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[H.N.S.C. No. 105–13]








MARCH 19, 1997

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HERBERT H. BATEMAN, Virginia, Chairman

CURT WELDON, Pennsylvania
JIM SAXTON, New Jersey

GENE TAYLOR, Mississippi
JANE HARMAN, California
ADAM SMITH, Washington

Hugh N. Johnston, Jr., Counsel
Peggy M. Cosseboom, Staff Assistant


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    Wednesday, March 19, 1997 The Fiscal Year 1998 Maritime Administration Authorization Request and Related Matters, and the Fiscal Year 1998 Panama Canal Commission Authorization Request and Related Matters


    Wednesday, March 19



    Bateman, Herbert H., a Representative from Virginia, Chairman, Special Oversight Panel on the Merchant Marine


    Aleman, Hon. Alberto, Administrator, Panama Canal Commission; accompanied by Joseph W. Cornelison, Deputy Administrator, and Ricaurte Vasquez, Chief Financial Officer
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    Herberger, Vice Adm. Albert J., Maritime Administrator, The Maritime Administration, U.S. Department of Transportation

    Reeder, Joe R., Chairman of the Board, and Under Secretary of the Army, Panama Canal Commission, accompanied by John A. Mills, Secretary



Abercrombie, Hon. Neil

Bateman, Hon. Herbert H.

Herberger, Vice Adm. Albert J.

International Organization of Masters, Mates & Pilots National Marine Engineers Beneficial Association National Maritime Union

Reeder, Joe R.

Zubieta, Alberto Aleman

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Questions and Answers Submitted for the Record


House of Representatives,

Committee on National Security,

Special Oversight Panel on the Merchant Marine,

Washington, DC, Wednesday, March 19, 1997.

    The panel met, pursuant to notice, at 2:09 p.m., in Room 2212 Rayburn Office Building, Hon. Herbert H. Bateman (chairman of the panel) presiding.


    Mr. BATEMAN. If the panel, as much of it as is present, would come to order. Mr. Allen is being very cooperative and orderly. I'm going to go ahead and proceed with the opening statement I prepared which will not be of great moment, and perhaps by then some of our colleagues will have joined us.
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    Before we address the business before the panel—which is consideration of the Maritime Administration budget request for fiscal year 1998 and the budget request for the Panama Canal Commission for fiscal year 1998, I want to extend a warm welcome to the witnessess who have agreed to testify today.

    I particularly want to welcome the new administrator of the Panama Canal Commission, the Honorable Alberto Aleman. I believe this will be his first appearance before the panel, and I hope that his visit to our Capitol will indeed be a fruitful one. We look forward to hearing from him; and also, of course, my good friend, the Under Secretary of the Army, the Honorable Joe Reeder.

    I understand that we will again be asked to look at a legislative package designed to assist the Panama Canal Commission's task or assuring seamless transition of the canal to the Republic of Panama on December 31, 1999.

    I understand that part of the package was transmitted formally by the Administration last night, and that a follow-on package will be forthcoming next week. If the members of this panel are to give it the consideration it deserves, it must arrive soon. This is critical since I'm advised the jurisdiction over several of the proposals is shared between the House National Security Committee and the House Committee on Government Reform.

    Working through these issues which are sometimes esoteric to say the least takes time, but please be assured that we want to be helpful.

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    I would now like to extend the panel's welcome again to an old friend and a very good friend, Adm. Albert Herberger, the Administrator of the U.S. Maritime Administration. The admiral and I had a very nice visit yesterday, and I also look forward to hearing from him today.

    It strikes me that it has been many decades since the Maritime Administrator has appeared before a congressional committee to describe the efforts of his agency in implementing Maritime reform legislation. Was it 1936? I remember those many years when our efforts simply came up short. But Admiral, this is not one of those years. It is, of course, particularly rewarding to me not because of my position at the time of the enactment of the Maritime Security Act, but because it was one of those occasions when we all were able to put aside partisan differences, which have on too many occasions characterized this body's efforts, and actually passed real reform.

    From this panel's perspective in its first session, it was indeed a major accomplishment. We need to hear from you today, Admiral, on several issues. Not only implementation of the Maritime Security Act, but where we are to go from here.

    Several members of the panel and I are particularly interested in a build and charter program for surge sealift. While the funding will have to come from the Department of Defense, I would be interested in hearing your views on this proposal.

    Finally, I want to thank the former ranking member and newly arrived gentleman from Mississippi, Mr. Taylor, for his support last session, and of course we'll extend a warm welcome to the new ranking member, the Honorable Neal Abercrombie of Hawaii.
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    At this time, I call on Admiral Herberger for any statement he may make, unless Mr. Taylor or Mr. Allen have a statement they would like to make for the record.

    [The prepared statement of Mr. Bateman can be found in the appendix on page 30.]

    Mr. TAYLOR. Mr. Bateman, on behalf of Congressman Abercrombie, I'm asking that his statement be included for the record. He's anticipating a vote on the House floor in less than 1 minute.

    [The prepared statement of Mr. Abercrombie can be found in the appendix on page 34.]

    Mr. BATEMAN. It will be done.

    Mr. Allen.

    Admiral, I think we are ready to hear from you. Apparently we may have to interrupt you to go and do some voting, but we do look forward to your testimony.


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    Admiral HERBERGER. Mr. Chairman, and members of the panel, I welcome the opportunity to be with you today to discuss the Maritime Administration's programs for fiscal year 1998.

    In my opening remarks, I will highlight a number of important items in my full statement, which is submitted for the record.

    Mr. BATEMAN. It will be made a part of the record, Admiral.

    Admiral HERBERGER. First, I would like to thank the members of this panel and the Committee on National Security for their support and hard work in passing the Maritime Security Act of 1996. The bipartisan support for this legislation clearly indicates the Congress' recognition of the importance of preserving a U.S.-flag fleet to support U.S. economic and national security interests.


    The maritime security fleet of modern commercial ships with their supporting intermodal transportation systems will be available in time of war or national emergency to provide critical sealift support to the Defense Department by carrying supplies and sustainment cargoes to the U.S. forces deployed overseas.

    In addition to maintaining a U.S.-flag fleet, the MSP also ensures the continued availability of trained U.S. citizen mariners to crew the government controlled fleet. Without a U.S.-flag merchant marine, this pool of qualified and reliable U.S. citizen crews would disappear.
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    The government relies entirely on civilian U.S. mariners to crew the Ready Reserve Force and other Government sealift ships during a military contingency.

    Thus, the citizen crews serve important national defense interests.

    Another major element of the MSP is the requirement for participants to enroll in an emergency preparedness program making their worldwide commercial intermodal transportation system available to the Defense Department during a war or other national emergency. As a result of the lessons learned during the Persian Gulf conflict, MARAD together with the U.S. Transportation Command and U.S.-flag carriers developed the voluntary intermodal sealift agreement [VISA] to fill this new requirement.

    The Maritime Security Act of 1996 also extends to American seafarers the same basic reemployment rights that apply to reserve members of our armed forces in time of war or national emergency. I particularly want to thank this panel for your strong support on this issue.


    With regard to the title XI Loan Guarantee Program, MARAD has approved as of February 20 this year approximately $2 billion of title XI financing for 260 vessels and 5 shipyard modernization projects. The fiscal year 1998 request for the title XI program is $39 million, which would give us a coverage of about $500 million worth of shipbuilding.

    MARAD also jointly administers with DARPA, the Defense Advance Research Project Agency, the MARITECH Program to improve commercial shipbuilding technology. After 3 years of this 5-year program, 53 projects including, 36 new commercial vessel designs, have been awarded.
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    MARAD's National Defense Reserve Fleet [NDRF] is funded by the Department of Defense National Defense Sealift Fund. There are 219 ships in the NDRF, 93 of which are Ready Reserve Force ships. Currently 51 RRF ships are outported at commercial or government piers around the United States near Army ports of embarkation.


    Our request for Maritime Education and Training Program expenses is $41.5 million. Included in this amount is the cost of officer training at the U.S. Merchant Marine Academy at Kings Point, NY, and continuing assistance to the six State maritime academies.


    MARAD provides coordination between commercial maritime sector and the military to improve the capability and the efficiency of the nations ports to transfer commercial and military cargoes between water and land transport carriers.

    In summary, MARAD's fiscal year 1998 budget reflects the President's continued commitment to our Nation's maritime activities. It also reflects the importance of sealift readiness, a strong U.S.-flag fleet, strength in commercial shipbuilding, maritime education and training, and a seamless transportation system, as well as other maritime support programs.
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    Mr. Chairman, this concludes my opening statement. I would be pleased to answer any questions that you may have.

    [The prepared statement of Admiral Herberger can be found in the appendix on page 36.]

    Mr. BATEMAN. Thank you very much, Admiral. We do have to vote, and probably what would make the most sense would be for us to recess long enough to go make the vote, and then we will return as soon as circumstances permit.


    Mr. BATEMAN. If the panel would come to order. Our situation is that we have 10 minutes of debate that's already begun, and then another vote followed by 10 minutes of debate, and another vote. And so, Admiral Herberger, you are going to be very fortunate today; you will not get many questions today. Members have asked that you indulge us with a response to some questions for the record that will be sent to you.

    Admiral HERBERGER. Yes, sir.

    Mr. BATEMAN. Primarily in consideration of not having you wasting your time at the committee table, I want to recognize Mr. Allen for a question he has, and then we'll be able to excuse you.

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    Mr. Allen.

    Mr. ALLEN. Admiral, not many people get that break, I can tell you. But I wanted to ask you about the budget for maritime education. I noticed you mentioned that the maritime education training program expenses are budgeted not to exceed $41.5 million. I wanted to ask you to concentrate for 1 minute on the portion that goes to the six State maritime academies. As you know, Castine is very important to the State of Maine. They are in the budget for $8 million, and I understand that's a $2.9 million increase over last year?

    Admiral HERBERGER. Yes, it is.

    Mr. ALLEN. My understanding is that that increase is there, certainly in the case of Castine, to cope with the added maintenance cost of maintaining a new ship, and I would like you to indicate whether or not if that's what it's for. Could you explain, and could you indicate whether or not you support this increase?

    Admiral HERBERGER. No. We expect less maintenance and repair with the newer ships as a matter of course. It's there because it's the amount needed to support the training ships for the schools, as well as take care of a lesser amount of repair.

    The older ships, obviously, their repair and maintenance was greater. And it's the amount we wished we had gotten last year. We considered to be under what we needed to maintain those school ships, and provide for the student incentive pay.

    There were some other amounts in that total of $8 million. It's about $6.2 for the school ships themselves.
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    Mr. ALLEN. I see.

    Admiral HERBERGER. And the money for the refurbishment of the State of Maine actually came from separate funds.

    Mr. ALLEN. OK. I take that——

    Admiral HERBERGER. But we're optimistic because we have a new ship in California, Maine, and Texas, and reasonably new ships in Massachusetts and New York. And we are expecting that the maintenance and repair—maintenance probably level—but the repair, the reoccurring type of things that come up for repair, should be less than what it had been, say, the last 5 years.

    Mr. ALLEN. I appreciate that clarification. I would just note for the record that at Castine we train 650 students with about a $15 million budget, and only 2 percent of the budget comes from the Federal Government. But that 2 percent is very important.

    Admiral HERBERGER. I understand that. I do.

    Mr. ALLEN. Good. Thank you very much.

    Mr. BATEMAN. Thank you, Mr. Allen.

    Admiral, I think with that, we can excuse you with our very deep appreciation for the remarkable service that you've rendered as our Maritime Administrator.
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    Admiral HERBERGER. Thank you, Mr. Chairman.


    Mr. BATEMAN. I just talked with our next panel of witnesses, Secretary Reeder, and the Commissioner of the Panama Canal Commission, Mr. Aleman, and they are agreeable to our suspending the proceedings until we get these next two votes behind us so we can then proceed with the hearing without interruption after that point.

    So the panel will be in recess for what I would estimate to be about 20 or 25 minutes.


    Mr. BATEMAN. The committee will come to order. I'd like to thank our witnesses for indulging us during a rather bizarre bit of scheduling and conflicts with our important business.

    Again, let me welcome Secretary Reeder and Mr. Aleman to the committee. In my opening statement I had already done that, but you weren't in the room at the time, so I repeat a very warm welcome, and tell you how glad we are to hear from you. And, especially to welcome Mr. Aleman to what I think is his first appearance before the committee. I hope you'll find that your visit to Washington is a very fruitful one.

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    With that, I would now recognize Mr. Reeder for any statement he may choose to make.


    Mr. REEDER. Thank you, Mr. Chairman, and Mr. Taylor. And thank you both for all of the interest that you've demonstrated and shown in the Panama Canal as we lead up to the transition over the last 3 years that I've had the privilege and honor of serving. I will never forget the evening that we spent during your 3-day visit down to Panama, particularly when we were at the Administrator's home, the predecessor of Alberto Aleman. We appreciate your support very much, because many things that we are doing in this transition, we feel are critical making it smoothly.

    I'm very pleased to report to you on the programs, and especially those that are related directly to the transition and our efforts to execute a seamless transfer of the canal in what is now less than 33 months, or less than 1,000 days.

    This treaty is vitally important to the United States for at least two reasons. When we go out in the future, decades from now, this treaty stands more conspicuous in Latin America than any other treaty, with the possible exception of NAFTA.

