it day in and day out and I am certain that probably they could give pretty definite information in answer to that question.

Mrs. SULLIVAN. We will get that information before we have the other witnesses. I will just ask you several questions now and then pass on to the other members.

How much would it cost the Panama Canal Company if commercial operations were eliminated as proposed in Mr. Eisenhower's order of December 21?

Mr. GERHARDT. Mrs. Sullivan, if the company continued to operate two ships and all of the commercial services were to be eliminated and they were just to serve the canal organization, the transportation costs would be materially increased.

As I calculated that, the transportation cost to the canal organization at the present time under the present mode of operation amounts to about $1.5 million.

However, the revenues that are earned from the commercial services provided by the line amounts to around $4.5 million.

If you eliminate the commercial revenue, of course, there will be some reduction in the operating costs, but they would not be anything like the $4.5 million. It may be a million dollars. It is hard to tell.

On the other hand, if the Panama Line were to be continued in service, there would not be any point in operating two ships because they have some unused capacity now as far as freight is concerned and certainly they would not need two ships to provide the canal organization's freight requirements.

Maybe a one-ship operation would suffice. I do not know. I have not attempted to arrive at any sound thought with regard to what might be done or what should be done if the commercial operations are discontinued.

Mrs. SULLIVAN. Then to follow up on that, can the Panama Canal Company sustain that loss of revenue from the ship line without raising tolls or without charging Canal Zone employees higher rents and higher prices in the commissaries or higher fares to make up those losses?

Mr. GERHARDT. In the first place, as I previously said, I question whether it would be practical to continue the two-ship operation.

On the other hand, as to whether they would have to increase toll rates to provide these services, I would say certainly not, not at the present time, because the great number of transits that were made through the canal has resulted in a rather sizable operating income in 1960 and that trend, I understand, is continuing.

Mrs. SULLIVAN. I will defer these questions for a moment until some of the members have had a chance to question.

Mr. Garmatz?

Mr. GARMATZ. Mr. Gerhardt, this was a very fine statement. Relative to the financial report, I do have some other questions to ask later on. I wonder if we are going to have witnesses to tell us about the labor situation, Madam Chairman?

Mrs. SULLIVAN. Yes, sir.

Mr. GARMATZ. For instance, we have one or two thousand employees who may be affected.

Mrs. SULLIVAN. Yes.

Mr. GARMATZ. That is all I have at this time.

Mrs. SULLIVAN. Mr. Mailliard?

Mr. MAILLIARD. Do I interpret your analysis of the Drake report correctly if I say that you challenge their first conclusion that the operation of the line is contrary to Government policy?

It probably would have been better stated that it is an exception to general Government policy.

Would that be a fair statement?

Mr. GERHARDT. I think that is right.

Mr. MAILLIARD. The second point, their conclusion that there is an abundance of transportation service available, you agree with except as far as passengers are concerned and you feel that that is a question on which you cannot make a definite determination.

In other words, there are ways of providing that service but it does not exist now?

Mr. GERHARDT. Certainly, Mr. Mailliard.

Mr. MAILLIARD. And on the third one, the Drake report's conclusion that the discontinuance of the operation of the line would increase net cash flow to the United States by $1.2 million, you say maybe but you cannot prove it; is that right?

Mr. GERHARDT. That is right, Mr. Mailliard. It depends entirely on whether the two principal lines operate at a profit and have a taxable income.

I understand that one of those lines is not in that position this year.

Also there is another factor involved in the case of Grace Line; that is, its preferential tax treatment as a subsidized line. If the line is in a subsidy recapture position; that is, if its net revenues exceed an amount equivalent to 10 percent of the capital necessarily involved in the operation, then taxes on any additional income would be deferred and they would not pay any tax.

However, I might state that in such case the Government would derive some benefit because it participates in any earnings over and beyond the 10 percent to the extent of 50 percent so that there would be some recapture of subsidy and to that extent there would be a benefit to the Government.

Mr. MAILLIARD. As I understand what you have said here, the Drake report throws in everything they can think of as a benefit to the Government and the Panama Canal Company's rebuttal takes the reverse position and discounts every possible benefit to the Government so that, would it be reasonable for us on the committee to assume that somewhere in between lies the probable result?

