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NET INCOME OF COMPANY

The peak level of traffic in 1953 and the economy program of management have resulted in exceptionally favorable financial results in that year. After payment of all costs of operation, interest on the investment, depreciation, costs of Canal Zone Government, and other charges provided by law, but without depreciation or amortization of the channel, treaty rights, and simillar costs heretofore treated as nondepreciable, the Company showed a net income of $7,200,963.

Senator ELLENDER. General, what does that treaty right consist of, I mean from a monetary standpoint?

General SEYBOLD. $10 million, sir, that was paid to the Republic. Senator ELLENDER. You mean for the use of the 10-mile strip? General SEYBOLD. It was a right; yes, sir.

Senator ELLENDER. I thought that was charged to the costs of the canal.

General SEYBOLD. No, sir; that is considered and being treated as a nondepreciable charge.

Senator ELLENDER. But I say, it should be a charge to the canal and in time amortized ?

General SEYBOLD. In accordance with the instructions of the committee last year we of course have presented such legislation to the Bureau of the Budget.

Senator ELLENDER. Do you know what the status of it is?

General SEYBOLD. It is still within the Bureau under consideration, sir.

Senator ELLENDER. And it has been there how long?
General SEYBOLD. How long has it been up there, Mr. Whitman?
Mr. WHITMAN. Three months.
Senator ELLENDER. Three months.

General SEYBOLD. The unusually high rate of traffic through the canal in 1953 and in the first half of 1954 is believed to be attributable to abnormal conditions affecting world trade, such as the Korean war, and a return to a more normal situation is anticipated in fiscal

Senator ELLENDER. When you say the first half of 1954, you mean the fiscal year beginning July 1953 ?

General SEYBOLD. Yes, sir.
Senator ELLENDER. I wanted to make that plain.

Year 1955.

DECLINE IN TOLL REVENUE

General SEYBOLD. The best estimates we are able to make indicate that traffic, and therefore toll revenues, will decline sharply in fiscal year 1955. We estimate that the number of transits during that year will drop to 8,391 and that toll revenues will be reduced to about $32 million. That decrease in revenue will result in an overall loss of $350,000 after payment of costs of operation, interest, depreciation, costs of Canal Zone Government, and other costs of the Company, but before depreciation or amortization of the channel and other assets heretofore classified as nondepreciable.

Senator ELLENDER. That is assuming that your expenses will be the same and that you do not make any further cuts in operations?

General SEYBOLD. Yes, sir, and it also fails to take into consideration any probable increases in labor costs which may be anticipated.

Notwithstanding this deficit, the Company will not be required to seek appropriations in 1955, and in fact, the budget for that year contemplates payment into the Treasury of a dividend of $10 million from prior year operations. As indicated above, the appropriation for Canal Zone Government in 1955 will also be reimbursed to the Treasury.

Senator ELLENDER. When you say a dividend of $10 million, would you consider that in the nature of a profit to the Government!

General SEYBOLD. Well, it is excess funds in our balances. Whether or not that is a profit, Senator, I imagine would be debatable in the way in which you set up your accounting systems.

Senator KNOWLAND. Depending upon what depreciation is considered and reserves for obsolence.

Senator ELLENDER. I know that it has caused a lot of talk in the Republic that these canals should be operated not for profit and any excess should be distributed to raise the wages of the people there, and things like that.

General SEYBOLD. Yes, sir.

AMORTIZATION OF CANAL INVESTMENT

Senator ELLENDER. I believe it is essential, as I told you on several occasions, that the law be presented to the Congress with the view of trying to amortize the original investment on this canal; we ought to do it. We are mighty late in trying to do it. It ought to be done without any hesitancy or any more studies.

General SEYBOLD. Yes, sir; I may comment on this return of the $10 million to the Treasury. Of course, the Treasury has had use of those dollars all this time.

Senator ELLENDER. Yes.

General SEYBOLD. We foresee the time when it may be necessary for the Company to come before the Congress for an appropriation in lieu of this because of the fact that we also anticipate, and I think rightly can see, several large capital costs that are in front of us in these near future fiscal years.

