipated? Are there particular areas or skills where the early retirements were particularly damaging?
Mr. McAULIFFE. The mass exodus of experienced U.S. citizens, which some persons had predicted, failed to materialize. The liberalized retirement provisions of Public Law 96-70 which are applicable throughout the life of the Treaty, together with the relative smoothness of the transition to date have undoubtedly served to calm the apprehensions which many U.S. citizen employees had about the Treaty.
In the one-year period from April 1979 through March 1980 a total of 317 U.S. citizen employees retired. During the same period in 1978-1979 there were 105 U.S. citizen retirements. At the same time, however, the number of resignations by U.S. citizens were 28 fewer in 1979 than in the previous year. The higher number of retirements among U.S. citizens is largely attributed to the reduction in force that was in process in 1979, during which many employees elected to retire in lieu of being adversely affected in the reduction in force. To a lesser degree, they were also due to the early retirement eligibility provisions available under regular Civil Service rules to employees involved in major reductions in force. Still others retired because of their unwillingness to stay on under the changed conditions brought about by the Treaty.
The retirements and resignations among U.S. citizens which occured during the one-year period spanning from six months before to six months after the Treaty implementation date were not concentrated in any single occupation or group of occupations. The loss of a larger-than-usual number of U.S. citizens in the period could not help but be felt in the Canal organization, especially since many of these employees, through their years of service, had acquired a fund of experience and expertise that is difficult to replace. In spite of this, however, we have not suffered damaging losses in particular areas or skills. To a large extent, competent and wellqualified on-board employees have replaced those who have retired or resigned. Where outside recruitment has been necessary, we have been able to locate sufficient numbers of qualified candidates with the particular skidls that we require.
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QUESTIONS SUBMITTED BY SENATOR STROM THURMOND, ANSWERS SUPPLIED BY
SECRETARY BLUMENFELD, CHAIRMAN OF THE BOARD, PANAMA CANAL
COMMISSION
Question. Mr. Secretary, did any of the Panama members oppose your selection as Board Chairman?
Answer. Senator, the Panamanians desired that the Chairmanship be rotated between the United States and the Republic of Panama. That proposition, however, was not accepted by the Board. During the subsequent vote on election of the Chairman, the Panamanians abstained; therefore, they did not vote against my selection.
Question. Were all the Board members present at the first meeting?
Answer. Yes, all United States and Panamanian members were present.
Question. Provide for the Record the actions of the Board to date.
Answer. Senator, as you are aware, the Board has had one meeting. A number of significant actions were accomplished. They were:
a. Adoption of internal regulations which will govern Board operations.
b. Election of a Chairman.
c. Organization of Board committees (Executive committee; Budget/Finance; and a special committee on long-range Canal improvement).
d. Approval of major decisions made by the Administrator since October 1, 1979 with the proviso that certain actions will be reviewed in depth by the various committees of the Board at a future date to determine whether revision or modification might be indicated.
e. Appointment of a Secretary, Panama Canal Commission.
f. In-depth discussion of:
1. Code of Conduct.
2. Chief Financial Officer, Chief Engineer and Ombudsman roles.
3. Current wage policies and systems.
4. Capital programming and budget.
5. Financial status of Commission.
6. Personnel structure of Commission, and vehicles for increasing Panamanian employment in technical, professional and managerial positions.
These are a few of the topics discussed or decided upon during the first Board meeting. As you might well imagine, a considerable amount of time was consumed in organizing the Board.
Question. Provide for the Record any proposals on which there was a division between the U.S. and Panama members.
Answer. Senator, as in any deliberation by any organized body, there are disagreements. The Board of the Commission is no different. There were disagreements on a number of issues but these disagreements were solved either by vote or by referring the matter to the proper committee for study. The committees will then report to the Board and if it is necessary for the Board to take action on the recommendation, it will do so.
Question. Why is Panama being paid on a monthly basis?
Answer. From a financial management point of view, monthly payments are more convenient for both the Commission and the Republic of Panama than would be a single annuity.
Question. What has been the impact of the lower oil shipments?
Answer. Most of the nearly $6.0 million shortfall in tolls revenue during the first eight months of the fiscal year is due to lower than budgeted shipments of Alaska North Slope oil through the Canal. Shipments averaged 400 thousand barrels daily compared to the budget estimated of 475 thousand barrels per day. Tolls generated by this trade totaled $22.6 million, approximately $4.3 million below the estimate for the period.
Question. What would you expect future impacts to be?
Answer. The North Slope oil trade through the Canal has been increasing the last four months, averaging 526 thousand barrels daily in April and May. Recent estimates indicates that shipments during the next few months should perform at forecast levels of 500 thousand barrels daily. No impact is therefore expected from this trade for the balance of the fiscal year. Since this commodity is the most prominent one, any significant increase or decrease in traffic could have a major impact on Canal operations.
Question. Have you recommended any changes in the 1979 Act other than those in your statement?
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Answer. Senator, I don't believe I recommended any changes to the Panama Canal Act of 1979. The Act, as you know, requires the President to submit to Congress by October 1, 1981 a request for such legislation. We are considering a number of items that might be developed into specific proposals, but it is much too early to define them as "recommended changes."
Question. What financial problems do you envision in the long term?
Answer. I currently have no basis for identifying any specific financial problems in the long term. The Canal continues to be susceptible to factors beyond its immediate control, such as the world economic picture, world trade patterns, alternative means of transportation, and the advance of technology, that all have significant effects on the Canal traffic and tolls. The Canal has remained financially self-sufficient through traffic growth and recent toll increases. I don't anticipate anything to the contrary.
Question. How important is the guide program to the Canal operation?
Answer. Ti:e importance of the Panama Canal Guide Service as a public relations tool has been readily apparent since its inception in 1962, but it has become even greater under our new relationship with the Republic of Panama.
Question. Why is it needed at all?
Answer. The Guide Service conducts orientation tours and gives briefings on the Canal operation to local civic and educational groups, U.S. and foreign military, and visiting government officials and diplomatic personnel from many nations. At the request of the American Embassy, we recently instituted periodic tours and briefings for newly assigned personnel. These services increase understanding of Canal operations and foster friendly relations between the many diverse groups having an interest in the waterway.
More than 300,000 people from all walks of life visit Canal installations each year. Handling of these visitors in an orderly manner is of the utmost importancenot only from a public relations standpoint but as a matter of their safety. If there were no guide service, these installations would have to be closed to the public, thereby depriving visitors of the opportunity to gain first hand information about the Canal.
Question. Has it ever paid its own way?
Answer. The Guide Service is not a revenue producing operation. It has, however, produced immeasurable returns in good will and understanding of the U.S. presence in Panama. There is no cost to the U.S. taxpayer in providing the service.
Question. What provisions of the 1979 Act do you feel have been ineffective or a hindrance to Canal operations?
Answer. I have not found that any of the provisions were ineffective, nor have any thus far adversely affected the efficiency of the Canal operation in any significant way. There are several provisions that have proven to be very cumbersome to the management of the Canal operations. I particularly would cite applicability of Title VII of the Civil Service Reform Act to the Canal area as difficult at best. The steps to union recognition are still in progress. To date, only one petition for recognition has been finalized. Because of the significant differences between Panamanian labor laws and Title VII, I anticipate considerable effort will be devoted just to the implementation phase.
The changeover from corporate to appropriated form of the agency has led to many difficulties also. This situation was exacerbated by the short time allowed for the transformation.
Finally, we will only know after further experience whether the requirements relating to selection of U.S. Board members, and the lack of a "proxy" device in relation to the quorum requirement, will hinder effective and efficient operation of the Board; that could potentially be a problem.
QUESTIONS SUBMITTED BY SENATOR STROM THURMOND, ANSWERS SUPPLIED BY
DENNIS P. MCAULIFFE, ADMINISTRATOR, PANAMA CANAL COMMISSION
MAINTENANCE COSTS
Senator THURMOND. Mr. McAuliffe, your fiscal year 1981 request shows a sizable increase in funds for maintenance in the areas handled by Panama. Why is this increase necessary?
Mr. McAULIFFE. The 1981 budget request provides for additional funding for maintenance and equipment overhauls in the transit operations area. This additional amount includes maintenance and overhaul of dredging equipment, restoration of spoil dump areas, tugboat maintenance and overhauls, major maintetenance on lock structures and equipment, and on-going maintenance of other
30
transit facilities and equipment. This higher level of maintenance on transit facilities and equipment is necessary to provide acceptable levels of safety and operations in the transiting of ships through the waterway. This serves also to make up some maintenance deferrals from previous years. All these maintenance costs will be covered by revenues.
Senator THURMOND. How many additional Panama workers are to be added as a result of this increase?
Mr. MCAULIFFE. The varying requirements for maintenance and overhaul are accomplished, in many instances, through the use of temporary and parttime employments. By far, the majority of these employments are obtained through the local labor market and are Panamanian citizens. Peak periods of maintenance effort occur in the dry season months and the employments associated with these maintenance projects are not a component of the Commission's permanent full-time workforce. The number of temporary workers associated with this increase would vary depending on the availability of workers and the nature of the project.
Senator THURMOND. Did Panama request this increase?
Mr. MCAULIFFE. No, Sir. The Agency's maintenance requirements are the result of standards of preventive maintenance established over the years which have been proven effective in routine and cyclical programs of maintenance and repair efforts. Requirements identified in periodic inspection and survey activities by engineering and other specialist personnel, and established maintenance programs, comprise the core of the Agency's overall maintenance and overhaul requirements, all of which are aimed at maintaining the waterway and as to assure its continued safe and efficient operation throughout the life of the Treaty.
FINANCING CAPITAL IMPROVEMENTS
Senator THURMOND. Is there any doubt that all capital improvements being initiated can be financed to completion from Canal revenues?
Mr. McAULIFFE. None whatsoever. The Panama Canal Act of 1979 ensures in three ways that capital improvements will be financed to completion from canal revenues. First, the toll provisions of that Act require that rates be set at levels calculated to produce revenues to cover all costs of operations, including capital for plant replacement, expansion, and improvements. This places a legal mandate on management to insure that toll rates remain adequate to finance capital improvements being sought. Secondly, the Act provides that no funds may be appropriated to or for the use of the Commission in any fiscal year in excess of the estimated revenue to be deposited in the Commission Fund during that year, plus any unexpended revenue balance in the Fund from prior years. This provision imposes on the Commission the ongoing requirement that revenues be sufficient to cover appropriations. Finally, the Act requires that any unrecovered costs be included as an element for recovery in setting toll rates. Thus, in the event revenue proved insufficient to cover costs in any given period, the shortfall would be recovered prospectively.
EMERGENCY FUND
Senator THURMOND. Do you still feel the $25 million emergency fund is the proper level of money for this fund?
Mr. MCAULIFFE. In my judgment, $25 million will provide a reasonable and needed level of reserves to ensure the continuous and efficient operation of the waterway. It is based on an assessment of the costs that could be incurred for the correction of landslides into the Canal, the removal of vessels obstructing the channel, the clean up of a major oil spills, as well as the potential cost for meeting unanticipated traffic increases. It also represents an amount that could prudently be set aside from Canal revenues for that purpose. At some future point in time, the Emergency Fund may have to be increased to keep pace with inflation.
Senator THURMOND. Why do you feel additional money could be "expeditiously processed" if necessary?
Mr. MCAULIFFE. I believe an emergency of such proportions, costing in excess of $25 million, would be of such importance to the Canal operation that it would prompt expeditious processing by OMB and the Congress. The $25 million emergency fund and any funds that could be diverted from operations would provide us the means to initiate a large part of the emergency work. In the meantime, we would request supplemental funding authority to complete the project and restore operations.
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TRANSIT OF OIL
Senator THURMOND. Is there any reason to believe the oil shipments will not continue to provide needed revenues over the next few years?
Mr. MCAULIFFE. No significant changes in the flow of Alaska North Slope Oil through the Canal are anticipated for at least the next two years. Shipments are projected to remain steady at a level of nearly 500 thousand barrels daily during this period.
RESERVES
Senator THURMOND. Should you be building a reserve to protect the canal if these oil shipments drop in the next few years?
Mr. MCAULIFFE. Without a change in legislation, there is no way to build a reserve to protect against the future loss of oil shipment revenues. The tolls formula set forth in the Panama Canal Act of 1979 provides only for the recovery of costs in setting rates for tolls. There is no authority for increasing toll rates to cover prospective losses of revenues. When and if revenues become insufficient to cover costs, the law requires that a toll rate increase be implemented.
HOUSE ACTION ON PROJECT COST INCREASES
Senator THURMOND. What was the rationale of the House action on captial project cost increases?
Mr. MCAULIFFE. I assume you are referring to the provision allowing any of the Committees or Subcommittees to which changes in the cost of individual capital projects are reported to disapprove such changes. We are not certain of the rationale for this requirement, but it appears that the purpose was to impose additional and more strict controls over capital expenditures. We believe this provision is unnecessarily restrictive, provides for a redundant approval of project change, and thus would impede the conduct of the capital program.
Senator THURMOND. What type of improvements are involved in the housing requests?
Mr. MCAULIFFE. The capital improvements involved in the housing request are for minor improvements, reroofing and insulation. A description of each category follows:
1. Minor improvements to quarters-This program contributes to improving management/employee relations by funding improvements to quarters that enhance their desirability. Its popularity is attested to by the heavy backlog of requests and the continued interest of communities in it, and is essential because of its effect on employees' morale.
