Grace Line telegram urging that the operation of the line be discontinued.

We pointed out in the report that the current question of discontinuing the Panama Line stems from a Grace Line proposal to the Chairman, Board of Directors, Panama Canal Company, in November 1958 that the canal organization freight and passenger transportation needs be provided by the Grace Line and that the operation of the Panama Line be discontinued. Subsequently in 1959, Grace Line, Inc., and United Fruit Co. jointly wrote to the Chairman, Board of Directors, Panama Canal Company, contending that the operation of the line should be discontinued because it is in direct commercial competition with the American-flag ships of Grace Line, Inc., and United Fruit Co. and that the competition results in severe financial losses to the two private lines. In support of that position, they stated that the operation of the line is contrary to U.S. Government policy; that the freight and passenger requirements of the canal organization can be more effectively handled by other sea and air carriers, private and Government-owned, now serving the Canal Zone; and that, whatever circumstances might have dictated the operation of the Panama Line at the time the Panama Canal was built, or the line's operation in the intervening years, there is now no reasonable justification for its operation.

STUDY OF NECESSITY FOR CONTINUED OPERATION OF THE PANAMA LINE

The Director, Bureau of the Budget, on May 8, 1959, engaged Drake, Startzman, Sheahan & Barclay, distribution and materials handling consultants, New York City, to undertake a study for the purpose of obtaining an objective appraisal of the necessity for continuing Government ownership and operation of the line in view of the Government policy as expressed in the Bureau of the Budget Bulletins Nos. 55-4 and 57-7.

Drake, Startzman, Sheahan & Barclay transmitted its report to the Bureau of the Budget on October 26, 1959. The Drake report states that the scope of the study was to include the findings and conclusions regarding (1) the nature and extent of the transportation services required by the canal organization, (2) the extent to which the Panama Line and its attendant facilities are currently employed to meet its requirements, including the trend thereof and the extent and nature of other means employed to meet the requirements, (3) the availability of alternate nongovernmental means to perform the services rendered by the Panama Line and its attendant facilities, including a comparative evaluation of the line, and (4) to make a specific recommendation as to whether the Government should or should not continue to own and operate the line.

The Drake report recommended that the operation of the Panama Line be discontinued and that its assets be disposed of to the best advantage of the Government. The recommendation was based on the following conclusions:

1. Government operation of the Panama Line is clearly contrary to stated policy.

2. There is an abundance of transportation service available between the United States and the Canal Zone.

3. The discontinuance of the operation of the Panama Line would increase the annual net cash flow to the U.S. Government by $1.2 million annually.

Our review and analysis of the Drake report and the Panama Canal Company reports show that (1) the operation of the Panama Line is clearly not contrary to Government policy based on the legislative enactments related thereto, (2) the American-flag private shipping lines currently serving the Canal Zone have adequate freight capacity to meet the canal organization's freight requirements but do not have the passenger accommodations necessary to meet the canal organization's employee home leave travel requirements, and (3) the annual economic effect on the U.S. Government of discontinuing the operation of the Panama Line cannot be determined with the indicated degree of certainty.

GOVERNMENT POLICY

The Drake report conclusion that Government operation of the Panama Line is clearly contrary to stated policy is not based on any analysis of Government policy in terms of specific factors which determine such policy. In fact, the letter transmitting the report to the Bureau of the Budget states:

We were not required to interpret or apply Government policy. We consulted frequently with the Bureau of the Budget on all such matters.

The Secretary of the Army, the representative of the President of the United States for supervision of the Panama Canal, and the Assistant Secretary of the Army (Financial Management), the Chairman, Board of Directors, Panama Canal Company, both state that the continued operation of the Panama Line is in accord with the policy of the Government of the United States.