Senator ELLENDER. You mean repairs and replacements of some of these antiquated machines you have in there?

General SEYBOLD. Yes, sir. Senator ELLENDER. I was very much impressed with the longevity of some of those machines you now have. It is remarkable how long they have lasted, but I can see the time when you will have to substitute for that with more modern machinery.

General SEYBOLD. And then, of course, the wear and tear of 45 years is beginning to tell, and I think we will have large replacement programs.

Senator ELLENDER. Would not that be a way to set aside funds fu that purpose instead of handling it in the nature of a profit so as to indicate to the people of Panama that this money is set aside for the purpose of replacing machinery that is going to wear out?

General SEYBOLD. We have attempted, Senator, in many instances to explain to them that this is just a reserve really.

Senator ELLENDER. Yes, I understand.

General SEYBOLD. But they have failed to accept it as such arj always continue to look upon it as a profit.

Senator ELLENDER. The way it is reported it may look like profit, but any business would show that as a reserve for depreciations.

Senator KNOWLAND. I noticed in the hearings of last year on page 90 of the Civil Functions Appropriation Act there is a statement by Mr. Newman reading as follows:

The emergency fund of $10 million was set up by the Congress in Public Law 808 that was the first Federal charter granted to the corporation. Prior to that time the corporation was a New York corporation which was bought from the French in 1904. At the time the legislation was passed the Company believed they needed $10 million as a reserve fund.

I wonder if this has any relation to that $10 million?

General SEYBOLD. You are speaking, Mr. Chairman, of an additional $10 million.

Senator KNOWLAND. I see. You may proceed.

LEGISLATIVE PROVISIONS OF ACT

General SEYBOLD. Turning to specific provisions of the appropriation act for 1954, I can report full compliance by the Company and government with the requirements for reduction in the number of passenger automobiles by 6 for the Company and 3 for the government.

As requested in the conference report of the 1954 appropriation act, a report on the Company's study of the adequacy of present toll rates has been submitted to the Congress.

In accordance with section 106 of the 1954 act, free medical care and hospitalization for employees of the Panama Canal Company and Canal Zone Government was discontinued as of January 1, 1954. In reference to this section of last year's appropriation act, I wish to invite to the attention of the committee the fact that free hospitalization and medical care have been furnished to employees as part of their conditions of employment from the time the United States first started to build the canal. The Executive order providing for free hospitalization and medical care for our employees was supported by law and was recognized as part of their compensation.

COMMITTEE REPORT

The committee reports accompanying the 1954 Appropriation Act clearly indicate a recognition of the necessity for furnishing medical and hospital care to employees at reduced rates. The manifest intention was not to require the recovery of full cost or the payment of rates comparable to rates paid in the United States or elsewhere. The reduced rates are still regarded as an employee benefit that has been recognized as proper and necessary since construction days, and further increases in the cost of medical care would in reality constitute a reduction in pay on a selective basis for those who can least afford it.

MEDICAL CARE

Another practical reason for keeping the expense of medical care at a minimum is the necessity for inducing employees to obtain medical attention at the first indication of illness. It is to be remembered that the solution of the health problem in Panama was necessary

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before the canal could be built, and the potential hazards present in 1904 are the same today. The outbreak of yellow fever within a few miles of the canal in 1950 was a clear demonstration that health standards cannot be relaxed.

At the direction of this committee last year, an independent survey of the compensation of our employees was made by a management firm, whose report with the recommendations of the Board of Directors of the Company has been separately submitted to the committee. In general, that report recommended retention of the 25-percent differential and fringe benefits then available to employees, including free hospitalization and medical care. The survey also concludeil that additional fringe benefits were necessary to attract and hold qualified employees in today's market.

I have already referred to the program of reducing the number of employees in the Canal Zone to the minimum essential for efficient operation, but I cannot emphasize too strongly that the success of that program depends on the adequate compensation and fair treatment of the employees who are retained on the job.

