restored only after I met with labor groups and promised my support of an amendment to the pay cutoff proposal.

Basically, I recommended withdrawal of the application of the proposal to the MG-10 and equivalent level, as well as the NM-6 level; also, I recommended allowing present employees in grades NM-4 and NM-5 to continue to be paid on the U.S. wage scale and to receive all subsequent pay increases.

The Commander in Chief, U.S. Southern Command, Lieutenant General McAuliffe, has endorsed my proposed amendment. The Canal Zone Civilian Personnel Policy Coordinating Board has not yet met to make a decision on these two issues.

FINANCIAL POSITION

In regard to the Company's financial position and financial problems, I think that in order to adequately comprehend them, a look at the past is necessary. From the time the Panama Canal Company was reorganized into its present corporate form by Congress in fiscal year 1952 and up through fiscal year 1975, the Panama Canal Company has been self-sustaining. In addition, over those 24 years it was able to repay to the U.S. Treasury $40 million of the U.S. Government's investment in the Company, and to invest, through recycling of interest-free capital, some $264 million in plant improvements and replacements.

This favorable accomplishment demonstrates the wisdom of Congress in enacting the legislation which established the financial structure of the Panama Canal Company. As you will see, that structure was designed to handle practically every contingency.

The Company's favorable financial performance during these years also owes a great deal to the employees of the Panama Canal organization, who significantly contributed to productivity gains.

A broad, but meaningful, measure of productivity for the Panama Canal Company is determined by the total Panama Canal tonnage of vessels that transit the canal in a year, divided by the total number of man-years worked by the Company's employees.

In 1952, 2,082 Panama Canal tons were moved through the Canal for each man-year worked. In fiscal year 1975 each man-year accounted for the transit of 10,740 Panama Canal tons. The foregoing demonstrates a 416-percent increase in productivity over this period, or an average increase of 18 percent a year, which certainly is an outstanding achievement.

Mr. SNYDER. Excuse me, Governor, is there any relation between that productivity and the Panama Canal Zone tons and increased revenue?

Are you getting a lot more tons stacked on top that you are not getting paid for?

Governor PARFITT. I am not sure I understood your question, sir. Mr. SNYDER. Has the revenue per ton increased along with that productivity?

Governor PARFITT. The revenue per ton has only increased by 19.7 percent. This increase in rates was placed into effect in July 1975.

Mr. SNYDER. But that on deck cargo that you were not getting paid for, are you putting those tons into this computation?

Governor PARFITT. No. Tolls are based on the Panama Canal measurement ton-which is generally the below-deck measurement.

Mr. SNYDER. They are all paid for?

Governor PARFITT. Yes, paid for Panama Canal tons only.

To encourage productivity the Company has a thriving incentive awards program, and an excellent suggestion program, but much of the Company's work involves teamwork where it is difficult to single out individuals for recognition.

I think that probably the greatest incentives are only partly tangible, and have to do with the employee feeling a part of the great concerted effort that it takes to run the Canal. The sense of community is a great part of that incentive and the sense that the Company will look out for the employee's interests also has a great deal to do with the employee's feeling of responsibility for the Canal.

It is impossible to measure these incentives, but the evidence is that they exist, and we have to show for it the 60 years of efficient service to shipping since the Canal opened in 1914.

FINANCIAL PROBLEMS

The financial problems confronting the Panama Canal Company are not essentially different from those faced today by many financially sound business firms in the United States, but the measures we can take to respond are limited. A depressed world economy has cut our revenues and continuing inflation has ballooned our costs.

There is nothing that the Company can do to induce more revenueproducing traffic to come through the Canal. To increase revenues, its only avenue is through rate increases, principally a toll rate increase. On the cost side, the Panama Canal Company has, as any prudent business firm would when its volume of business is down, pared costs to the extent practicable. Unfortunately, in cutting costs the Company is limited to certain narrow areas because of the preponderance of fixed costs.

