Mr. OSBORN. Mr. Drake's point in regard to this.

I will confess that if I have these figures wrong it was because of my hurry to take them down, but one figure was that there would be an additional cost of $385,000 to carry the passengers commercially. Under the circumstances that exist right now, this is perfectly correct, but we have all listened to the Grace Co. make an offer to carry the passengers at exactly the same rate that the Panama Line itself now charges the Government. I do not know whether they will or not, but, if a firm contract were negotiated for them to do so, it seems to me that you must then eliminate this $385,000 extra cost.

There was one other figure involved that was not mentioned. It was assumed that the cost of carrying the freight would be the same as is now charged by the Panama Line.

We have heard people from the Grace Co, make an offer to negotiate a discount rate, a large volume industrial rate. I do not know whether they will or not, but, if it were possible to negotiate a discount rate in the neighborhood of what some people describe as 12 percent and some people describe as 15 percent-MSTS gets a considerably larger one if it were only 121⁄2 percent this would amount to a saving of around $125,000; so that, when we add those two together we come very close to eliminating the half a million dollars extra that the Governor gave in his figures yesterday.

There are a lot of other considerations that have not been taken up. Things like these are the sort of things that people are disputing. The Panama Line now carries its passengers all the way to New York. They do not all live in New York. They live all over the United States. Drake made an analysis of the homes, the destination of those passengers, and said, if you were to drop those passengers off at alternate ports, and he mentioned New Orleans, Port Everglades in Florida, and New York-he said if you could drop the passengers off at whichever one of those three ports is best and then have the Government pay transportation home, you would have saved some $67,000.

There is another consideration and that is inland freight. When you ship everything to New York you have, of course, the inland freight to consider.

They also made a spot analysis of a certain number of shipments. I am sorry that Congressman Byrne is not here but they said, "Supposing that you could also ship out of Philadelphia," and they made an analysis of a certain number of sailings, and showed the freight costs would be considerably reduced if you could use Philadelphia as an alternate port.

Mrs. SULLIVAN. You say "they." Do you mean the Drake report? Mr. OSBORN. The Drake report; yes.

Mrs. SULLIVAN. Do you people have statisticians and people behind you to look into the figures that are offered by any other source or do you accept and just weigh those figures from each other?

Mr. OSBORN. We have to do a lot of weighing but in this particular case we wondered "who can we use as a traffic expert since this is a traffic problem," and we asked the Military Traffic Agency in the Department of Defense to comment on this analysis of the freight situation that had been made by Drake and they reported to us and said:

On the basis of the rates that are there and so on, this is a sound way of computing it.

There are other considerations, and I must go along with the Panama Canal Company and say that it is not a black and white situation. There are additional freight forwarders' fees and additional claims and so on, but the fact remains that, if you are tied to one port such as New York, there is no possibility of exploring these alternate ports and seeing what kind of transportation can be arranged.

Mrs. SULLIVAN. Would these military men who evaluated this for you be officers who have just come into this job for 3 years and then are sent to some other post when another man comes in, or are they civilian experts?

Mr. OSBORN. I imagine that this must be the biggest traffic management operation in the world.

Mrs. SULLIVAN. They do procurement for the largest number of airplanes in the country.

Mr. OSBORN. I must confess I only saw this yesterday. This is signed by Major General I. Sewell Morris. His comment is that the analysis that Drake did is correct.

Again I want to say that I am certainly not going to defend every dot and figure in the Drake report. Most of it is based on an estimate of what would have happened had an alternative course of action been taken. Anyone can make an estimate on these things, and I think they are entitled to their opinion. Our job was to weigh the whole thing and see what the possibilities were.

As I say, I do not know what the economics of this thing are. It all depends on what you can negotiate with the alternate sources.

Mrs. SULLIVAN. You do not know what the economics are and yet the recommendation was to discontinue without any one else going into the facts.

Mr. OSBORN. Which recommendation are you talking about, Madam Chairman?

Mrs. SULLIVAN. The recommendation of the Bureau of the Budget to the President of the United States.

Mr. OSBORN. The only one that I know of was our recommendation. There may have been others and I am sure there were because after a while it went up beyond our level; but our recommendation was that the Secretary of the Army attempt to see what kind of a deal he could negotiate with these commercial people.