    In the year 2010 and 2020, and beyond, when countries, our neighbors, our friends in the south talk about entering into treaties with the United States, they will point to Panama, and they will say, ''That's what happens when you enter into a treaty with the United States of America.''
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    And I am confident that when they say that, it will be a positive thing. But it's important that we make that so.

    It is also critically important because 65 percent of all commerce through the canal either originates in, or is destined for, the United States.

    At the outset, Mr. Chairman, I'd like to state that the Commission very much appreciates the productive relationship that we've had with members of this panel, with you personally, and with the staff, who have been enormously helpful. May we all work in the next 33 months to provide for the long-term success of the canal. We maintain a constant awareness of how commercially important the canal is to the country, to Panama, and to the world commerce in general.

    As the transition becomes eminent, it encourages us and it energizes us to see congressional interest in the Panama Canal increase. I would like to extend an open invitation—and I understand that you're going back to Panama this Friday with Chairman Spence—but extend that invitation to all members of the panel, and also to members of the staff. I think you'll agree with me that the on sight experience is an invaluable way to really learn about the subject that you simply can't reconstruct here in Washington.

    Seated with me here today to my immediate right is our new Administrator, Alberto Aleman Zubieta, who assumed his position in August 1996. I would just take this opportunity, Mr. Chairman, to say that we are extremely fortunate to have Mr. Aleman. The search was a very diligent search. It was a very apolitical search, and what we got in the process was one of the outstanding engineers, one of the outstanding and proven businessman, corporate CEO's, in the entire Latin America.
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    He is the proud graduate of the friendly rival of one of my alma maters, Texas A&M. He's the one that's the Aggie. I am the Teasip. And I believe you will find, as I have, that he is an enormously capable and energetic person. He actually started off on the blue ribbon engineering panel that oversaw our infrastructure study. He has vision and integrity, and he is ideally suited to carry us over the transom December 31, 1999.

    We are also ably assisted again this year by our Deputy Administrator, Mr. Joe Cornelison, on Alberto's right. Joe was a graduate of many institutions, the first being the trade school on the Hudson. Others refer to it as West Point.

    We are assisted by our Secretary, Mr. John Mills, formerly a district engineer, who has been a superb representative, and I'm sure you and your staff have very much enjoyed working with him. He's a consummate professional.

    And I would like to introduce for the first time the Panamanian chief financial officer, Dr. Ricaurte Vasquez, who also has extraordinary credentials. Among others, a Ph.D. from Insulair Polytechnic, who joins the Commission's management team, and has been with us since December.

    I will give an interview of the Commission's programs and the transition; and our Administrator, our Chief Executive Officer, will offer a more detailed report on our programs.

    I'm pleased to report that the Commission is energetically meeting the three challenges I first outlined in last year's testimony. One, excellence in day-to-day operations; two, sound strategic planning; and three, effective management over all of the transition process.
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    The Commission's business is the transit of vessels with safe, reliable, high quality cost effective service in its day-to-day business operations. While also performing its longer term strategic and transition responsibilities, the Commission must maintain laser focus on day-to-day business operations.

    The Commission is engaged in an expanded maintenance and modernization program carrying out needed changes that will directly result in better service to customers well into the 21st century. And again, Mr. Aleman will elaborate on the specific programs.

    Like any business, the commission must, in addition to performing its basic day-to-day functions, reliably look beyond the horizon to anticipate market needs, if it is to maintain its position and reputation in world shipping.

    One key challenge we face in the near term is actually generated by our success. Record traffic was severely limiting the available time window to carry out needed recurring maintenance without creating long backlogs.

    Now, these backlogs not only have lengthened the average vessel's transit time above the traditional 24 hours canal water time, which is our benchmark, they also have increased the waiting times beyond what we think should be acceptable.

    Now, our solution to ensure quality customer service is multifaceted, but we have one aim, and that is to expand canal capacity so that routine maintenance can be performed without serious disruption to shippers schedules.
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    On the 1st of January, the Commission instituted the first of a two-phase toll increase in order to fund improvements. Mr. Aleman will detail.

    I would simply say, though, that as a business, we did not relish raising our rates, and we did so only after a long period of consultation with our customers.

    Nevertheless, we know that a toll raise is never popular, and we continue to do our best to demonstrate to the users of the waterway that these investments are all committed to maintenance, modernization, and capital improvement. They are in the long-term interest of all of our customers.

    It is also crucially important to realize that the canal is a break-even operation, one that pays for itself. It is not a profit generating enterprise. I would simply add that this is the seventh toll raise that we've had in our 82-year history, and any Fortune 100 company would be highly envious of being able to say that in 82 years they only raised prices seven times.

    I would also add that we've seen no impact whatever on the volume of business coming through the canal.

    Mr. BATEMAN. Mr. Secretary, I believe Mr. Taylor has a question he would like to interject.

    Mr. TAYLOR. Yes. I was under the understanding that the Panamanian Government, either now or in the near future, will be able to pull a certain amount of the revenues out for uses other than for the maintenance of the Canal.
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    Mr. REEDER. Well, that certainly is not correct today.

    Mr. TAYLOR. That will also be prohibited in the future?

    Mr. REEDER. Well, I would turn the question of the organic law and what it provides to the Administrator.

    Mr. ALEMAN. Yes. The organic law provides that the canal—the new canal organization, the Panama Canal Authority, will have complete independence and the moneys received from the tolls will be put into the canal.

    Mr. TAYLOR. There's no provision to pull say either $50 or $100 million a year out of that?

    Mr. ALEMAN. No, the only provision, sir, is that the same amount that is now being paid to Panama, the $0.39 per ton, will be paid to the government.

    Mr. TAYLOR. What's the difference, then, between $0.39 a ton—if that's being paid to Panama, that really isn't correct. There is money being paid to the Government of Panama.

    Mr. ALEMAN. Today, yes, sure. Absolutely.

    Mr. REEDER. Under the treaty there is money being paid every year to the canal, and I think what Mr. Aleman is saying is that basically, by law, when he uses the term ''independent,'' he's saying that by law you can't touch anything other than that formula.
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    Mr. TAYLOR. Well, again, my point was that not all of the money from the tolls is being plowed back into the canal. That's all I want to clarify.

    Mr. BATEMAN. If I can try to see if we have this down accurately. Historically and presently, there is a sum of money being paid to the Government of Panama. As I understand, what you're saying is that under your organic law of Panama, after 1999 that will remain the status quo. You will not become a cash cow, as some would say, for the Government of Panama, which would continue to receive what they have historically been receiving.

    Mr. ALEMAN. That's correct.

    Mr. BATEMAN. Are we all together on that?

    Mr. TAYLOR. And that's only since the treaty, right, that Panama has been receiving some payment for the canal?

    Mr. REEDER. The treaty has specific provisions, which, for example, last year resulted in the payment of approximately $110 million. Prior to the Treaty, I think there were payment provisions. They were different, and I'm not familiar with what they were.

    Mr. TAYLOR. Thank you, Mr. Chairman.

    Mr. BATEMAN. You may proceed, Mr. Secretary.
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    Mr. REEDER. On the 1st of January, the Commission instituted the first of a two-phased toll increase, as I mentioned earlier. And this has been not well received by customers. Customers don't like prices raised. But the fact of the matter is, we had a number of customers who came in and said they acknowledged the toll raises and they appreciated very much that they were not double digit.

    We broke it into 2 years. To put this into context, I told you this was the seventh time in history that we raised tolls. Three times the toll raise in aggregate was greater than the aggregate of the 2 years. We're right in the middle of the toll—the aggregate toll increases. There is nothing out of line with this particular toll rate.

    I'd like to focus now, Mr. Chairman, on the Commission's third challenge of managing the transition process, and highlight some of the examples of significant progress we feel that we have made on this.

    The bottom line is the Commission and Panama remain firmly on track for a successful transition. A major step in this process is now the focus of Panama's Legislature. That's ongoing today as we speak. It began a week and a half ago, 4 or 5 days a week through the weekend; and that's what we refer to as the organic law, which will govern the canal operations under the general guidelines of a special amendment to Panama's Canal to ensure that the canal is operated as a business, and with a system of employment based solely on merit.

    We expect this law should be passed soon. This is speculation, but I would guess sometime in the next 30 to 60 days.
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    The U.S. Congress and this committee have also helped to ensure that the United States is approaching the transfer date with diligence and vision by approving changes to the Commission that facilitate adoption by the PCA, the Panama Canal Authority, which will be the successor entity, of as much of the U.S. tested systems as possible. We appreciate very much your submission yesterday of the Administration backed proposal for 1998, which addresses other changes, particularly in compensation and procurement, changes we believe will clear the way for Panama to continue those systems smoothly, post 1999.

    Also, on the transition front, as you probably already know, the Commission will cosponsor with the Government of Panama the Universal Congress this October, which is an international conference taking place this year in Panama. It's actually September 7 to 10, which marks the 20th anniversary after the signing of the treaty. And I'm very pleased, Mr. Chairman, that you, Mr. Bateman, and Mr. Taylor intend to be there. There will be heads of state, and we believe a lot of dignitaries will be there for this event.

    On behalf of the Commission, I would again invite all of the members of the panel and hope they and key staff are able to attend the Universal Congress.

    This Congress will serve several crucial purposes. One is to bring together all interested parties to review the Government of Panama's strategy for maintaining and improving operations.

    A second objective is to afford the canal's customers the opportunity to meet the new canal owners and to find out exactly how they intend to conduct business post 1999.
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    A third is to learn about Panama's new vision for transforming the nation into a global transportation hub and maritime service center.

    The active involvement and support of the Commission's leadership helps to convey the strength and solidarity of the United States-Panamanian partnership that has evolved. The Universal Congress is an important element of the successful transfer of the canal, and to the efficient future operation of a transportation artery vital to U.S. commerce.

    The Commission is also reviewing opportunities to advance the growth strategy concept that I discussed briefly last year. Our focus is to look creatively for opportunities to leverage the canal's core business opportunities to apply the Commission's financial human and fiscal assets toward other business ventures within current treaty constraints before 1999, and within the Government of Panama's strategic plans post 1999.

    Now, last year I addressed what I considered to be the ''three pillars'' for a successful canal. First is the work force; second is physical infrastructure; and third, of course, it's customers.

    I've already highlighted the Commission's significant commitment to maintenance and improvement of its fiscal assets. Permit me to quickly update you on several matters affecting the work force, and also to highlight the Commission's outreach efforts to our customers.

    First, Panama already has committed, by amending its constitution, to fundamental continuity and conditions of employment and benefits for employees who continue post 1999 employment. That continuity is vital to a seamless transition.
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    However, some changes from the current compensation system are warranted. As the administrator will address, the Commission is working to design and implement a modernized private sector like compensation plan that would better enable the Canal Agency to attract and retain high quality employees, particularly at the senior levels.

    The canal is a world class business whose annual revenues approximate eight percent of the GDP of Panama. It is incumbent upon us to make every effort within the next three years to ensure compensation systems are in place that meet the canal's, as well as Panama's, needs well into the 21st century.

    The Commission is also developing a succession plan that will ensure that committed, well prepared, professionals are available for executive and managerial vacancies when they occur.

    Our third pillar for success is the customer. Our record setting years in 1995 and 1996, both as to gross revenues and gross tonnage, demonstrate how quickly the global economy can change, and how quickly customers react.

    We are committed to open communication with the customers about the Commission and the transition.

    Mr. Aleman will highlight the customer outreach program that we executed, for example, during the toll increase.

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    In closing, Mr. Chairman, as we approach the December 31 time line, the other board members and I, and senior management, continue to focus intensely on sound execution of existing programs, and on initiatives to ensure a seamless transition that will position the canal for long-term success.

    On behalf of the entire commission, it's work force, let me again express our collective gratitude for your support in passing legislative measures to help facilitate the business like operation of the canal and a successful transition.

    This support over the next 33 months will be vital.

    Again, I encourage and very much welcome you and your staffers to visit the canal anytime to see this engineering wonder first hand, and to visit with what I think you will agree is a world class management team.

    This concludes my comments. I've submitted more extensive comments for the record. I would offer that Mr. Aleman could perhaps proceed, and then we would just remain for any questions that you may have, Mr. Chairman. Thank you.

    [The prepared statement of Mr. Reeder can be found in the appendix on page 58.]

    Mr. BATEMAN. Thank you, Mr. Secretary. Before I recognize Mr. Aleman, which I'll do very promptly, let me point out that the legislative proposals that you made reference to my having introduced yesterday didn't get done because we didn't formally receive them until sometime late yesterday. I do anticipate that, at the Administration's request, I will be introducing it and Mr. Abercrombie will be a copatron on that legislative package, and in that manner, we'll get it moving.
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    With that, I'm very pleased to recognize and to again thank Mr. Aleman for coming to visit with us.


    Mr. ALEMAN. Thank you, Mr. Chairman, members of the panel. And thank you, Chairman Reeder for your kind words.

    I'm Alberto Aleman Zubieta. I'm Administrator of the Panama Canal Commission. I'm pleased to appear before this panel today to discuss the programs of the Panama Canal Commission. My testimony will focus on the recent toll rate increase and transition activities.

    Let me begin by explaining why the toll increase was necessary. During the last 3 years, the number of vessels transiting the canal has increased substantially. In addition, the number of Panamax vessels, those with beams over 100 feet, which require the most resources to transit and impose the greatest transit restrictions, has risen to an all time record.