The Chairman, Board of Directors, stated that the statutory charter of the Panama Canal Company authorizes the operation of vessels and vests the responsibility for management of the affairs of the corporation in the Board of Directors, and that in the exercise of that authority and responsibility the question of discontinuance of some of the activities of the corporation is peculiarly one for the Board. He pointed out that the Board had given prolonged consideration to questions of discontinuance of the Panama Line but on each occasion it had found that, in the discharge of its responsibilities for operation of the Panama Canal, continued operation of the line was required. He pointed out also that the view that continued operation of the line is essential had been supported by the Congress in exempting the Panama Line from provisions of the act which prohibited the operation of Government vessels in commercial service (sec. 1740(b)) of the Merchant Ship Sales Act of 1946 (60 Stat. 41) and of the act which requires 50 percent of all Government cargo to be carried in privately owned American-flag vessels (Public Law 644, 83d Cong.; 68 Stat. 932) and in providing in the Panama Canal Company's charter for the operation of vessels (62 Stat. 1078).

The Chairman, Board of Directors, states that the operation of the line falls within the exceptions of the general policy based on pertinent considerations of public interest as provided for in the bulletin. He states, in support of that position, that the operation of the Panama Line (1) furthers the foreign policy of the United States by making a substantial contribution to the economic development of the Repub

lics of Haiti and Panama, (2) furthers the maritime policy of the United States by providing service on an essential foreign trade route (trade route No. 4) with American-flag vessels with a capability to serve as military or naval auxiliary ships in time of war or national emergency, and (3) is essential in support of the Panama Canal and that discontinuance of the line would impair the canal as an instrument of national defense.

The various merchant marine acts and their related legislative histories indicate that the U.S. merchant marine shall be owned and operated by private citizens of the United States insofar as may be practicable, and, subject to certain exceptions, they further imply that public vessels of the United States shall not compete with privately owned American-flag vessels. However, we believe that the Drake report conclusion that the operation of the Panama Line is clearly contrary to Government policy is not supportable in view of the statutory authority for the operation of the line; the specific exemption of the line from certain statutes prohibiting or limiting Government vessels in commercial services; and the annual reviews by the Congress, through its legislative and appropriation committees, of the operation of the line.

As previously stated, the Board of Directors, Panama Canal Company, is of the opinion that the operation of the line is essential to the discharge of its responsibilities for operation of the Panama Canal and that the discontinuance of the line would impair the canal as an instrument of national defense. We believe that the need for continuing the Panama Line as an assured line of supply to the Canal Zone is a policy matter for consideration and resolution by the Congress.

ADEQUACY OF PRIVATE TRANSPORTATION CAPACITY TO MEET THE CANAL ORGANIZATION REQUIREMENTS

FREIGHT SERVICE

The Drake report concluded that the freight capacity of the U.S. private shipping lines principally Grace Line, Inc., and the United Fruit Co. is adequate to meet the freight transportation requirements of the canal organization and other Government agencies and of commercial organizations now using the Panama Line, except for Panama northbound reefer exports. The conclusion is supportable on the basis of the presented data relating to (1) the freight carried on the Panama Line in the 12 months ended May 31, 1959-the so-called base year and the projected requirements for the 5-year period through 1964 and (2) the private shipping lines' capacity to have provided the freight services in 1959 and their indicated increased capacity that will become available in the near future upon the placing of new and larger ships in service.

The Drake report shows that in 1959 the Panama Line transported a total of 159,932 revenue tons of freight-about 53,000 tons for the canal organization, 10,000 tons for other Government agencies in the Canal Zone, and 92,000 tons destined for commercial organizations in the Republics of Haiti and Panama-and shows that the estimated total freight transportation requirements for the Government and commercial organizations in the 5-year period from 1959 through 1964 will range from 143,000 to 196,000 revenue tons.

The Drake report states that the ships operated by Grace Line, Inc., and United Fruit Co. between U.S. Atlantic and gulf ports and the Canal Zone had unused capacities in 1959 which were more than adequate to handle the freight transported on the Panama Line between New York and the Canal Zone, and that the freight capacity of both lines will be increased in the near future by the acquisition of new and larger ships.

The Drake report shows that the Grace Line ships southbound from Atlantic ports had unused capacities of 249,100 measurement tons, and that the United Fruit Co. ships southbound from Atlantic and gulf ports had unused capacities of 829,700 and 282,000 tons, respectively. Northbound the Grace Line ships had unused capacities of 534,600 tons, and the United Fruit Co. ships had unused capacities to Atlantic and gulf ports of 33,700 and 132,800 tons, respectively.