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Mrs. SULLIVAN. Somewhere in the committee papers is a letter from Mr. Stans, who was the head of the Bureau of the Budget, recommending to the President, so that that is based then, on the findings of you technical men making a recommendation to him, is it not?

Mr. OSBORN. Recommendations that I know about were based upon the Secretary of the Army obtaining adequate and economical, satisfactory alternative transportation service for the Panama Canal Company and the Canal Zone government.

Mrs. SULLIVAN. To your knowledge, did the Secretary of the Army recommend the discontinuance of the line?

Mr. OSBORN. To my knowledge, he did not recommend it. He recommended against it.

Mrs. SULLIVAN. Then, unless I am a little thick this morning, I do not understand your explanation of the recommendation of the Secretary of the Army.

Mr. OSBORN. The whole point is that the Secretary of the Army, to my knowledge, has never attempted to negotiate and find out what kind of a deal he could get from the alternate sources.

Mrs. SULLIVAN. Do you recall the other day when the Grace Line was testifying that Mr. Diaz, I believe, talked about a shipping conference as to whether or not they could negotiate the fares for passengers? This was done very quickly. We had an answer yesterday by telephone and this morning we have one by mail.

I am going to ask the counsel to read it. This is their idea right now, that, regardless of anything else, they could sit down and make an agreement to do something.

I have not read this.

Mr. CowEN. This is addressed to

Hon. LEONOR K. SULLIVAN,

House of Representatives, Washington, D.C.

DEAR MRS. SULLIVAN: In answer to questions put to representatives of Grace Line by members of your subcommittee during the recent hearings, set forth below is the text of a telegram which has been received by the Grace Line from C. D. Marshall, vice chairman, Atlantic and Gulf/Panama Canal Zone Colon and Panama City Conference:

"M. DIAZ, Vice President, Grace Line, Inc.,

"1507 K Street NW., Washington, D.C.:

"Urtel first this conference at emergency meeting convened today in accordance your request agreed pursuant to conference voting procedure and with the Panama Line abstaining that in the event the Panama Line were to suspend service the conference would undertake to negotiate with the Panama Canal Com.pany an industrial contract whereby supply and maintenance equipment and material of a proprietary and nonresale nature and therefore cargo no commercially competitive of the Panama Canal Company be carried by the conference lines under a beneficial rate industrial contract. Also agreed that the conference contract with the Panama Canal Company so that all member lines could carry the automobiles of home-leave Government employees of the Panama Canal Company at the same rates as presently being charged by the Panama Line."

It is signed "C. D. Marshall, vice chairman, Atlantic and Gulf/ Panama Canal Zone Colon and Panama City Conference."

Mrs. SULLIVAN. I think we would still need assurance that whatever contract was entered into would be for a long period of time to protect the employees, to protect the Canal Company and also to protect Haiti which we all know is having so much trouble now with economic problems.

Mr. OSBORN. In this I heartily agree. I certainly agree with not recommending that any action be taken without this kind of an

assurance.

Mrs. SULLIVAN. I would like to give a little more time and study to that answer that came in this morning. In just reading it over I am not quite certain of what it means.

Mr. OSBORN. I would like to amplify a little more fully on this point that the Secretary of the Army, as far as I knew, had not negotiated alternative arrangements. He did attempt to negotiate an agreement whereby one of the private operators would operate his ships for him and provide the same service and utilize the two ships. This was such a restricted proposal that nobody took him up on it and that was the end of it.

I do not know of any attempt to negotiate whereby the private carriers would carry the Panama Line requirements in their own vessels.

Mrs. SULLIVAN. Mr. Mailliard?

Mr. MAILLIARD. If I understood this situation correctly, the fact that the Secretary of the Army made a contrary recommendation to the President, in other words, recommended that the line be continued

in operation, was based not on any argument as to the economics. It was based upon the fundamental premise of the Canal Company that they must have control of their own transportation. Was that not basically correct?

Mr. OSBORN. That was one of the factors. The Secretary of the Army, as the Governor testified yesterday, considered that American foreign policy would be jeopardized, that this was contrary to American maritime policy, that it would impair our national security, that he must have an assured logistics line, and he also disagreed on the economics on the grounds that up to this point there had been no proposal made by the steamship lines on which he could place reliance. Mr. MAILLIARD. Is that not kind of a curious thing that the Secretary of the Army says that it is going to endanger our foreign policy and the Secretary of State says it is not?