Improvements generally provide for the conversion of open areas into living space and include such items as patio and carport slab, roofs and enclosures, security protection systems, basement enclosures and sidewalks.
Under this program the agency pays a portion of the cost of each improvement with the employee paying the balance. Rental rates are then increased to offset the agency's cost and provide for future maintenance. Improvements to approximately 80 apartment units are planned for fiscal year 1981.
2. Reroof employee quarters-This program provides for the replacement of deteriorating roofs of employees' quarters that have exceeded their normal life expectancy and have become uneconomical to repair. Failure to replace roofs on a timely basis results in higher maintenance costs when extensive repairs are required and frequently include water-soaked insulation, dry rot damaged framing members and warped and deteriorated interior ceilings.
3. Insulate employees quarters-This provides for insulating frame quarters by installing insulation in attics and installing vinyl siding on those quarters with ship-lap siding.
The primary purpose of the insulation program is to reduce electrical energy consumption. A secondary purpose is to lower maintenance and painting costs and retard deterioration of building exteriors.
PANAMA CANAL ACT OF 1979
Senator THURMOND. What portion of the 1979 Act have you found a hindrance to efficient operations?
Mr. MCAULIFFE. To be frank, we have had insufficient time to evaluate the effect of the new legislation on the operation of the canal. During the last eight
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months, we have had to focus all our efforts toward implementing the requirements of both the Treaty and the new legislation, while at the same time ensuring the continuous operation of the waterway. At this point, I am satisfied that the canal is operating as efficiently as it has in the past.
Senator THURMOND. Have you recommended any changes?
Mr. McAULIFFE. No, sir, I haven't. The Panama Canal Act of 1979 requires the President to submit to the Congress by October 1, 1981, a request for legislation which would, among other things, contain provisions considered necessary and appropriate in light of the experience as of that time under the Treaty. I would expect to have completed our assessment and recommendations by that time.
Senator LEVIN. We thank you for coming.
Mr. BLUMENFELD. Thank you, Mr. Chairman.
[Whereupon, at 9:10 a.m. the hearing was concluded.]
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PANAMA CANAL COMMISSION AUTHORIZATION FISCAL YEAR 1981 HEARING BEFORE THE COMMITTEE ON ARMED SERVICES UNITED STATES SENATE NINETY-SIXTH CONGRESS SECOND SESSION JUNE 12, 1980 Printed for the use of the Committee on Armed Services I I rl v U.S. GOVERNMENT PRINTING OFFICE 65-578 0 WASHINGTON: 1980
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COMMITTEE ON ARMED SERVICES JOHN C. STENNIS, Mississippi, Chairman HENRY M. JACKSON, Washington JOHN TOWER, Texas HOWARD W. CANNON, Nevada STROM THURMOND, South Carolina HARRY F. BYRD, JR., Virginia BARRY GOLDWATER, Arizona SAM NUNN, Georgia JOHN W. WARNER, Virginia JOHN C. CULVER, Iowa GORDON J. HUMPHREY, New Hampshire GARY HART, Colorado WILLIAM S. COHEN, Maine ROBERT MORGAN, North Carolina ROGER W. JEPSEN, Iowa J. JAMES EXON, Nebraska CARL LEVIN, Michigan FRANCIS J. SULLIVAN, Staff Director JOHN T. TICER, Chief Clerk (II)
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PANAMA CANAL COMMISSION AUTHORIZATION, FISCAL YEAR 1981 THURSDAY, JUNE 12, 1980 U.S. SENATE, COMMITTEE ON ARMED SERVICES, Washington, D.C. The committee met at 8:24 a.m., pursuant to call in room 212, Russell Senate Office Building, Hon. Carl Levin presiding. Present: Senators Levin and Byrd. Staff present: John C. Roberts, general counsel; Edward B. Kenny, professional staff member; Christine E. Cowart, assistant chief clerk; and Karen A. Love, clerical assistant. Also present: Frank Krebs, assistant to Senator Cannon; Quentin Crommelin, assistant to Senator Byrd; Charles Stevenson, assistant to Senator Culver; Peter Lennon, assistant to Senator Levin; and Mike Donley, assistant to Senator Jepsen. OPENING STATEMENT BY SENATOR CARL LEVIN, PRESIDING Senator LEVIN. Good morning, gentlemen. At the request of Chairman Stennis, I am chairing this morning the 1981 authorization for the Panama Canal Commission. The press of other committee business necessitated that we meet at this hour. I appreciate all you coming by at this time of the day. The Panama Canal Act of 1979 established the Panama Canal authorization and appropriation scrutiny by the Congress. Although many of us initially had reservations about this approach, including myself, we accepted it because many others felt that it would provide some additional protection to the U.S. Treasury and taxpayers while still allowing adequate flexibility to the Board and Administrator in the operation of the canal. The annual authorization cycle, of which this hearing is a part, is our opportunity to assure that both of these objectives are met. We are now well in the first year of operation under the new treaty and under the new operating partnership with Panama. I hope that our witnesses today will inform us briefly as to the status of that new arrangement and any actions that we and the Congress can take on this authorization bill, or any other areas for that matter, to assure the continued smooth and efficient functioning of the canal. Last year the Senate and the House were unable to resolve their differences over some provisions of the fiscal year 1980 authorization bill and, as a result, that bill was never enacted into law. The Commission has, therefore, been operating on its appropriation but without the more precise guidance of authorizing legislation. The (1)
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2 authorizing committees, the Senate Armed Services Committee and the H-ouse Merchant Marine and Fisheries Committee, do have an important role to play in overseeing the functioning of the canal. We are hopeful that we will be able to act expeditiously on this matter and reach an early accommodation with the House on legislation sent to the President. We have as our witnesses this morning Assistant Secretary of the Army, Michael Blumenfeld, who has had the primary responsibility within the Department of Defense for overseeing the old Panama Canal Company, and is now Chairman of the Board of the Panama Canal Commission; and General D. P. McAuliffe, Administrator of the Commission and former commander in chief of the U.S. Southern Command. I am wondering if the third person at the table will identify himself? Mr. SCHROEDER. I am Myron A. Schroeder, Chief of the Financial Planning Division of the Panama Canal Commission. Senator LEvIN. We welcome all three of you. You may proceed. STATEMENT OF HON. MICHAEL BLUMENFELD, ASSISTANT SECRETARY OF THE ARMY (CIVIL WORKS), CHAIRMAN OF THE BOARD OF DIRECTORS, PANAMA CANAL COMMISSION, ACCOMPANIED BY HON. DENNIS P. McAULIFFE, ADMINISTRATOR, PANAMA CANAL COMMISSION Mr. BLUMENFELD. Thank you, Mr. Chairman. Let me say it is good to be here and good to see you again. CHANGES REQUESTED TO HOUSE BILL I will enter my statement in the record and proceed briefly to summarize the key items. We would very much value the help of the committee in changing some of the provisions of the authorization bill that is now awaiting floor action in the House, and I shall focus on those. I think they are changes that would be in the spirit with which this committee has approached the question of the Panama Canal authorization. Information on the events that have happened since October, and on some of the preliminary decisions and considerations of the Panama Canal Board is covered in my statement, as are the prognoses for revenues and cost. I won't bother summarizing those in the interest of time, but will refer you to the full statement. PROPOSED AMENDMENT Let me focus on the proposed amendment to the bill which now awaits floor action in the House. An insert in section 2(d) (1) of the bill provides that increases in expenditures for previously approved projects can be disapproved by any of the four authorization and appropriations committees or subcommittees. The phrase states, "Any of the committees or subcommittees may disapprove the increases in expenditures proposed by the Commission."
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3 The bill already provides for an overall project category limit that we accept and will comply with even if certain projects experience difficulties. The effect of requiring the second approval is to delay the start of certain projects, or to suspend or abandon ongoing projects. BOARD AUTHORITY FOR REPROGRAMING This course of action would obviously introduce inefficiencies and costs that are undesirable. We believe the Board of the Commission should be given the reprograming authority that it seeks, so long as the amount authorized and appropriated by Congress for the total capital program and the major categories within it is not exceeded. I think this is consistent with the treaty, it is consistent with Public Law 96-70, it is consistent with sound management practices, and it is consistent with the trust that ought to be afforded the Board of the Commission, with its five member U.S. majority which the Senate confirmed after careful consideration. AUTHORITY TO INITIATE NEW PROJECTS I recommend that the committee for similar reasons also adopt language authorizing the Commission to initiate projects that are not included in the budget submission, but have been subsequently determined by the Board to be necessary for efficient, continuous, and safe operation of the canal, on a 30-day notice and wait basis and with the understanding, of course, that these new project starts would not violate the ceiling for the various categories of capital projects. There have been cases in the past where similar reprograming actions were necessary to assure safety and to increase canal capacity. There are examples of those in my statement. They prove, I think, the need for this authority we seek. RESTORATION OF BUDGET LIMITATION The remaining actions that I believe are necessary require restoration of certain budget limitations that were imposed by the House committee in this pending bill, in three activities. I will mention them only briefly. The Administrator will be prepared to provide more detailed justification, either this morning or in followup written answers if you have some questions. LIMITATION ON HIRE OF VEHICLES First, I believe all limitations on the hire of vehicles ought to be removed. The funds we have sought for hire of vehicles are required to provide a contract for shuttle bus service to transport employees where their duties are related to the actual movement of ships through the canal. GUIDE SERVICE Also, we seek restoration of a reduction of $68,000 in the operation of guide services. If we had to live with this reduction, one of two equally unfavorable actions would happen: either (a) the Commission would be required to remove the motor launch Las Oraces from service, or (b) it would have to reduce its visitor facility operations to an ineffective level.
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4 EMPLOYEE HOUSING MAINTENANCE Finally, I would like to urge that the committee restore the limitation on maintenance of facilities in section (2a)(11) from the $3.7 million level proposed by the House Committee to the budget level that we requested, $5.1 million. This item covers only housing that is retained by the Commission for use by employees. We can't afford to neglect housing maintenance. It is doubly imperative that we not neglect it because we have no plans to build new housing. The Commission has to live with what we have and that is a task that is challenging enough, given the problems of maintenance in a tropical environment. Mr. Chairman, I believe this bill, if adjusted as I propose, reflects the most accurate estimate that can be made at this time of the expected net revenues and required operating costs of the Commission luring fiscal year 1981. I would appreciate the committee's help in getting the amendment wti' h I have sought this morning. I suggest that Mr. McAuliffe might summarize his statement as well, and then proceed to your questions. Senator LEvIN. Thank you for your statement and the brevity of it. We will put the entire statement in the record. [The prepared statement of Mr. Blumenfeld follows:] PREPARED STATEMENT OF HON. MICHAEL BLUMENFELD, ASSISTANT SECRETARY OF THE ARMY (CIVIL WORKS) Mr. Chairman, members of the Committee, I am Michael Blumenfeld, Assistant Secretary of the Army, Civil Works. As a portion of my responsibliity, I oversee the operation of the Panama Canal Commission on behalf of the Secretary of the Army. It is a pleasure for me to appear here today as you receive testimony concerning the Authorization Bill for the Panama Canal Commission for Fiscal Year 1981. ORGANIZATIONAL MATTERS Since my last appearance before this Committee on March 7, 1980, a number of actions have progressed. The members of the Board of the Commission have been appointed by the President following confirmation of the U.S. members by the Senate. I am the Secretary of Defense's representative on that Board. The Board convened for the first time in Panama on June 2. I was selected to serve as Chairman of the Board. Primary items on the agenda included overview briefings on personnel and financial matters; a review of actions taken by the Commission thru May that might normally have been subject to Board guidance or decision; approval of the Board Regulations; establishment of the Executive Committee and three other Board committees; and preliminary discussion of a Code of Conduct. The meeting, I believe, established a sound framework for future operations. A second meeting is planned for late July, also in Panama. As mentioned, the Board had preliminat y discussions on a proposed Code of Conduct for Commission employees and Board members. The Board decided to defer further consideration until such time as there has been additional discussion between US and Panamanian representatives to clarify the standards of conduct that will conform to the laws of each country and are acceptable to all members of the Board. The Code will be an agenda item at the meeting next month. As you are aware, after the Code is approved by the Board, the Department of State will undertake the negotiations required by the Panama Canal Act. The Commission staff has formulated draft recommendations on the Panama Canal Employment System that will replace the Canal Zone Merit System. The new system continues merit system principles and protections for employees, and also carried out specific requirements of the Treaty related to personnel policy. While it is too early to discuss any particular provision of the system, I would like to highlight the policies that form the basis of the proposal.