The Panama Canal Company, in its reports, raises no questions regarding the adequacy of the capacity of the American-flag private shipping lines to meet the canal organization's freight requirements. The Company did, however, take the position that the discontinuance of the Panama Line would deprive the Panama Canal of an assured logistic support because the U.S. private shipping lines would not be able to provide a thoroughly flexible and dependable freight service. This position was based to some extent on the premise that the Grace Line serves the Canal Zone ports as privilege ports of call on its Government-subsidized service on trade route No. 2. However, the Federal Maritime Board on December 5, 1960, modified the Grace Line, Inc., operating-differential subsidy agreement to provide that its service on trade route No. 2 shall include calls at a port or ports in the Canal Zone as required ports of call.

PASSENGER SERVICE

The Drake report and the Panama Canal Company report both show that American-flag passenger ships now serving the Canal Zone do not have the necessary passenger capacity to meet the canal organization's employee home leave travel requirements that are now being met by the operation of the Panama Line.

The Drake report points out that, if the Panama Line is discontinued, the canal organization's employee home leave travel requirements could probably be provided (1) by the Grace Line C-2 combination passenger ships transiting the canal to the extent of the passenger accommodations available in 1959-the capacity will be increased upon the placing of new and larger ships in service, (2) by the Grace Line and United Fruit 12-passenger cargo ships, (3) by the increased use of air transportation, (4) by the Military Sea Transportation Service (MSTS) ships serving the Canal Zone, and (5) by a diversion of Grace Line's two 300-passenger ships-the Santa Paula and the Santa Rosa-from the regularly scheduled subsidized service to make sailings between New York and the Canal Zone-two northbound and two southbound-during each of the two heaviest months of canal organization employee travel in each direction.

The Drake report recognizes that the discontinuance of the Panama Line would undoubtedly result in the loss to the canal organization employee of the privilege of transporting automobiles on the Panama

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Line at a rate of $80, compared with rates of about $300 on the private steamship lines. However, the Drake report states that special rates for canal organization employees' automobiles will most certainly be protected and that Grace Line, Inc., and United Fruit Co. are prepared to propose and to vote favorably on the matter before the steamship conference.

The Panama Canal Company report shows that, if the Panama Line had not been in operation in 1959, surface accommodations would not have been available for 2,532 persons, based on the actual home leave travel in that year and the effective capacity of the Grace Line C-2 combination ships. The Company states that it is not amenable to the suggestion that canal organization employees on home leave travel be transported on either Grace Line or United Fruit 12-passenger cargo ships because the ships do not provide medical facilities or personnel considered essential for family travel. The Company expressed no views on the suggested use of MSTS ships or of increased air transportation to meet its employee home leave travel requirements. The Company, however, questions the practicability of the suggested diversion of Grace Line's two 300passenger ships from the regularly scheduled subsidized service to meet the canal organization's employee home leave travel requirements in view of the Grace Line, Inc., statement that the passenger capacity of the two ships will be substantially filled for a considerable period of time. The withdrawal of the ships from the regularly scheduled subsidized service would be possible only with the approval of the Federal Maritime Board.

ECONOMIC EFFECT ON THE U.S. GOVERNMENT OF DISCONTINUING THE OPERATION OF THE PANAMA LINE

The Drake report states that discontinuing the operation of the Panama Line would increase the annual net cash flow to the U.S. Government by $1,181,000. Our review of the report and the Panama Canal Company report shows that the amount of any economic benefit is not susceptible of such exact determination.

The Panama Canal Company in its analysis of the Drake report contends that discontinuing the operation of the Panama Line will result in an annual net cash loss to the Government of about $564,000. The Company's analysis indicates that the Drake report estimate of the annual economic benefit that would accrue to the U.S. Government is overstated by $1,745,000 because the estimate was based (1) on an overstatement of $196,000 in the 1959 operating costs of the Panama Line, (2) on an understatement of $603,000 in the estimated cost that the canal organization would have incurred if the transportation services had been provided by private carriers, and (3) on an overstatement of $946,000 in the savings and additional revenues that would have accrued to other Government agencies if the transportation services had been provided by private carriers.

OPERATING COSTS OF THE PANAMA LINE

The indicated overstatement in the Panama Line operating cost of $196,000 comprises an imputed cost of $170,000 for insurance based on commercial rates and an overstatement of New York office