AUSTERITY PROGRAM

Because of this limitation, our cost cutting program, which we refer to as our austerity program, not only dealt with areas related to the reduced workload, but also went into other areas: deferrals of maintenance, scrimping on supplies, reductions in personnel not related to the workload falloff, and reductions in services to employees and others. We would rather not have touched some of these areas and will reverse certain of these actions as soon as the situation permits.

These austerity measures were initiated to partly offset the Company's projected operating losses for fiscal 1976 and 1977. In an early estimate to the Board of Directors we predicted a $29 million loss for fiscal year 1976.

Through the austerity program we have been able to squeeze some $14.8 million out of the 1976 budget, and consider the program a resounding success. But even with such results from the austerity program, it is anticipated that revenues will not be sufficient to cover costs in this fiscal year. We were able to overcome the effects of cost inflation with the austerity program, and some of the loss due to

traffic falloff, but the full effect of the traffic falloff was to much to absorb.

In our latest presentation to the House and Senate Appropriations Committees, we estimated a loss for fiscal year 1976 of $14.1 million. Since that last estimate, we found that although the exclusion of deck cargo from the measurement rule changes will reduce expected revenues, further cost economies are unfolding that may make it possible to lessen that $14.1 deficit figure.

STATUTORY FINANCIAL ALTERNATIVES

Although this loss appears large, it is far short of creating a financial crisis for the Panama Canal Company. Even if no statutory measures were available to us to dampen the impact of such a loss, operations would still not suffer in the short run. What would be affected would be our program for capital improvements and replace

ments.

Of course, in the long run these are vital to the continued operation. of the Canal, and Congress has, in its statutory plan for the Panama Canal Company, guarded against any deterioration in required capital investment.

The Congress anticipated that, from time to time, the Company would sustain losses, and through the legislative process has provided the Panama Canal Company with a number of alternatives for use in such circumstances which assure the Company's financial viability without compromising its capital program. Let us look for a moment at these alternatives.

Section 62 of title 2 of the Canal Zone Code requires the Panama Canal Company to pay into the Treasury:

(a) Interest on the U.S. Government's net direct investment in the Company;

(b) Annuity payments under article XIV of the 1903 Treaty with Panama as modified by article VII of the 1936 Treaty; and

(c) Net costs of operation of the Canal Zone Government.

In each case the requirement of the statute is that these payments "shall be made annually to the extent earned, and if not earned, shall be made from subsequent earnings." This provision for deferral does not replace the statutory requirement that the Company is to be self-sustaining, but provides flexibility by allowing the Company to achieve a balance between revenues and costs over a period longer than a fiscal year.

In addition to the provisions for deferment of such payments, the statutory plan also authorizes, in section 72 of title 2 of the Canal Zone Code, appropriations to cover losses. This provision could come into play after the deferment provisions were exhausted.

Also, the Panama Canal Company has statutory authority to borrow from the Treasury, for any of the purposes of the Company, not more than $40 million outstanding at any time. A portion of the $40 million borrowing authority is used to backstop obligations of the Company's capital program, and, although no portion of the $10 million has been withdrawn from the Treasury, the amount of that resource is reduced to the extent that it already is backstopping obligations.

In addition to all of the above, one further source of funds is provided in the statutory plan, a provision authorizing appropriations for the purpose of meeting increased capital needs.

These, then, are financial alternatives already contained in the statutory plan. What do they mean in terms of today's financial strain? To answer that, let me first state for you our perception of the problem.

There are two factors; one, the Company, like many other entities, did not anticipate the depth reached by the economic slump, nor the heights reached by inflation. Over the years, the Panama Canal has had an excellent record of forecasting traffic revenues and costs, as you can appreciate from the detail in section II G, subparagraphs 1 through 7 of our written submission. But the past 2 years have broken all previous patterns and the traffic upturn we expected from day to day never materialized.