    Transit demand is routinely at or near the canal's current capacity limits. This situation impacts adversely on the canal in two ways. To perform maintenance on the locks and related machinery, the locks must be periodically taken out of service and dewatered to allow repair cruise access to the machinery and structure. Insufficient reserve transit capacity limits our ability to schedule lane outages to perform the necessary maintenance, thereby preventing us from performing that maintenance in a timely, effective, and economic manner.
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    Insufficient capacity also results in increased delays to transiting vessels, and wide and unpredictable variations in the length of those delays, especially during peak traffic periods.

    Unless addressed, the capacity shortage would undermine the canal's longstanding commitment to maintenance, uninterrupted timely transit and quality customer service. An important measure of the quality of service to our customers is the average amount of time that a vessel spends in canal waters, including both waiting and transit time. Our quality goal is to provide an average canal waters time of 24 hours or less.

    In recent years, canal waters time has deteriorated from 22.7 hours in 1994 to 28.1 hours in 1995, and to 32.1 hours in 1996. This trend was unacceptable, and we have taken steps to reverse it.

    To meet the challenge imposed by increased transit demand, the Commission must add to the canal's capacity to ensure that it will be sufficient to meet future traffic requirements while providing an average canal waters time of 24 hours or less and simultaneously allowing for the performance of adequate maintenance.

    To accomplish that objective, we increased the level and pace of capital program expenditures and directed those expenditures at efforts to improve and modernize the waterway. Ultimately, we will increase canal capacity by 20 percent or more after completion of the program sometime between fiscal year 2002 and 2005.

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    The Commission's capital program is dedicated primarily to functions that are directly related to the transit of vessels through the canal. The vast majority of these funds are for projects to increase the transit capacity of the canal, with the remainder being programmed for the modernization of the canal's infrastructure.

    The program is centered around five major projects. The widening of the 8-mile long Gaillard cut; augmentation of the tugboat fleet; design and procurement of new locks towing locomotives to increase the locomotive fleet size; enhancement and modernization of the vessel traffic management system; and modernization of the locks machinery control systems including conversion of miter gates, rising stem valves, and cylindrical valves from mechanical to hydraulic actuation.

    To complete these improvements in the shortest time possible, in fiscal year 1997, we revised our initial capital budgets of $66 million upwards to $84 million.

    In fiscal year 1998, our proposed capital program is $100 million. Similar levels of capital expenditure will continue until the expanded capacity improvement program is completed.

    The increased capital program requirements resulted in substantial projected deficits for both fiscal year 1997, and fiscal year 1998. The commission is required by law to operate on a self-financing, break-even, basis. The commission, therefore, had to raise tolls to eliminate the deficits.

    By statute, the Panama Canal charges tolls on the basis of a vessel's earning capacity, which is measured in in Panama Canal universal measurement system net tons, with a ton being equal to 100 cubic feet of cargo carrying capacity.
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    Since their inception, the rules for measuring earning capacity have specified that only enclosed cargo carrying capacity is to be included. Therefore, vessels using the canal have not paid tolls on cargo carried on or above deck, including containerized cargo.

    In developing the toll rate increase proposal, the Commission sought to correct the existing inequity of not charging for on-deck capacity by changing the measurement rules to include on-deck container space in the vessel tonnage for tolls assessment purposes. The increasing use of on-deck cargo space, especially by container ships, has evolved over time to the point that large container vessels often carry half or more of their containers above deck. This has resulted in an inequitable distribution of operating costs to users of the canal with container ships paying less than their fair share.

    The rule change, which only charges for a portion of the on-deck container capacity, will more accurately reflect the true earning capacity of modern vessels through an easily administered process.

    We recognize that the rate increase is not poplar with the canal's users. However, I believe that the canal has an enviable record of toll rate stability, and minimal rate increases over the last 83 years. Since its inception, the canal has raised tolls only seven times, with the last increase prior to this year's occurring in 1992. Traditionally, we raise tolls reluctantly and as a last resort. We did so this time after extensive efforts to inform the world shipping community of the purpose and benefits of the increase. We made exhaustive efforts to disseminate all relevant information through a published proposal, the worldwide news media, trade publications, and extensive receive direct contacts with customers.
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    In the course of this effort, we held two public hearings and extended the period for the submission of written comments to allow the users of the canal the fullest opportunity to make their views known. All of the views presented, as well as other relevant information, were carefully considered by the Board before its final approval of the toll increase and the rule change.

    The toll rate increase is being implemented in two phases, and will result in a cumulative 16.32 percent increase at the end of both phases. The first phase, an 8.2-percent increase, was effective in January 1997, with the second phase, a 7.5-percent increase taking effect in January 1, 1998.

    The rule change to charge for on-deck capacity will have the overall impact of a one percent toll rate increase. The rule change was initially scheduled to be effective in January 1997, but its implementation was delayed until July 1, 1997, to allow customers to calculate the actual impact of the change based on new tonnage certificates which the Commission is issuing before July 1, 1997. The estimated total impact on the canal's toll rates is an increase of 17.32 percent after both phases and the rule change.

    Vessels with little or no on-deck container capacity will experience little or no impact from the rule change. Those vessels with significant amounts of on-deck capacity will experience a larger impact. Although the average impact will be 17.32 percent, this will vary by vessel, with most vessels having an impact between 16 percent and 22 percent. There will be a small number of vessels with slightly higher increases. Approximately 5 percent of the total revenue increase is provided by the rule change, with 95 percent being provided by the toll rate increase.
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    In summary, faced with heavy traffic demand and the obligation to ensure that the canal accommodates present and future demand, the Commission enhanced the capital program with a concomitant requirement to increase revenue.

    Canal traffic and toll revenue reached new records in fiscal year 1996, with ocean going transits rising to 13,721 or 37.6 daily, an increase of 0.7 percent from the 13,631 or 37.3 daily recorded in fiscal year 1995.

    Traffic growth followed the continued expansion of world trade, which benefited substantially from the increasing trade with and within Latin America, and the growth in Asian demand for U.S. grains and other products.

    Tolls revenue also reached a record $487 million, 5.2 percent above the amount collected in fiscal year 1995. Total operating revenues for the year were $625 million.

    Operating expenses in fiscal year 1996 were $627 million, an increase of $41 million, or 7 percent, over fiscal year 1995.

    At the bottom line, for fiscal year 1996, the commission had a net operating loss of $1.7 million—three-tenths of 1 percent of operating expenses.

    The loss will be carried forward and recovered in fiscal year 1998.

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    Canal traffic and tolls revenue are expected to show continued growth in fiscal year 1997. Oceangoing transits are expected to rise to 13,870 or 38 daily. I would note that while the total number of vessel transits is increasing slightly, the percentage of Panamax vessels continues to increase by about 2 percent a year. Those vessels carry more cargo than normal size vessels, so the amount of cargo being transited is increasing at a rate faster than the growth in overall transits. Tolls revenue for fiscal year 1997 is budgeted at $520 million, a $53 million increase over the estimate provided to Congress last year, due primarily to the toll rate increase and the on-deck cargo rule change previously discussed.

    Total operating revenues are budgeted at $649 million, with a total operating expenses budget at $651 million, for an operating loss of just under $2 million. This loss, together with the loss from the previous years, will be carried forward and recovered in fiscal year 1998.

    Based upon the actual results through February and the most current economic projections, it appears that traffic may fall short of the budgeted goal of $520 million by approximately $9 million. Naturally, we are monitoring this situation very closely, and are taking steps to effect offsetting reductions in expense to maintain the budgeted bottom line results.

    Turning to the fiscal year 1998 budgets, canal traffic is expected to remain flat in the face of slowing real economic growth in the nations most important to the canal. Oceangoing transits are expected to increase slightly from 13,870 to 13,900. Tolls revenue is expected to rise to $566 million, primarily due to the impact of the second phase of the toll rate increase beginning January 1, 1998.
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    Total operating revenues are budgeted at $677 million. Operating expenses are budgeted at $674 million, with most of the increase in expenses attributable to inflation. After the recovery of the $3.6 million in losses carried forward from prior years, the Commission is projecting a break-even operation for the year.

    Based on our most recent forecast, it appears that the fiscal year 1997 toll revenue underperformance could continue into fiscal year 1998. If that occurs, fiscal year 1998 toll revenues could be as much as $11 million below the budgeted amount. Should that prove to be the case, we will adjust our programmed expenses as necessary to achieve a break-even operation and recover the prior years' losses.

    The chairman has provided you with a broad overview of the Commission's transition efforts. I would now like to address in more detail a few of these efforts.

    Of critical importance to a seamless transition is a reliable, trained, experienced, and capable work force which will remain with the canal through the transition and beyond. We have made much progress in this area.

    As of March 1, 1997, Panamanian participation in the Commission's permanent work force was 92 percent. Panamanians fill over three-fourths of the canal's key positions, which include executives, managers, pilots, floating equipment, operating crews, and skilled craft positions.

    The Commission's succession planning program is progressing on schedule, and has identified key positions occupied by employees who have indicated that they do not intend to continue their employment with the canal organization after 1999. Through formal and on-the-job training, we are working to ensure that before the end of the century we will have in place well-prepared employees who will continue to work for the canal into the next century.
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    To date, we have already recruited a new chief financial officer, and deputy; an inspector general and deputy; and director of the Engineering and Construction Bureau.

    We are in the process of identifying a replacement for the marine director who has announced his retirement, as well as hiring our first chief information officer as a part of the reorganization of the management information function. These actions will ensure continuity of experienced management when the canal transitions to Panamanian administration, and will serve to carry the canal into the 21st century.

    On another front, the Commission is looking at changing its compensation system to one that would be more compatible with Panama's labor market to enable the canal to continue to attract and retain highly qualified personnel both during the remaining transition period, and into the next century.

    A critical component of the new system is incentive pay for performance through a gain sharing program which will reward productivity and efficiency.

    An important provision of the organic law being considered by the present session of Panama's Legislative Assembly, which resumes on March 1, 1997, will empower the Panama Canal Authority to operate as an autonomous, self-financing, business-like entity.

    The legislation exempts the Authority from Panama's administrative and labor laws and authorizes it to develop its own internal operating and procurement regulations and employment system or, where appropriate, to adopt the current regulations of the Commission. The law provides strong guarantees of continued employment with retention of existing benefits and working conditions. It also prohibits strikes to ensure that the canal, a vital commercial artery for many nations, remains open and is never held hostage to a labor dispute.
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    Most importantly, the Government of Panama has recognized the importance of operating the canal and related activities as a self-financing business rather than as a governmental activity. The Authority's budgets will require legislative approval, but the budgets by law will be completely separate from Panama's national budget. This is probably the most critical aspect of the law because it ensures the canal's continued efficiency and dedication to customer service, which have ensured its success in the past.

    Because the canal will remain self-financing, it will be able to generate and allocate the resources needed to ensure its continued success, and will not become dependent on the Government of Panama or its political priorities for the canal's operating and capital needs.

    There are many other provisions in the organic law intended to prevent the politicization of the canal.

    As mentioned in last year's testimony, the Commission retained the U.S. Army Corps of Engineers to evaluate the current state of the canal's infrastructure and evaluate the agency's maintenance and capital investment programs.

    The final report of the corps concluded that the infrastructure was generally in good condition. There were, however, selected areas in enhanced maintenance and capital improvements would be beneficial.

    In addition, the corps recommended that certain equipment be modernized to take advantage of newer technologies. The study validated the condition of the canal's infrastructure and provided an independent evaluation of our ability to turn the canal over to Panama in good operating condition as required by the treaty.
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    In an effort to make the Commission a more business-like enterprise prior to its transfer to Panama, we are also exploring the possibility of implementing a growth strategy before 1999. We have submitted proposed legislation that would authorize the Commission to perform certain commercial activities during the remaining period of U.S. stewardship of the canal.

    Among the activities being considered for immediate implementation are training, placement services, and tourism activities. I believe that it is important to undertake efforts like these now rather than leave them as a first order of business for Panama in the year 2000.

    In response to concerns expressed by our customers, we are revising the canal's transit reservation system to better meet the needs of our customers. The revisions being considered would allow vessels to reserve transit up to a year in advance regardless of backlogs. The proposed changes have been discussed with our customers, and announced in the Federal Register, and will undergo a testing period followed by another comment period to allow users of the canal to make their views known.

    Based on those comments, we will refine the system before its final implementation.

    In that regard, I would like to emphasize the Commission's dedication to listening to its customers in an effort to better serve their needs.

    In summary, the transition efforts are well on track. While much remains to be done, there are plans in place for accomplishing the work and ensuring a seamless transfer of the canal to the Republic of Panama on December 31, 1999.
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    Mr. Chairman, that concludes my prepared remarks. I sincerely appreciate the support and assistance panel members have provided the Panama Canal Commission. I look forward to completing the transition of the canal to Panamanian administration at the end of the century, working in a harmonious and cooperative manner with this panel.

    We would be pleased to answer any questions that you or the members of the panel may have at this time.

    [The prepared statement of Mr. Aleman can be found in the appendix on page 72.]

    Mr. BATEMAN. Thank you very much, Mr. Aleman. We do appreciate your coming and presenting that information to us.

    I'm not sure that I fully understand exactly how you're handling your proposed capital improvements. There is a toll increase to pay for them, and all of the revenues from the increased toll are set aside for the capital improvements, not operating?

    Mr. ALEMAN. Basically, yes, sir. They are set aside for the capital improvements of the canal.