Mr. GERHARDT. Mr. Mailliard, I might mention that I only commented on the items and pointed out where there is a difference between the Drake report and the Panama Canal Company's analysis of that report, and the important item is the additional income taxes that the Drake report states would be paid by the private carriers of which there may be some or there may be none. I do not know.

When it comes down to the cost of freight services, again the difference is made up primarily of the discount that the Drake report says Grace Line will grant from the established tariff rates. That is a matter for decision by the conference, and the Federal Maritime Board to rule upon. I have no ideas as to whether the discount would be granted or not.

The same thing is true, of course, in connection with the difference in the cost of transporting passengers. There, as I mentioned, I

understand there have been some more definite commitments made by Grace Line just recently. I am not certain about it, but I understand that such is the case.

Mr. MAILLIARD. Mr. Gerhardt, did you give any consideration to the effect on this financial picture of the eventual necessity of replacing these ships?

Mr. GERHARDT. No, Mr. Mailliard, I did not. I limited my statement, my report, and comments solely to a review of the reports which were submitted to me.

I gave no consideration as to what might have to be done with regard to replacement of ships or anything of that sort.

Mr. MAILLIARD. Would that be a difficult bit of information for us to get? I am just thinking of what the probable life of the ships may be and what the replacement costs would be and what impact this would have on the financial picture.

Mr. GERHARDT. As to the life of the ships, Mr. Mailliard, they, have about 15 more years to go. I would hesitate to venture any thought with regard to what the replacement cost of the ships might be even at the present time or at the termination of their life.

Mr. MAILLIARD. These ships were rehabilitated and put back in service in 1957.

Mr. GERHARDT. No, initially they had a 25-year life from 1939 and in 1957 or 1958, the life of the ships was extended another 10 years. That was based on the fact that it appeared that the ships could readily serve in that service for a full 35 years.

Mr. MAILLIARD. Did we do that by law?

Mr. GERHARDT. No, it was not done by law. The Company's Board of Directors directed the extension of the life of the ships and there is no prohibition in any of the statutes pertaining to the Panama Canal Company that would be violated in any way.

Mr. MAILLIARD. Why would this be a different circumstance than would be true with our other American-flag privately owned vessels? Why would they have this exceptionally long life in comparison with other ships? I do not see the logic of it.

Mr. GERHARDT. Mr. Mailliard, the subsidized ship operators are required, or were required, to replace their ships at the end of 20 years, I believe, but that does not mean that the ships are no longer serviceable at the end of 20 years.

What it does mean is that by replacing them we maintain an upto-date merchant marine.

Mr. MAILLIARD. That is the point that I am making is that these ships are then rapidly losing their value to the quality of our merchant marine by virtue of age.

Mr. GERHARDT. Yes, as compared to the ships which are maintained in the subsidized service.

Mr. MAILLIARD. This would give these ships what age? Even if they were considered as good as new and reconditioned in 1957, they already have 14 years on them.

What is the date established now?

Mr. JONES. About 15 years more life.

Mr. MAILLIARD. Fifteen years from now?

Mr. GERHARDT. Yes; they go to about 1974.

Mr. MAILLIARD. How much did you go into this question of utilization of MSTS versus Panama Line? I notice that the only

thing that you say here that comes to the essence of the thing is on page 18, where you say that:

The conclusion is based on the assumption that the operation of the MSTS ships would be continued, even though not serving the military organizations in the Canal Zone, since they have a strategic value and form a part of the MSTS nucleus fleet.

As a matter of fact, those ships do not serve only the Canal Zone, do they?

Mr. GERHARDT. No; they serve the Canal Zone and Guantanamo, and I suppose San Juan. They serve in that area.

Mr. MAILLIARD. Then unless the Panama Line were in a position. to take care of the rest of their route, you could not discontinue them not because of their strategic value but because they still have other ports to serve?

Mr. GERHARDT. I was merely pointing out that the Drake report assumed they would be continued.

Now, I believe that the Secretary of the Army in commenting on that point indicated that those ships would not be required to service the Canal Zone, and I believe he was implying that probably the two ships would not be necessary to service Guantanamo and San Juan. Mr. MAILLIARD. Did you look into that at all?