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5 A. Training that will contribute to increased participation ly Panamanians in all areas and levels of the Commission as required by the Treaty is receiving added emphasis. B. Mechanisms have been established to maximize hiring of qualified Panamanian nationals. Already implemented is a system whereby Panamanian applicants who achieve a passing score on the entrance examination are awarded 11 additional points. C. A five-year rotation policy for off-the-Isthmus recruits has been established, as required by the Treaty, in order to facilitate meeting local recruitment goals. These are only a few of the policies being included in the proposal that will eventually become the Panama Canal Employment System. Suffice it to say that we are committed to the training and development of Panamanians over the course of twenty years. A key to Panama's ultimate success is their involvement in the employee selection and classification process. They must be able to identify, hire, train and retain the best people available for the Canal operation. On May 27, the President signed Executive Order 12215 delegating to the Secretary of Defense certain powers and functions derived from Public Law 96-70. The order includes a requirement to exercise specific functions regarding Canal management, operations and maintenance through the Panama Canal Commission by redelegation of authority or other means. This Order replaces the temporary one issued last November. I continue to carry out the Secretary's functions with regard to the Commission. I am pleased to report that the U.S. and Panama exchanged notes on March 25, 1980 that provided for a payment schedule for annuity, tonnage payments and public service cost reimbursement to Panama, and the repayment by Panama of the previously disputed back debt. The first check to Panama was presented that same day in the amount of approximately $29 million. This covers payment of five months of the annuity, public service charge, and tonnage payment to Panama, less one quarterly payment on the back debt and the whole of the debt accruing to the former Canal Zone Government and the Panama Canal Company from July 1 thru September 30, 1979. Checks of approximately $5 million were presented to Panama in April and May. These checks represent the monthly payments to Panama, less another quarterly payment toward the debt. The entire debt will be recovered by December 1981 thru quarterly offsets to the monthly Treaty payments. With the exchange of notes, any debt not paid by the Central Government of the Republic of Panama within 30 days of invoice will be offset against the next monthly payment. CANAL TRAFFIC We had anticipated increased shipments of North Slope Oil at the beginning of this fiscal year and had predicted that shipments would reach 500 thousand barrels per day in December. These shipments were late meeting our expectations, For the first eight months of this fiscal year, the daily average was 394 thousand barrels, with a maximum throughput of just over 500 thousand barrels per day in May. We have noted a slight overall increase in the total number of oceangoing vessels transiting the Canal over the same period last year. However, principally because the increase in shipments of North Slope oil has failed to materialize, we are approximately $6 million below budget in toll revenues as of the end of May. In light of this, we have applied stringent budget constraints to assure we remain close to a break-even point by years' end, and we are approximately on target. FISCAL YEAR 1981 REVENUES AND COSTS Mr. Chairman, I have estimated-and as required by law the General Accounting Office has certified-that the revenues to be deposited by the Panama Canal Commission into the Panama Canal Commission Fund during fiscal year 1981 will amount to $406,363,000, of which $313,940,000 will come from tolls and $92,423,000 from other services. I further estimated that, in addition to those operating revenue receipts, the Panama Canal Commission wiil deposit into the Panama Canal Commission Fund in fiscal year 1981 certain other funds amounting to $3,750,000 comprised of collections from the Government of Panama Canal Company and Canal Zone Government accounts receivable and funds received from various sources. Total deposits for fiscal year 1981 in the Panama Canal Commission Fund are thus projected to be $410,113,000. This, coupled with the unexpended balance of the fund from fiscal year 1980, will far
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6 exceed the requested appropriation. As you may recall, our estimate was that $463 million would be deposited in the Panama Canal Commission Account in fiscal year 1980. As you will note from the proposed Authorization Bill, we propose to establish an emergency fund of $25 million during fiscal year 81. This fund will be derived from revenues deposited in the Panama Canal Commission Fund in the Treasury plus the unexpended balance of the fund from 1980, which I have just mentioned. While the $25 million amount is short of the $40 million originally requested for fiscal year 1980, it appears adequate to cover any reasonably foreseeable emergency. It is certainly adequate to permit initiating emergency action while concurrently seeking a supplemental appropriation if required. A second point of significance is the proposed capital program: $23 million has been requested for 1981, $17.9 million of that amount will be applied to transit projects. The sources of funds for this investment category are the depreciation allowance and the capital factor of 2.16 cents per Panama Canal ton included in the toll rate. In our estimation, this level of capital funding is adequate for nearterm requirements. PROPOSED AMENDMENTS I seek your assistance in revising certain items in the Bill currently awaiting floor action by the House of Representatives. If allowed to stand, these items will adversely affect the operation of the waterway and will certainly impede efforts to restore employee morale. An insert in Section 2(d)(1) of the Bill provides that increases in expenditures for previously approved projects can be disapproved by any of the four authorization and appropriations committees or subcommittees. The phrase states, "Any of the committees or subcommittees may disapprove the increases in expenditures proposed by the Commission." The Bill already provides for an overall project category limit that we accept and will comply with even if certain projects experience difficulties. The effect of requiring the second approval is to delay the start of certain projects, or to suspend or abandon ongoing projects. The inefficiency and cost attendant to such a course of action argue strongly against the proposal. We ask that the language be deleted. We believe that the Board should be given this reprograming authority so long as the amount authorized and appropriated by the Congress for the total capital program and major categories within it is not exceeded. I recommend that the Committee also adopt language authorizing the Commission to initiate projects not included in the budget submission, but subsequently determined by the Board to be necessary for the efficient and safe operation of the Canal provided that 30 calendar days notice be given to both Houses of Congress and that such new project starts will not violate the ceiling for the various categories of capital projects. There have been cases in the past where similar reprogramming actions were ncessary to assure safety and to increase Canal capacity, such as replacement of the soft-nose center wall protectors at both Pedro Miguel and Gatun Locks as a result of marine accidents, and unprogrammed repair to the miter gates. Appropriate language was contained in Section 2(d) (1) of the Administration's Bill introduced in the House as H.R. 6516. The remaining actions, which I believe are necessary, require restoration of budget limitations imposed by the House of Representatives in three activities. I shall mention each of these only briefly. The Administrator is prepared to provide more detailed justification. Referring to the Bill, I first request that all limitations on the hire of vehicles, Section 2(a)(1), be removed. The funds are required to provide a contract for shuttle bus service that transports employees where duties are directly related to the actual movement of ships through the Canal. The cost of the contract is variable because of cost escalation clauses in the contract. The reduction of $68,000 applied to the operation of guide services, Section 2(a)(6), would require one of two equally unfavorable actions. The Commission would either be required to remove the motor launch Las Cruces from service, or reduce the visitor facilities operations to an ineffective level. We therefore request that the limitation be raised to $340,000. The final suggestion we offer is to restore the limitation on maintenance of facilities; Section 2(a)(11), from the $3.724 million level passed by the House to the budget level of $5,109 million. This item covers only housing retained by the Commission for use by employees. The proposed limitation constitutes a substantial adverse impact on an employee benefit ranking second only to pay as a
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7 recruitment and retention incentive. Given that the quality of housing now is only fair, and that more than 50 percent of the housing exceeds thirty years in age, we can ill afford to neglect housing maintenance. This is doubly inperative because there are no plans to build new housing. The Commission must live with what we have, and it is impractical not to maintain the existing assets. Mr. Chairman, we believe this Authorization Bill, if adjusted as we propose, reflects the most accurate estimate that can be made at this time of the expected net revenues and required operating costs of the Commission during fiscal year 1981. Again, I appreciate the opportunity to appear here today and bring you up to date on events, and to speak to the proposed Authorization Bill. With your permission, Mr. Chairman, I will be followed by Mr. D. P. McAuliffe, the Administrator of the Panama Canal Commission. I recommend you hear Mr. McAuliffe's statement at this time, and offer questions to the two of us upon completion of his statement. Thank you. Senator LEVIN. General McAuliffe? STATEMENT OF HON. DENNIS P. McAULIFFE, ADMINISTRATOR, PANAMA CANAL COMMISSION, ACCOMPANIED BY MICHAEL RHODE, JR., SECRETARY, AND MYRON A. SCHROEDER, CHIEF, FINANCIAL PLANNING DIVISION Mr. McAULIFFE. Mr. Chairman, I am pleased to appear this morning to request authorization for the fiscal year 1981 budget programs of the Panama Canal Commission. Accompanying me are Michael Rhode, Jr., the Secretary of the Panama Canal Commission, and Myron A. Schroeder, Chief, Financial Planning Division. With your permission, I would like to summarize very briefly my statement and have the full text placed in the record. Senator LEVIN. It will be placed in the record. OVERVIEW OF OPERATIONS UNDER THE TREATY Mr. McAULIFFE. The treaty went into effect a little over 8 months ago. The Commission has gone through a period of significant adjustment to adapt to the changes. I am happy to report that, in spite of the traumatic impact of the entry into force of the treaties on our work force, our employees are coping well and the mission of transiting vessels through the canal is getting (lone as efficiently as in the past. This is not to say that all our problems are behind us. There is still much to be done, but we are receiving a great deal of cooperation, and the whole spirit of the enterprise is improving. TREATY IMPACT ON WORK FORCE Perhaps one of the most significant conditions of the entry into force of the treaties was the reduction that occurred in the work force of the Commission. Out of a work force in excess of 12,000 permanent employees, only 8,000 remained on October 1. Some of those were transferred to the Department of Defense activity, with the hospitals, the dependent schools, the postal system, and the retail stores. Others resigned and were employed immediately by Panama in the operation of the ports and the Panama Railroad. But there were others who were affected by reductions in force. Associated with it all was a traumatic impact on over a thousand of our employees who wound up 65-578 0 -81 -2
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8 in jobs for which they were not properly trained and, in many cases, at reductions in grade. We have put into effect several programs to correct the adverse impact of those personnel actions and these are detailed in my statement. I am pleased to report that employee morale is building again. 1981 APPROPRIATIONS REQUEST With respect to our authorization request, we are requesting two appropriations totaling $419.5 million. One is an appropriation of $394.5 million covering both operational and capital requirements of the Commission. Of that amount, $23 million is for capital equipment and construction, to remain available until expended. A second authorization of $25 million is requested to establish the Panama Canal Emergency Fund. All funds authorized for appropriation to the Commission are to come from the Panama Canal Commission Fund or, in other words, from canal revenues. The appropriation required for operating expenses is $371.5 million. The major cost components of this total are $184 million for personnel compensation, $78 million for treaty payments to Panama, and $38 million for supplies and materials. The $23 million requested for the capital program will be dedicated primarily to meet the needs of the canal in terms of increased traffic capacity and safety and efficiency in operations. The $25 million requested for establishment of the emergency fund is to be financed from the Panama Canal Commission Fund. REVISIONS TO HOUSE BILL I wish to join with Secretary Blumenfeld in soliciting the assistance of this committee in revising the language and provisions of the House bill that he has previously identified in his brief statement and which are addressed more fully in my statement. Additionally, I did provide a letter to the chairman of this committee, June 2, outlining the same requests. Mr. Chairman, this concludes my brief summary. We stand ready to answer any questions. [The prepared statement of Mr. McAuliffe follows:] PREPARED STATEMENT OF DENNIS P. McAULIFFE, ADMINISTRATOR, PANAMA CANAL COMMISSION INTRODUCTION Mr. Chairman, Members of the Armed Services Committee, I am Dennis P. McAuliffe, Administrator of the Panama Canal Commission I am pleased to appear before you today to request authorization for the fiscal year 1981 budget programs of the Panama Canal Commission, the agency responsible for operation of the Panama Canal. Attending with me are Michael Rhode, Jr., Secretary; and Myron A. Schroeder, Chief, Financial Planning Division. I would like first to provide you a brief assessment of the general situation in the Panama Canal area in the period since the Panama Canal Treaty took effect.
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9 TREATY TRANSITION The Treaty has now been in effect over eight months. While not a great deal of time, it is enough for an initial assessment of our programs. I believe that, for the Panama Canal Commission, we have been moving in a positive and favorable manner. Considering the many possibilities for disruption of activities when the Treaty went into effect, I am pleased to report that October 1 passed smoothly without any adverse incidents. The Canal organization transferred functions such as health, education, postal, and retail services to the Department of Defense. Responsibility for jurisdiction, port and railroad operations, customs and immigration services was transferred to the Government of Panama. The two governments began to share responsibility for fire protection and police protection in the area. The interagency and binational planning involved in the transfer of these activities was substantial, with many built-in hazards and chances for failure, but the record now shows that the extensive prior planning, coordination and and preparation paid dividends. Personnel of bcth the United States and the Republic of Panama prepared seriously for the transition and put forth their best efforts to assure its success. From the first day of the Treaty, the same spirit of cooperation has contributed to successful continuation of all activities by their new managers. The bulk of the bilateral agreements between the United States and Panama have been put into effect smoothly to the benefit of our organization and our people. Notable among these are the success of the joint police patrols in the Canal Housing areas and the coordinated fire protection services, as well as arrangements made by Panama to facilitate employee documentation, and automobile and driver licensing. The joint police patrols have been a particular source of reassurance to all. A good indication of the new relationship now existing between the United States and Panama was evidenced on January 9. the anniversary date of the 1964 riots. The anniversary was celebrated with a march through the former Canal Zone and passed with less than the usual display of anti-Americanism. Two major functions transferred to Panama on October 1 were the ports of Balboa and Cristobal and the Panama Railroad. The transfer of facilities and equipment was accomplished as planned, and both the ports and railroad continued normal operations under Panama's management. The Commission provided experienced personnel on a loan labor, reimbursable basis to advise and assist in the transition of these activities to Panamanian management. Panama was experiencing problems of congestion in the operation of its ports, particularly the Port of Cristobal, due to an increased volume of container traffic, difficulties associated with the maintenance of materials handling equipment at the terminals, and labor problems. Panama, however, has taken steps toward resolution of these problems. Recently, as a result of a reorganization of the Treaty affairs function within the Panamanian Government, the railroad was reassigned to the National Port Authority, the agency responsible for operation of all ports in Panama. We view this as a positive step, and the arrangement seems to be working well. Major functions transferred from Canal agencies to the Department of Defense were those related to health services and the Hospitals; dependent schools, including the Panama Canal College; the commissary stores; and postal service. These activities have continued to provide services to the authorized military and civilian communities. These transfers, however, did experience difficulties in adjusting to the new conditions-for example, the Army commissary system had a significant increase in customers-but major efforts have been made to continue acceptable levels of service. During the first eight months of the new Treaty, the Canal organization has continued to fulfill its mission of transiting vessels safely and efficiently through the waterway. During that period, approximately, 8,942 oceangoing vessels transited the Canal, a number slightly above the level of the same period of the previous year. There has been no apparent decrease in traffic because of the 29.3 percent toll rate increase that was placed in effect on October 1, 1979. The smoothness of the transition should not, however, cause us to lose sight of the traumatic impact of the Treaty on the Canal organization and its work force. The Commission's organization is still settling down after the massive personnel turbulence experienced last year. Some additional organizational changes are being implemented to meet Treaty requirements but these are designed to have minimal personnel impact.