    Mr. BATEMAN. Do you have the authority, and use it, to borrow money and to repay it through your toll revenues, or do you pay for all your capital improvements directly out of your revenues each year on an annual basis?
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    Mr. ALEMAN. I think that maybe Mr. Vasquez can——

    Mr. BATEMAN. Time to go to the finance officer.

    Mr. ALEMAN. Yes. To be more precise.

    Mr. VASQUEZ. Thank you, Mr. Chairman. As it stands right now, the Panama Canal Commission has the power to borrow from the U.S. Treasury up to $100 million. But, also, the Panama Canal Treaty provides that the transfer of the Panama Canal be made out of no debts or liens on the Panama Canal property. So that's the fundamental reason why it is required for the capital investment to be carried out from current revenues.

    Mr. BATEMAN. Would that continue after December 31, 1999? Would you then have some ability to borrow money for capital improvement?

    Mr. VASQUEZ. Under the Panamanian proposed legislation, the Panama Canal Authority will have the power, by itself, to borrow on the capital markets. But, at this moment, there are no plans whatsoever to do so.

    Mr. BATEMAN. You also mentioned that you are moving toward authorization to conduct additional activities, such as tourism and other services. Is this something that would be done directly by the Commission itself, or would this be done by some subsidiary entity?

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    Mr. ALEMAN. No, what we're planning to do is that as long as it's in sync with the Panama Canal Authority and is provided by the treaty, then we will engage in those possibilities.

    Mr. BATEMAN. Well, I certainly don't want to seem to indicate any discouragement to doing that, because from my one experience in going to Panama and observing the operation, there seems to be an extraordinary opportunity there for capitalizing on tourist activities from all those cruise ships that are constantly proceeding through the canal if you could—if there are things which would lead them to make it a port-of-call where they would stay instead of just transiting the canal as quickly as possible.

    So I think that would be a wonderful thing for the economy of Panama. I think, just speaking off the top of my head, it would be important that ventures of that kind not become something that could be a drain on the resources of the Canal Commission itself. But certainly, private entities, in cooperation with the Commission and the Panamanian Government, ought to be strongly encouraged to develop those tourist resources.

    Mr. ALEMAN. Well, sir, that's exactly what we're planning to do. To actually make the best use of our capacities, and allow the private sector of Panama to engage in those things that are not our core business.

    Mr. BATEMAN. The other question I have relates to the increase in the traffic of the Panamax vessels. That is self-explanatory, but I'm curious as to whether or not the maritime fleets of the world are increasing in the number of super-Panamax vessels that cannot transit the canal?
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    Mr. ALEMAN. Well, at this time, sir, 92 percent of all of the vessels can transit the canal. We expect by the year 2000, 90 percent—that will be a 2-percent reduction—would be able to go through the canal. So there is a movement in basically the containerships to go to what is being called a post-Panamax. Those are ships with over 4,500 containers. But, we still think there is very strong the amount of ships that are able to use the canal. And what maybe is happening is that some of the Panamax ships that are being replaced with the post-Panamax are moving into using this—the canal—to transit. That's why we're getting an increase in the number of Panamax ships.

    Mr. BATEMAN. With the trend of a larger number of ships which are super-Panamax, are you trying to develop intermodeal transportation services so that the larger ships that can't transit the canal can bring containers, and then traverse Panama by rail, to then be on-loaded onto super-Panamax vessels on the other side?

    Mr. ALEMAN. The Commission is actually studying what is being called a third set of locks. We are studying the possibility of looking in the future after these capital improvements are developed, to look into the possibility of expanding the next canal into a third set of locks, because we are actually a waterway, and the way to handle bigger ships would be through a bigger lock, because after we increase the capacity or the width of the Gaillard cut, then our next bottleneck will be the locks themselves.

    So, in order to have the capability of moving larger ships through the canal, we will be thinking about the possibility of going with a third set of locks.

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    Mr. BATEMAN. A third set of locks, a wider set of locks, is the better solution than the intermodal trans-Panama or land transportation from ocean to ocean?

    Mr. ALEMAN. If I understand your question, the idea is to have those larger ships, the post-Panamax, be able to transit the canal; and that will be making a wider lock, maybe also larger. A study on this, this was originally being implemented in 1939, was stopped; and then it was also the proposal of the studies they were doing in 1993.

    We believe that there is a possibility of doing this on a stage basis, using the same water resources that we have today, the same set of Locks; then moving when the demand is there to have an added watershed, expanded watershed, because the next bottleneck will be the amount or water. Because as you know, Mr. Chairman, we use 52 million gallons per transit. That's a lot of water that——

    Mr. BATEMAN. You're a heavy user of water.

    Mr. ALEMAN. Exactly.

    Mr. BATEMAN. Mr. Taylor. Any questions?

    Mr. TAYLOR. Mr. Chairman, I appreciate you recognizing me, but I will yield temporarily to the ranking Democrat.

    Mr. BATEMAN. Well, I didn't mean to slight Mr. Abercrombie in any way. I was doing it on the basis of who got here first.
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    Mr. ABERCROMBIE. Mr. Aleman, welcome, aloha. I'm from Hawaii. We haven't had the opportunity to meet. I've had a chance to meet some of the other members of the Commission, and I haven't had the chance to visit Panama. I hope to do that. I realize that in these circumstances because there are new members on this panel all the time, it's a constant question of educating people as to what the realities are and how we can be most helpful.

    In this particular instance, I have an interest because obviously, we are served by ocean shipping in Hawaii virtually exclusively, except for what air transportation we get. But for all intents and purposes, the shipping that we get is fundamental to our existence.

    So in that process, over time, we have had circumstances in which the terms and conditions of labor were of key importance to us. At one time, there was even a strike which, obviously, affected the economic and social well-being of Hawaii. But it involved certain fundamental questions of justice and opportunity for working people.

    Now, you indicate on page 13 of your testimony that part of the legislation now being put together—I believe it's going to be your organic law, is that a short term for it, is that correct?

    Mr. ALEMAN. Correct.

    Mr. ABERCROMBIE. Involves a point in which strikes will not be allowed. Could you elaborate a little bit as to what circumstances then will be involved, or what you propose in the law? I presume there's some kind of arbitration or something of that nature?
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    Mr. ALEMAN. That's correct.

    Mr. ABERCROMBIE. Could you summarize at least what the proposed legislation is?

    Mr. ALEMAN. Yes, sir. What we are proposing is that at the time for instance, there is no right to strike in the canal today, because it is a vital importance waterway.

    What we are proposing in the law is a fast and expedient method of solution of conflicts. We believe that a conflict should never end in having a stoppage in the waterway. So it expressly says in the law that it forbids the right to strike.

    Obviously, some of our unions do not like that position. They want to have the right to strike because every other employee in Panama has that right. But what we are proposing, and the law is proposing, actually is an arbitration, a tribunal, or consolation tribunal, in which we are preparing people to be able to resolve their problems in an expedient way. That's what is being proposed in the law.

    Mr. ABERCROMBIE. I presume there's discussion with the unions now on this question.

    Mr. ALEMAN. Yes, sir.

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    Mr. ABERCROMBIE. Has it been resolved as of now, or is it still in negotiation or discussion?

    Mr. ALEMAN. It's still in discussion. It's in the first hearing, and then it has to go to a second—to the floor, and then a third debate. So it's in the process now. All of the unions have been invited, and let me tell you that we went through the process of discussing with the unions, every single one of them, all of the different articles of the organic law. There was only one in which we were in discrepancy, and this is this one, the right to strike.

    Mr. ABERCROMBIE. Is some provision going to be made for collective bargaining? In other words, a collective bargaining process nonetheless will be a part of the organic law, right?

    Mr. ALEMAN. Definitely, yes.

    Mr. ABERCROMBIE. It's just that you want to end up with something that will preclude strikes.

    Mr. ALEMAN. Exactly. That's the idea.

    Mr. ABERCROMBIE. Well, I wish you good luck in putting that together.

    Mr. ALEMAN. Thank you very much. It's up to the Assembly.
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    Mr. ABERCROMBIE. Perhaps you can help me on this. I'm speaking to you or asking you a question based only on superficial knowledge based on a newspaper article, and having been in politics as long as I have been, I have an immediate distrust of anything I read in the newspapers being either accurate or even a fair resemblance of what reality is.

    But, nonetheless, there are questions now about the servicing of ports on the Pacific side of the canal, and companies associated with China, companies associated with the United States. My question is does the Commission have a role? The newspaper reports talk about the Panamanian Government, and I just wonder what the role of the Commission is with respect to licensing or whatever other process might be involved with respect to who has authority and responsibility for movement in the ports either on the Atlantic or the Pacific side.

    Mr. ALEMAN. The Commission has to grant—we'll call it a license, or a permit on any construction, any modifications, anything that has to do with ports in the banks of the canal. And also anything that impacts, using—has to be even ports in the operation of the canal. We have to look at the plans and approve them beforehand.

    Also in the operation of the canal, anything that has to do in canal waters is controlled by the Panama Canal Commission, and will be controlled by the Panama Canal Authority.

    Mr. ABERCROMBIE. Well, my question relates to leases in Cristobal, I believe, and Balboa? Are you familiar with these leases? These lease arrangements?

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    Mr. ALEMAN. I understand there's——

    Mr. ABERCROMBIE. Let me just quote it to you.

    Are you familiar with that transaction, or transactions?

    Mr. ALEMAN. The the only thing that we understand is that the Government of Panama is having a contract with HIT for the ports of Cristobal and Balboa.

    Mr. ABERCROMBIE. That's the Government of Panama, that's not the Commission?

    Mr. ALEMAN. Yes, that's the Government of Panama. We don't have anything to do with it, sir.

    Mr. ABERCROMBIE. I see. Could you be affected by that, though?

    Mr. ALEMAN. Anything that can be in the operations, since those ports are within canal waters, are in the banks of the canal, their operations, if they affect the canal, we have the right to object or control whatever their plans are.

    Mr. ABERCROMBIE. Well, part of the reason I ask that question is not to engage you in a discussion about foreign policy of the Panamanian Government, or for the United States for that matter, but one of the points raised in the article, and let me quote it briefly, if I might, Mr. Chairman:
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    ''Beginning this month, Hutchison will pay $22.2 million a year to operate the Panamanian ports of Balboa on the Pacific and Cristobal on the Atlantic, two commercially strategic sites that anchor either side of the canal. As modern ships increase in size and outgrow the canal'' in other words, this a reference to the discussion you had with the chairman about ship size and the canal, and whether or not there would be off-loading and on-loading—''as modern ships increase in size and outgrow the canal, Balboa and Cristobal will offer the shortest land route between the two oceans.''

    So I guess my question is, and I'm not necessarily looking for an answer, perhaps a little bit more detailed observation from you as to what the prospects of the canal are, what kind of capital investment needs to be made. This would seem to indicate that this company at least foresees a time in which there will of necessity be off-loading of merchandise, of cargo, and a land transportation of—if you want to look—if it's the same article, it's in the second column, the last paragraph in the second column where it says, ''Beginning this month, Hutchison will pay.''

    In other words, the implication is that this company is getting into business in a long-term lease because it fully expects to be taking cargo over land. That's what I deduce from this.

    If that's the case, they must expect that the canal will not be prepared to deal with large ships or larger ships, at least for some time, and that it's in their interests to have a lease on these two ports.

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    I guess I would like to get from you if it's possible, and you don't have to necessarily answer at this point if you're not able to, but I think we should probably get from you at some point, Mr. Chairman, a more detailed and perhaps written response to the question about what the capital expenditure expectations are of the Commission in order to deal with this question of whether or not you have to off-load cargo, take it over land, and then on-load it again on the other side of Panama, depending on which way, of course, the cargo is coming.

    Mr. ALEMAN. Yes. If we can defer that question, sir, I think that we'll be in a better position to do it, and answer that.

    Mr. ABERCROMBIE. Dr. Vasquez, do you have an observation at this point, it doesn't have to be definitive? Is that article merely speculative and doesn't have a basis in reasonable expectation?

    Mr. REEDER. Let me, if I might, Congressman, address that.

    Mr. ABERCROMBIE. OK, Mr. Reeder.

    Mr. REEDER. I've seen the article. I was told that the article might be a subject of discussion.

    Mr. ABERCROMBIE. You understand, I'm not taking this as gospel.

    Mr. REEDER. No, and I appreciate very much your introductory remarks, because there are things in there that I think leave a lot to the imagination.
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    There is a provision as I understand it—I would refer to Hutchison as the HIT contract—which basically gives preeminence to the operation of the Panama Canal. I don't think that's in the article.

    In addition, Mr. Aleman referred to the fact that we do, at some point in time, have authority to grant a license. The operative language under which that license is granted is consistent with ''the management, operation, maintenance, protection, and defense, of the canal.''

    Mr. ABERCROMBIE. Well, that's more of a comfort, but if the—is the government and the Commission sufficiently in sync that they wouldn't necessarily be operating against each other?