Mr. GERHARDT. No, sir. I did not go beyond the reports. Mr. MAILLIARD. It does seem, just on the face of it, that to operate competing Government-owned lines in the same area is a little bit inefficient. Where would we go for an analysis of the fact that we have two Government-owned lines, one forbidden even to carry commercial traffic and the other carrying commercial traffic in addition to the Government traffic, operating in the Caribbean?

Mr. GERHARDT. Mr. Mailliard, I suppose as far as the necessity for continued operation of the MSTS ships, even if they did not serve the Canal Zone, that MSTS probably would be able to provide information as to whether they would have to be continued or whether they could have a curtailed operation to service Guantanamo and San Juan or whatever ports they service.

Mr. MAILLIARD. Do you know anybody who has made an effort to find out what the probabilities would be of combining these two services?

Mr. GERHARDT. I believe, Mr. Mailliard, that some consideration, at a rather low level, had been given to that possibility some years

ago.

I know that a committee was set up in the Canal Zone comprised of some military and canal organization personnel whose function was to attempt to decide what duplicate facilities could be discontinued in the Canal Zone area and that the discontinuance or the combining of the operations of these two lines had been considered at that time but nothing ever materialized out of that consideration. Mr. MAILLIARD. The fact of the matter is, though, that both of these Government-owned lines have surplus capacity; is that not true? Mr. GERHARDT. As far as the freight is concerned, I can say that the Panama Line has. I do not know about the MSTS ships.

Mr. MAILLIARD. I think you pretty well indicated here that MSTS could carry this.

Mr. GERHARDT. That is right, Mr. Mailliard. I believe that the Drake report so stated.

Mr. MAILLIARD. So that if they could carry a portion at least of the canal cargo they must have surplus space, I would think.

Mr. GERHARDT. I think, Mr. Mailliard, I did mention that the Drake report indicated that the MSTS could provide the freight service for the canal organization; that is, not only by the two MSTS ships serving the Canal Zone but also through the use of the commercial augmented service that they have.

The Drake report points out that MSTS ships could have provided about 30 percent of the canal organization southbound freight requirements and that the remainder could be taken care of by their supplementary service.

Mr. MAILLIARD. It seems to me that the committee is in a curious situation here where we have two wholly Government-owned steamship lines plus Government subsidized steamship lines all serving the

same area.

Mr. GROSS. Will the gentleman yield for a question?
Mr. MAILLIARD. I yield.

Mr. GROSS. Does MSTS operate on fixed schedules?

Mr. GERHARDT. I cannot answer that definitely, Mr. Gross. I really do not know.

Mr. MAILLIARD. I think that is all I have for now, Mrs. Sullivan. Mrs. SULLIVAN. If I may comment, did you not mention in your report that Panama Line could carry all of the cargo necessary to supply the military at the Canal Zone but it could not take care of about 395 passengers in its peak load time?

Mr. GERHARDT. That is correct, Mrs. Sullivan.

Mrs. SULLIVAN. So that if the MSTS would be eliminated from that port of call, all of the military in the Canal Zone could be taken care of by the Panama Line?

Mr. GERHARDT. That is correct, and certainly they would have far more adequate capacity than would be needed if they discontinued even the Haiti freight service.

Mrs. SULLIVAN. Do you mean that the Panama Line, if it had to do away with all commercial carriage, could be filled to capacity?

Mr. GERHARDT. Mrs. Sullivan, no. The Panama Canal Company at the present time, I believe, could take care of the military requirements in the Canal Zone.

Mrs. SULLIVAN. I am only talking about the Canal Zone.

I mean if the directive stopping all commercial passengers and commercial cargo on the Panama Line would go into effect and then the Panama Line would take over carrying the military cargo just to the Canal Zone, would that involve as much cargo as they take commercially?

Mr. GERHARDT. Mrs. Sullivan, the answer is "No." At the present time, as I say, I believe that the Panama Line could take care of all the military requirements in the zone in addition to the commercial services it is now providing so that, if it eliminated the commercial services, it would have a lot of unused capacity.

Mrs. SULLIVAN. That is what I wanted to get clear.

We are going to have MSTS here to answer the questions on that. MSTS will give us their view on why they need to call at the Canal Zone. The Panama Canal Company will give their side as to why they need the Panama Line there. Possibly we can evaluate that then.