The second factor contributing to our present problem is that once. the extreme nature of the traffic slump became apparent, it was inappropriate to try to institute an immediate toll rate change. The slump appeared to be a temporary phenomenon, and we wanted to avoid asking for a sharp rate hike with uncertain consequences and subsequently have to revise it downward as soon as traffic picked up. So part of our loss this year could be attributed to our perceived obligation to keep toll rates stable in an uncertain economic situation, At this point, with the economy beginning to move again, the direction indicated by our statutory plan is so clear that we are brought to the conclusion that it was the specific intent of Congress to enable the Company to weather just such a storm as this, and still maintain tolls stability.

Following that direction, in order to restore the balance between revenues and costs, we plan to seek a toll increase to be effective in fiscal year 1977. Included in the calculations for that toll rate increase will be a portion of all of the amount of interest unearned by the Company in fiscal year 1976, which is being withheld from the Treasury on a current basis.

For fiscal year 1976 that interest expense is estimated at $16,578,000; annuity payments are estimated at $519,000, and the estimate for the net cost of Canal Zone Government is $23.899,000.

Thus, in fiscal year 1976 it is estimated that costs totaling $40,996,000 will accrue for which payment need not be made in that year unless the amounts are earned. The unearned portion of such costs in fiscal year 1976 is presently estimated at $14,120,000, which is the amount of the estimated net operating loss for this year which I mentioned earlier.

The present financial problems are the worst since the Panama Canal Company was organized in 1950, yet the statutory resources for dealing with financial crises are barely being touched.

For this reason it is the view of the Panama Canal Company that the existing statutory provisions relating to the financial management of the Panama Canal Company assure the Company necessary financial viability under all forseeable operating adversities.

The twin factors of recession and inflation have laid an enormous burden on the Panama Canal Company, but belt-tightening by both

management and employees have put us into a position where, with the help of the tools provided by Congress, we can keep the Canal self-sustaining.

This concludes my prepared statement. I would be pleased to respond to any questions you may have. Thank you.

Mr. METCALFE. The Chair recognizes Mrs. Sullivan for any questions she may wish to ask at this point.

Mrs. SULLIVAN. Thank you very much, Mr. Chairman. I do have a few questions.

Governor, is it not true that if the various accounting changes instituted in 1972 and 1974 had not gone into effect the Company would not have experienced losses since fiscal year 1973 and would not be projecting a loss for 1977?

Also, let me ask why the period of 40 years was chosen for depreciation?

Governor PARFITT. Mrs. Sullivan, I do not believe that is quite correct. The accounting changes that you refer to were included in both the cost and the tolls increase, and therefore, their impact on the operating results was nil. The only factors contributing to the loss in fiscal year 1975 were economic events, that occurred subsequent to the toll increase.

Had we not made those changes, the tolls increase and our costs in 1975 would have been less, and therefore the same results, that is a loss, would have been obtained.

In other words, the accounting changes have been a wash. They were included, and resulted in an increase in the tolls rate, and therefore have been accounted for in the income, so there has been a complete wash of that transaction.

Mrs. SULLIVAN. Well, after the last trip that a number of us made down there in January about a year ago, on our way back we discussed the changes in the accounting system, what kind of effect they were going to show, and why the need, or the necessity, for those changes.

I do not think we were able to get all of those answers, Governor. I think all of this was just a few months prior to the change of Governors, and I am sorry to say that I did not really dig into that depreciation either because of a number of other problems, and I just did not get to it deeply, but we could not quite accept and understand the changes. It was very difficult to criticize the changes because we ourselves had not made a deep enough study, and maybe were not really able to make the kind of a study that you and those in charge of that department of the Company were able to come up with.

It just seemed to me that things were being charged off and depreciated in a way they had never been before, and that it would reflect greatly on the figures that you ended up with.

Governor PARFITT. There was a substantial increase in the cost to the Company, that cost was ground into the toll rate increase and has been accounted for in the 19.7 percent toll rate increase.

Without those accounting changes the toll rate increase for 1975 would have been less, this is true.

Mrs. SULLIVAN. That is the one conclusion we arrived at, that by changing that system you have a greater tolls increase.