    Mr. REEDER. No, they wouldn't be operating against each other. However, this contract process in its entirety took place wholly independent of anything direct or indirect having to do with the Panama Canal Commission. I would just——

    Mr. ABERCROMBIE. I'm a little concerned about that. That's my point, is that if the Government——

    Mr. REEDER. Let me just say that the article suggests irregularity in the contract——

    Mr. ABERCROMBIE. No, I'm not——
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    Mr. REEDER. We have no knowledge of that. I would just say that our experience in the canal, the canal operates under the Federal Acquisition Regulation, the FAR, and our experience has been very good, and with our annualized——

    Mr. ABERCROMBIE. Please don't misunderstand me. I'm not concerned about irregularities or anything of that. I'm concerned strictly with the question of whether or not the Commission may find itself at odds with the Panamanian Government at some point if you have a vested interest in loading and off loading, because of this lease, and the relationships that may have been established as a result of the granting of this lease as opposed to whether or not the Canal Commission can find itself smoothly moving through its capital expenditure program to increase its capacity.

    Mr. REEDER. I think the latter is the case. The fact of the matter is that that contract had to go to the Assembly of Panama. And in the Assembly, it was clarified that the preeminence of the operation of the canal would also take priority.

    I would just supplement something that may help clarify what the chairman asked earlier when we were talking about the third set of locks. That is feasible, maybe. And I must emphasize the word maybe. Because I've heard numbers as high as $20 billion, and I've heard numbers as low as $10 billion. But we are still talking about something that is very, very, dramatic. We're talking about more than doubling the entire water requirements in order to operate a post-Panamax type, third set, of locks.

    Now, that brings us back to——
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    Mr. ABERCROMBIE. Brings you back to the question of loading and off-loading.

    Mr. REEDER. I would add, again, that we also are studying a rail connection, a loading and off-loading rail connection. Now we're in pure speculation, but if that's what the company was thinking of saying, you know, the third set of locks is really not even a drawing board item yet. This is more or less on an interim basis, that could be well what they have in mind.

    Mr. ABERCROMBIE. OK. Well, I won't pursue it further, Mr. Chairman, but I do think it's pertinent.

    Mr. BATEMAN. Well, I think it's highly pertinent. I don't want to inject myself, and certainly not the panel, into something which is not our business, and to interfere in the internal affairs of Panama in the conduct of its relationships with any foreign countries.

    But, I wouldn't be frank if I didn't raise some disquietude at a shipping entity with close ties to the government of mainland China having critical contact or positioning on both the Atlantic and the Pacific ports at either end of the canal. And adding to it, if that contemplates an intermodal arrangement whereby we get a Chinese owned and operated railroad through the Panama Canal, there is perhaps more of a Chinese presence than I think I would feel very, very, comfortable with.

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    This is above my pay grade, but I certainly have to express a degree of concern.

    Mr. ALEMAN. Yes, sir. I just want to add to that that our understanding is that the rail is being negotiated with Kansas City Rail.

    Also just let me point out that the containerized business in the canal at this time is 13 percent of the business; 87 percent is bulk cargo.

    So we feel that having privatized ports between the two oceans can help the canal because it can help the shipping companies, making Panama a hub of containerized cargo. And that will allow a better structure for all of the shipping companies to have a reason why to use more of the canal. That's some of the reasoning behind privatizing ports.

    Mr. ABERCROMBIE. Thank you, Mr. Aleman. I'm pleased to make your acquaintance. As someone who lives in what is now a state, which was once a kingdom, and then a republic, and then a territory, and now a state, I can tell you I understand very well what happens to people in small areas who have to deal with big nations.

    We came to one conclusion, and I certainly want to, now that I have the privilege of serving on this panel, to be a good neighbor to you in Panama, and hopefully we'll all be able to come to conclusions that benefit us all.

    Mr. ALEMAN. Thank you very much, sir.

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    Mr. BATEMAN. To that I would only add that I'm from one of the 13 original colonies——


    Mr. BATEMAN. By debt of something called a successful revolution, the most successful in the history of the world, I acquired a different status.

    Mr. Taylor.

    Mr. TAYLOR. Mr. Taylor, of course, is from a separate country altogether——


    Mr. TAYLOR. Also at one time occupied by the United States of America, in rather a callous way. [Laughter.]

    I think my two colleagues have both articulately stated what would have to be our concern. Although I'm also one to say, ''Well, that appeared in the Washington Times, so therefore its credibility is immediately thrown into question.''

    The severity of the allegations, both in that paper and in Panama's paper, about the propriety of how this contract was awarded to a country that not that long ago was making the weapons that in various wars of national liberation were killing Americans in different places around the world, a country that to this day is supplying arms to many avowed enemies of the United States of America, allowing facilities that were built by the United States of America and reverted to the Government of Panama to be, as alleged in the paper, made available to this country in an improper way, I too, must voice my concerns.
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    I think our country has a very special relationship with Panama. Unlike Hawaii, we chose to give Panama back to the Panamanians after taking it from the Colombians. That's pretty unique in the world's history.

    Having expended a great deal of effort on the part of this Nation, we gave the canal back when we were under absolutely no obligation to do so to the people of Panama. I think that is also rather unique in the history of the world.

    I would hope that we could maintain the special relationship between our two countries, and I would hope your country would understand the sensitivity of having someone who is an avowed foe of the United States not that long ago, and a potential foe of the United States, operating the port that was built by the people of America, it hits a raw nerve.

    Mr. Reeder and Mr. Aleman, you mention that the canal authority does have the ability to veto those things that you consider against the best interests of the canal.

    I would certainly encourage you to at least investigate the allegations that have been made. I think that is a fair request to make.

    I would also encourage you that when possible, when American corporations have been fair in making bids to continue doing business with Panama, that we be given every fair consideration.

    Again, when I say there's a very special relationship between our two countries, I mean that. Our Senator McCain was borne in your country. My oldest sister was borne in your country. Many of the people who work for the Panama Canal Commission were educated in this country, and many of them come from this country. I think our ties to Panama are about as close as our ties to Great Britain as far as the intermarriage of the two countries and people being from one and living in another, sharing of dual citizenship. I would certainly hate to see that special relationship threatened by the introduction of a third party which is, again, a former, and yet potential, foe of this country.
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    Having said that, I will also ask that your country—that was one of the two things, if I recall, that the opponents of the treaty were saying could happen, that a potential foe of the country could end up running the canal, of our country. And here we are not only being magnanimous in trying to return it to the people of Panama, but creating an opportunity that could hurt us, number one.

    The second thing, if I recall, that they said was the Panamanians, not unlike some states in the United States, may not do as good a job of maintaining something that is turned over to them as they should have. And when I see almost as much money being returned to the national treasury this year as money put aside for maintenance; again, that does give some credence to what the nay sayers would say. And as the new director of the Commission, I would hope the members of the Commission would be particularly sensitive of that.

    A third suggestion would be, and this comes directly to me from the captain of a cruise ship that has transited the canal, his complaint was that—and I could see it having taken a trip on that vessel and getting a feel for how their operation is—in everything they do, he had a thousand people who were setting their watches on the schedule provided to them by the ship. If they said they were going to be at the dock at 8 a.m., then they had best be there at 7:55 when these people are ready to get off.

    The same thing when they left the dock in New Orleans, and returned to New Orleans.

    Again, he said that it was a great frustration to not only himself but to his company that he could not get that type of certainty as far as his transit through the canal from the Canal Commission as far as a time to show up, a time he could expect to transit, a time that he could expect to leave.
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    And knowing that the Canal Commission has made a very strong effort to attract international cruise lines, I would hope that you would take that to heart and see what you can do under those circumstances to encourage more business.

    And I would hope, Mr. Aleman, having said that, again, I hope half as eloquently as my friend from Virginia, and half as eloquently as my friend from Hawaii have said, that you could get back to us on this. That is a big concern. And I see, given the campaign finance phobia that has gripped this town, it may be right that this issue will not go away, it will probably only get bigger. So, if you all could report back to us I think that would be most helpful.

    Mr. REEDER. Congressman, your words are well taken. We will definitely supplement the record. We will come back on the questions of the points you've raised. Your story about the cruise line is very helpful to us. The testimony that Mr. Aleman gave regarding the water time is critical to that. That means a lot to us, that kind of feedback, and the frustration. And I will just tell you, that's what drove the infrastructure capital improvement acceleration. Mr. Aleman didn't give you the exact figures. It's close to $1 billion that we are spending over the next 6 years. We're taking, for example, the widening of the Gaillard cut nine miles north of Panama City, we are accelerating that from the year 2014 up to now about 2002. So it's about a 10 or 12 year acceleration. That will help us more than anything else.

    And on your point that you make regarding perceptions of fairness and fair dealing, we take that to heart. There's nothing more important to Panama, to the Panama Canal, and the success of Panama in the 21st century, than the perception when a company comes there, that it's going to be treated fairly. So we take that to heart.
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    Mr. TAYLOR. Thank you, Mr. Chairman.

    Mr. BATEMAN. Thank you, Mr. Taylor. And we thank Mr. Aleman and Secretary Reeder.

    I have one other issue that I want to broach, and it may be one that is not discreet to talk about on the record. But it concerns the transfer, the removal of the Southern Command from Panama to Florida and what implications that has, and what the status of negotiations to the extent that you all are privy to them about what properties may or may not remain available for American use after December 31, 1999.

    If this is something that's delicate and if you'd rather get back to it off the record, I'll understand. But it is an issue that Mr. Taylor and I have a great deal of interest in, and a great desire to see the Government of Panama and the Government of the United States come to grips with this and come to a mutually agreeable arrangement without any further extended delays. Because time is genuinely running out.

    We are facing a situation where decisions made after a certain point become embarrassing in their implementations just because of budget cycles in the Congress of the United States; and whether something needs to be maintained, doesn't need to be maintained, what goes into military, and construction budgets, and funding, all becomes exceedingly delicate as you get closer and closer to that terminal date without knowing what arrangements have been made in the interest of both countries.

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    So we are very interested in that, and if you could get back to us with anything that you are cognizant of on that score, it would be very helpful.

    Mr. REEDER. Mr. Chairman, we will do that. That doesn't fall, as you know, under our jurisdiction. It does under mine as Under Secretary of the Army, not as Chairman of the Panama Canal Commission.

    I would simply tell you that there have been informal discussions, extensive and repeated, and there have been reports, accounts, and they are ongoing now.

    Your concern relating to the timeliness of all this is indeed well taken and right on the mark. And I would expect the next 30 to 60 days for some significant developments to take place—not closure, because under the constitution and the laws of Panama, it would go first to the Assembly, and then there's a required 90-day period, I believe, before it would go to referendum.

    So that would be what it would take. But I would offer to come back to you, and I saw just before we started this hearing, General Clark, the CINC who is here in the building—he's in fact down with your colleague, Chairman Hefley—and we would come back and talk to you off-line.

    Mr. BATEMAN. Very good.

    Well, Mr. Aleman, I don't know whether you return to Panama before I will get to Panama sometime Saturday, or a thereabout time frame, but I look forward to coming back to Panama and hope that schedules will permit my coming in September for the universal Congress.
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    We wish you well, and thank you for your participation today.

    And thank you, Secretary Reeder.

    We have a vote, and so I suggest that at this point, the panel needs to stand in adjournment.

    Thank you both.

    [Whereupon, at 4:49 p.m., the panel was adjourned.]

    "The Official Committee record contains additional material here."


Maritime Security Program

    Mr. BATEMAN. Have there been any major problems in implementing the Maritime Security Act?

    Admiral HERBERGER. No, there were no major problems in implementing the Maritime Security Program (MSP). Although it was necessary for MARAD to clarify issues with respect to citizenship criteria with one applicant, the selection and award process developed according to our expectations. P.L. 104–239 required that MARAD complete the selection and program implementation process within 90 days of receiving applications which, based on the dates applications were received, was to be no later than the first week of February, 1997. This was accomplished well ahead of our schedule.
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    Mr. BATEMAN. What were the most controversial issues you faced in implementation?

    Admiral HERBERGER. P.L. 104–239, the Maritime Security Act of 1996 (MSA), provided detailed guidance regarding the process to be followed by the Maritime Administration (MARAD) for the solicitation, evaluation, selection, award and implementation of the Maritime Security Program (MSP). MARAD followed the law in awarding operating agreements for applicants who met the criteria for Priority One. Limiting the agreements to those in Priority One and to a pro rata apportionment, also in the law, meant that some applicants did not receive agreements.

    Following initial implementation of the MSP, the two most controversial issues which have surfaced are as follows:

    The first issue is the extent to which U.S. flags denied entry into the MSP are granted the automatic right to reflag. In its denial actions, MARAD determined that 14 U.S. flag vessels can reflag without MARAD permission in accordance with section 6 of the MSA, which amended section 9 of the 1916 Act. Several companies have subsequently sought MARAD's determination that they, too, are eligible for automatic reflagging rights, but have been denied by MARAD because they were not qualified MSP applicants in the first priority (which is a prerequisite). These companies may still apply to MARAD to reflag their vessels under conventional section 9 procedures.

    The second issue is the U.S. domestic trade ''grandfather'' provision under section 656 of the MSA. Congress prescribed that any domestic capacity operated by a MSP participant would be limited henceforth to an amount not greater than what the company was operating in each domestic trade route on August 9, 1995. MARAD published in the Federal Register several notices of dockets on section 656 capacity based on MSP carrier data inputs. To date, MARAD has received over 500 pages of comments, mostly from non-MSP domestic trade only operators. MARAD will shortly issue its final determinations on what the grandfather level of service is.
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    Mr. BATEMAN. Will the Department of Defense (DOD) get the ships it needs and in sufficient quantity?