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10 The morale of the work force, which understandably was extremely low at the time the Treaty took effect, is now beginning to build. Employee morale has been a matter receiving priority attention from management. The task is all the more difficult as issues impacting on the quality of life surface. The full-time permanent work force immediately prior to October 1 was approximately 12,200 employees. The number of employees separated through a reduction-in-force was approximately 460 and 2,300 employees were transferred to elements of the Department of Defense. An additional 1,440 employees terminated their employment voluntarily through retirement or resignation. The combination of these actions reduced the full-time permanent work force to something over 8,000 employees, of which approximately 2,000 are U.S. citizens and 6,000 are Panamanians and third country nationals. We also employ up to 1,000 individuals on a part-time or temporary basis, of whom about 700 are Panamanians. Of the 8,000 permanent employees remaining with the Commission, over 1,300 were either reassigned to other jobs or reduced in grade, or both, on October 1. Working to minimize the impact of these actions on personnel, a priority placement program is in effect which seeks to place U.S. citizen employees in like jobs in other Federal agencies in the United States. Another program is the priority reemployment program which assures that those employees who lost their jobs because of the Treaty have first consideration in hiring. The third program, the promotion priority program, is designed to give employees who lost grades preferential consideration for promotion back to their former grade. The Panama Canal employment system currently under development, in accordance with the provisions of section 1212, the Panama Canal Act of 1979, includes provision for granting hiring preference to Panamanians, a five-year rotation policy for recruitment outside of Panama, and a reduction in the need for off-the-Isthmus recruitment through intensified local recruitment efforts and special training and development programs. The hiring preference for Panamanians provides for adding eleven extra points to the numerical scores of all Panamanian applicants tested after October 1 who have achieved a passing score. The five-year rotation policy has also been established. Procedures to implement the other changes are being developed at this time. We are also emphasizing training that will contribute to increased Panamanian participation in all areas and levels of the Panama Canal Commission, as required by the Treaty. I am pleased to advise that an exchange of diplomatic notes took place between the United States and Panama on March 25 which effectively settled the issue of collection of overdue receivables. By one note, Panama has agreed that amounts owed to the former Canal agencies will either be paid in cash in nine quarterly installments or may be offset against treaty payments due Panama. In the other note, the United States agreed that the Commission will make treaty payments in monthly remittances, except for any amounts that may become due under the contingent payment provided for in Article XIII(4)(c). Any payment due Panama under this latter provision would be made no later than April 30 of each year. To date, Panama has received $40.8 million, representing $42.7 million in treaty payments less $1.9 million in offsets for amounts due from Panama. Another event of particular signifiance was the first meeting of the Commission Board, held earlier this month in Panama. The Board began to address many issues, and I believe the foundation was laid for successful participation by Panama in the management of the Canal. I should now like to move from the general situation to our authorization request. AUTHORIZATION REQUIREMENTS The authorization request covers two appropriations for the Panama Canal Commission in fiscal year 1981, totaling $419.5 million. One is an appropriation of $394.5 million covering both operational and capital requirements of the Commission. Of that amount, $23.0 million is for capital equipment and construction to remain available until expended. A second authorization of $25.0 million is requested to establish the Panama Canal Emergency Fund. All funds authorized for appropriation to the Commission are to come from the Panama Canal Commission Fund. OPERATING EXPENSES The appropriation required for operating expenses in 1981 is $371.5 million. The major cost components of this total are $184.4 million for personnel compensation, $78.6 million for Treaty payments to Panama, $38.5 million for supplies
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11 and materials, and $16.7 million for liberalized retirement benefits, in accordance with the implementing legislation. The appropriation requested for 1981 represents an increase of $8.2 million over the amount appropriated for operations in 1980. Most of this increase reflects pay raises and other cost escalations, offset by a decrease of $6.7 million in reimbursable technical support services to Panama. However, the 1981 program does provide for a higher level of maintenance in the transit area, additional pilots, tug crews, and deckhands related to increased transit work-loads, and industrial training. With respect to industrial training, an expansion of the apprentice training program will allow a greater number of local recruitments for skilled labor benefiting the Commission in the long term and meeting the requirement for increased participation by Panamanians in the operation of the Canal. The $78.6 million for Treaty payments to Panama is comprised of a $10 million fixed annuity payment, a $10 million payment for public services that Panama is now providing, and a $58.6 million payment calculated on the net tons transited. CAPITAL PROGRAM The Commission's capital program reflects $23 million in budget authority for 1981 and is dedicated primarily to meet the needs of the Canal in terms of increased traffic capacity and safety and efficiency in operations. Accordingly, the major portion of the resources requested, $17.9 million, will be applied to the transit operations function. Improvements in the waterway itself are designed to facilitate the transit of the larger class of ships, now using the Canal in increasing number, and to ease the navigational problems in certain difficult curves in the waterway. These projects will permit two-way traffic in some areas now restricted to one-way movements and reduce the potential for marine accidents through improvements in navigational safety. Also programmed in this year is construction of a ship tie-up station near the Pedro Miguel Locks which will contribute directly to an increased throughput of transiting ships. We have planned the obligation of $7.4 million for improvement and additions to our floating equipment in 1981. The major procurement is for a replacement tugboat at the cost of $4 million. This acquisition is part of a long-range plan to replace over-aged and underpowered tugboats and to increase the tug fleet as the transit workload demand materializes. The 1981 program also provides for the replacement of a large work boat and a small dredge tender, and a dump scow. Another project of major significance in our capacity improvement efforts is the installation of additional lighting in the Locks chamber at Gatun Locks at a cost of $1.3 million. We presently restrict the transit of the larger class of vessels to daylight. The added light in the Locks chambers will allow such transits to begin earlier and clear later in the day, and facilitate the handling of other wide beam ships in the Lock chambers at night time. EMERGENCY FUND The Panama Canal Act of 1979 authorized the establishment of the Emergency Fund. The request for a $25 million authorization for 1981 is based upon a current assessment of the amounts that could be required immediately for additional expenditures over those appropriated to defray emergency expenses or to maintain continuous, efficient, and safe operation of the Canal. Factors considered in arriving at this amount were the costs of correcting slides, removal of vessels obstructing the Canal, clean up of a major oil spill, and the potential for additional costs of increased Canal traffic. In arriving at that figure, it was also presumed that in the event that $25 million proves insufficient to overcome the emergency, a request authorizing additional funding would be expetitiously processed. PANAMA CANAL COMMISSION FUND The Panama Canal Act of 1979 provides that no funds may be appropriated to or for the use of the Commission for any fiscal year in excess of the revenue estimated for deposit in the Panama Canal Commission Fund during the year, plus prior deposits to the fund remaining unexpended at the begining of such year. The 1981 request is in compliance with such provisions of this act.
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12 CANAL TRAFFIC AND TOLLS Our budget for fiscal year 1980 is based on a forecast of oceangoing transits of 13,765 for the year or 37.6 daily and tolls revenue of $299.6 million. For 1981, the budget predicts a 1.9 percent increase in oceangoing transits, or 14,020, with tolls revenues of $313.9 million. Our estimates of North Slope Oil movements in the current fiscal year projected shipments averaging 400 thousand barrels per day during October and November, increasing to some 500 thousand barrels daily during the remainder of the year. The forecast for 1981 assumes continuation of the 500 thousand barrels level predicted for 1980, combined with some growth in other segments of traffic. Tolls revenues through the first eight months of 1980 are short of budget targets by about $6 million. Nearly $4.3 million of the shortfall can be attributed to lower than expected shipments of North Slope Oil during this period. For the past four months, however, shipments of North Slope oil have risen sharply, and during April and May have slightly exceeded the budget targets. Most other elements of traffic remain near budget levels. Our budget estimates of costs and revenues for 1981 indicate that existing tool rates will be adequate to cover all costs of operations of the Canal as required by law. Detailed descriptions of the operating and capital programs for the Commission for fiscal year 1981 are included in the justification booklet previously furnished to the Committee. Before leaving the subject of Canal traffic I would like to mention one significant trend which is impacting on operations and makes the need for Canal improvement more compelling-that is the increase in the size of ships transiting the Canal. A decade ago, only about 12 percent of transits were by vessels having beams in excess of 80 feet. This past year, vessels of this size accounted for more than 42 percent of all oceangoing transits. Moreover, the growth in transits of the largest vessels-those having beams over 100 feet-has been more impressive. While in 1969 such vessels accounted for about two percent of oceangoing transits, today they account for over 15 percent and further increases are expected to occur. This shift in the size of ships is being taken into account in our capital program. HOUSE ACTION ON AUTHORIZING LEGISLATION The House Merchant Marine and Fisheries Committee has reported on H.R. 6515, the authorizing legislation for the Commission in 1981. Certain provisions of that bill, if allowed to stand, will adversely affect Canal operations and employee morale. CAPITAL PROJECT COST INCREASES Subsection 2(d) of H.R. 6515 provides the Commission with authority to increase expenditures for approved individual capital projects so long as such increases do not exceed the dollar limitation placed on the capital category to which the project belongs, or the appropriation total itself. However, the Commission's Board must have approved such increases and so notified the appropriate committee and subcommittees of the House and the Senate. The purpose of this authority is to permit the Commission to accommodate to individual instances of cost escalation, changes in project scope, or other unanticipated cost increases, and yet remain within specific limitations on project groupings and total fund availAbility. The bill provides the additional stipulation, however, that any of the Committees or Subcommittees may disapprove the increases in expenditures proposed by the Commission. It is requested that this provision allowing committee or subcommittee disapproval be deleted. In reality, this would constitute a second approval of capital projects previously authorized by the Congress. Its effect could be to defer or suspend work on a capital project until the prospect of disapproval was removed. In the case of work in progress, the delay could be considerable and adversely affect the orderly execution of the capital program. It will introduce inefficiencies in capital construction efforts and equipment acquisition through delay and uncertainties, and conceivably result in abandonment of some projects partially complete, with no offsetting advantages occuring in terms of fund control or existing expenditure limitations. NEW CAPITAL PROJECTS The House bill does not allow the Commission to initiate work on capital projects which were not included in the originally approved budget program. The need for such authority often becomes vital, such as in the event of marine accidents,
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13 landslides and other acts of nature which would require immediate corrective action and the use of capital resources. The experience of Canal operators over the years demonstrates the need for capital expenditures on projects not anticipated nor included in the capital program at the time of origination. For example, marine accidents were responsible for destruction of the softnose center wall protectors at Pedro Miguel and Gatun Locks; emergency action was necessary to restore the launch landing at Ft. Davis used to transport workers to and from transiting vessels; and a survey at the Locks disclosed that latches for the miter gates, an essential component or our flood control contingency plans, were either deficient or missing. In each instance, immediate remedial action was taken and all work was approved by the Board of Directors of the then Panama Canal Company, in accoid with policies and procedures in effect at that time. In all of these cases, time was critical and deferral of work to satisfy procedural requirements of the normal budget cycle would have been unwise and in some cases hazardous to safety. The cost of any such project would be absorbed within the fund limitations established for the project category to which it would apply and within the total of the capital appropriation. LIMITATION ON MAINTENANCE AND ALTERATION OF FACILITIES OF THE GOVERNMENT OF PANAMA The House Bill limits expenditures to $3,724,000 for maintenance and alteration of facilities of the Government of Panama which are used by the Commission. The agency request was for $5,109,000. Although it is not apparent from the title, this category of expenditure includes the upkeep and improvement of employee housing, and for 198 1, the total amount requested is targeted for this purpose. While ownership of Canal housing resides with Panama, the Commission retains use rights. Accor dingly, the impact of the proposed limitation falls directly on the employee and his family in the form of reductions to his standard of living, and indirectly on the Commission in lower morale of the work force with its productivity consequences. Deteriorating housing facilities would also affect the capability of the Commission to recruit and retain the necessary skilled employees. Housing is considered by our employees to be second in importance only to their pay. The quality of Canal housing, on the average, is only fair, but it is adequate for the area and our situation. More than 50 percent of the housing inventory is over 30 years in age and quarters here incur an accelerated rate of deterioration due to the tropical environment. The programmed maintenance and improvements contemplated in the $5,109,000 requested are considered to be the minimum amounts required for furnishing a merely acceptable level of quality of accommodations for our work force. The proposed limitation constitutes a substantial reduction resulting in an extremely adverse impact on employee morale and an attendant detrimental effect on recruitment and retention efforts. Furthermore, recognizing that we will not construct any new housing units in the future, it is incumbent on the Commission to maintain those quarters available in a manner that will extend the useful life of the houses to the maximum term possible. For these reasons I ask that the amount provided in the House Bill be restored to $5,109,000. HIRE OF PASSENGER CARRYING VEHICLES The Commission hire of passenger carrying vehicles covers two contracts for shuttle-bus service to transport deckhands and certain locks employees to and from their job sites. The contracts are full-service contracts covering drivers, fuel, vehicle maintenance and repair and other contractor costs. Due to the volatility of the fuel market, the contracts are not fixed-price contracts. There are escalation clauses which allow the contractor to pass on certain costs incurred. The shuttle bus service is an indispensable component of the Commission's overall transit function. The loss of this service would severely disrupt the movement of vessels through the Canal. With the potential for sharp increases in contractor costs, any estimate of future costs is highly susceptible to change and an operational limitation based thereon is not a prudent action. The shuttle bus service is far too critical to our mission to be exposed to such a risk. Therefore, I request that no limitation be imposed on this essential transit service. OPERATION OF GUIDE SERVICES The Commission's guide service activity consists of two principal operations. One is the operation and maintenance of the motor launch, Las Cruces, and the other is the operation of visitor facilities at the Lock sites. Operation of visitor