REIMBURSEMENT FOR SCHOOLS AND HOSPITAL SERVICES

The application of section 105 of the 1954 appropriation act has involved some problems which deserve further consideration by the committee. Those problems concern the extent of the obligation of other agencies to reimburse the Canal Zone Government for school and hospital services, and the impact on certain groups of Canal Zone residents of new policies of recovering the cost of hospital services.

Prior to the adoption of section 105 the Canal Zone Government, as a part of the local government of the Canal Zone, furnished free primary and secondary education for children of all residents of the Canal Zone and of employees of the United States Government in the adjacent territory of the Republic of Panama. Hospital service was furnished without charge to employees of the canal agencies, and at reduced rates, depending on the ability of the head of the family to pay, to families of canal employees and to employees of other Gorernment agencies and their families. Other Government agencies which were authorized by law to reimburse the local government for the cost of these services furnished to their personnel did so to the extent of that authorization. Section 105 of the 1954 appropriations act provides that amounts expended by the Canal Zone Government in providing school and hospital services for Government agencies other than the Panama Canal Company and Canal Zone Government hereafter shall, notwithstanding any other provision of law, be fully reimbursable to the Canal Zone Government by such other agencies

Section 106 of the 1954 appropriations act contains the provision, discussed above, prohibiting use of Company or Government funds to furnish free hospital and medical care to the employees of those agencies.

RULING OF COMPTROLLER GENERAL Construing these sections together, the Comptroller General of the United States has held that under section 105 other Government agencies may not reimburse the Canal Zone Government for hospital sertices or for educational services furnished to their employees or meni

bers of their families except as otherwise specifically authorized by statute. This decision appears to render section 105 without effect. If payment of these charges is authorized by other provisions of law, the section is unnecessary; if such payment is not authorized by other provisions of law, the decision holds that section 105 is ineffective to authorize such payment.

In any further consideration of this problem, it is most urgently recommended that no provision be adopted which would have the effect of requiring local residents to assume the burden of paying full cost of hospital services and school tuition. Such a provision would put medical care and education out of the reach of the majority of the personnel in the area and would be contrary to traditional American concepts of the function of local government. The United States is not only in this area as an employer; it also provides the local government in the area, including police and fire protection, schools, medical care, and similar services. Furthermore, in view of the responsibilities of the United States Government in the Canal Zone, it is evident that where residents of the area require hospital care they will have to be admitted to the hospitals—as charity patients if they are unable to pay.

The Company-Government has continued to maintain its responsibilities as the United States in overseas areas. It has endeavored to foster and improve relations with the Republic of Panama by adjustment of its activities and policies to assist the Republic in improvement of its economy and social growth. The Company-Government has increased its purchases from the Republic and now procures all supplies when they are available at quality level and at competitive prices. The zone management has adopted the policy of reduction of service facilities for the indigenous worker and is endeavoring to accelerate the removal of these employees from Canal Zone housing to the Republic. This program is being hindered by an acute shortage of housing within the Republic. It is hoped that the Panamanian authorities will soon develop housing projects which can accommodate the excess of Panamanian citizens now resident in the zone, in which case most of the supporting services on the zone for these people can be reduced or discontinued entirely.

Senator ELLENDER. General, of the entire number of employees in the Canal Zone that are Panamanians, what percentage of them live on Canal Zone property?

General SEYBOLD. Around 35 percent at the present time.

Senator ELLENDER. To what extent has that been decreasing in recent years?

General SEYBOLD. I would say markedly in the last year and a half.

Senator ELLENDER. And as to those who live in Panama City, outside of the zone, are they given more salary than those who live within the zone?

General SEYBOLD. No, sir; the pay rate is the same.

Senator ELLENDER. Do those who live outside of the zone get the same medical facilities and schools as do those who live and work in the zone?

General SEYBOLD. They have access and the same privileges as to medical facilities. As to the schools, they of course go to the Panamanian schools. They do not go to our schools.

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