    Admiral HERBERGER. Yes, the Maritime Administration (MARAD) has worked closely with DOD, and in particular, the U.S. Transportation Command (USTRANSCOM) to configure the Maritime Security Program (MSP) fleet to maximize both the military utility and economic viability of the fleet. Then Secretary of Defense William J. Perry, in a letter dated December 12, 1996, to then Secretary of Transportation Federico Peña, endorsed the 47 ships selected for the MSP. The Secretary of Defense also designated USTRANSCOM as the DOD representative to work with the department of Transportation and MARAD on the implementation and future administration of the MSP.

    The MSP Fleet is configured as follows to meet national security requirements:


    The 47 commercial vessels in the MSP are necessary to sustain the transport of cargo throughout a period of crisis to transport sustainment cargoes (resupply, ammunition and follow-on unit equipment). The DOD sealift fleet is configured to meet early surge requirements to deploy combat unit equipment from the continental U.S. (CONUS) to overseas. In the near term, until the delivery of 19 Large Medium Speed Ro/Ro's (LMSRs) is completed (scheduled for 2001), DOD will rely more heavily on the commercial industry to also meet its surge sealift requirements.
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    The MSP requires participants to commit militarily useful ships, intermodal capacity, personnel, equipment and systems to the Emergency Preparedness Program (EPP) called the Voluntary Intermodal Sealift Agreement (VISA), which provides ''assured access'' and a smooth transition from peace to war, particularly in the critical early phases of a deployment. However, the level of each VISA participant's commitment is based on its U.S.-flag capacity and a portion of the company's total Intermodal resources, which requires that we maintain a robust U.S.-flag fleet to make VISA work properly. The results of recent VISA planning sessions suggest that no fewer than 47 commercial ships of capacity are required to meet DOD's mission.

    Mr. BATEMAN. Is the U.S. Transportation Command (USTRANSCOM) satisfied with the program?

    Admiral HERBERGER. Yes, USTRANSCOM is satisfied with the Maritime Security Program (MSP). The Department of Defense (DOD) has consistently reaffirmed the importance of the U.S. commercial fleet to augment the Government sealift fleet and to maintain a labor pool of merchant mariners to crew the fleets. The Maritime Administration (MARAD) has worked closely with DOD, and in particular, with USTRANSCOM to configure the MSP fleet to maximize both the military utility and economic viability of the fleet.

    A major element of the MSP is its requirement for a participant's enrollment in an Emergency Preparedness Program. Working together with TRANSCOM, DOD, U.S.-flag operators, and maritime labor, MARAD has developed and is implementing a companion program to MSP, i.e., the Voluntary Intermodal Sealift Agreement (VISA). The 47 MSP vessels are the cornerstone of VISA and will allow DOD to utilize existing civilian commercial intermodal transportation systems—from ships to containers to management systems—while minimizing disruption to commercial operations. VISA takes advantage of the U.S. commercial fleet's multi-billion dollar capital base and its door-to-door, just-in-time transportation capabilities. VISA's ongoing Joint Planning Advisory Group (JPAG), i.e., industry, MARAD, USTRANSCOM, and maritime labor, provides for a seamless, time-phased transition from peacetime to wartime operations for the delivery of sustainment cargoes to deployed U.S. forces. On January 30, 1997, the Secretary of Defense approved VISA as an alternate to the existing Sealift Readiness Program.
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    The participants in MSP would make available a modern and efficient fleet of U.S.-flag ships crewed by U.S. citizens to serve their country in time of need. The Government will leverage its investment of only $100 million per year to obtain benefits from the industry's combined capitalization base of approximately $8.5 billion, annual capital expenditures over $550 million, and shoreside human resource base of approximately 22,000 people. In addition, participants will make available a worldwide intermodal network which includes vessels, trains, trucks, handling equipment, cargo and equipment tracking systems, and various management services.

    Mr. BATEMAN. Will either agency be recommending additional changes to the Maritime Security Act (MSA)?

    Admiral HERBERGER. Assuming continuation of adequate funding for the Maritime Security Program (MSP), the Maritime Administration does not envision recommending changes to the MSA at this time. The U.S. Transportation Command (USTRANSCOM) also indicates that they do not envision changes to the MSP.

    Mr. BATEMAN. Is implementation of the Maritime Security Program (MSP) complete, and if not, what are the outstanding issues?

    Admiral HERBERGER. The Maritime Administration (MARAD) awarded 38 MSP contracts on December 20, 1996, followed closely by 9 MSP contracts to American President Lines on January 21, 1997. This completed the selection and award process for the 47 ship MSP program.

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    MARAD published the MSP interim final rule and request for comments in the Federal Register on October 16, 1996. Due to the large number of industry comments received, MARAD is still developing the MSP final regulation which must be published by July 4, 1997. MARAD will meet this deadline.

    An outstanding issue is the U.S. domestic trade ''grandfather'' provision under section 656 of the MSA. Congress prescribed that any domestic capacity operated by a MSP participant would be limited henceforth to an amount not greater than what the company was operating in each domestic trade route on August 9, 1995. To date, MARAD has received over 500 pages of comments, mostly from non-MSP domestic trade only operators. MARAD expects to issue a decision shortly on what the final level of service should be for MSP operators.

Budget Request

    Mr. BATEMAN. You asked for $54.0 million to implement the [Maritime Security] program this year. Because of carryovers, will that requirement actually be lower? It also appears that the number reported in the budget for Operating Differential Subsidies is different than that actually required. Please explain.

    Admiral HERBERGER. The Maritime Security Program (MSP) carryover into FY 1998 is estimated at $54.3 million due to later than expected contract awards, estimated ship re-flagging dates and the projected end of subsidized Operating Differential Subsidy (ODS) voyages or Military Sealift charters for some MSP enrolled vessels. With a projected total FY 1998 program payout of $89.8 million, the FY 1998 request for new budget authority should be $35.5 million.
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    The Operating Differential Subsidies program amount was initially set at $135 million in order to show the paydown of the estimated unpaid ODS contract obligations. Subsequently, it was determined that the amount of unpaid ODS obligations set forth in MARAD and Treasury FY 1996 accounting reports was too high. In March 1997, MARAD officially adjusted downward the estimate of unpaid ODS obligations to a more realistic figure. MARAD also set in place additional internal coordination mechanisms to insure that the estimate is reviewed annually for accuracy and that any necessary adjustments are made in our official reports prior to the end of each fiscal year. As a result of this activity, and a reexamination of the estimated subsidy accruals for ships participating in ODS in FY 1998, the ODS liquidating cash (outlay) requirement for FY 1998 should be $51.03 million.

Title XI

    Mr. BATEMAN. How many Title XI loans have been approved since fiscal year 1994?

    Admiral HERBERGER. Forty-four applications were approved since fiscal year 1994. The cost of these projects was in excess of $2.5 billion and the related Title XI guarantee amount was approximately $2.1 billion. Included in this total were five shipyard modernization projects, which had a total project cost and Title XI guarantee amount of approximately $120 million and $105 million, respectively. Also included were export projects, which had a total project cost and Title XI guarantee amount of approximately $1 billion and $800 million, respectively. These financings covered a wide range of vessel types, including 15 ocean-going double hull tankers.
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    Mr. BATEMAN. Have there been any defaults?

    Admiral HERBERGER. There has not been a default on any guarantees issued since 1985. During this period of time approvals of approximately $2.7 billion have been issued.

    Mr. BATEMAN. What effect would passage of the OECD implementing legislation have on the viability of the Title XI program?

    Admiral HERBERGER. While the maximum length of the transaction will be reduced to twelve years and the financing level limited to 80 percent, Title XI will continue to be a viable financing alternative. We expect the Title XI program to be attractive compared to financing available from private banks in many cases, as bank financing will generally be for a shorter duration than the twelve years provided for under OECD. Additionally, the fixed rate financing offered under Title XI is often considered an advantage to the floating rates generally provided by the private sector.

    The agreement will not cover all vessel types as it is limited to self-propelled ocean going vessels. Therefore, it does not apply to equipment such as power barges, inland tugs and barges, and drill rigs. Also, shipyard modernization projects are not subject to these specific limitations but only to a general requirement that the terms and conditions of a loan guarantee be comparable to commercial terms.

OECD Agreement
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    Mr. BATEMAN. On page MA–60 of your budget justification, you make a statement that suggests that in 1998 you will be adhering to the terms of the OECD agreement. Can you explain that statement in light of this body rejection of the OECD agreements?

    Admiral HERBERGER. MARAD will not adhere to the OECD Shipping Agreement until it is ratified by Congress. The terms of the FY 1998 Title XI program have not been changed from what is currently allowable under the law. The intent of the sentence was to indicate that the budget request of $35 million at a subsidy rate of 7% would still allow for approximately $500 million in loan guarantees for 1998, even with a potential requirement to adhere to the terms of the OECD agreement should it be ratified by Congress in 1997, due to the expected strong continued interest in Title XI.

Title XI

    Mr. BATEMAN. Do you see a need to continue the Title XI program, and has it worked as envisioned in 1993?

    Admiral HERBERGER. In 1993, the National Shipbuilding Initiative (NSI) was enacted as part of the National Defense Authorization Act of 1994 to assist the U.S. shipbuilding industry to be competitive in the international marketplace. NSI expanded the existing Title XI program to provide financing for 1) export vessels constructed in U.S. shipyards and 2) advanced and modern shipbuilding technology for U.S. shipyards.

    Since the implementation of NSI, five shipyard improvement projects, with a Title XI guarantee amount of approximately $105 million, have been approved. These projects involved National Steel and Shipbuilding Company, Avondale Industries Inc., North American Shipbuilding, Inc., T.T. Barge Services, Inc. and Massachusetts Heavy Industries, Inc. The shipyard improvement projects have or will enable these shipyards to become more efficient and competitive. This has already helped them to attract new business.
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    These projects are already yielding positive results. For example, the $22.7 million Title XI shipyard capital improvement project for National Steel and Shipbuilding Company (NASSCO) has resulted in a savings to both the company and the Government which has far exceeded the amount of the Title XI financing. Savings estimated for the six Sealift ship program at NASSCO as a direct result of reduced hours in engineering, planning and production total $17.5 million each for the Navy and NASSCO for a total savings of $35 million.

    Also, export projects with a total Title XI guarantee amount of $800 million have been approved. Export transactions have had clear benefits to the U.S. shipbuilding industry. For example, the Dannenbrog Rederi AS project, which involved the construction of two double hull 16,000 deadweight ton tankers at a cost of approximately $53 million, is expected to support 200 shipyard jobs and 500 support jobs at Alabama Shipyard. These export projects not only improve the U.S. balance of trade but represent the first major export of U.S. built vessels in approximately 30 years. Without the Title XI financing, it is unlikely that these export projects would have been consummated.

    Clearly, the Title XI program has enabled U.S. shipyards to take the initial steps to become internationally competitive. However, achievement of this goal can only occur over the long term. Therefore, the continued availability of Title XI financing is essential if this goal is to be achieved.

    Mr. BATEMAN. Will an appropriation of $39 million be sufficient to address adequately the number of applicants for guarantees?

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    Admiral HERBERGER. The appropriation amount of $39 million, $4 million of which is for administrative expenses, will provide $35 million for loan guarantees. This $35 million amount, together with an assumed seven percent risk factor, will provide for guarantees which amount to $500 million.

    It is anticipated that the program will be able to fully utilize this amount, and recent interest in the program from growing sectors such as the offshore oil industry indicates that demand for Title XI financing could well exceed $500 million in FY 1998.

Ready Reserve Force

    Mr. BATEMAN. There were problems with activating a number of the Ready Reserve Force (RRF) vessels during the Persian Gulf conflict. What steps if any have been taken to correct the deficiencies?

    Admiral HERBERGER. Building upon the lessons learned from Operation Desert Shield/Desert Storm, the Maritime Administration implemented several important actions to improve the activation reliability of the RRF. Among these were (1) improvements to deactivation procedures, including sea trials and repairs to all known deficiencies prior to lay-up; (2) redefined readiness requirements; (3) assignment of ROS crews to maintain priority ships and provide a nucleus trained crew on activation; (4) initiation of a periodic test activation and sea trial/dock trial program; (5) outporting vessels to be close to projected loading ports; (6) installation of an automated maintenance and repair tracking system; (7) initiation of an automated logistics and spare parts system; (8) institution of new performance based RRF ship manager contracts; and (9) the establishment of a quality assurance group.
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    The favorable results of these initiatives were reflected when 14 RRF ships were ordered activated for Operation Uphold Democracy in September 1994, with an average activation time of only 3.1 days per ship. Since the Persian Gulf sealift there have been 47 no-notice activations and all but one RRF ship (10 hours late) has made this prescribed activation time. In addition, other post-DESERT STORM RRF operations which were successful include three ships activated and operated in support of Operation Restore Hope and 10 ships activated and operated for the interim Army Warfare Reserve and Prepositioning Forces at Diego Garcia and Guam beginning in late 1993 and continuing until at least 1998.

Merchant Mariner Reemployment Rights

    Mr. BATEMAN. Have there been any problems with the implementation of the Merchant Mariners Reemployment Rights provisions which were part of the Maritime Security Act?

    Admiral HERBERGER. No. A Final Rule was published in the Federal Register (Vol. 62, No. 23) on February 4, 1997, implementing ''Reemployment Rights of Certain Merchant Seamen,'' as required under Section 10 of the Maritime Security Act. The rulemaking contained new information collection requirements which were recently published in the Federal Register (Vol. 62, No. 83), with a sixty day comment period in accordance with the Paperwork Reduction Act of 1995.