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14 centers accommodates over 300,000 visitors annually who observe Lock operations firsthand while multi-lingual guides explain the events as they unfold. An observation platform and a theater for slide and film presentations are available. The guides also conduct tours and present briefings to civic and educational groups, representatives of foreign countries, cruise ship passengers, and official visitors to the Commission. The service is an important function in the Canal organization promoting goodwill towards the United States as well as the Panama Canal Commission. The motor launch Las Cruces serves a twofold purpose. It supports the goals of the guide service by providing partial transits of the Canal as a part of the tour program. These trips, scheduled every other Saturday, have provided guided tours of the Canal for over 4,000 tourists and visitors in 1979 at a nominal fee. Even more important, perhaps, is the contribution to employee morale provided by the Las Cruces. The motor launch is primarily available to employee groups for recreational and social purposes for periods of two to four hours on a reimbursable basis. The utilization of the launch by employees is extensive and beneficial to both the agency and the employee. It is especially important at this time that we do no more in the way of diminishing the quality of life for Canal workers and their families. The House bill proposes to limit expenditures for these services to $272,000 an amount which, if applied to operation of visitor facilities, would reduce this activity to an ineffectual level; if applied to the Las Cruces operation, its use would be sharply curtailed and possibly eliminated. Neither alternative would serve the needs of the Commission and its employees. I ask that the limitation be increased to $340,000, the amount in our original budget request. As a result of the various limitations contained in the House bill, the appropriation requested by this agency was reduced $1,129,000. While the reduction is not welcomed, we do not ask for restoration of the $1,129,000. What we ask is that, within the reduced appropriation total, the limitations be revised to the original amounts for those specific activities I have cited, and that our needs for capital reprogramming authority within approved project group and appropriation fund limitations be recognized and granted. Mr. Chairman, that concludes my prepared remarks. I shall be pleased to answer any questions that you or other members of the committee may have. Thank you. Senator LEVIN. I thank both of you. First of all, I want to commend you for the way the canal has been operated. It appears to be operating smoothly. The transition appears to have taken place smoothly and that is a great credit to your efforts, as well as some of the foresight of people like you in putting together both the treaty and the implementation legislation. INITIAL BOARD MEETING What has been the experience on the Board? Has it been a harmonious situation on the Board, or have there been some basic differences between the Panamanian and American members? Mr. BLUMENFELD. The first meeting, which took place for 3 days in Panama on June 2-4, was basically harmonious. There were a number of instances in which the Panamanians registered objection to various policies the Commission has adopted since October 1, but unanimously -passed a motion which commended the Administrator for the work which has been done in the absence of a Board to date, and indicated that while the Board would want to reappraise in more detail certain of the policies and the actions that have been taken, it ratified those actions taken to date, subject to possible change based on the review I mentioned. BOARD COMMITTEES The Board proceeded, I think, fairly smoothly to its own organizational matters, including establishment of a budget and finance committee, a personnel committee, and a special committee on longrange canal improvement. Committees will do much of the preparatory
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15 work of the Board by addressing issues prior to full Board action. As was mentioned, I was elected Chairman at that first meeting, and the Board approved the regulations by which it will operate. I would say basically that it was a productive and harmonious first meeting. EMERGENCY FUND Senator LEVIN. Did you address the problem of the emergency fund authorization in your total statement? Mr. BLUMENFELD. Yes. Senator LEVIN. Have you explained in that how the legal status issue has been resolved? Mr. BLUMENFELD. The legal status issue? Senator LEVIN. Of the emergency fund, how you have been able, in effect, to achieve an emergency fund with respect to the problem we had last year? Mr. BLUMENFELD. We are seeking in 1981 the authorization of that emergency fund. My statement and that of Administrator McAuliffe indicate authorization of that fund would be feasible within the restraints on what may be authorized and appropriated by the Congress. Senator LEVIN. The upshot is that there is a $25 million emergency fund authorized in 1981; is that correct? Mr. BLUMENFELD. If a bill which is identical in that respect, in both the House and the Senate versions, is enacted, that is the case. It will be authorized. There will still remain the matter of appropriation. TREATY PAYMENTS Senator LEVIN. Have you addressed in your statement the question of negotiations relative to the scheduling of payments to Panama and the payment of debts owed to the Commission by Panama? Mr. BLUMENFELD. Yes. I am very pleased to report that agreement was reached in late March on a schedule both of payments by the United States and of repayments by Panama. Panama's complete back debt will be repaid by December 1981, and there are provisions for any future unpaid obligations of Panama that develop to be offset quarterly from the monthly treaty payments. GAO REPORT Senator LEVIN. Secretary Blumenfeld, the GAO recently completed an overview of the problems in implementing the treaties. One of the issues they addressed was assurance of procedural guaranties for U.S. citizens accused of crimes by the Panamanian authorities. This is a sensitive area for our citizens in Panama. The GAO seemed to think that substantial problems remain to be solved. I am wondering if you would comment on that? Mr. BLUMENFELD. I think these are problems remaining to be solved. I think progress is being made. We are accompanied by Mr. Richard Wyrough, from the State Department, who is prepared to speak in more detail on that issue, or we can elaborate for the record if you would prefer. Senator LEVIN. We would prefer that. If you will give us the current status of that, it will be useful. Also, if you would comment for the record on the question of taxation of U.S. businesses. GAO noted that contractor exemption from local taxes was not yet fully accepted by 65-578 0 -81 -3
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16 Panama. As you will remember, the question of taxation of U.S. businesses was a matter of great concern to the Congress, and I wonder if you could bring us up to date on this issue. Mr. BLUMENFELD. Certainly. [The information follows:] PROCEDURAL GUARANTEES The Government of Panama has assured us that the annexes to the two implementing agreements to the Treaty which contain the procedural guarantees in question are self-executing under Panamanian law. Until a contrary statement or action is taken, we are prepared to accept these Panamanian assurances. Our attitude in this regard parallels the view we have repeatedly expressed regarding the Panama Canal Act and our actions under it. We have asked Panama to judge us on our actions; in effect, we have said that how we fulfill our Treaty obligations through our internal law should not be of particular concern to Panama, as long as our actions comport with the requirements of the Treaty. The same holds true of Panama-we are not inclined to question its internal legal procedures unless they would clearly result in actions inconsistent with the Treaty. To date we have been given no reason to believe that Panama will fail to provide the full range of guarantees required by provisions of the Treaty and related agreements. Recognizing the importance of these procedural guarantees to the morale of our citizens, our Embassy has been instructed to monitor this situation closely. A full and detailed comment on this section of the GAO repoi t is under preparation. TAXATION OF CONTRACTORS Before addressing the contractor taxation issue raised in the GAO report, it is important to make clear that this problem is completely separate from the issue of retroactive taxation by Panama of enterprises in the former Canal Zone which came up several times during the Congressional consideration of the Treaty implementing legislation. This issue was fully resolved at that time and remains so. The GAO report's discussion of contractor taxation concerns the provisions of the two major Treaty implementing agreements which provide for post-Treaty exemption of designated contractors from Panamanian tax under certain circumstances. Both governments clearly agree that this exemption is valid and effective, but discussions are proceeding to better define the circumstances in which it applies. Designated contractors are exempt from Panamanian tax under the implementing agreements providing they are subject to "substantially equivalent" United States tax. This language reflects an effort by the negotiators: (a) to avoid subjecting the U.S. Government to an indirect tax which might result from the imposition of a Panamanian tax on such contractors, and (b) to avoid giving U.S. contractors a "tax free" competitive advantage over their Panamanian competitors in bidding on contracts. What has developed in the implementation of this provision can be described fundamentally as a definitional problem involving the term "substantially equivalent." This Treaty language was based on certain technical assumptions on how the tax laws of the two countries would be applied; in practice, the situation has proven to be more complicated than these assumptions. A U.S. team composed of representatives of the Departments of Defense, Treasury and State, and including international tax law specialists, has been meeting with their Panamanian counterparts in an effort to work out a mutually satisfactory procedure to put this Treaty provision into practice. As a result, substantial progress has been made, to the point where only a handful of areas remain unresolved. Another series of meetings has been scheduled for the week of June 23 here in Washington. As the GAO report states, a mutually satisfactory solution to this complex, technical issue has required time, dedicated and expert effort, and cooperation. We think we are close to a resolution of this matter which meets the requirements of the Treaty and its agreements, as well as the tax laws of the two countries.
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17 RELATIONS WITH PANAMA Senator LEVIN. What has been the relationship since the implementation legislation has taken effect between the two countries in Panama? Mr. BLUMENFELD. I think the relationship has been quite good. I think we are addressing difficulties that exist in a cordial and open manner. I am encouraged by the state of relations thus far. $1.1 MILLION REDUCTION IN HOUSE BILL Senator LEVIN. General McAuliffe, on page 17 of your statement, after you go through some of the changes that were made by the House committee in the proposed bill, you indicate that you do not request the restoration of the million dollar cut, but merely a change in the specific language of the bill. Would you welcome a restoration of that cut? Mr. McAULIFFE. Yes, Mr. Chairman, I would welcome a restoration of the cut because these funds are needed overall for our operation, for the maintenance of our physical plant, and to assist in implementing the necessary capital projects for the future. My willingness to accept a $1.1 million reduction is really a forthcoming offer in an effort to eliminate the specific ceilings on project categories that appear, or will appear, in the House bill. These specific ceilings will be, from my point of view, the point of view of the operator, exceedingly difficult to live with. I would be willing to offer up a reduction in the overall amount just to eliminate those ceilings. RESTORATION OF HOUSE REDUCTION Senator LEVIN. If the final product is going to have the flexibility you need, it may be necessary for us to insert the requested amount of funds as well at this point. We will have something to go to conference on? Mr. McAULIFFE. Yes, sir. Senator LEVIN. I am just wondering whether or not, if we did reinsert the funds, we would be putting in unneeded funds? We don't want to do that just for a conferenceable item. Mr. McAULIFFE. I assure you, sir, we need and can use that additional $1 million. Senator LEVIN. You prefer the flexibility if you are given a trade-off? Mr. McAULIFFE. That is correct. PANAMA AREA WAGE BASE Senator LEVIN. There was controversy, General McAuliffe, during consideration of the implementation legislation, on the question of wage rates. Many members, including myself, wanted a minimum wage law to apply to Commission employees, while others were concerned about the cost implications of applying the minimum wage law. There was also some real possibility of inequities among employees doing the same job.