Mr. OSBORN. Yes, sir.

Mr. MAILLIARD. So what business is it of the Secretary of the Army to decide what is good or bad for our foreign policy?

Mr. OSBORN. Well, I must agree with the Secretary of the Army. I think that the operations of the Panama Line have been extremely beneficial to Haiti in transporting their traffic. I assume that this was in his mind when he said so.

Mr. MAILLIARD. You are in the Bureau of the Budget so that you are dealing with all departments on an equal footing.

Would you not accept the word of the Secretary of State on a matter of foreign policy as against the Secretary of the Army?

Mr. OSBORN. I did not accept one or the other but they were presented in the Bureau side by side. The Secretary of the Army said this and the Secretary of State said that.

It was the same way with national security and the same way with maritime policy.

Mr. MAILLIARD. So that the Secretary of the Army, in taking the position he did, said this was contrary to maritime policy but the Maritime Board said it was not?

Mr. OSBORN. That is right.

Mr. MAILLIARD. He said it was contrary to foreign policy but the Secretary of State said it was not. He said it was essential for defense but the Defense Department said it was not. I do not think that any further comment is necessary.

Mrs. SULLIVAN. I will ask you this. Did not the Secretary of State say, "As long as they were assured of an adequate alternative."? Mr. MAILLIARD. This has been testified to and the Federal Maritime Board said they could and would make this possible.

Mrs. SULLIVAN. Mr. Gross?

Mr. GROSS. Mr. Osborn, the Bureau of the Budget hired this consulting firm of Drake and others, is that correct?

Mr. OSBORN. Yes, sir.

Mr. GROSS. Do they have an established record and reputation as experts on maritime transportation? What is the firm's business? Mr. OSBORN. The Drake Co. are materials handling consultants. Let me explain.

Mr. GROSS. I want to have your explanation.

Mr. OSBORN. This was a rather difficult problem. This controversy about the Panama Line has been going on for some time. Certainly it predates my association with the Bureau of the Budget.

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I understand that it started back in 1928 and has been going on ever since. There were several things involved in this study. The Bureau has always been concerned that this is not an economic practice. It has gotten to this point: that we are inclined to view with skepticism what the Panama Canal Company says about this operation and they are certainly inclined to view with skepticism what we say about the operation, so that the alternative was to go to some outside source and let them make a study.

The other thing is this. The Bureau of the Budget is not equipped with maritime specialists and it was a question of finding one. We looked over a list of management firms who might be qualified. We picked five of them, firms that were dealing in transportation and handling the movement of supplies.

We asked the Panama Canal Company if they had any further people they would like to add to this proposed list. No further names were offered. We asked them if they had any objection to any of the five on the list, and no objections were raised at that point. We then sent out a letter to these five and said, "Would you be interested in making a study of this type?"

All five of them said they were.

We asked them, "What kind of people would you put on the study?" We had one primary concern. We wanted to find an organization that could not possibly have a conflict of interest where its prior associations, its current contracts, and so on, could influence its decision. This was rather difficult. We had to eliminate two otherwise well-qualified organizations because they had people on their staffs who had either been formerly officials in steamship lines or had been connected with MSTS or had current contracts that involved steamship lines, and we explained our feelings to the representatives of the Canal Company and they agreed with us.

This narrowed it down to a firm of Buckley Associates, Drake, and the Stanford Research.

Mr. GROSS. Stanford, Calif.?

Mr. OSBORN. Yes, sir.

The Governor of the Canal Zone said that he did not want us to use Stanford Research because they were already doing considerable work for the Canal Company. However, this did not disqualify them in our eyes, so we asked them anyway, but they lost interest.

This is a very expensive proposition, making a detailed bid, and we got two firms to present their bids. The Drake bid happened to be considerably lower than the alternative one. Both of them appeared to be equally competent and both of them appeared as though they might do the same job.

We had a meeting with the people on Mr. Drake's staff because we wanted to start with the lowest bid first. We invited representatives of the Panama Canal Company and we had people from our own staff. We spent some hours with them going over their qualifications, how they proposed to do the study, and whatever we could ask them.

We then invited anybody who had any comments as to whether or not we should take this firm to make them and nobody objected.

So then we went ahead with the contract. At all stages in the contract we consulted freely with the Panama Canal Company. The Canal Company was most cooperative. They furnished all of the data about the Canal Company that we find in the report.