Merchant Mariner Supply

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    Mr. BATEMAN. Do we still have a potential shortage of trained merchant mariners to crew RRF vessels? If so, what steps should be taken?

    Admiral HERBERGER. Current analysis indicates no significant problems in manning the RRF and Military Sealift Command fleets for the initial activation of all sealift assets, with all sealift ships involved being fully operational. However, the actively sailing labor force would be hard pressed to simultaneously meet both commercial and defense crewing needs to sustain cargo delivery in a full mobilization for war over an extended period.

    In order to meet future RRF crewing demands, the Merchant Marine Academy and State maritime academy programs must continue to operate at or near current levels. MARAD must also continue to promote the use of approved industry schools for training licensed and unlicensed seagoing personnel, and to improve access to qualified inactive mariners. Recently enacted legislation providing re-employment rights will help greatly in providing access to inactive mariners.

    The Maritime Security Program (MSP) requires an annual appropriation to cover 47 oceangoing commercial vessels operating in the international arena. Funding for the MSP and preservation of the Jones Act are needed to provide crews for the RRF vessels and commercial vessels, both of which will be operating during a national emergency or war.

NDRF Funding Level

    Mr. BATEMAN. The funding for National Defense Reserve Fleet (NDRF) comes out of the National Defense Sealift Fund. Can you describe the process you go through with the Department of Defense (DOD) to ascertain the correct level of funding to maintain the Fleet? Are there sufficient funds in this year's request? Are there funds provided for the state school ships?
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    Admiral HERBERGER. The Maritime Administration (MARAD) develops its NDRF funding requirements after close coordination with DOD. The process starts with the US Transportation Command (USTRANSCOM) setting annual readiness requirements. MARAD then sends its budgetary estimates to the Navy for incorporation into their National Defense Sealift Fund. We meet with both USTRANSCOM and Navy staffs to review our planning estimates as they form the foundation for Navy's NDRF request.

    There are sufficient funds in this year's request to satisfy DOD's Ready Reserve Force (RRF) requirements ($309.7 million).

    For the two state school ships which are assigned 10-day readiness as part of the Ready Reserve Force (RRF), the EMPIRE STATE and PATRIOT STATE, funds are included in the NDRF budget to help maintain their readiness.

Ship Scrapping

    Mr. BATEMAN. What steps can be taken to correct the backlog of vessels which need to be scrapped? How much is this costing per vessel to keep these unneeded ships?

    Admiral HERBERGER. The Environmental Protection Agency's (EPA's) current interpretation of its regulations governing the handling, storage, disposal and export of polychlorinated biphenyls (PCBs) and the application of its enforcement letter have effectively prevented the sale of MARAD's obsolete vessels for scrapping in foreign countries. MARAD has historically exported vessels for scrapping because scrap prices are much higher in foreign markets and because the capacity of the domestic scrap market is limited. Although MARAD is presently evaluating bids for domestic scrapping, the number of ships to be awarded will be limited in order to determine the feasibility of, and MARAD liability inherent in complying with EPA's regulations. Even if domestic scrapping under the current bid is successful, MARAD will not be able to scrape a significant number of ships domestically in an expedited manner. In order for MARAD to scrap its obsolete vessels in a timely manner and reduce the backlog, the EPA's characterization of a vessel as a PCB waste and requirement to notify the country of import that they are receiving a shipment of hazardous PCB waste would have to be modified.
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    At present, MARAD has approximately 70 ships available for scrapping. MARAD incurs annual expenses of nearly $1,750,000 to maintain these obsolete vessels at an average cost of $24,500 per vessel. However, there are currently 14 vessels that will require more significant repairs and drydocking to keep them from sinking if they are not scrapped in the near future. Estimates to perform this work are as high as $900,000 per vessel for certain vessels.

Jones Act

    Mr. BATEMAN. What is the Administration's position with respect to the Jones Act? Will you be recommending changes?

    Admiral HERBERGER. The Administration supports the Jones Act as an essential element of U.S. maritime policy and believes that it will continue to serve the Nation's interests well into the 21st Century. The Jones Act fleet is an essential link in our national transportation infrastructure. According to industry and government data, there are more than 44,000 cargo vessels, barges, and passenger ferries in the U.S. domestic fleet serving the coastwise, noncontiguous, inland waterways, and Great Lakes trades. These vessels carry over one billion tons of cargo (valued at about $222 billion) and 80 million passengers annually, support about $26 billion in private capital investment, employ about 80,000 American citizens, and generate another 44,000 jobs in this shipbuilding, ship repair, and related industries.

    The Administration does not plan to recommend changes to the Jones Act. The Jones Act maintains reliable domestic shipping services and ensures that domestic ship operators, as well as shipbuilders and suppliers, are available and subject to national control in time of need. In addition, the Act helps to provide an adequate cadre of seafarers to meet national defense requirements. Jones Act carriers serve America's national and economic security needs dependably and efficiently.
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Noncontiguous Trade Study

    Mr. BATEMAN. An article appeared in the March 18, 1997 Journal of Commerce concerning a draft report prepared for the Department of Transportation. For those members who support the Jones Act, it would appear to lend support for the retention of this Act. Would you care to comment?

    Admiral HERBERGER. The report referenced in the article was prepared by the Department of Transportation; it was required under Section 407 of the Interstate Commerce Commission Termination Act of 1995. The purpose of the report was to assess competition in the noncontiguous (Hawaii, Guam, Alaska, and Puerto Rico) domestic maritime trades. The final report, released on March 24, 1997, concluded that although these trades are concentrated, competition exists and shippers' overall needs are met. This conclusion is based upon data indicating that during the last 10 years in these markets freight revenues have risen less rapidly than inflation, market shares have fluctuated among various carriers, operators have exited and entered, and chronic excess shipping capacity has placed downward pressure on freight rates.

    As a result of the Jones Act and the dedicated service by U.S.-flag liner operators, the domestic offshore trades receive outstanding service and are linked to worldwide markets through U.S.-flag carriers' world-class logistics systems. This reliable and efficient service is essential to the quality of life and economic growth of the noncontiguous U.S. markets.

    Mr. BATEMAN. On page 61 of the hearing transcript you were asked to investigate the allegations concerning the treatment of the United States corporations in the leasing of port terminals in Panama and the involvement of the Chinese in these transactions. Please provide the results of this investigation.
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    Mr. ALEMAN. Media coverage of the Hutchinson, Ltd. port concession, perhaps because of media speculation about the influence of the Peoples' Republic of China (PRC), has led to misapprehensions about the ports' relationship to the Panama Canal. We are grateful for the opportunity to clarify the matter.

    First, the Panama Canal Commission (the PCC) has had no involvement whatsoever in the bidding process for the leasing of port terminals in Panama. That process has been between the Government of Panama (GOP) and bidders. However, the circumstances regarding this matter as we understand them are as follows.

    Pursuant to the terms of the 1977 Panama Canal Treaty, ownership and control of the two ports located at the Pacific and Atlantic entrances to the Canal (known as the Balboa and Cristobal ports, respectively) transferred to the GOP on entry into force of the treaty on October 1, 1979. Since that time, PCC contact with the National Port Authority has been focused primarily on issues relating to the safe passage of vessels using ports adjacent to Canal waters, as provided for in the 1977 Treaty and related agreements.

    It is important to note that port operations have nothing directly to do with the transit of ships through the Canal—they constitute a separate maritime activity. Vessels using the ports will, however, enter some of the Canal operating area, but will be under the direct control of the PCC (and after December 31, 1999, its successor agency, the Panama Canal Authority) at all times.

    Under the Treaty, the PCC must approve any proposed port activity as compatible with the continuous effective management, operation, maintenance, protection and defense of the Canal. The PCC must approve any changes in the use of lands and waters of Balboa and Cristobal. Even after the PCC approves an activity, it may withdraw its concurrence in the license issued by Panama for such activity if the agency later determines that the use no longer meets the standard set out above (and thus, in effect, revoke the license). It is on that basis that the PCC has taken its only active role, in ensuring that the Government of Panama's contract for the operation of the ports of Balboa and Cristobal included stipulations that require future port activities to be fully coordinated in advance with the PCC and its Panamanian successor.
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    The Panama Canal will continue after December 31, 1999 to have primacy over all areas that could affect its operations, including the ports. A new title to Panama's Constitution covering the Panama Canal was adopted in 1994. It establishes that any ''plans for construction, the use of waters, and the utilization, expansion, and development of the ports . . . shall require the prior approval of the Panama Canal Authority.''

    Turning to the port concessions at issue, the Republic of Panama recently awarded the contract for operation of the Balboa and Cristobal ports to a subsidiary of Hutchison Port Holdings, Ltd., a unit of Hutchinson Whampoa, Ltd., a publicly-traded Hong Kong-based real estate and transportation conglomerate. According to The Journal of Commerce, Hutchison Ports is the world's largest independent terminal operator, and is the dominant operator in the Port of Hong Kong. That newspaper also reported that Hutchinson is in discussions to form a partnership with the Port of San Francisco (copies of articles attached as Appendix 1).

    Detailed plans to develop Balboa and Cristobal are expected from Panama in the summer of 1997 for a determination of compatibility with Canal operations. Panama did forward a general proposal for a port facility outside of the Port of Balboa in the area of the Rodman Navy Base piers. The PCC responded with a list of minimum requirements to be followed for any port activity in that area. (A copy of this correspondence is attached at Appendix 2).

    Questions have been raised about a company with alleged ties to the PRC(see footnote 1) having strategic positions in the Canal area. While this geopolitical background is distinct and separate from the compatibility analysis outlined above, the PCC would make two threshold observations on this point. First, there has been speculation about a connection between Hutchison and the PRC, and speculation about use of such a connection to further supposed strategic designs of the PRC, but this has not been established or even clearly articulated in any material we have seen. Second, throughout four decades of the Cold War, as well as during World War II, vessels of all nations (including the former Soviet Union and the PRC) transited the Canal on completely neutral terms. That neutrality is continued, and guaranteed and enforceable, by the Treaty Concerning the Permanent Neutrality and Operation of the Panama Canal, whose terms were memorably debated in the Senate proceedings on its ratification.
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    Other concerns have been expressed on economic grounds, that these ports would compete for Canal business. However, these ports would be handling primarily container traffic, which is used for higher-value, more time-sensitive cargoes. Container traffic represents about thirteen percent of the Canal's business. The Canal is more suited to the transportation of bulk (i.e., petroleum, grain, ores, lumber, etc.) cargoes. Therefore, we do not see the increased use of container ports having any significant negative effect on Canal traffic, especially in the near term. In fact, transshipment ports for containers may increase Canal container traffic.

    For the long-term, Panama has aspirations to make the Canal a centerpiece of a larger hub for international commerce, taking advantage of Panama's natural geographic advantages. That would include handling container traffic from post-Panamax vessels too large to traverse the Canal. Thus, if land bridge service brings a minor diversion of traffic in the near term, it makes business sense for Panama to develop their transportation capacity to the fullest extent possible, which will in the end only buttress and complement the Canal business.

    Because of the jurisdictional status of the Ports of Balboa and Cristobal, the contracting decisions regarding the ports were and are totally within Panama's responsibility and discretion. Because representation of the U.S. commercial interests are being handled properly by the United States Embassy in Panama and the U.S. Departments of State and Commerce, we have not performed an investigation of the complicated facts that underlie the Panamanian port contract processes. We will continue to monitor the issue, but the contracting aspects of the port concessions constitute a commercial and diplomatic matter in which the PCC does not have a proper role.

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    NOTE.—The United States Embassy in Panama is ready to provide their knowledge of the bidding process if requested.

    Mr. BATEMAN. The PCC recently completed a two-part toll increase. Can you outline for the record the process you went through? Did you obtain public comment?

    Mr. ALEMAN. Section 1604 of the Panama Canal Act of 1979, as amended, establishes the procedures for proposing toll rate increases and changes in the rules for measurement of vessels. Those procedures are supplemented by regulations in 35 CFR Part 70 which provide interested parties with instructions for participating in the process governing changes in toll rates and measurement rules. The pertinent sections of both of these governing documents were published in the proposal in the Federal Register to increase tolls. The proposal contained the PCC's analysis showing the basis and justification for the proposed changes.

    To ensure maximum notice and participation in the rule making process, the PCC issued a press release on August 19, 1996 that was distributed to more than 125 publications worldwide, including special business and shipping publications as well as all major news services. Information on the proposal was faxed directly to approximately 400 shipowners and operators, maritime organizations and port authorities. In addition, the press release and analysis were made available on the Internet. Letters from the Administrator were faxed directly to the top 40 users of the Canal to advise them that they would be contacted on this matter. Shortly thereafter the Administrator or Deputy Administrator called senior officials of each of the top 40 users to discuss the proposal. A delegation of PCC staff met with the Panama Maritime Chamber, whose members represent Canal users from around the world. Follow-up letters from the Administrator were faxed to 40 top users and the shipowners, operators, and maritime authorities previously contacted encouraging comment and attendance at the public hearings. Two public hearings were held and the comment period was extended for the second hearing. Ten parties presented oral testimony at the public hearings. Sixty-seven written comments were received during the comment period. The views presented by interested parties as well as other relevant information were considered by the Board of Directors. The advance hearings, the convening of two hearings rather than one, and the scope of public participation in the proceedings (both written comments and oral testimony) were unprecedented.
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    The PCC's Board of Directors, after giving careful consideration to all of the input and comments submitted by the Canal's customers, decided to proceed with the tolls changes, and issued a formal notice to that effect in the Federal Register. In addition, all available means of disseminating that decision were utilized, including press releases and the Marine Director's Notices to Shippers.