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18 I am wondering what progress you are making in devising an overall wage system that makes sense? Mr. MCAULIFFE. First of all, Mr. Chairman, the new wage system to which you refer, the Panama area wage base, which was pegged at the U.S. minimum wage that was in effect when the treaty took effect and would increase 2 percent per annum thereafter, that wage system is in effect. We find that it is reasonably competitive with other wages for similar skills in the country of Panama, although there is some question that, at the rates of pay under that system for the more skilled craftsmen, for example, the degree of competitiveness is narrowing considerably. It is something that we are going to have to keep our eye on in the future. In terms of steps that we are taking toward resolving the wage issue, we have recently placed into effect a compromise wage for certain specific skill categories that can be recruited in Panama, but if there are insufficient numbers available there, can also be recruited in the United States. So, within certain specific skill categories, I have been authorized to put into effect a compromise wage rate which I think will help out in this matter of remaining competitive in hiring in the skilled areas. AMERICAN BUSINESS INTEREST IN PANAMA Senator LEVIN. How have American businesses been doing since the implementation legislation went into effect and the treaty went into effect? Are they generally satisfied with the relationship? Mr. MCAULIFFE. You refer to American businessmen? Senator LEVIN. The business community in Panama. Mr. MCAULIFFE. They seem to be doing fairly well, although the rather seriously depressed economy of Panama is giving problems to all businessmen there, whether they be American or Panamanian or third country. One thing that many of the businessmen have commented on to me is the fact that since the treaties have gone into effect, they have been able to count on a certain stability within the country, and even though the economy is depressed, the stability resulting from the assurance that the United States and Panama worked out an accommodation is beneficial to the business interests. Senator LEVIN. I have a number of other questions which we will be submitting to you for the record. I hope that we can mark this bill up as expeditiously as possible. The chairman did want to drop by to say hello. He might have some comments when we can mark it up. There may be other members of the committee who will have questions for the record. We thank you for coming by and for your work. Is there anything else you want to add before we adjourn? PANAMA CANAL BOARD MEMBERS Mr. BLUMENFELD. No, sir. We much appreciate the tremendous help which you have given in shepherding through the nominations of the Panama Canal Commission Board members and your work in
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19 leading this effort to come up with a good 1981 authorization bill; the executive branch and the President himself much appreciate those efforts. Senator LEVIN. Thank you for that. There is one other question I want to ask. FIRST MEETING OF BOARD What was the attendance at that Board meeting that you had a few weeks ago? Mr. BLUMENFELD. All nine Board members attended, as well as some invited guests. Senator LEVIN. Do you send minutes of those meetings as a normal matter to these committees, both in the House and in the Senate? Mr. BLUMENFELD. No, sir; we have not. Senator LEVIN. Are they public? Mr. BLUMENFELD. No; they are not public documents. Senator LEVIN. Any problems in sending us minutes of meetings? Mr. BLUMENFELD. I anticipate no such problem. Senator LEVIN. Could you send minutes of those meetings to this committee? Mr. BLUMENFELD. Yes, indeed. Senator LEVIN. Mr. Blumenfeld and Mr. McAuliffe, we thank you all. Thank you all for coming today. Thanks for the good work. We are going to come back into session. We now have the opportunity to have the question directly from Senator Byrd, rather than for the record. We, of course, welcome Senator Byrd and call upon him. Senator BYRD. Thank you very much, Senator Levin. I appreciate it. CABLE FROM PRESIDENT OF PANAMA General McAuliffe, are you aware of President Royo's cable dated May 1 to President Carter which protested naval maneuvers in the Caribbean, including a planned amphibious landing at Guantanamo Bay on May 8, 1980? Mr. McAULIFFE. I am generally aware of it, sir. I have not seen the message, but I am aware of it. Senator BYRD. I have a copy of the cable and request that it be interred in the record. [The information follows:] PANAMA ROYO SENDS MESSAGE TO CARTER ON U.S. MANEUVERS PA040240 Panama City LA ESTRELLA DE PANAMA in Spanish 3 May 80 pp A-1, D-6 [Text] President Aristides Royo has expressed his concern to U.S. President Jimmy Carter over the announced U.S. maneuvers in the Caribbean, specifically at the U.S. naval base in Guantanamo, Cuba. In a cable to President Jimmy Carter, Royo states that "the Republic of Panama does not consider these maneuvers ordinary exercises, since they go against the many efforts which all the countries in the region have been making to have the area considered a zone of peace." President Royo's message to President Carter is dated 1 May. It is believed that it was received in Washington shortly before the U.S. President announced the suspension of the maneuvers in the Caribbean. The text of the message is as follows:
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20 Mr. Jimmy Carter, President of the United States, White House, Washington, D.C., Dear Mr. President: I wish to express to you our concern over the military maneuvers which the armed forces of your country have scheduled for next week in the Caribbean area, which has ceased to be the private sea of the United States because of the dignity of the sovereign states that exist there. The Republic of Panama does not consider these maneuvers ordinary exercises, since they go against the many efforts which all the countries in the region have been making to have the area considered a zone of peace that is not subject to interference or disturbances by any power. We hope that your government will reconsider the original plans in order to avoid greater tension, thereby permitting us to continue to work together to achieve greater understanding among the countries of the region. Respectfully, [signed] Aristides Royo, president of the Republic of Panama. Senator BYRD. Did anyone in the executive branch consult with you or members of the Panama Canal Commission in connection with the Royo communication? Mr. McAULIFFE. Not with respect to that particular communication. It would have been appropriate, I think, to consult with the commander in chief of the U.S. Southern Command, since he is the officer responsible for the defense of the canal. My responsibilities are in the canal operation and the canal operation was not affected at all in that respect. Senator BYRD. Are you aware of any response by the President or the administration to the Royo cable of May 1? Mr. McAULIFFE. No, sir; I am not. Again, the matter might not have been brought to my attention because I am the canal operator. U.S. MILITARY IN PANAMA Senator BYRD. Would you describe the major military units stationed in the former Canal Zone? Is there a special forces battalion in the Canal Zone and if so what is its designation? Mr. McAULIFFE. I am aware of the U.S. military forces in the area that formerly was the Canal Zone. I used to be the commander in chief of the U.S. Southern Command up through September 30 of last year. The forces comprise on the Army's side an independent brigade. It has a number of maneuver battalions in it. It also has a special forces battalion, the 3d Battalion of the 7th Special Forces Group. Senator BYRD. Are you aware of any Department of Defense or Department of the Army plan or study involving the reorganization of special forces which would lead to the deactivation of the Special Forces Battalion you have identified? Mr. McAULIFFE. I had heard of such a study last year. It was my impression that the impact of that reorganization in Panama would have been minimal. I have lost touch with the study since that time, since retiring on September 30. CUBAN FINANCING OF PANAMANIAN OLYMPIC TEAM Senator BYRD. Mr. Blumenfeld, a translation of Panamanian press accounts indicates that Cuba is financing the Olympic team that Panama is sending to Moscow. Can you shed any light on that? Mr. BLUMENFELD. I am afraid I can't, Senator. I think the question you have addressed to Administrator McAuliffe, as well as this one to me, reflect responsibilities and matters outside the scope of
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21 the operation, management and maintenance of the canal with which we are charged. Senator BYRD. You are interested, I assume, in Panama as such? Mr. BLUMENFELD. Of course, but I have not the details on the ramifications of the Panamanian decision with respect to its Olympic team's participation. Senator BYRD. Do you know of any Cuban assistance to the Panamanian Olympic team? Mr. BLUMENFELD. I am not personally aware of any. FORMAL CANAL COMPANY INTELLIGENCE SECTION Senator BYRD. The former Panama Canal Company had an intelligence and security section which maintained information bearing on individuals and groups which might pose a threat to the safe and efficient operation of the canal. Would you describe what has become of that intelligence section, including the disposition of its records? Mr. MCAULIFFE. Senator, that particular section was disbanded with the elimination of the Canal Zone Government, that elimination having taken place on October 2, as the treaty took effect. The records that were maintained in that intelligence section have been-and I am 90 percent sure on this; and if I may, I will recheck for the record-turned over to the Intelligence Directorate of the Southern Command. [Additional information follows:] The Internal Security Office of the Canal Zone Government was reorganized into an Industrial Security Office on October 1, 1979. The intelligence and security section having to do with maintaining information on individuals and groups constituting a potential threat to the Canal was disbanded on entry into force of the treaty. The records of this section were offered to the Intelligence Director of the Southern Command. Senator BYRD. What was the purpose of disbanding it? Mr. MCAULIFFE. Because it was in effect a function of the Canal Zone Government and the government itself was disbanded. COMMISSION INDUSTRIAL SECURITY OFFICE I might add, Senator, that I retain within the Commission an Industrial Security Office. That office is responsible for planning, you might say, the internal security of our canal facilities. There is some information that that office has retained from the Canal Zone Government, but the information is much less, let us say, of an intelligence nature than had been the case up to the end of September. COMMISSION NEED FOR INTELLIGENCE AND SECURITY OFFICE Senator BYRD. You feel that we do not need that additional intelligence? Mi. MCAULIFFE. I now rely completely upon the U.S. Southern Command for that, since they have the full responsibility for defense. My reliance is on that command for defense matters. I do, of course, have a small police force which will remain with the Commission until 1982, when it is phased out under the terms of the treaty. Senator BYRD. Evidently it was felt necessary previously to have such an intelligence and security section and now it is not considered necessary?
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22 Mr. MCAULIFFE. Since the Commission is oriented to the commercial operation of the canal, the requirements for intelligence and for the preparation of defense plans has been stripped out and I, as the operator, am satisfied with the arrangement that I have with the Southern Command, because in a real sense I have to depend on the Southern Command for the forces necessary to do something about any threat to the canal. Senator BYRD. Why did we need it in the past? Mr. MCAULIFFE. It was a complementary operation to the intelligence activities of the Southern Command. In the past the Canal Zone had a separate government; it handled all sorts of governmental things, like customs, like clearing people in and out of the zone, and in terms of handling all law and order problems. Now, with the disappearance of the Canal Zone, and most of the areas in which we live being under Panamanian jurisdiction, the situation does not lend itself to a separate intelligence collection activity or any separate kind of police actions by the Commission. We are, as I mentioned, oriented toward canal operations. We rely very heavily upon U.S. military forces there to provide us the security and protection that we need. We do not administer any areas except the canal operating area. I do maintain a small security force that in effect protects the locks and industrial facilities against sabotage and tampering and that kind of thing. But the force is so small that I have to be prepared to call upon the Southern Command to assist, and they are prepared to respond. Senator BYRD. Since the Panama Canal Treaty went into effect, has the Panama Canal been closed at any time? Mr. MCAULIFFE. No, sir. Senator BYRD. I understood that the canal was shut down for 3 days as a result of a Panamanian strike? CLOSURE OF CRISTOBAL PORT Mr. MCAULIFFE. I believe you may refer to the port area of Cristobal. That is the port area on the Caribbean, or Atlantic, side. That was closed down for 2 days back in January because of a strike. The port areas were transferred to Panama on October 1, as was the Panama Railroad. The closure of that port, while causing problems within Panama, did not affect or close down the operation of the canal. As a matter of fact, our pilots and other harbor personnel who normally use the Cristobal Port were still able to come and go during that strike without interference. Senator BYRD. Had that port been closed prior to the turning over of the canal to Panama? Mr. MCAULIFFE. I believe that it may have been closed down during a period in 1976 when there was a work slowdown and work stoppage within the Panama Canal, itself. But I will have to reconfirm that for the record. I don't know of any other closure. [Additional information follows:] The Port of Cristobal was shut down in 1962 for a period of one day by labor seeking higher pay for workers. There has not been a closure of the Port of Cristobal since that date through October 1, 1979, althQugh there have been some instances of unrest. Since October 1, 1979, the Port has been closed for two days, January 28-29, 1980, due to a labor dispute with the Government of Panama.
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23 Senator BYRD. Since the Panama Canal Treaty went into effect, the port has been closed by a 2-day strike? Mr. MCAULIFFE. That is correct. Senator BYRD. The classified method for operating the locks and the canal, has that information been turned over to the Panamanians? Mr. MCAULIFFE. No, sir; that remains with the Commission. NICARAGUA ARMS SHIPMENTS Senator BYRD. Are you aware of any evidence that during the civil war in Nicaragua arms were shipped to Nicaragua through the Panama Canal or offloaded at ports in the former Canal Zone? Mr. MCAULIFFE. No, sir; I am not aware of anything like that. USE OF CANAL BY CUBA AND U.S.S.R. Senator BYRD. How Often is the Panama Canal used by Cuban or Soviet merchant ships and warships? Mr. McAULIFFE. Soviet ships use the canal regularly. I believe that in the course of the year we see 400 or 500 various Soviet ships. These are either personnel carriers-what I mean by personnel are cruise ships-or cargo ships coming through the canal. There has similarly been regular use of the canal by Cuban ships but I do not have the regularity of it. I would say that it is a number considerably less than those of the Soviet ships. I will insert a table showing Communist use of the canal for the record. [The information follows:] CANAL TRANSITS OF VESSELS FROM COMMUNIST COUNTRIES Country Fiscal year 1979 Fiscal year 1969 U.S.S.R -.--------------------------------------------------------------587 104 Bulgaria .._---------------------------------------------------------------5 11 Cuba ._.----------------------------------------------------------------61 43 Czechoslovakia---------------------------------------------------------1 4 East Germany---------------------------------------------------------55 6 Peoples Republic of China -------------------------------------------------10 0 Poland -------------------------------------------------------------. 75 32 Yugoslavia .---------------------------------------------------------92 33 Total __-----------------------------------------------------------886 233 Senator BYRD. Has there been any significant change in the numbers of Cuban and Russian ships going through the canal? Mr. MCAULIFFE. No, sir. I believe these numbers have remained about the same for quite a number of years. Senator BYRD. Thank you very much. Thank you, Mr. Chairman. Senator LEVIN. If there are no additional questions at this time we will adjourn this hearing. As I indicated, there will be additional questions submitted for the record from members of the committee. [The questions, with answers supplied, follow:] QUESTIONS SUBMITTED BY SENATOR CARL LEVIN, ANSWERS SUPPLIED BY SECRETARY BLUMENFELD, CHAIRMAN OF THE BOARD, PANAMA CANAL COMMISSION Question. You have requested only $25 million for the emergency fund instead of the $40 million authorized; is that sufficient to give you the kind of flexibility that fund was intended to provide?