    Mr. BATEMAN. Why did you need to raise tolls now?

    Mr. ALEMAN. The PCC determined that traffic levels were rapidly approaching the Canal's maximum operating capacity. Unless addressed, this saturation of capacity would undermine PCC's longstanding commitment to quality customer service, including the target average Canal Waters Time (CWT) of 24 hours or less. In large measure because of record-breaking traffic, the Canal Waters Time had deteriorated in recent years from 22.7 hours in 1994 to 28.1 hours in 1995 and then to 32.1 hours in 1996. That trend was unacceptable, and steps were required to reverse it. To meet that challenge, PCC's Board of Directors approved management's recommendation to increase and accelerate the capital program to ensure a Canal operating capacity that would meet future traffic demands and an acceptable long-term quality of transit service. The toll rate increase and the measurement rule change were necessary to meet the projected significant deficits in Fiscal Year's 1996–1998 resulting from capital expenditures to expand Canal operating capacity.

    To provide context, this tolls increase was only the seventh in the 83-year history of the Panama Canal, a break-even operation. Few, if any other businesses (in the transportation sector or otherwise) can claim this enviable record of cost control. Even when considered in the aggregate, this two-part toll raise (a 1997 increase of 8.2 percent and a 1998 increase of 7.5 percent), is lower than three prior toll increases.
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    Since the last toll increase in 1992, in addition to increased costs of doing business, significant investments in excess of $800M have been accelerated to ensure that the transition is both smooth and efficient, and that the Canal can deliver quality service to its world-wide customers. For example, accelerating the widening of the Gaillard cut from a completion date of 2014 to 2002 will allow for the first time two-way 24 hour per day traffic of Panamax vessels. This is of critical importance to the United States, because 65% of all commerce transiting through the Canal either originates in, or is destined for, the United States. Other large expenditures that required the increase include: modernizing and expanding the existing tugboat fleet, designing and procuring a modernized locomotive fleet to handle the increased volume of traffic and higher percentage of Panamax vessels, modernizing the Canal's vessel traffic management system, hydraulic conversion of original miter gate equipment, and various other improvements that will ensure the Canal is in excellent condition and able to efficiently handle projected workloads. Because the Panama Canal requires that the PCC be a ''break-even'' operation that does not utilize taxpayer funds, the toll increase was essential.

Controversial Aspects

    Mr. BATEMAN. What part of the proposal was the most controversial? Will the increase effect the volume of traffic? What will be the effect on the U.S. consumer or U.S. shipping companies?

    Mr. ALEMAN. The most controversial aspects of the toll rate were its magnitude and the fact that the increase was in the form of two back-to-back increases in 1997 and 1998. In addition, some sectors of the shipping community were more concerned about the decision to begin reflecting ondeck cargo capacity in our tolls computation (which was done to spread the tolls burden more equitably among all users of the Canal).
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Impact on Canal Traffic

    Based on current studies of Canal traffic demand, and its sensitivity to toll rate increases, coupled with our experience with toll rate increases of similar magnitudes in the past, we believe that the current toll rate increase will have no measurable impact on overall Canal traffic.

    Elasticity studies of Canal demand indicate that the bulk trades, excluding grain, are sensitive to rate hikes. Grains (the single largest Canal commodity by total tonnage) were found to be relatively inelastic to rate hikes of the magnitude being proposed. Furthermore, little diversion from the Panama Canal is expected in the short run to medium term for higher value products such as containerized cargo and automobiles. Despite recent downward freight trends, the liner trade remains less sensitive to price and more sensitive to time constraints. Therefore, we expect the Canal to continue to play the same relative role in world commerce that it has in the past.

Impact on U.S. Economy

    About 17 percent of the total international seaborne trade of the U.S. moves through the Panama Canal. Cargo shipments originating in or destined for the U.S. totaled 131.8 million long tons in fiscal year 1995, with exports accounting for 87.6 million long tons and imports 35.1 million tons. Intercoastal shipments totaled 3.0 million long tons.

    The most important U.S. region related to Canal traffic is the Gulf area. Cargo moving to and from the Gulf of Mexico via the Canal totaled nearly 83 million long tons, with exports accounting for about 66 million tons and imports for nearly 14 million long tons. (Intercoastal movements made up the remaining 2.8 million long tons.) About 60 percent of the export volume—nearly 39 million long tons—consisted of grain shipments. This area was also the source for shipments of phosphates, chemicals, petroleum products, lumber, coal and coke.
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    The importance of the Canal to other U.S. regions varied. Cargo moving to and from North Atlantic and South Atlantic ports accounted for over 25 million tons, with exports totaling over 12 million tons and imports about 13 million tons. Containerized cargo, scrap metal and coal were the leading exports in the region. Major imports destined for U.S. Gulf/East Coast ports consisted of petroleum and petroleum products, manufactures of iron and steel, salt, ores and metals, coal and coke and containerized cargo. The U.S. West Coast accounted for nearly 18 million long tons of cargo. Petroleum products and containerized cargo were among the main export products, while the main imports consisted of petroleum and petroleum products, containerized cargo, and manufactures of iron and steel.

    To conclude, the magnitude of the toll rate increases being considered (an aggregate of approximately 16 percent in general and up to 30 percent for container ships) is not expected to generate a significant impact on U.S. trade in the short to medium term. In the longer term, the U.S. West Coast region and intermodal routing through U.S. West Coast ports may benefit marginally from the slight container ship trade diversion that the Canal toll increase may generate. The net effect for the country, however, would be null, since shifts would be mainly internal.

Impact on U.S. Shipping Companies

    A Panama Canal toll rate increase is imposed equally on all vessels, regardless of flag. U.S. flag merchant vessels are affected by a toll rate increase in the same manner as all vessels of similar type and size utilizing the Canal. A toll rate increase at the Canal should thus have no unique impact on the U.S. flag fleet. The real effect of such an increase on the competitive position of Canal users, including U.S. flag vessels, depends on the magnitude of the increase, with the impact varying according to the commodities transported and the trade routes served by the U.S. flag vessels.
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    The U.S. flag fleet currently total 319 vessels (ships of 1,000 gross tons and over), of which approximately 49% use the Canal. In fiscal year 1995, U.S. flag vessel transits totaled 224, a drop of 18.9 percent from the previous year's level. This drop is consistent with the overall declining trend that has characterized the U.S. maritime industry in the past decades as a result of the general loss of competitiveness in shipping and the high cost of manning U.S. flag vessels.

    In fiscal year 1995, over 39 percent of U.S. flag vessel transits consisted of tankers primarily carrying crude oil or petroleum products from the West Coast to the U.S. Gulf refineries. Another 17 percent were barges carrying grains from the U.S. East Coast to the West Coast of Central and South America. The rest of the U.S. trade was spread over a variety of ship types and routes.

    There could be a slight beneficial effect on U.S. container vessel operators serving the Far East-U.S. Coast trade via West Coast ports and the U.S. railroad system by improving their competitive position versus foreign flag operators that still ply the all-water route through the Canal.

    Mr. BATEMAN. What will the revenues be used for?

    Mr. ALEMAN. The revenues are being used to fund an accelerated capacity expansion program which is centered around five major projects, and to a lesser extent, the inflationary costs of doing business. The expansion program includes the widening of the eight-mile long Gaillard Cut; augmentation of the tugboat fleet; design and procurement of new locks towing locomotives to increase the locomotive fleet size; enhancement and modernization of the vessel traffic management system; and modernization of the locks machinery control systems including the conversion of miter gate, rising stem valves and cylindrical valves from mechanical to hydraulic actuation.
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    Mr. BATEMAN. What are your projections for traffic growth over the next ten years?

    Mr. ALEMAN. The most recent long-range forecast of Canal traffic for the period FY 1997–FY 2010 was prepared under contract to the PCC by ICF Kaiser International, Inc., in association with Wharton Econometic Forecasting Associates (WEFA Group). The forecast was submitted to the PCC in December, 1996 (see chart on following page).

Table 1

    We would be remiss if we did not note in closing that the ''science'' of projections is, at best, an inexact one, given the many variables and assumptions.

    Mr. BATEMAN. Have you consulted with those parties who may be affected by one or more of your legislative proposals? Have provisions been modified as a result of those concerns? Are you free to give us any examples of approaches that have been modified as a result of the discussions?

    Mr. ALEMAN. The PCC's initial legislative proposals were submitted earlier this year to the representatives of the five collective bargaining units representing agency employees. Meetings were also held with the Labor-Management Partnership Council to explain and answer questions regarding the proposals. As a result, changes were made to several provisions before forwarding to OMB.

    After the proposals were submitted to OMB, they were subjected to an extensive interagency review process. OMB circulated specific proposals it considered of interest to other federal agencies. Several of the proposals were revised to accommodate the concerns of those agencies. National labor representatives were heard from again during the OMB review and, consequently, several provisions were further amended. Examples of other changes were those made to accommodate Department of Labor concerns regarding the treatment of certain socioeconomic programs in the procurement provision, and a change in the statutory date on which a Department of Labor actuarial report is due. Finally, through negotiations which took place before final OMB clearance, the package as a whole was reviewed and not opposed by the national representatives of the PCC's bargaining units.
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    Mr BATEMAN. What are the biggest problems facing the Canal in the next ten years?

    Mr. ALEMAN. The PCC, the United States and Panama have a tremendous challenge ahead in completing the transition of the Panama Canal on December 31, 1999. However, we feel that both countries have been meeting the challenge, and that the preparation the agency has done since 1979 is paying off, especially in terms of Panamanian workforce participation and experience. On operational issues, we also feel we are well-prepared, especially after committing the resources to expand Canal capacity to meet the demand of record-breaking traffic and to modernize key systems.

    The most difficult tasks ahead are not so much problems, which connote an unexpected or unplanned quality, but rather challenges to the United States and Panama to continue to operate the Canal to its full potential. This challenge is composed of a myriad of separate projects, all of which require a great deal of binational planning and a tremendous amount of coordination. We are providing as Appendix 3 a copy of the agency's most current Treaty Milestone Plan, which sets out in project planning form the many tasks still before us.

    Here are a few of the biggest challenges the PCC and Panama will face in the next ten years, organized around what we have in previous congressional testimony described as the ''three pillars'' of the Panama Canal—its workforce, its infrastructure and its customers.

    For the PCC's workforce, the challenge is to modernize and adapt a federal-style set of personnel and labor policies to one which will work for Panama will reflect the best practices of world-class companies. A careful balance must be struck between the changes that are needed to effect a ''seamless transfer'' and the need to keep the confidence of workers that the best features of the U.S. system (the merit system, fair and transparent personnel actions, and accountability) will be maintained. Another challenge for the PCC will be succession planning, so that the management team that will lead the waterway through its most challenging and demanding phase will be in place. Changes the PCC proposed in its FY 1998 package will aid greatly in both of these areas.
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    The Canal infrastructure also presents challenges over the next ten years. The challenge generally is to provide shippers with the most consistently reliable and expedient passage through the Isthmus as possible. Increased traffic levels have required the PCC to accelerate these efforts, as outlined above. The PCC also is meeting this challenge by modernizing its computer systems and instituting a computerized vessel traffic management system that utilizes the latest satellite navigation technology. These long-range commitments of resources are being made with Panama's concurrence, and will be able to be formally ratified as the policy of Panama's successor to the PCC, the PCA, when it is established later this year.

    Finally, for the PCC's customers (and the interests of ocean shipping in general), the challenge is ensuring a healthy, open dialogue. The PCC, as a provider of service in a competitive environment, must work even harder to listen to its customers and respond to their needs. As well, the PCC needs to keep customers informed of the progress on the transition, so that unfounded or uninformed pessimism does not dampen the prospects for the transition. To that end, the PCC is sponsoring in September of this year with the Republic of Panama the Universal Congress on the Panama Canal, which will give the world community the opportunity to see firsthand and in detail the progress of what we believe will be a near-seamless transfer of stewardship.

    Mr. BATEMAN. What effect is the discussion of U.S. presence having on your efforts at transition? What effect will the move of SOUTHCOM to Miami have on your transition?

    Mr. ALEMAN. There has been no discernible impact on Canal transition effort as a result of the draw down of U.S. forces in Panama, including the relocation of USSOUTHCOM Headquarters to Miami, Florida later this year. By and large, those efforts, including informal discussions about a possible post-1999 military presence, have been addressed separately by Department of Defense and Department of State transition teams who in turn, coordinate directly with their respective GOP counterparts. We are unaware of any issues to date which might adversely affect future Canal operations should the Governments of Panama and the United States agree to a post-1999 US military presence in Panama in support of a Multilateral Counternarcotics Center.
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    The Canal in the past two years has completed two record-breaking years for both revenue and tonnage, which reflects highly on the 9,000-plus workforce which is 92 percent Panamanian nationals. The ongoing discussion, we believe, will not affect the close cooperation and coordination that will continue through December 31, 1999.

(Footnote 1 return)
The PRC will, of course, assume sovereignty over Hong Kong on July 1, 1997.