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Answer. While the $25 million amount is short of the $40 million originally requested for fiscal year 1980, it appears adequate to cover any reasonably foreseeable emergency. It is certainly adequate to permit initiating emergency action while concurrently seeking a supplemental appropriation if required. Such a request would presumably receive expeditious handling by the Congress. The $40 million authorization in Public Law 96-70 was patterned after the $40 million borrowing authority previously authorized for the Panama Canal Company. That borrowing authority was used by the Company both to backstop programed obligations under the Anti-Deficiency Act and to serve as a reserve source of funds to finance operations should the inflow of tolls revenue be cut off as the result of a Canal closure. For this latter purpose, the Company adopted a policy of holding in reserve funds equivalent to a 40-day loss of tolls revenue. Since the Commission operates directly from appropriations rather than from the revenues it generates, it has no requirement for a reserve either to backstop programed obligations or to protect itself against a temporary cut off of tolls revenue. It does, however, have a requirement for a reserve to defray emergency expenses and expenses arising from unforeseen traffic increases in the event annual appropriations prove inadequate for such purposes. These requirements call for a lesser amount of reserve than was needed by the Panama Canal Company. The $25 million requested is based on the need to fund for the potential of an emergency of major proportion occurring two years in succession. A two-year, rather than a one-year, reserve is necessary because of the time it would take to replenish the Emergency Fund once a withdrawal is made. Withdrawals from the fund will be replenished prospectively from Canal tolls-a recovery cycle taking at least a year. Accordingly, without a two-year reserve, the Commission would be without a source of emergency funds during the interim between any initial withdrawals of funds and their replenishment through the appropriation and tolls process. Question. I am happy to see the two countries have completed their negotiations concerning the scheduling of payments to Panama and the payment of debts owed to the Commission by Panama. Could you give us an idea how many bilateral agreements are still in the negotiation stage? How are these negotiations progressing? Answer. Four major issues, and approximately 35 others of a more technical nature, are being resolved in diplomatic channels or by the Coordinating Committee. The status of issues is discussed below. CEMETERY AGREEMENT The Cemetery Agreement has been accepted by negotiators of both countries, and awaits ratification by the ROP National Assembly for Community Representatives. The next session is scheduled to convene on October 11, 1980. PUBLIC SERVICE STANDARDS Standards of performance for fire protection, garbage and trash collection and street sweeping, road and street maintenance, street lighting, and traffic management have been agreed upon at subcommittee level and forwarded to Panama's Representative for approval at the Coordinating Committee as soon as possible. Agreement at subcommittee level on the standard for police protection has been withheld by Panama pending completion of review by the Guardia National, but we understand that agreement is imminent. Panama has not yet developed a method for verifying costs incurred in the performance of public services. However, the Comptroller's Office in Panama has just recently proposed that a meeting be set up in the near future to discuss compiling, supporting, and reporting of the cost for these services. In the event progress is not made in the near future on this matter, the subject will be raised in the Coordinating Committee. LAND USE LICENSING Panama is currently developing a procedure for licensing of other land uses pursuant to Article IV of the Agreement in Implementation of Article III of the Treaty. The Commission has repeatedly emphasized the importance of this matter, most recently in a special meeting with DEPAT officials on May 27, 1980. On June 11, the Panamanian Representative to the Coordinating Committee agreed to pursue this as a matter of the highest priority.
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25 SEA LEVEL CANAL STUDY In preliminary discussions between our two governments, the U.S. has informed Panama that we were "favorably disposed" to participate in a feasibility study with Panama and Japan. The U.S. and Panama have a Treaty obligation to carry out jointly a sea level canal feasibility study by the year 2000. Both we and the Panamanians have expressed the view that a tripartite study with Japan would meet this Treaty obligation. Following a visit to Japan by President Royo in late March, a Japanese-Panamanian communique was issued expressing interest in early "multilateral" consultations. OTHER ISSUES There are also about 35 other bilateral agreements pending formal approval of the Coordinating Committee. Some of these agreements are complete and in effect, requiring only ratification by the Committee. Others are in draft form and are undergoing legal review within the Commission. Approximately 15 of these agreements are still in the negotiation stage. The problem regarding taxation of contractors was discussed previously. Question. Mr. Secretary, I understand that you have just returned from the first meeting of the binational Board of the Commission. There were several issues regarding the functioning of the Board, such as the quorum question and the Code of Conduct, that were to be dealt with in regulations or bylaws. Did the Commission discuss these matters, and are you optimistic as to their resolution? Answer. Yes, Senator, the Board discussed the matters to which you refer in great detail. I would say that the Board focused harmoniously on its responsibilities for the smooth and efficient operation of the Canal while implementing the provisions of the Treaty between the two nations. In order to accomplish this, it was necessary to adopt regulations for the internal operation of the Board. The Board-adopted regulations included the requirement for a quorum, which will consist of a minimum of five Board members of which a majority of those present are nationals of the United States. As regards the Code of Conduct, after some discussion, it was decided that more work was needed on the Code and it will be an agenda item at the July meeting. QUESTIONS SUBMITTED BY SENATOR CARL LEVIN, ANSWERS SUPPLIED BY DENNIS P. MCAULIFFE, ADMINISTRATOR, PANAMA CANAL COMMISSION WAGE RULES IN TRANSFERRED ACTIVITIES Senator LEVIN. What have the Panamanians done regarding wage levels for the functions they have taken over from the old Company/Government? Mr. MCAULIFFE. The Government of Panama has maintained the same pay and classification systems which existed in the Panama Canal Company on September 30, 1979. Specifically, the systems consist of wage categories and grade levels determined by the nature and difficulty of work; pay steps within grade levels; and a minimum wage of $2.90 per hour. The systems apply to all employees of the activities assumed by Panama. Future pay adjustments will be determined by, the Government of Panama. AMERICAN BUSINESSES AND NON-PROFIT ENTITIES Senator LEVIN. Mr. McAuliffe, the recent GAO analysis of treaty implementation pointed up several unresolved issues regarding the regulation of American businesses and nonprofit organizations in what was the Canal Zone. Could you give us a little background on this problem? How many such businesses and organizations are there? What difficulties are they encountering? What progress are we making in solving these problems? Mr. MCAULIFFE. Prior to October 1, 1979, there were approximately 130 commercial and 305 non-profit activities authorized to operate from sites in the former Canal Zone. The commercial activities are directly related to the operation of the waterway, and include petroleum companies, shipping agents, tank branch offices, and professionals, such as attorneys and dentists. Some small-scale concessionaires, such as beauty, barber, and shoe repair shops, also operate in Commission housing areas. The non-profit activities include religious, welfare, fraternal, and
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26 recreational organizations which support the U.S. and non-U.S. citizens residing in Canal area communities. Because these organizations were located in the Canal Zone prior to treaty implementation, they benefited from lower costs for utilities and other community services, as well as access to U.S. health, educational and commissary facilities. Freedom from Panamanian taxation, customs duties, and labor laws, further substantially reduced the cost of operation for these organizations and their personnel. With the entry into force of the treaty on October 1, 1979, however, eligibility for these benefits and immunities was lost in whole or in part. These changes appear to have had less of an adverse financial impact on commercial than on non-profit activities. Commercial activities have, as a rule, passed on higher costs of operation to their customers. Non-profit activities, which rely on membership support, have had difficulty finding additional sources of income to cope with the higher costs of operations in Panama. Both U.S. and Panama officials are aware of the financial plight of non-profit activities in the Canal area and have agreed on arrangements to attenuate the impact of the treaty during the 30-month transition period. One such arrangement provides for a gradual increase of utility rates for non-profit activities from the September 30, 1979, Canal Zone employee rate to the higher charged in Panama. This will be accomplished in incremental steps over the 30-month period. LAND USE LICENSES Senator LEVIN. A related problem mentioned by GAO in its report concerns land use licenses for businesses and other entities. What is being done to solve this problem? Are any of these businesses and entities that are being threatened with double rents going out of business entirely? Mr. MCAULIFFE. One of the factors affecting Land Use Licensing was the dissolution of the Panama Canal Authority (PCA) in January 1980 and the transfer of its responsibilities to various Ministries of the Government of Panama. Meetings are again underway with the PCA's successor, a much smaller office, entitiled DEPAT, which is located within the Panamanian Ministry of the President. Topics under discussion include those listed in the GAO report. We are also working with Panama on establishing bilateral processes for the issuance of Land Use Licenses in accordance with Article IV of the Implementing Agreement of Article III. Some of the key factors contributing to the delay in resolution of Land Use License issues include (a) differences in interpretation of the treaty terms, and (b) a lack of existing comparable mechanisms in the Panama legal or civil structure for issuing permits to private individuals or commercial activities to use land owned by a government entity. In many cases, differences in interpretation of treaty terms are so great that quick resolution of problems is not expected. We are aware that Panama's Director of Revenue (Bacienda y Tesoro) is presently billing some 470 commercial and non-profit activities located in the former Canal Zone. We are not aware, however, of any circumstance where double billing is being claimed as the primary reason for dissolution of a commercial or nonprofit activity in the Canal area. We are aware of the case of Foster Construction de Costa Rica, Texaco, and IBM in which these companies have reported double billing by Panama for use of Commission facilities. The billings may be placing some of these organizations in the position of making a decision to discontinue activities. PUBLIC SERVICES Senator LEVIN. Mr. McAuliffe, could you please discuss for the Committee the progress we are making in developing a sound system for verifying and evaluating the costs of public services now provided to the Commission and DOD by the Government of Panama? This was a matter of concern during the treaty debate, and I understand we still do not have a full understanding of the way in which the Panamanians price these services. Is that so? Mr. MCAULIFFE. It is correct that we still do not have a cost reporting system for the public services being provided by the Government of Panama. As early as April 1979, the Panama Canal Company submitted to the Government of Panama for its consideration a draft procedure providing for the systematic reporting and verification -of costs incurred by the various Panamanian agencies in performing the public services for the Commission. In September 1979,
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27 the Government of Panama submitted a counter-proposal to which the Commission responded in November 1979 with its evaluative comments and a request that the two parties meet to discuss further the points in question in order to arrive at an agreement in the near future. To date, no formal response to our comments has been received even though several attempts have been made to elicit action on the part of the Government of Panama to successfully resolve this long-standing matter of joint concern. The latest of these appeals was forwarded to the Director of the Office of the Comptroller for the Canal area in May 1980, to which we received a response on May 27, 1980, indicating that they would be in contact with us to discuss the method to be used for cost reporting. We will continue to pursue this matter with Panama. Senator LEVIN. What about the quality of public services? Have you been satisfied so far with the services you have been purchasing from Panama? Mr. McAULIFFE. Most public services being purchased from Panama have been provided since October 1, 1979, at a level generally comparable to that provided by the Company/Government prior to that date. Standards for these services have not yet been fully agreed by Panama. In the area of roads and street maintenance, performance has lagged and the quality is barely satisfactory. Panama's work effort has been severely hampered by late release of funds for acquisition of materials and equipment, and by labor problems. Road and street maintenance began only two months ago, missing the dry season climate, most favorable for this type of work. Notwithstanding the problems, our direct working relationship with counterpart operating personnel responsible for this function in Panama remains good, we will continue to press Panama to provide service as contemplated by the standard. RETIREMENTS Senator LEVIN. Mr. McAuliffe, we heard dire predictions last year concerning the flight of experienced American personnel from Panama that would result from implementation of the Treaty. How severe was that impact now that it is behind us? Was it larger or smaller than we had anticipated? Are there particular areas or skills where the early retirements were particularly damaging? Mr. McAULIFFE. The mass exodus of experienced U.S. citizens, which some persons had predicted, failed to materialize. The liberalized retirement provisions of Public Law 96-70 which are applicable throughout the life of the Treaty, together with the relative smoothness of the transition to date have undoubtedly served to calm the apprehensions which many U.S. citizen employees had about the Treaty. In the one-year period from April 1979 through March 1980 a total of 317 U.S. citizen employees retired. During the same period in 1978-1979 there were 105 U.S. citizen retirements. At the same time, however, the number of resignations by U.S. citizens were 28 fewer in 1979 than in the previous year. The higher number of retirements among U.S. citizens is largely attributed to the reduction in force that was in process in 1979, during which many employees elected to retire in lieu of being adversely affected in the reduction in force. To a lesser degree, they were also due to the early retirement eligibility provisions available under regular Civil Service rules to employees involved in major reductions in force. Still others retired because of their unwillingness to stay on under the changed conditions brought about by the Treaty. The retirements and resignations among U.S. citizens which occured during the one-year period spanning from six months before to six months after the Treaty implementation date were not concentrated in any single occupation or group of occupations. The loss of a larger-than-usual number of U.S. citizens in the period could not help but be felt in the Canal organization, especially since many of these employees, through their years of service, had acquired a fund of experience and expertise that is difficult to replace. In spite of this, however, we have not suffered damaging losses in particular areas or skills. To a large extent, competent and wellqualified on-board employees have replaced those who have retired or resigned. Where outside recruitment has been necessary, we have been able to locate sufficient numbers of qualified candidates with the particular skills that we require.
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28 QUESTIONS SUBMITTED BY SENATOR STROM THURMOND, ANSWERS SUPPLIED BY SECRETARY BLUMENFELD, CHAIRMAN OF THE BOARD, PANAMA CANAL COMMISSION Question. Mr. Secretary, did any of the Panama members oppose your selection as Board Chairman? Answer. Senator, the Panamanians desired that the Chairmanship be rotated between the United States and the Republic of Panama. That proposition, however, was not accepted by the Board. During the subsequent vote on election of the Chairman, the Panamanians abstained; therefore, they did not vote against my selection. Question. Were all the Board members present at the first meeting? Answer. Yes, all United States and Panamanian members were present. Question. Provide for the Record the actions of the Board to date. Answer. Senator, as you are aware, the Board has had one meeting. A number of significant actions were accomplished. They were: a. Adoption of internal regulations which will govern Board operations. b. Election of a Chairman. c. Organization of Board committees (Executive committee; Budget/Finance; and a special committee on long-range Canal improvement). d. Approval of major decisions made by the Administrator since October 1, 1979 with the proviso that certain actions will be reviewed in depth by the various committees of the Board at a future date to determine whether revision or modification might be indicated. e. Appointment of a Secretary, Panama Canal Commission. f. In-depth discussion of: 1. Code of Conduct. 2. Chief Financial Officer, Chief Engineer and Ombudsman roles. 3. Current wage policies and systems. 4. Capital programming and budget. 5. Financial status of Commission. 6. Personnel structure of Commission, and vehicles for increasing Panamanian employment in technical, professional and managerial positions. These are a few of the topics discussed or decided upon during the first Board meeting. As you might well imagine, a considerable amount of time was consumed in organizing the Board. Question. Provide for the Record any proposals on which there was a division between the U.S. and Panama members. Answer. Senator, as in any deliberation by any organized body, there are disagreements. The Board of the Commission is no different. There were disagreements on a number of issues but these disagreements were solved either by vote or by referring the matter to the proper committee for study. The committees will then report to the Board and if it is necessary for the Board to take action on the recommendation, it will do so. Question. Why is Panama being paid on a monthly basis? Answer. From a financial management point of view, monthly payments are more convenient for both the Commission and the Republic of Panama than would be a single annuity. Question. What has been the impact of the lower oil shipments? Answer. Most of the nearly $6.0 million shortfall in tolls revenue during the first eight months of the fiscal year is due to lower than budgeted shipments of Alaska North Slope oil through the Canal. Shipments averaged 400 thousand barrels daily compared to the budget estimated of 475 thousand barrels per day. Tolls generated, by this trade totaled $22.6 million, approximately $4.3 million below the estimate for the period. Question. What would you expect future impacts to be? Answer. The North Slope oil trade through the Canal has been increasing the last four months, averaging 526 thousand barrels daily in April and May. Recent estimates indicates that shipments during the next few months should perform at forecast levels of 500 thousand barrels daily. No impact is therefore expected from this trade for the balance of the fiscal year. Since this commodity is the most prominent one, any significant increase or decrease in traffic could have a major impact on Canal operations. Question. Have you recommended any changes in the 1979 Act other than those in your statement?
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29 Answer. Senator, I don't believe I recommended any changes to the Panama Canal Act of 1979. The Act, as you know, requires the President to submit to Congress by October 1, 1981 a request for such legislation. We are considering a number of items that might be developed into specific proposals, but it is much too early to define them as "recommended changes.'' Question. What financial problems do you envision in the long term? Answer. I currently have no basis for identifying any specific financial problems in the long term. The Canal continues to be susceptible to factors beyond its immediate control, such as the world economic picture, world trade patterns, alternative means of transportation, and the advance of technology, that all have significant effects on the Canal traffic and tolls. The Canal has remained financially self-sufficient through traffic growth and recent toll increases. I don't anticipate anything to the contrary. Question. How important is the guide program to the Canal operation? Answer. The importance of the Panama Canal Guide Service as a public relations tool has been readily apparent since its inception in 1962, but it has become even greater under our new relationship with the Republic of Panama. Question. Why is it needed at all? Answer. The Guide Service conducts orientation tours and gives briefings on the Canal operation to local civic and educational groups, U.S. and foreign military, and visiting government officials and diplomatic personnel from many nations. At the request of the American Embassy, we recently instituted periodic tours and briefings for newly assigned personnel. These services increase understanding of Canal operations and foster friendly relations between the many diverse groups having an interest in the waterway. More than 300,000 people from all walks of life visit Canal installations each year. Handling of these visitors in an orderly manner is of the utmost importancenot only from a public relations standpoint but as a matter of their safety. If there were no guide service, these installations would have to be closed to the public, thereby depriving visitors of the opportunity to gain first hand information about the Canal. Question. Has it ever paid its own way? Answer. The Guide Service is not a revenue producing operation. It has, however, produced immeasurable returns in good will and understanding of the U.S. presence in Panama. There is no cost to the U.S. taxpayer in providing the service. Question. What provisions of the 1979 Act do you feel have been ineffective or a hindrance to Canal operations? Answer. I have not found that any of the provisions were ineffective, nor have any thus far adversely affected the efficiency of the Canal operation in any significant way. There are several provisions that have proven to be very cumbersome to the management of the Canal operations. I particularly would cite applicability of Title VII of the Civil Service Reform Act to the Canal area as difficult at best. The steps to union recognition are still in progress. To date, only one petition for recognition has been finalized. Because of the significant differences between Panamanian labor laws and Title VII, I anticipate considerable effort will be devoted just to the implementation phase. The changeover from corporate to appropriated form of the agency has led to many difficulties also. This situation was exacerbated by the short time allowed for the transformation. Finally, we will only know after further experience whether the requirements relating to selection of U.S. Board members, and the lack of a "proxy" device in relation to the quorum requirement, will hinder effective and efficient operation of the Board; that could potentially be a problem. QUESTIONS SUBMITTED BY SENATOR STROM THURMOND, ANSWERS SUPPLIED BY DENNIS P. McAULIFFE, ADMINISTRATOR, PANAMA CANAL COMMISSION MAINTENANCE COSTS Senator THURMOND. Mr. McAuliffe, your fiscal year 1981 request shows a sizable increase in funds for maintenance in the areas handled by Panama. Why is this increase necessary? Mr. McAULIFFE. The 1981 budget request provides for additional funding for maintenance and equipment overhauls in the transit operations area. This additional amount includes maintenance and overhaul of dredging equipment, restoration of spoil dump areas, tugboat maintenance and overhauls, major maintetenance on lock structures and equipment, and on-going maintenance of other
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30 transit facilities and equipment. This higher level of maintenance on transit facilities and equipment is necessary to provide acceptable levels of safety and operations in the transiting of ships through the waterway. This serves also to make up some maintenance deferrals from previous years. All these maintenance costs will be covered by revenues. Senator THURMOND. How many additional Panama workers are to be added as a result of this increase? Mr. MCAULIFFE. The varying requirements for maintenance and overhaul are accomplished, in many instances, through the use of temporary and parttime employments. By far, the majority of these employments are obtained through the local labor market and are Panamanian citizens. Peak periods of maintenance effort occur in the dry season months and the employments associated with these maintenance projects are not a component of the Commission's permanent full-time workforce. The number of temporary workers associated with this increase would vary depending on the availability of workers and the nature of the project. Senator THURMOND. Did Panama request this increase? Mr. MCAULIFFE. No, Sir. The Agency's maintenance requirements are the result of standards of preventive maintenance established over the years which have been proven effective in routine and cyclical programs of maintenance and repair efforts. Requirements identified in periodic inspection and survey activities by engineering and other specialist personnel, and established maintenance programs, comprise the core of the Agency's overall maintenance and overhaul requirements, all of which are aimed at maintaining the waterway and as to assure its continued safe and efficient operation throughout the life of the Treaty. FINANCING CAPITAL IMPROVEMENTS Senator THURMOND. Is there any doubt that all capital improvements being initiated can be financed to completion from Canal revenues? Mr. MCAULIFFE. None whatsoever. The Panama Canal Act of 1979 ensures in three ways that capital improvements will be financed to completion from canal revenues. First, the toll provisions of that Act require that rates be set at levels calculated to produce revenues to cover all costs of operations, including capital for plant replacement, expansion, and improvements. This places a legal mandate on management to insure that toll rates remain adequate to finance capital improvements being sought. Secondly, the Act provides that no funds may be appropriated to or for the use of the Commission in any fiscal year in excess of the estimated revenue to be deposited in the Commission Fund during that year, plus any unexpended revenue balance in the Fund from prior years. This provision imposes on the Commission the ongoing requirement that revenues be sufficient to cover appropriations. Finally, the Act requires that any unrecovered costs be included as an element for recovery in setting toll rates. Thus, in the event revenue proved insufficient to cover costs in any given period, the shortfall would be recovered prospectively. EMERGENCY FUND Senator THURMOND. Do you still feel the $25 million emergency fund is the proper level of money for this fund? Mr. MCAULIFFE. In my judgment, $25 million will provide a reasonable and needed level of reserves to ensure the continuous and efficient operation of the waterway. It is based on an assessment of the costs that could be incurred for the correction of landslides into the Canal, the removal of vessels obstructing the channel, the clean up of a major oil spills, as well as the potential cost for meeting unanticipated traffic increases. It also represents an amount that could prudently be set aside from Canal revenues for that purpose. At some future point in time, the Emergency Fund may have to be increased to keep pace with inflation. Senator THURMOND. Why do you feel additional money could be "expeditiously processed" if necessary? Mr. MCAULIFFE. I believe an emergency of such proportions, costing in excess of $25 million, would be of such importance to the Canal operation that it would prompt expeditious processing by OMB and the Congress. The $25 million emergency fund and any funds that could be diverted from operations would provide us the means to initiate a large part of the emergency work. In the meantime, we would request supplemental funding authority to complete the project and restore operations.
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31 TRANSIT OF OIL Senator THURMOND. Is there any reason to believe the oil shipments will not continue to provide needed revenues over the next few years? Mr. McAULIFFE. No significant changes in the flow of Alaska North Slope Oil through the Canal are anticipated for at least the next two years. Shipments are projected to remain steady at a level of nearly 500 thousand barrels daily during this period. RESERVES Senator THURMOND. Should you be building a reserve to protect the canal if these oil shipments drop in the next few years? Mr. MCAULIFFE. Without a change in legislation, there is no way to build a reserve to protect. against the future loss of oil shipment revenues. The tolls formula set forth in the Panama Canal Act of 1979 provides only for the recovery of costs in setting rates for tolls. There is no authority for increasing toll rates to cover prospective losses of revenues. When and if revenues become insufficient to cover costs, the law requires that a toll rate increase be implemented. HOUSE ACTION ON PROJECT COST INCREASES Senator THURMOND. What was the rationale of the House action on captial project cost increases? Mr. MCAULIFFE. I assume you aie referring to the provision allowing any of the Committees or Subcommittees to which changes in the cost of individual capital projects are reported to disapprove such changes. We are not certain of the rationale for this requirement, but it appears that the purpose was to impose additional and more strict controls over capital expenditureF. We believe this provision is unnecessarily restrictive, provides for a redundant approval of project change, and thus would impede the conduct of the capital program. Senator THURMOND. What type of improvements are involved in the housing requests? Mr. MCAULIFFE. The capital improvements involved in the housing request are for minor improvements, reroofing and insulation. A description of each category follows: 1. Minor improvements to quarters-This program contributes to improving management/employee relations by funding improvements to quarters that enhance their desirability. Its popularity is attested to by the heavy backlog of requests and the continued interest of communities in it, and is essential because of its effect on employees' morale. Improvements generally provide for the conversion of open areas into living space and include such items as patio and carport slab, roofs and enclosures, security protection systems, basement enclosures and sidewalks. Under this program the agency pays a portion of the cost of each improvement with the employee paying the balance. Rental rates are then increased to offset the agency's cost and provide for future maintenance. Improvements to approximately 80 apartment units are planned for fiscal year 1981. 2. Reroof employee quarters-This program provides for the replacement of deteriorating roofs of employees' quarters that have exceeded their normal life expectancy and have become uneconomical to repair. Failure to replace roofs on a timely basis results in higher maintenance costs when extensive repairs are required and frequently include water-soaked insulation, dry rot damaged framing members and warped and deteriorated interior ceilings. 3. Insulate employees quarters-This provides for insulating frame quarters by installing insulation in attics and installing vinyl siding on those quarters with ship-lap siding. The primary purpose of the insulation program is to reduce electrical energy consumption. A secondary purpose is to lower maintenance and painting costs and retard deterioration of building exteriors. PANAMA CANAL ACT OF 1979 Senator THURMOND. What portion of the 1979 Act have you found a hindrance to efficient operations? Mr. MCAULIFFE. To be frank, we have had insufficient time to evaluate the effect of the new legislation on the operation of the canal. During the last eight
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32 months, we have had to focus all our efforts toward implementing the requirements of both the Treaty and the new legislation, while at the same time ensuring the continuous operation of the waterway. At this point, I am satisfied that the canal is operating as efficiently as it has in the past. Senator THURMOND. Have you recommended any changes? Mr. McAULIFFE. No, sir, I haven't. The Panama Canal Act of 1979 requires the President to submit to the Congress by October 1, 1981, a request for legislation which would, among other things, contain provisions considered necessary and appropriate in light of the experience as of that time under the Treaty. I would expect to have completed our assessment and recommendations by that time. Senator LEVIN. We thank you for coming. Mr. BLUMENFELD. Thank you, Mr. Chairman. [Whereupon, at 9:10 a.m. the hearing was concluded.] 0
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